SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
Commission File Number 1-12381
Linens 'n Things, Inc.
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(Exact name of Registrant as specified in its charter)
Delaware 22-3463939
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
6 Brighton Road, Clifton, New Jersey 07015
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(Address of principal executive offices) (Zip Code)
(973) 778-1300
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Number of shares outstanding of the issuer's Common Stock:
Class Outstanding at May 3, 2001
----- --------------------------
Common Stock, $0.01 par value 40,513,851
INDEX
Part I. Financial Information Page No.
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Item 1. Financial Statements
Consolidated Statements of Operations for the
Thirteen Weeks Ended March 31, 2001
and April 1, 2000 3
Consolidated Balance Sheets as of March 31, 2001,
December 30, 2000 and April 1, 2000 4
Consolidated Statements of Cash Flows for the
Thirteen Weeks Ended March 31, 2001
and April 1, 2000 5
Notes to Consolidated Financial Statements 6-7
Independent Auditors' Review Report 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
Part II. Other Information
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
(a) Exhibit Index 12
(b) Reports on Form 8-K 12
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
LINENS 'N THINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Thirteen Weeks Ended
--------------------------------
March 31, April 1,
2001 2000
------------- --------------
Net sales $379,245 $326,976
Cost of sales, including buying and distribution costs 228,543 198,675
------------- --------------
Gross profit 150,702 128,301
Selling, general and administrative expenses 142,535 120,227
------------- --------------
Operating profit 8,167 8,074
Interest expense (income), net 570 (106)
------------- --------------
Income before provision for income taxes 7,597 8,180
Provision for income taxes 2,904 3,125
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Net income $ 4,693 $ 5,055
============= ==============
Per share of common stock:
Basic
Net income $0.12 $0.13
Weighted average shares outstanding 40,335 39,482
Diluted
Net income $0.11 $0.13
Weighted average shares outstanding 41,325 40,418
See accompanying notes to consolidated financial statements.
LINENS 'N THINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
March 31, December 30, April 1,
2001 2000 2000
------------------- ------------------ -------------------
(Unaudited) (Audited) (Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 3,502 $ 38,524 $ 13,938
Accounts receivable, net 33,214 31,508 19,599
Inventories 475,465 437,258 377,896
Prepaid expenses and other current assets 26,655 25,360 23,214
------------------- ------------------ -------------------
Total current assets 538,836 532,650 434,647
Property and equipment, net 271,531 262,409 231,399
Goodwill, net 18,764 18,977 19,614
Deferred charges and other noncurrent assets, net 7,696 7,521 6,139
------------------- ------------------ -------------------
Total assets $ 836,827 $ 821,557 $ 691,799
=================== ================== ===================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 190,296 $ 183,473 $ 172,204
Accrued expenses and other current liabilities 88,413 118,580 80,812
Short-term borrowings 27,321 3,903 --
------------------- ------------------ -------------------
Total current liabilities 306,030 305,956 253,016
Deferred income taxes and other long-term liabilities 58,837 56,607 49,579
Shareholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized; none issued and outstanding -- -- --
Common stock, $0.01 par value; 135,000,000 shares authorized;
40,622,506 shares issued and 40,508,191 outstanding at
March 31, 2001; 40,173,441 shares issued and 40,059,126
outstanding at December 30,2000; and 39,561,938 shares
issued and 39,485,461 outstanding at April 1, 2000 406 402 396
Additional paid-in capital 240,401 231,547 220,938
Retained earnings 234,879 230,186 170,304
Accumulated other comprehensive income (296) 289 --
Treasury stock, at cost; 114,315 shares at March 31, 2001
and December 30, 2000, and 76,477 at April 1, 2000 (3,430) (3,430) (2,434)
------------------- ------------------ -------------------
Total shareholders' equity 471,960 458,994 389,204
------------------- ------------------ -------------------
Total liabilities and shareholders' equity $ 836,827 $ 821,557 $ 691,799
=================== ================== ===================
See accompanying notes to consolidated financial statements.
LINENS 'N THINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Thirteen Weeks Ended
-----------------------------------------
March 31, April 1,
2001 2000
------------------- ------------------
Cash flows from operating activities:
Net income $ 4,693 $ 5,055
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 9,394 7,621
Deferred income taxes 1,398 820
Loss on disposal of assets 3 --
Federal tax benefit from common stock issued under
stock incentive plans 3,979 51
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (1,706) 1,237
Increase in inventories (38,207) (35,215)
Increase in prepaid expenses and other current assets (963) (1,000)
Increase in deferred charges and other
noncurrent assets (321) (604)
Increase in accounts payable 6,823 27,320
Decrease in accrued expenses and other liabilities (30,263) (22,303)
------------------- ------------------
Net cash used in operating activities (45,170) (17,018)
------------------- ------------------
Cash flows from investing activities:
Additions to property and equipment (18,149) (14,931)
------------------- ------------------
Cash flows from financing activities:
Proceeds from common stock issued under stock incentive
plans 4,879 136
Increase in short-term borrowings 23,418 --
------------------- ------------------
Net cash provided by financing activities 28,297 136
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Net decrease in cash and cash equivalents (35,022) (31,813)
Cash and cash equivalents at beginning of period 38,524 45,751
------------------- ------------------
Cash and cash equivalents at end of period $ 3,502 $ 13,938
=================== ==================
See accompanying notes to consolidated financial statements.
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statements, except for the December 30,
2000 consolidated balance sheet, are unaudited. In the opinion of management,
the accompanying consolidated financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to present fairly the
financial position of the Company as of March 31, 2001 and April 1, 2000 and the
results of operations and cash flows for the respective thirteen weeks then
ended. 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 consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements for the fiscal year ended
December 30, 2000, included in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission. All significant intercompany
accounts and transactions have been eliminated.
The December 30, 2000 consolidated balance sheet amounts have been derived from
the Company's audited consolidated balance sheet amounts.
2. Short-Term Borrowing Arrangements
The Company has available a three-year, $140 million senior revolving credit
facility agreement (the "Credit Agreement") with third party institutional
lenders expiring October 20, 2003. The Credit Agreement also allows for up to
$40 million in borrowings from uncommitted lines of credit outside of the Credit
Agreement. Under the Credit Agreement, the amount of borrowings can be increased
up to $150 million provided certain terms and conditions contained in the Credit
Agreement are met. Interest on all borrowings is determined based upon several
alternative rates as stipulated in the Credit Agreement, including a fixed rate
plus LIBOR rate. 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 March
31, 2001, the Company was in compliance with the terms of the Credit Agreement.
As of March 31, 2001, the Company had $20.0 million in borrowings under the
Credit Agreement and $7.3 million in borrowings against the uncommitted lines of
credit. In addition, as of March 31, 2001 the Company had $10.7 million of
letters of credit outstanding. The letters of credit were used to guarantee
certain insurance obligations and to secure a foreign line of credit.
3. Recent Accounting Pronouncements
The Company was required to adopt Statement of Financial Standards ("SFAS") No.
133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). This statement was effective with the first quarter of fiscal years
beginning after June 15, 2000. For the Company, implementation was required for
the first quarter of fiscal 2001. The Company has determined that the
implementation of SFAS No. 133 did not have a significant effect on its results
of operations or financial position.
At a recent FASB Emerging Issues Task Force ("EITF") meeting, a consensus was
reached with respect to the issue of "Accounting for Certain Sales Incentives,"
including point of sale coupons, rebates and free merchandise. The consensus
included a conclusion that the value of such sales incentives that result in a
reduction of the price paid by the customer should be netted against sales and
not classified as a sales or marketing expense. The adoption of the EITF is
required in the second quarter of fiscal 2001. The Company already includes such
sales incentives against sales and records free merchandise in cost of goods
sold as required by the new EITF consensus.
4. Comprehensive Income
Comprehensive income for the three months ended March 31, 2001 and April 1, 2000
is as follows:
March 31, April 1,
2001 2000
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Net income $ 4,693 $ 5,005
Foreign currency translation adjustment (585) --
----------- -------------
Comprehensive income $ 4,108 $ 5,055
=========== =============
5. Reclassification
Certain reclassifications were made to the fiscal 2000 consolidated financial
statements in order to conform to the fiscal 2001 presentation.
Independent Auditors' Review Report
The Board of Directors and Shareholders
Linens 'n Things, Inc.:
We have reviewed the consolidated balance sheets of Linens 'n Things, Inc. and
Subsidiaries as of March 31, 2001 and April 1, 2000, and the related
consolidated statements of operations and cash flows for the thirteen weeks
ended March 31, 2001 and April 1, 2000. These consolidated financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. 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 auditing standards generally accepted in the United States of
America, 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 consolidated financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Linens 'n Things, Inc. and Subsidiaries as of December 30, 2000 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended (not presented herein); and in our report dated January 31,
2001 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 December 30, 2000 is fairly presented, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
KPMG LLP
New York, New York
April 18, 2001
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto appearing
elsewhere in this document.
Results of Operations
Thirteen Weeks Ended March 31, 2001 Compared with Thirteen Weeks Ended April 1,
2000
Net sales increased 16.0% to $379.2 million for the thirteen weeks ended March
31, 2001, up from $327.0 million for the same period last year, primarily as a
result of new store openings since April 1, 2000. Comparable store net sales for
the thirteen weeks ended March 31, 2001, declined 1.8% as compared with an
increase of 3.3% for the same period last year. The decline in comparable store
net sales can be attributed to a decline in consumer traffic due to a slowing
economy and the consolidation of retailers within the Company's category.
During the thirteen weeks ended March 31, 2001, the Company opened 11 stores
including one in Canada, and closed one store, compared with opening 12 stores
and closing two stores during the same period last year. At March 31, 2001, the
Company operated 293 stores, compared with 240 stores at April 1, 2000. Store
square footage increased 23.6% to 10,238,000 at March 31, 2001 compared with
8,282,000 at April 1, 2000.
Gross profit for the thirteen weeks ended March 31, 2001 was $150.7 million, or
39.7% of net sales, compared with $128.3 million, or 39.2% of net sales, for the
same period last year. The increase in gross profit was due primarily to
improved mark-on as a result of product mix. In addition, logistics costs as a
percentage of net sales were lower as compared to the same period last year, as
the Company continues to leverage these costs through its centralized logistics
network.
Selling, general and administrative expenses for the thirteen weeks ended March
31, 2001 were $142.5 million, or 37.6% of net sales, compared with $120.2
million, or 36.8% of net sales for the same period last year. The increase as a
percentage of net sales is predominately due to the de-leveraging of occupancy
costs, and to a lesser extent, store payroll costs. However, these expenses were
partially offset by the leveraging of administrative expenses.
Operating profit for the thirteen weeks ended March 31, 2001 increased to $8.2
million, or 2.2% of net sales, compared with $8.1 million, or 2.5% of net sales,
for the same period last year.
The Company was in a net borrowing position for the thirteen weeks ended March
31, 2001, compared to being in a net cash position for the same period in 2000.
As a result, the Company incurred net interest expense of approximately $570,000
(including commitment fees in connection with the Company's Credit Agreement)
for the thirteen weeks ended March 31, 2001, compared with earning net interest
income of approximately $106,000 for the same period last year.
The Company's income tax expense for the thirteen weeks ended March 31, 2001 was
approximately $2.9 million as compared with $3.1 million for the same period
last year. The Company's effective tax rate was 38.2% for the thirteen weeks
ended March 31, 2001 and April 1, 2000.
As a result of the factors described above, net income for the thirteen weeks
ended March 31, 2001 was $4.7 million, or $0.11 per share on a fully diluted
basis, compared with $5.1 million, or $0.13 per share on a fully diluted basis,
for the same period last year.
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 are
funded through a combination of internally generated cash from operations,
credit extended by suppliers and short-term borrowings.
The Company has available a $140 million senior revolving credit facility
expiring October 20, 2003, which can be increased up to $150 million provided
certain terms and conditions contained in the Credit Agreement are met. This
agreement allows for up to $40 million in borrowings from uncommitted lines of
credit.
Net cash used in operating activities for the thirteen weeks ended March 31,
2001 was $45.2 million compared with $17.0 million for the same period last
year. The increase in cash used in operating activities was primarily due to the
settlement of vendor payments outpacing inventory turnover.
Net cash used in investing activities during the thirteen weeks ended March 31,
2001 was $18.1 million compared with $14.9 million for the same period last
year. The increase in net cash used in investing activities was due to capital
expenditures related to incremental new store openings scheduled to occur in the
first half of 2001 compared with the same period last year.
Net cash provided by financing activities during the thirteen weeks ended March
31, 2001 was $28.3 million compared with $136,000 for the same period last year.
This increase was primarily the result of short-term borrowings of $27.3 million
at the end of the thirteen weeks ended March 31, 2001 due to the increase in net
cash used in operating activities.
Management currently believes that the Company's cash flows from operations,
credit extended by suppliers, the revolving credit facility and the uncommitted
lines of credit will be sufficient to fund anticipated capital expenditures and
working capital requirements in the foreseeable future.
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.
LINENS `N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Seasonality
The Company's business is subject to substantial seasonal variations.
Historically, the Company has realized a significant portion of its net sales
and net income for the year during the third and fourth quarters. The Company's
quarterly results of operations may also fluctuate significantly as a result of
a variety of other factors, including the timing of new store openings. The
Company believes this is the general pattern associated with its segment of the
retail industry and expects this pattern will continue in the future.
Consequently, comparisons between quarters are not necessarily meaningful and
the results for any quarter are not necessarily indicative of future results.
Forward-Looking Statements
The foregoing contains forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995. The statements were made a
number of times and have been identified by such forward-looking terminology as
"expect," "believe," "may," "will," "intend," "plan," "target" and similar
statements or variations of such terms. All of our "outlook" information
constitutes forward-looking information. All such forward-looking statements are
based on our current expectations, assumptions, estimates and projections about
our Company and involve certain significant risks and uncertainties including
levels of sales, store traffic, acceptance of product offerings and fashions,
the success of our new business concepts and seasonal concepts, the success of
our new store openings, competitive pressures from other home furnishings
retailers, the success of the Canadian expansion, availability of suitable
future store locations, schedule of store expansion, the impact of the
bankruptcies and consolidations in our industry, and the impact of a slowing
consumer economy. These and other important factors that may cause actual
results to differ materially from such forward-looking statements are included
in the "Risk Factors" section of the Company's Registration Statement on Form
S-1 as filed with the Securities and Exchange Commission on May 29, 1997, and
may be contained in subsequent reports filed with the Securities and Exchange
Commission. You are urged to consider all such factors. In light of the
uncertainty inherent in such forward-looking statements, you should not consider
their inclusion to be a representation that such forward-looking matters will be
achieved. The Company assumes no obligation for updating any such
forward-looking statements to reflect actual results, changes in assumptions or
changes in other factors affecting such forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
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.
In the normal course of operations, the Company is exposed to market risk
arising from adverse changes in interest rates. The Company is exposed to
interest rate risks primarily through borrowings under the Credit Agreement. The
Company does not hedge these interest rate risks. As of March 31, 2001, the
Company had $20.0 million in borrowings under the Credit Agreement and $7.3
million in borrowings against the uncommitted lines of credit at a variable
rate.
The Company enters into some purchase obligations outside of the United States,
which are predominately settled in U.S. dollars and, therefore, 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.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The Company is a defendant in a California state court litigation brought as a
class action on behalf of certain managers of Company stores located in
California seeking overtime pay as well as a claim for accrued vacation pay on
behalf of certain former employees. In the event such claims for vacation pay
are determined adversely to the Company, management of the Company does not
believe that such claims if so adversely determined, would have a material
adverse effect on the Company's financial position, liquidity or results of
operations. On April 2, 2001, the managers were granted class certification
status for the overtime pay claims. The class of approximately 480 managers
consists of all current and former employees of Linens 'n Things in the State of
California, holding the position of salaried manager designated by Linens 'n
Things as a Department Manager, Merchandise Manager, Assistant Merchandise
Manager or Receiving Manager (also known as Flow/Ops Manager) at any time on or
after February 17, 1996 until April 2, 2001. There has been no determination of
the extent to which overtime pay may or may not be owed. The Company is
proceeding to defend the overtime claims on the merits and to evaluate potential
exposure.
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBIT INDEX
Exhibit
Number Description
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11 Computation of Net Income Per Common Share
15 Letter re unaudited interim financial information
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated March 29, 2001,
concerning the Employment Agreements with certain executive officers
of the Company.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LINENS 'N THINGS, INC.
(Registrant)
WILLIAM T. GILES
By:
-------------------------------------------
William T. Giles
Senior Vice President, Chief Financial Officer
(Duly authorized officer and
principal financial officer)
Date: May 14, 2001