SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended April 3, 2004
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Commission file number 1-12381
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LINENS 'N THINGS, INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3463939
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(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
6 Brighton Road, Clifton, New Jersey 07015
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(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 May 4, 2004: 45,094,564
INDEX
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Part I. Financial Information Page No.
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Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the
Thirteen Weeks Ended April 3, 2004 and April 5, 2003 3
Condensed Consolidated Balance Sheets as of April 3, 2004,
January 3, 2004 and April 5, 2003 4
Condensed Consolidated Statements of Cash Flows for the
Thirteen Weeks Ended April 3, 2004 and April 5, 2003 5
Notes to Condensed Consolidated Financial Statements 6-9
Independent Auditors' Review Report 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Item 4. Controls and Procedures 18
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
LINENS 'N THINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
Thirteen Weeks Ended
---------------------------------------
April 3, April 5,
2004 2003
------------------ -----------------
Net sales $ 552,800 $ 480,471
Cost of sales, including buying and distribution
costs 332,346 287,630
------------------ -----------------
Gross profit 220,454 192,841
Selling, general and administrative expenses 220,390 189,401
------------------ -----------------
Operating profit 64 3,440
Interest income (138) (56)
Interest expense 154 132
------------------ -----------------
Interest expense, net 16 76
------------------ -----------------
Income before provision for income taxes 48 3,364
Provision for income taxes 18 1,286
------------------ -----------------
Net income $ 30 $ 2,078
================== =================
Basic earnings per share $ -- $ 0.05
================== =================
Fully diluted earnings per share $ -- $ 0.05
================== =================
See accompanying notes to Condensed Consolidated Financial Statements.
3
LINENS 'N THINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
April 3, January 3, April 5,
2004 2004 2003
------------------- ------------------ -------------------
(Unaudited) (Audited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 67,754 $ 136,129 $ 58,445
Accounts receivable 20,818 29,531 24,299
Inventories 762,021 701,928 685,911
Prepaid expenses and other current assets 34,768 33,982 28,782
Current deferred taxes 292 1,295 --
------------------- ------------------ -------------------
Total current assets 885,653 902,865 797,437
Property and equipment, net 386,502 377,244 362,332
Goodwill, net 18,126 18,126 18,126
Deferred charges and other noncurrent assets, net 12,108 10,783 10,695
------------------- ------------------ -------------------
Total assets $ 1,302,389 $ 1,309,018 $ 1,188,590
=================== ================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 284,013 $ 250,142 $ 295,139
Accrued expenses and other current liabilities 120,837 174,002 128,525
Current deferred taxes 11,073 15,759 6,850
Short-term borrowings 3,544 -- 2,244
------------------- ------------------ -------------------
Total current liabilities 419,467 439,903 432,758
------------------- ------------------ -------------------
Deferred income taxes and other long-term liabilities 114,787 107,396 84,237
------------------- ------------------ -------------------
Total liabilities 534,254 547,299 516,995
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; 45,309,835 shares issued
and 45,076,496 shares outstanding at April 3, 2004;
45,052,255 shares issued and 44,818,916 shares
outstanding at January 3, 2004; and 44,341,745 shares
issued and 44,104,335 shares outstanding at April 5, 2003
453 450 444
Additional paid-in capital 369,079 362,483 346,583
Retained earnings 404,036 404,006 331,259
Accumulated other comprehensive income 1,178 1,391 94
Treasury stock, at cost; 233,339 shares at April 3, 2004 and
January 3, 2004, and 237,410 shares at April 5, 2003 (6,611) (6,611) (6,785)
------------------- ------------------ -------------------
Total shareholders' equity 768,135 761,719 671,595
------------------- ------------------ -------------------
Total liabilities and shareholders' equity $ 1,302,389 $ 1,309,018 $ 1,188,590
=================== ================== ===================
See accompanying notes to Condensed Consolidated Financial Statements.
4
LINENS 'N THINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Thirteen Weeks Ended
----------------------------------------------
April 3, April 5,
2004 2003
----------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 30 $ 2,078
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 14,343 12,842
Deferred income taxes 749 12,563
Loss on disposal of assets 6 --
Federal tax benefit from common stock issued under stock
incentive plans 1,067 50
Changes in assets and liabilities:
Decrease in accounts receivable 8,702 246
Increase in inventories (60,685) (69,295)
Increase in prepaid expenses and other
current assets (671) (2,241)
(Increase) decrease in deferred charges and other
noncurrent assets (1,537) 49
Increase in accounts payable 34,103 77,489
Decrease in accrued expenses and other liabilities (49,741) (36,996)
----------------------- -------------------
Net cash used in operating activities (53,634) (3,215)
----------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (23,713) (25,666)
----------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock issued under stock incentive plans 5,542 282
Increase in short-term borrowings 3,546 303
Purchase of treasury stock -- (16)
----------------------- -------------------
Net cash provided by financing activities 9,088 569
----------------------- -------------------
Effect of exchange rate changes on cash and cash equivalents (116) 152
Net decrease in cash and cash equivalents (68,375) (28,160)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 136,129 86,605
----------------------- -------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 67,754 $ 58,445
======================= ===================
CASH PAID DURING THE YEAR FOR:
Interest (net of amounts capitalized) $ 157 $ 185
Income taxes $ 10,101 $ 9,396
See accompanying notes to Condensed Consolidated Financial Statements.
5
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying Condensed Consolidated Financial Statements are unaudited. In
the opinion of management, the accompanying Condensed Consolidated Financial
Statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of Linens 'n
Things, Inc. and its subsidiaries (collectively "the Company") as of April 3,
2004 and April 5, 2003 and the results of operations for the respective thirteen
weeks then ended and cash flows for the thirteen 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 Annual Report on Form 10-K
filed with the Securities and Exchange Commission. All significant intercompany
accounts and transactions have been eliminated.
Certain prior period expense items, which include inventory shrinkage, have been
reclassified between cost of sales and selling, general and administrative
expenses to conform with the current period presentation. These
reclassifications increased cost of sales and decreased selling, general and
administrative expenses by equal amounts with no impact on operating profit for
any of the periods presented.
Certain prior period vendor accounts receivable balances have been reclassified
to accounts payable to conform with the current period presentation. These
reclassifications decreased accounts receivable and accounts payable by equal
amounts.
2. Earnings Per Share
The calculation of basic and fully diluted earnings per share ("EPS") is as
follows:
Thirteen Weeks
Ended April 3, 2004
(in thousands, except EPS)
----------------------------------------------
Net
Income Shares EPS
------------- ------------ ------------
Basic $ 30 44,920 $ --
Effect of outstanding stock options
and deferred stock grants -- 1,211 --
------------- ------------ ------------
Fully diluted $ 30 46,131 $ --
============= ============ ============
Thirteen Weeks
Ended April 5, 2003
(in thousands, except EPS)
----------------------------------------------
Net
Income Shares EPS
------------- ------------ ------------
Basic $ 2,078 44,098 $ 0.05
Effect of outstanding stock options
and deferred stock grants -- 426 --
------------- ------------- -----------
Fully diluted $ 2,078 44,524 $ 0.05
============= ============= ===========
Options for which the exercise price was greater than the average market price
of common shares for the periods ended April 3, 2004 and April 5, 2003 were not
included in the computation of fully diluted earnings per share. These consisted
of options totaling 18,000 shares and 2,589,000 shares for the thirteen weeks
ended April 3, 2004 and April 5, 2003, respectively.
6
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
3. 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 April 3, 2004, the additional lines of credit include
committed facilities of approximately $26 million that expire on June 16, 2004
and are subject to annual 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 April 3, 2004,
the Company was in compliance with the terms of 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 2003, the
Company borrowed against its credit facility for seasonal working capital needs.
As of April 3, 2004, the Company had no borrowings under the Credit Agreement
and $3.5 million in borrowings under the additional lines of credit at an
interest rate of 4.25%. The Company also had $62.2 million of letters of credit
outstanding as of April 3, 2004, which included standby letters of credit issued
primarily under the Credit Agreement and import letters of credit used for
merchandise purchases. The Company is not obligated under any formal or informal
compensating balance requirements.
4. Comprehensive Income
Comprehensive income for the thirteen weeks ended April 3, 2004 and April 5,
2003 is as follows (in thousands):
Thirteen Weeks Ended
--------------------------------
April 3, April 5,
2004 2003
--------------------------------
COMPREHENSIVE INCOME (LOSS):
Net income $ 30 $ 2,078
Other comprehensive income (loss) -
foreign currency translation adjustment (213) 480
-------------- --------------
Comprehensive income (loss) $ (183) $ 2,558
============== ==============
5. 2001 Restructuring and Asset Impairment Charge
In fiscal 2001, the Company developed and committed to a strategic initiative
designed to improve store performance and profitability. This initiative called
for the closing of certain under-performing stores, which did not meet the
Company's profit objectives. In connection with this initiative, the Company
recorded a pre-tax restructuring and asset impairment charge of $37.8 million
($23.7 million after-tax) in the fourth quarter of fiscal 2001. A pre-tax
reserve of $20.5 million was established for estimated lease commitments for
stores to be closed. This reserve is included in accrued expenses. The reserve
considers estimated sublease income. Because all of the stores were leased the
Company is not responsible for the disposal of property other than fixtures. A
pre-tax writedown of $9.5 million was recorded as a reduction in property and
equipment for fixed asset impairments for these stores. The fixed asset
impairments represent fixtures and leasehold improvements. A pre-tax reserve of
$4.0 million was established for other estimated miscellaneous store closing
costs. Additionally, a pre-tax charge of $3.8 million was recorded in cost of
sales for estimated inventory markdowns below cost for the stores to be closed.
Certain components of the restructuring charge were based on estimates and may
be subject to change in the future. The Company has closed all of the initially
identified store closures other than one store, whose reserve was reversed, and
one store which is expected to be closed during fiscal 2004.
7
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
The following table displays a roll forward of the activity and significant
components of the 2001 restructuring and asset impairment charge and the
reserves remaining as of April 3, 2004 ($ in millions):
Remaining at Usage Remaining at
1/03/04 2004 4/03/04
----------------------- --------------------- -----------------------
(Audited) (Unaudited) (Unaudited)
Cash components:
Lease commitments $ 15.6 $ (1.6) $ 14.0
----------------------- --------------------- -----------------------
Total $ 15.6 $ (1.6) $ 14.0
======================= ===================== =======================
The 2004 usage primarily consists of payments for lease commitments and
miscellaneous store closing costs. The 2004 activity also includes the reversal
of estimated lease commitment and other store closing costs of approximately
$0.7 million as these reserves were not needed, offset by an increase to lease
commitment costs by a like amount due to changes in estimates based on current
negotiations.
6. Stock Incentive Plans
In accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), the Company accounts for its stock-based
compensation plans under the recognition and measurement principles of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees" and related interpretations. Accordingly, no compensation cost has
been recognized in connection with stock options under these plans in the
accompanying Condensed Consolidated Financial Statements. The compensation cost
that has been charged against income for restricted stock unit grants was
$157,000 and $99,000 for the thirteen weeks ended April 3, 2004 and April 5,
2003, respectively. The following table illustrates the effect on 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. 123, for the
thirteen weeks ended April 3, 2004 and April 5, 2003:
Thirteen week period ending
--------------------------------------
April 3, April 5,
(in thousands, except per share data) 2004 2003
-----------------------------------------------------------------------------------------------------------------
NET INCOME:
As reported $ 30 $ 2,078
Deduct: Total stock-based employee compensation expense
determined under the fair value based method for all
awards, net of related tax effects 1,753 1,528
--------------------------------------
Pro forma $ (1,723) $ 550
======================================
NET INCOME PER SHARE OF COMMON STOCK:
Basic:
As reported $ -- $ 0.05
Pro forma $ (0.04) $ 0.01
Fully diluted:
As reported $ -- $ 0.05
Pro forma $ (0.04) $ 0.01
-----------------------------------------------------------------------------------------------------------------
8
LINENS 'N THINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
7. Guarantees
The Company has assigned property at a retail location in which the Company
guarantees the payment of rent over the specified lease term in the event of
non-performance. As of April 3, 2004, the maximum potential amount of future
payments the Company could be required to make under such guarantee is
approximately $1.0 million.
8. Recent Accounting Pronouncements
In January 2003, the Emerging Issues Task Force ("EITF") issued EITF 02-16,
"Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor" ("EITF 02-16"), which states that cash consideration
received from a vendor is presumed to be a reduction of the prices of the
vendor's products or services and should, therefore, be characterized as a
reduction of cost of merchandise sold when recognized in the Company's Condensed
Consolidated Statement of Operations. That presumption may be overcome when the
consideration is either a reimbursement of specific, incremental and
identifiable costs incurred to sell the vendor's products, or a payment for
assets or services delivered to the vendor. EITF 02-16 is effective for
contracts entered into or modified after December 31, 2002. This issue did not
have a material impact on the Company's fiscal 2003 audited Consolidated
Financial Statements as substantially all of the Company's vendor contracts in
effect during fiscal 2003 were entered into prior to December 31, 2002.
Beginning in the first quarter of fiscal 2004, as vendor agreements are
initiated or modified, the Company applies the method of accounting for vendor
allowances pursuant to EITF 02-16. In connection with the implementation of EITF
02-16, the Company treats certain funds received from vendors as a reduction in
the cost of inventory and, as a result, these funds are recognized as a
reduction to cost of merchandise sold when the inventory is sold. Accordingly,
certain funds received from vendors, which were historically reflected as a
reduction of advertising expense in SG&A or cost of sales, are now treated as a
reduction of cost of inventory.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of SFAS No. 123" ("SFAS
No. 148"). This statement amends SFAS No. 123 and provides alternative methods
of transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, the statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used. For the thirteen
week periods ended April 3, 2004 and April 5, 2003, the Company accounted for
stock options using the intrinsic value method prescribed under APB Opinion 25,
and accordingly, the Company did not recognize compensation expense for stock
options. The Company continues to account for stock-based compensation using APB
Opinion No. 25 and has not adopted the recognition provisions of SFAS No. 123,
as amended by SFAS No. 148. However, the Company has adopted the disclosure
provisions and has included this information in Note 6 to the Company's
Condensed Consolidated Financial Statements.
9
INDEPENDENT AUDITORS' REVIEW REPORT
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 April 3, 2004 and April 5, 2003, and the related
condensed consolidated statements of operations for the thirteen week periods
then ended and the related condensed consolidated statements of cash flows for
the thirteen week periods ended April 3, 2004 and April 5, 2003. These condensed
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 generally accepted auditing standards, 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 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 January 3, 2004 (presented herein)
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 February 4, 2004 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.
/S/ KPMG LLP
KPMG LLP
New York, New York
May 3, 2004
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Condensed Consolidated Financial Statements of the Company and the notes thereto
appearing elsewhere in this document.
GENERAL
Linens `n Things, Inc. (the "Company") is one of the leading national 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 April 3, 2004, the Company operated 461 stores in 45
states and in five provinces across Canada.
CRITICAL ACCOUNTING POLICIES
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 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 2003 Annual Report on Form
10-K.
VALUATION OF INVENTORY: Merchandise inventory is a significant portion of the
Company's balance sheet, representing approximately 59% of total assets at April
3, 2004. Inventories are valued using the lower of cost or market value,
determined by the retail inventory method ("RIM"). Under RIM, the valuation of
inventories at cost and the resulting gross margins are determined by applying a
calculated cost-to-retail ratio to the retail value of inventories. RIM is an
averaging method that is used in the retail industry due to its practicality.
The methodologies utilized by the Company in its application of RIM are
consistent for all periods presented. Such methodologies include the development
of the cost-to-retail ratios, the development of shrinkage reserves and the
accounting for price changes.
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 April 3, 2004, January 3, 2004 and April 5, 2003, the Company's sales returns
reserve was approximately $5.2 million, $6.2 million and $4.6 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 April 3, 2004,
January 3, 2004 and April 5, 2003, the Company's net value for property and
equipment was approximately $386.5 million, $377.2 million and $362.3 million,
respectively, and goodwill was approximately $18.1 million on each of the
aforementioned dates.
11
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
April 3, 2004, January 3, 2004 and April 5, 2003, the Company had $14.0 million,
$15.6 million and $21.4 million, respectively, remaining related to this
reserve. The Company has closed all of the initially identified stores other
than one store, which the Company decided to keep open and whose reserve was
reversed, and one other store which is expected to close during fiscal year
2004. The Company has continued to negotiate lease buyouts or sublease
agreements for these stores. The activity in the first quarter of fiscal 2004
includes the reversal of estimated lease commitment and other store closing
costs of approximately $0.7 million as these reserves were not needed, offset by
an increase to lease commitment costs by a like amount due to changes in
estimates based on current negotiations. Final settlement of these reserves is
predominantly a function of negotiations with unrelated third parties, and, as
such, these estimates may be subject to change in the future.
SELF-INSURANCE: The Company purchases third party insurance for worker's
compensation, medical, auto and general liability costs that exceed certain
levels for each type of insurance program. However, the Company is responsible
for the payment of claims under these insured excess limits. The Company
establishes accruals for its insurance programs based on available claims data
and historical trend and experience, as well as loss development factors
prepared by third party actuaries. The accrued obligation for these
self-insurance programs was approximately $13.2 million as of April 3, 2004,
$13.5 million as of January 3, 2004 and $8.9 million as of April 5, 2003.
LITIGATION: The Company records an estimated liability related to various claims
and legal actions arising in the ordinary course of business, which is based on
available information and advice from outside counsel where applicable. As
additional information becomes available, the Company assesses the potential
liability related to its pending claims and may adjust its estimates
accordingly.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED APRIL 3, 2004 COMPARED WITH THIRTEEN WEEKS ENDED APRIL 5,
2003
Results of operations for the thirteen weeks ended April 3, 2004 were impacted
by an accounting change resulting from the implementation of the provisions of
EITF 02-16 "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor" (EITF 02-16). EITF 02-16 is effective for
contracts entered into or modified after December 31, 2002. This issue did not
have a material impact on the Company's fiscal 2003 audited Consolidated
Financial Statements as substantially all of the Company's vendor contracts in
effect during fiscal 2003 were entered into prior to December 31, 2002.
Beginning in the first quarter of fiscal 2004, as vendor agreements are
initiated or modified, the Company applies the method of accounting for vendor
allowances pursuant to EITF 02-16. In connection with the implementation of EITF
02-16, the Company treats certain funds received from vendors as a reduction in
the cost of inventory and, as a result, these funds are recognized as a
reduction to cost of merchandise sold when the inventory is sold. Accordingly,
certain funds received from vendors, which were historically reflected as a
reduction of advertising expense in SG&A or cost of sales, are now treated as a
reduction of cost of inventory.
12
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
The provisions of EITF 02-16 impacted the Company's first quarter 2004 results
of operations as follows:
In thousands, except per share data EITF 02-16
As Adjustment
Reported Impact
--------------------------------
Net sales $ 552,800 $ --
Cost of sales 332,346 (141)
--------------------------------
Gross profit 220,454 141
SG&A 220,390 (7,780)
--------------------------------
Operating profit 64 7,921
Interest expense, net 16 --
--------------------------------
Income before provision for income taxes 48 7,921
Provision for income taxes 18 3,026
--------------------------------
Net income $ 30 $ 4,895
================================
Earnings per share
Basic $ -- $ 0.11
Fully diluted $ -- $ 0.11
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 adjustment of $7.9 million represents those allowances
reflected as a reduction of the cost of inventory, which historically would have
been treated as a reduction of cost of sales or selling, general and
administrative expenses ("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. For
presentation purposes in the above table reflecting the impact of EITF 02-16 on
the statement of operations, 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.
The following discussion of the results of operations includes and, where
indicated, excludes the impact of the implementation of EITF 02-16 ("the
accounting change"). In discussing its period-to-period results, the Company
believes it is useful, for investors and management in reviewing comparative
operating performance and performance indicators, to identify the particular
impact of the accounting change on first quarter fiscal 2004 operating
performance, and it is useful in understanding and evaluating the Company's
operating results and changes in operating performance on a comparative basis.
Management uses these adjusted numbers to assist it in managing and evaluating
its business and in comparing performance on a period-to-period basis. Its
inclusion is intended to provide an additional metric for reviewing performance
and supplements, and is not intended to represent, GAAP presentation.
13
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
Net sales for the thirteen weeks ended April 3, 2004 increased approximately
15.0% to $552.8 million, up from $480.5 million for the same period last year.
The increase in net sales is primarily the result of new store openings since
April 5, 2003. At April 3, 2004, the Company operated 461 stores, including 20
stores in Canada, as compared with 400 stores, including 15 stores in Canada, at
April 5, 2003. Store square footage increased approximately 13% to 15.8 million
at April 3, 2004 compared with 13.9 million at April 5, 2003. During the
thirteen weeks ended April 3, 2004, the Company opened 21 stores and closed no
stores as compared with opening 16 stores and closing seven stores during the
same period last year.
Comparable store net sales increased 4.7% for the thirteen weeks ended April 3,
2004 compared to a decline of 3.2% for the same period last year. The increase
in comparable net sales for the thirteen weeks ended April 3, 2004 is due
primarily to an increase in customer traffic as well as average transaction,
with traffic representing more than 80% of the increase. The Company believes
these improved sales results reflect the steady progress being made on its
strategic operating initiatives, which include improvements of in-stock
inventory positions, particularly on key items and advertised merchandise,
expansion of the store inventory ownership program, improvements to its
merchandise assortment planning process, and enhancements to the guest shopping
experience.
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 April 3,
2004 was $220.5 million, or 39.9% of net sales, compared with $192.8 million, or
40.1% of net sales, for the same period last year. Excluding the impact of the
accounting change, gross profit for the thirteen weeks ended April 3, 2004 was
$220.6 million, or 39.9% of net sales. The slight decline in gross profit as a
percentage of net sales is due to an increase in both markdowns and freight
costs, which was partially offset by a higher initial mark-on rate. The markdown
rate increased slightly due to selected SKU reductions in connection with the
Company's assortment planning initiative as well as more focused clearance
activities, which have contributed to the Company's improved inventory
complexion. Rising fuel prices is the primary reason for the increase in freight
costs.
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 April 3, 2004 were
$220.4 million, or 39.9% of net sales, compared with $189.4 million, or 39.4% of
net sales, for the same period last year. Excluding the impact of the accounting
change, SG&A for the thirteen weeks ended April 3, 2004 was $212.6 million, or
38.5% of net sales. The Company was successful in leveraging its fixed costs as
well as its core operating costs, including store payroll. Included in SG&A for
the thirteen weeks ended April 5, 2003 were advertising credits equaling 1.4% of
net sales which, as a part of the accounting change, are no longer classified as
an offset to SG&A in fiscal 2004.
Operating profit for the thirteen weeks ended April 3, 2004 was approximately
$64,000, or 0.01% of net sales, compared with $3.4 million, or 0.7% of net
sales, for the same period last year. Excluding the impact of the accounting
change, operating profit for the thirteen weeks ended April 3, 2004 was $8.0
million, or 1.4% of net sales.
Net interest expense for the thirteen weeks ended April 3, 2004 decreased to
approximately $16,000 from $76,000 during the same period last year. The
decrease in net interest expense is mainly due to lower average borrowings.
The Company's income tax expense was approximately $18,000 for the thirteen
weeks ended April 3, 2004, compared with $1.3 million for the same period last
year. Excluding the impact of the accounting change, income tax expense for the
thirteen weeks ended April 3, 2004 was $3.0 million. The Company's effective tax
rate was 38.2% for both the thirteen weeks ended April 3, 2004 and April 5,
2003.
14
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
As a result of the factors described above, net income for the thirteen weeks
ended April 3, 2004 was approximately $30,000, zero earnings per share on a
fully diluted basis, compared with $2.1 million, or $0.05 per share on a fully
diluted basis for the same period last year. Excluding the impact of the
accounting change, net income for the thirteen weeks ended April 3, 2004 was
$4.9 million, or $0.11 per share on a fully diluted basis.
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 April 3, 2004, the additional lines of credit include
committed facilities of approximately $26 million that expire on June 16, 2004
and are subject to annual renewal arrangements. As of April 3, 2004, the Company
was in compliance with the terms of the Credit Agreement. As of April 3, 2004,
the Company had no borrowings under the Credit Agreement and $3.5 million in
borrowings under the additional lines of credit at an interest rate of 4.25%.
The Company also had $62.2 million of letters of credit outstanding as of April
3, 2004, which included standby letters of credit issued primarily under the
Credit Agreement and import letters of credit used for merchandise purchases.
The Company is not obligated under any formal or informal compensating balance
requirements. See Note 3 to the Condensed Consolidated Financial Statements. The
Company maintains a trade payables arrangement with General Electric Capital
Corporation ("GECC") under which GECC purchases the Company's payables at a
discount directly from the Company's suppliers prior to the payables due date,
thereby permitting a supplier to receive payment prior to the due date of the
payable, with the Company sharing in part of the GECC discount. At April 3,
2004, January 3, 2004, and April 5, 2003, the Company owed approximately $69.0
million, $66.2 million, and $56.3 million, respectively, to GECC under this
program, which was included in accounts payable.
Net cash used in operating activities for the thirteen weeks ended April 3, 2004
was $53.6 million compared with $3.2 million used in operating activities for
the same period last year. The increase in cash used between periods is
primarily due to the timing of vendor payments.
Net cash used in investing activities for the thirteen weeks ended April 3, 2004
was $23.7 million, compared with $25.7 million for the same period last year.
The Company currently estimates capital expenditures will be approximately $80
million in fiscal 2004, primarily for an estimated 45 to 50 new stores,
maintenance of existing stores, and system enhancements.
Net cash provided by financing activities for the thirteen weeks ended April 3,
2004 was $9.1 million compared with $0.6 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 current store expansion plan is implemented, such peak
periods may require increases in the amounts available under its credit
facilities from those currently existing and/or other debt or equity funding.
Management currently believes that the Company's cash flows from operations,
credit extended by suppliers, its access to credit facilities and its
uncommitted lines of credit will be sufficient to fund its expected capital
expenditures, working capital and non-acquisition business expansion
requirements for at least the next 12 to 18 months.
15
LINENS 'N THINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CON'T
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Emerging Issues Task Force ("EITF") issued EITF 02-16,
"Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor" ("EITF 02-16"), which states that cash consideration
received from a vendor is presumed to be a reduction of the prices of the
vendor's products or services and should, therefore, be characterized as a
reduction of cost of merchandise sold when recognized in the Company's Condensed
Consolidated Statement of Operations. That presumption may be overcome when the
consideration is either a reimbursement of specific, incremental and
identifiable costs incurred to sell the vendor's products, or a payment for
assets or services delivered to the vendor. EITF 02-16 is effective for
contracts entered into or modified after December 31, 2002. This issue did not
have a material impact on the Company's fiscal 2003 audited Consolidated
Financial Statements as substantially all of the Company's vendor contracts in
effect during fiscal 2003 were entered into prior to December 31, 2002.
Beginning in the first quarter of fiscal 2004, as vendor agreements are
initiated or modified, the Company applies the method of accounting for vendor
allowances pursuant to EITF 02-16. In connection with the implementation of EITF
02-16, the Company treats certain funds received from vendors as a reduction in
the cost of inventory and, as a result, these funds are recognized as a
reduction to cost of merchandise sold when the inventory is sold. Accordingly,
certain funds received from vendors, which were historically reflected as a
reduction of advertising expense in SG&A or cost of sales, are now treated as a
reduction of cost of inventory. Based on the Company's current evaluation, the
estimated impact from the implementation of EITF 02-16 is expected to reduce
fully diluted earnings per share on a non-cash basis by approximately $0.24 for
fiscal 2004, as a result of delaying the recognition of vendor allowances until
the related inventory is sold. The provisions of EITF 02-16 impacted the
Company's first quarter 2004 results by approximately $4.9 million, net of tax,
or $0.11 per fully diluted share, and the majority of this non-cash reduction in
earnings per share is expected to occur in the first two quarters of fiscal
2004. The Company currently expects SG&A on an annualized basis to increase by
approximately 1.1% as a percent of sales as a result of this accounting change.
This accounting change will have no impact on the Company's cash flows or the
expected amount of funds to be received from vendors. In addition, following the
initial implementation impact of EITF 02-16 in fiscal 2004, subsequent fiscal
years will reflect vendor allowances on a consistent basis other than for future
net changes in such vendor allowances.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of SFAS No. 123" ("SFAS
No. 148"). This statement amends SFAS Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), and provides alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, the statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used. For the thirteen
week period ended April 3, 2004, the Company accounted for stock options using
the intrinsic value method prescribed under APB Opinion 25, and accordingly, the
Company did not recognize compensation expense for stock options. The Company
continues to account for stock-based compensation using APB Opinion No. 25 and
has not adopted the recognition provisions of SFAS No. 123, as amended by SFAS
No. 148. However, the Company has adopted the disclosure provisions and has
included this information in Note 6 to the Company's Condensed Consolidated
Financial Statements.
INFLATION
The Company does not believe that its operating results have been materially
affected by inflation during the preceding three years. There can be no
assurance, however, that the Company's operating results will not be affected by
inflation in the future.
SEASONALITY
The Company's business is subject to substantial seasonal variations.
Historically, the Company has realized a significant portion of its net sales
and net income for the year during the third and fourth quarters. The Company's
quarterly results of operations may also fluctuate significantly as a result of
a variety of other factors, including the timing of new store openings. The
Company believes this is the general pattern associated with its segment of the
retail industry and expects this pattern will continue in the future.
Consequently, comparisons between quarters are not necessarily meaningful and
the results for any quarter are not necessarily indicative of future results.
16
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, acceptance of
product offerings and fashions and our ability to anticipate and successfully
respond to changing consumer tastes and preferences, the success of our new
business concepts, seasonal concepts and new brands, the performance of our new
stores, substantial competitive pressures from other home furnishings retailers,
the success of 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 in this report, 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 may be contained in subsequent reports filed with the
Securities and Exchange Commission, including our Quarterly Reports on Form
10-Q. You are urged to consider all such factors. In light of the uncertainty
inherent in such forward-looking statements, you should not consider their
inclusion to be a representation that such forward-looking matters will be
achieved. The Company assumes no obligation for updating any such
forward-looking statements to reflect actual results, changes in assumptions or
changes in other factors affecting such forward-looking statements.
17
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company continuously evaluates the market risk associated with its financial
instruments. Market risks relating to the Company's operations result primarily
from changes in interest rates and foreign exchange rates. The Company does not
engage in financial transactions for trading or speculative purposes.
INTEREST RATE RISK:
The Company's financial instruments include cash and cash equivalents and
short-term borrowings. The Company's obligations are short-term in nature and
generally have less than a 30-day commitment. The Company is exposed to interest
rate risks primarily through borrowings under the Credit Agreement. Interest on
all borrowings is based upon several alternative rates as stipulated in the
Credit Agreement, including a fixed margin above LIBOR. As of April 3, 2004, the
Company had no borrowings under the Credit Agreement and $3.5 million in
borrowings under the additional lines of credit at an interest rate of 4.25%
(see Note 3 to the Condensed Consolidated Financial Statements). The Company
believes that its interest rate risk is minimal as a hypothetical 10% increase
or decrease in interest rates in the associated debt's variable rate would not
materially affect the Company's results from operations or cash flows. The
Company does not use derivative financial instruments in its investment
portfolio.
FOREIGN CURRENCY RISK:
The Company enters into some purchase obligations outside of the United States,
which are predominately settled in U.S. dollars, and therefore, the Company 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 20 stores in Canada as of April 3, 2004. The
Company believes its foreign currency translation risk is minimal, as a
hypothetical 10% strengthening or weakening of the U.S. dollar relative to the
Canadian dollar would not materially affect the Company's results from
operations or cash flow.
Since fiscal year end 2003, there have been no material changes in market risk
exposures.
Item 4. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer, with the
assistance of other members of the Company's management, have evaluated the
effectiveness of the Company's disclosure controls and procedures as of the end
of the period covered by this Quarterly Report on Form 10-Q. Based on such
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that the Company's disclosure controls and procedures are
effective.
The Company's Chief Executive Officer and Chief Financial Officer have also
concluded that there have been no changes in the Company's internal control over
financial reporting during the quarter ended April 3, 2004 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
15 Letter re unaudited interim financial information
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,
signed by Norman Axelrod, Chairman and Chief Executive Officer
of the Company, and William T. Giles, Executive Vice President
and Chief Financial Officer of the Company.
(b) REPORTS ON FORM 8-K:
The Company furnished the following reports on Form 8-K during the quarter
for which this report on Form 10-Q is filed:
The Company furnished a Current Report on Form 8-K dated February 4, 2004
in reference to a press release dated February 4, 2004 reporting the
Company's sales and earnings results for its fourth quarter and fiscal year
ended January 3, 2004.
The Company furnished a Current Report on Form 8-K dated February 27, 2004
in reference to an employment agreement entered into between the Company
and F. David Coder, Senior Vice President, Store Operations.
19
SIGNATURES
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.
Dated: May 7, 2004 By: /s/ Norman Axelrod
------------------
Name: Norman Axelrod
Title: Chairman and Chief
Executive Officer
Dated: May 7, 2004 By: /s/ William T. Giles
--------------------
Name: William T. Giles
Title: Executive Vice President and
Chief Financial Officer
20