p13
(Linens 'n Things, Inc. & Subsidiaries)
Five-Year Financial Summary
<TABLE>
<CAPTION>
1997(2) 1996(3) 1995(4) 1994 1993
- --------------------------------------------------------------------------------------------------------------------
(in thousands, except per share and selected operating data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net Sales $ 874,224 $ 696,107 $ 555,095 $ 440,118 $ 333,178
Operating Profit 45,507 30,683 8,133 32,242 21,736
Net Income (Loss) 25,790 15,039 (212) 17,198 11,719
Net Income (Loss) Per Share $ 1.30 $ 0.78 $ (0.01) $ 0.89 $ 0.61
Weighted Average Shares Outstanding(1) 19,769 19,279 19,268 19,268 19,268
Balance Sheet Data:
Total Assets $ 472,099 $ 423,957 $ 343,522 $ 273,167 $ 196,517
Working Capital 123,375 113,582 69,399 42,568 35,143
Total Long-Term Debt -- 13,500 -- -- --
Shareholders' Equity $ 280,035 $ 249,727 $ 76,678 $ 85,819 $ 74,340
Selected Operating Data:
Number of Stores 176 169 155 145 143
Total Gross Square Footage (000's) 5,493 4,727 3,691 2,865 2,078
Increase (Decrease) in Comparable
Store Net Sales 6.6% 1.1% (1.5%) 5.4% 5.0%
</TABLE>
(1) 1995 and prior reflect the actual shares issued upon the completion of the
Company's initial public offering on November 26, 1996.
(2) Reflects diluted earnings per share for 1997 in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share"
("SFAS No. 128"). Basic earnings per share for 1997 is $1.34 based on
19,289 weighted average shares outstanding.
(3) Reflects diluted earnings per share for 1996 in accordance with SFAS No.
128. Basic earnings per share for 1996 was $0.78 based on 19,268 weighted
average shares outstanding.
(4) Reflects certain one-time special charges related to the CVS Strategic
Program (as described in the notes to the consolidated financial
statements). Operating profit in 1995, excluding the effect of these
charges, would have been $31.5 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<PAGE>
p14
(Linens 'n Things, Inc. & Subsidiaries)
Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following table sets forth the percentage of net sales for certain items
included in the Company's statements of operations for the periods indicated:
December 31 1997 1996 1995
- --------------------------------------------------------------------------------
Percentage of net sales
Net sales 100.0% 100.0% 100.0%
Cost of sales, including buying
and warehousing costs 60.4 61.2 62.2
- --------------------------------------------------------------------------------
Gross profit 39.6 38.8 37.8
Selling, general and
administrative expenses 34.4 34.4 34.3
Restructuring and asset
impairment charges -- -- 2.0
- --------------------------------------------------------------------------------
Operating profit 5.2 4.4 1.5
Interest expense, net 0.1 0.7 1.3
- --------------------------------------------------------------------------------
Income before income taxes and
cumulative effect of change in
accounting principle 5.1 3.7 0.2
Provision for income taxes 2.1 1.5 0.2
- --------------------------------------------------------------------------------
Income (loss) before cumulative
effect of change in
accounting principle 3.0 2.2 (0.0)
Cumulative effect of change in
accounting principle, net -- -- 0.0
- --------------------------------------------------------------------------------
Net income (loss) 3.0% 2.2% (0.0%)
- --------------------------------------------------------------------------------
Year Ended December 31, 1997 Compared
With Year Ended December 31, 1996
Net Sales
- --------------------------------------------------------------------------------
Net sales for 1997 were $874.2 million, an increase of 25.6% over 1996 sales
of $696.1 million, primarily as a result of new store openings and increased
comparable store net sales. The Company opened 25 superstores and closed 18
stores in 1997, as compared with opening 36 superstores and closing 22 stores in
1996. At December 31, 1997, the Company operated 176 stores, of which 153 were
superstores, as compared with 169 stores, of which 132 were superstores at
December 31, 1996. Comparable store net sales increased 6.6% in 1997 compared
with 1.1% in 1996. Comparable store net sales were driven not only by higher
consumer traffic, but by an increase in average transaction, which reflects the
increased focus placed on providing better guest service as well as the
continued expansion of "things" merchandise. In addition, the Company had a very
strong holiday selling season during the fourth quarter having reported a
comparable store net sales increase of 7.3%.
The Company's average net sales per superstore increased to $5.8 million in
1997 from $5.5 million in 1996, while average net sales per traditional store
remained flat at $1.7 million. For the year ended December 31, 1997, net sales
of "linens" merchandise increased approximately 20% over the prior year, while
net sales of "things" merchandise increased approximately 38% for the same
period. The greater increase in "things" merchandise primarily resulted from the
growth in the number of superstore locations which carry a larger line of
"things" products as well as the overall expansion of the product categories in
existing superstores.
Gross Profit
- --------------------------------------------------------------------------------
Gross profit for 1997 was $346.3 million, or 39.6% of net sales, as compared
with $269.9 million, or 38.8% of net sales, in 1996. This increase as a
percentage of net sales resulted from improvements in buying, improved selling
mix and lower freight costs from the leveraging of the Company's distribution
center. The gross margin for "things" merchandise was slightly higher than the
gross margin for "linens" merchandise for each period, accounting for a higher
gross margin in 1997 compared with 1996.
Expenses
- --------------------------------------------------------------------------------
Selling, general and administrative expenses for 1997 were $300.8 million, or
34.4% of net sales, as compared with $239.2 million, or 34.4% of net sales, in
1996.
As a result of the factors described above, operating profit for 1997
increased to $45.5 million, or 5.2% of net sales, from $30.7 million, or 4.4% of
net sales, during 1996.
Net interest expense in 1997 decreased 78.4% to $1.0 million, or 0.1% of net
sales, from $4.7 million, or 0.7% of net sales, during 1996. This decrease was
due primarily to an increase in cash flow from operations in 1997, as well as
$158.0 million in capital contributions from CVS in 1996. These contributions
were used to repay the Company's intercompany debt to CVS prior to the initial
public offering ("IPO") in 1996.
<PAGE>
p15
(Linens 'n Things, Inc. & Subsidiaries)
The Company's income tax expense for 1997 was $18.7 million, as compared with
$11.0 million during 1996. The Company's effective tax rate in 1997 was 42.0%,
as compared with 42.1% in 1996.
Net Income
- --------------------------------------------------------------------------------
As a result of the factors described above, net income for 1997 was $25.8
million, or 3.0% of net sales, as compared with $15.0 million, or 2.2% of net
sales in 1996.
Year Ended December 31, 1996 Compared
With Year Ended December 31, 1995
Net Sales
- --------------------------------------------------------------------------------
Net sales for 1996 were $696.1 million, an increase of 25.4% over 1995 sales
of $555.1 million, primarily as a result of new store openings. The Company
opened 36 superstores and closed 22 stores in 1996, as compared with opening 28
superstores and closing 18 stores in 1995. At December 31, 1996, the Company
operated 169 stores, of which 132 were superstores, as compared with 155 stores,
of which 101 were superstores at December 31, 1995. Comparable store net sales
increased 1.1% in 1996 compared with a decrease of 1.5% in 1995. During the
first half of 1996, the Company's comparable store net sales decreased below the
same period in 1995 by 2.7% due primarily to increased competitive intrusions at
approximately 40% of the Company's superstores in existing markets. These
competitive intrusions commenced primarily in mid-1995 through the first half of
1996. However, for the second half of 1996, comparable store net sales increased
4.1% as a result of a strong back-to-school and holiday selling season, as well
as the diminishing effect of the prior year's competitive intrusions.
The Company's average net sales per superstore increased slightly in 1996 to
$5.5 million from $5.4 million in 1995, while average net sales per traditional
store remained flat at $1.7 million. For the year ended December 31, 1996, net
sales of "linens" merchandise increased approximately 20% over the prior year,
while net sales of "things" merchandise increased approximately 36% for the same
period. The increase in "things" merchandise primarily resulted from the growth
in the number of superstore locations which carry a larger line of "things"
products, as well as the overall expansion of the product categories in existing
superstores.
Gross Profit
- --------------------------------------------------------------------------------
Gross profit for 1996 was $269.9 million, or 38.8% of net sales, as compared
with $209.9 million, or 37.8% of net sales, in 1995. Excluding charges related
to the CVS Strategic Program (the Company was a wholly-owned subsidiary of CVS
prior to the IPO in November 1996) discussed in the notes to consolidated
financial statements, gross profit in 1995 would have been $218.1 million or
39.3% of net sales. This decrease as a percentage of net sales resulted from
higher clearance markdowns during the spring associated with the closing of
traditional stores, partially offset by reduced freight expenses as a percentage
of net sales. The gross margin for "things" merchandise was slightly higher than
the gross margin for "linens" merchandise for each period, accounting for a
higher gross margin in 1996 compared with 1995.
Expenses
- --------------------------------------------------------------------------------
Selling, general and administrative expenses for 1996 were $239.2 million, or
34.4% of net sales, as compared with $190.8 million, or 34.3% of net sales in
1995. This increase as a percentage of net sales resulted from a one-time charge
of approximately $1.5 million relating to certain employee benefit costs
associated with the initial public offering.
As a result of the factors described above, operating profit for 1996
increased to $30.7 million, or 4.4% of net sales, from $8.1 million, or 1.5% of
net sales, during 1995. Excluding one-time charges relating to the CVS Strategic
Program, the Company's operating profit in 1995 would have been $31.5 million,
or 5.7% of net sales.
Net interest expense in 1996 decreased 33.5% to $4.7 million, or 0.7% of net
sales, from $7.1 million, or 1.3% of net sales, during 1995. This decrease was
due primarily to $158.0 million in capital contributions from CVS in 1996, which
were used to repay the Company's inter-company debt to CVS.
The Company's income tax expense for 1996 was $11.0 million, as compared with
$1.1 million during
<PAGE>
p16
(Linens 'n Things, Inc. & Subsidiaries)
1995. The Company's effective tax rate in 1996 was 42.1%, as compared with
103.2% in 1995, primarily due to the effect of the Company's one-time charges
incurred in 1995. Excluding these charges, the Company's effective tax rate
would have been 42.3% in 1995.
Effective January 1, 1995, the Company changed its policy from capitalizing
internally developed software costs to expensing them as incurred. The impact in
1995 as a result of this change, exclusive of the cumulative effect of $0.3
million (before income tax effect), was to reduce net income by $0.2 million.
Net Income
- --------------------------------------------------------------------------------
As a result of the factors described above, net income for 1996 was $15.0
million, or 2.2% of net sales, as compared with a net loss of $212,000 in 1995.
Excluding one-time charges relating to the CVS Strategic Program, the Company's
net income would have been $14.1 million, or 2.5% of net sales, in 1995.
Liquidity and Capital Resources
The Company's capital requirements are primarily investments in new stores,
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.
On November 20, 1996, the Company entered into a $125.0 million three-year
senior revolving credit facility agreement (the "Credit Agreement"). The Credit
Agreement also allows for $20.0 million in borrowings from uncommitted lines
outside of the Credit Agreement. Management currently believes that the
Company's cash flows from operations, 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.
Net cash provided by operating activities for the year ended December 31,
1997 was $75.2 million compared with $20.2 million for the same period in 1996.
The increase in net cash provided by operating activities was primarily due to
improved working capital management and an increase in net income. During 1997,
the Company reduced its inventory per square foot by 5.0% and experienced
increases in accounts payable and accrued expenses. Accounts payable increased
over last year due to the timing of vendor payments, and accrued expenses
increased due to the timing of tax, salary and benefit payments.
Net cash used in investing activities for the year ended December 31, 1997
was $35.4 million as compared with $46.4 million for the same period in 1996.
The decrease compared to last year resulted from the decrease in the number of
new store openings from 36 in 1996 to 25 in 1997.
Net cash used in financing activities for the year ended December 31, 1997
was $26.8 million compared with net cash provided by financing activities of
$48.9 million for the same period in 1996. Net cash used in financing activities
in 1997 was primarily attributable to the timing of the settlement of vendor
payments as well as the prepayment of the $10.0 million remaining on the CVS
Note. Net cash provided by financing activities in 1996 was primarily the result
of capital contributions of $158.0 million from CVS, which were used to repay
the intercompany debt in 1996.
Change in Effective Tax Rate
Effective the beginning of 1998, the Company expects to reduce its effective
tax rate from 42.0% to approximately 39.0%.
The Year 2000 Issue
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and has
developed an implementation plan to resolve the issue. The Year 2000 problem is
the result of computer programs being written using two digits rather than four
to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. The Company presently believes that, with modifications
<PAGE>
p17
(Linens 'n Things, Inc. & Subsidiaries)
to existing software and conversions to new software for certain applications,
the Year 2000 problem will not pose significant operational problems for the
Company's computer systems. However, if such modifications and conversions are
not completed timely, the Year 2000 problem may have a material impact on the
operations of the Company. Also, there can be no assurance that the systems of
other companies on which the Company's systems rely also will be timely
converted or that any such failure to convert by another company would not have
an adverse effect on the Company's systems or operations.
Inflation and Seasonality
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.
The Company's business is subject to substantial seasonal variations.
Historically, the Company has realized a significant portion of its net sales
and substantially all of its net income for the year during the third and fourth
quarters. The Company's quarterly results of operations may also fluctuate
significantly as a result of a variety of other factors, including the timing of
new store openings. The Company believes this is the general pattern associated
with its segment of the retail industry and expects this pattern will continue
in the future. Consequently, comparisons between quarters are not necessarily
meaningful and the results for any quarter are not necessarily indicative of
future results.
Forward-Looking Statements
This Annual Report to Shareholders contains forward-looking statements within
the meaning of The Private Securities Litigation Reform Act of 1995. The
statements are made a number of times throughout the document and may be
identified by forward-looking terminology as "expect," "believe," "may," "will,"
"intend" or similar statements or variations of such terms. Such forward-looking
statements involve certain risks and uncertainties including levels of sales,
store traffic, acceptance of product offerings and fashions, competitive
pressures from other superstore retailers and from department stores which carry
other products including certain designer products not carried by the Company's
stores, availability of suitable future store locations and schedule of store
expansion plans. 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 such factors. The Company assumes no
obligation for updating any such forward-looking statements.
<PAGE>
p18
(Linens 'n Things, Inc. & Subsidiaries)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31 1997 1996 1995
- -----------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Net sales $ 874,224 $ 696,107 $ 555,095
Cost of sales, including buying and warehousing costs 527,924 426,196 345,162
- -----------------------------------------------------------------------------------------------
Gross profit 346,300 269,911 209,933
Selling, general and administrative expenses 300,793 239,228 190,826
Restructuring and asset impairment charges -- -- 10,974
- -----------------------------------------------------------------------------------------------
Operating profit 45,507 30,683 8,133
Interest expense, net 1,013 4,692 7,059
- -----------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect
of change in accounting principle 44,494 25,991 1,074
Provision for income taxes 18,704 10,952 1,108
- -----------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change
in accounting principle 25,790 15,039 (34)
Cumulative effect of change in accounting principle, net -- -- 178
- -----------------------------------------------------------------------------------------------
Net income (loss) $ 25,790 $ 15,039 $ (212)
- -----------------------------------------------------------------------------------------------
Per share of common stock:
Basic
Income (loss) before cumulative effect of change
in accounting principle $ 1.34 $ 0.78 $ (0.00)
Cumulative effect of change in accounting principle, net -- -- 0.01
- -----------------------------------------------------------------------------------------------
Net income (loss) $ 1.34 $ 0.78 $ (0.01)
- -----------------------------------------------------------------------------------------------
Weighted average shares outstanding 19,289 19,268 19,268
Diluted
Income (loss) before cumulative effect of
change in accounting principle $ 1.30 $ 0.78 $ (0.00)
Cumulative effect of change in accounting principle, net -- -- 0.01
- -----------------------------------------------------------------------------------------------
Net income (loss) $ 1.30 $ 0.78 $ (0.01)
- -----------------------------------------------------------------------------------------------
Weighted average shares outstanding 19,769 19,279 19,268
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
p19
(Linens 'n Things, Inc. & Subsidiaries)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31 1997 1996
- ---------------------------------------------------------------------------------------
(in thousands, except share amounts)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 39,882 $ 26,914
Accounts receivable, net 13,764 17,384
Inventories 223,188 202,134
Prepaid expenses and other current assets 13,058 10,360
- ---------------------------------------------------------------------------------------
Total current assets 289,892 256,792
Property and equipment, net 154,480 138,508
Goodwill, net of accumulated amortization
of $5,664 in 1997 and $4,814 in 1996 21,526 22,376
Deferred charges and other noncurrent assets, net 6,201 6,281
- ---------------------------------------------------------------------------------------
Total assets $472,099 $423,957
=======================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 98,418 $ 92,529
Accrued expenses and other current liabilities 68,099 50,681
- ---------------------------------------------------------------------------------------
Total current liabilities 166,517 143,210
Long-term note -- 13,500
Deferred income taxes and other long-term liabilities 25,547 17,520
Shareholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized;
none issued and outstanding -- --
Common stock, $.01 par value; 60,000,000 shares authorized;
19,316,920 shares in 1997 and 19,267,758 shares in 1996
issued and outstanding 193 193
Additional paid-in capital 204,707 200,189
Retained earnings 75,135 49,345
- ---------------------------------------------------------------------------------------
Total shareholders' equity 280,035 249,727
- ---------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $472,099 $423,957
=======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
p20
(Linens 'n Things, Inc. & Subsidiaries)
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional
----------------------- Paid-in Retained
Shares Amount Capital Earnings Total
- ----------------------------------------------------------------------------------------------------------
(in thousands, except number of shares)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 100 $ -- $ 42,372 $ 43,447 $ 85,819
Net loss -- -- -- (212) (212)
Dividends paid to CVS -- -- -- (8,929) (8,929)
- ----------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 100 -- 42,372 34,306 76,678
Net income -- -- -- 15,039 15,039
Capital contributions by CVS, net
of assets and liabilities transferred -- -- 158,010 -- 158,010
Conversion of common stock 19,267,658 193 (193) -- --
- ----------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 19,267,758 193 200,189 49,345 249,727
Net income -- -- -- 25,790 25,790
Common stock exercised under stock
incentive plans 49,162 -- 1,018 -- 1,018
Capital contribution by CVS -- -- 3,500 -- 3,500
- ----------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 19,316,920 $ 193 $ 204,707 $ 75,135 $ 280,035
==========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
p21
(Linens 'n Things, Inc. & Subsidiaries)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 25,790 $ 15,039 $ (212)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 17,978 14,569 12,862
Restructuring and asset impairment charges -- -- 10,974
Cumulative effect of change in accounting principle -- -- 294
Deferred income taxes 2,677 4,342 (3,296)
Loss on disposal of assets 2,912 2,400 3,817
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 3,620 (3,429) (1,933)
Increase in inventories (21,054) (25,241) (46,333)
Increase in prepaid expenses and other current assets (690) (957) (1,928)
(Increase) decrease in deferred charges and other
noncurrent assets (577) (329) 567
Increase in accounts payable 23,424 9 17,246
Increase (decrease) in accrued expenses and other liabilities 21,078 13,836 (4,135)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 75,158 20,239 (12,077)
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and equipment (35,355) (46,429) (41,329)
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Capital contributions by CVS -- 158,010 --
(Decrease) increase in due to related parties -- (118,652) 51,200
Dividends paid to CVS -- -- (8,929)
Proceeds from common stock exercised under stock incentive plans 1,018 -- --
(Repayment) issuance of long-term note (10,000) 13,500 --
(Decrease) increase in book overdrafts (17,853) (3,976) 11,251
- ----------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (26,835) 48,882 53,522
- ----------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 12,968 22,692 116
Cash and cash equivalents at beginning of year 26,914 4,222 4,106
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 39,882 $ 26,914 $ 4,222
- ----------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest (net of amounts capitalized) $ 1,630 $ 4,957 $ 7,339
Income taxes $ 4,377 $ 6,590 $ 7,214
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
p22
(Linens 'n Things, Inc. & Subsidiaries)
Notes to Consolidated Financial Statements
1. Business
- --------------------------------------------------------------------------------
Linens 'n Things, Inc. (formerly Bloomington, MN., L.T., Inc.) and
subsidiaries (collectively the "Company") operated 176 stores, including 153
superstores, in 37 states across the United States as of December 31, 1997. The
Company's stores emphasize a broad assortment of home textiles, housewares and
home accessories, carrying both national brand and private label goods.
2. Initial Public Offering
- --------------------------------------------------------------------------------
The Company was a wholly-owned subsidiary of CVS Corporation ("CVS" or the
"Parent"), formerly Melville Corporation, until November 26, 1996, when CVS
completed an initial public offering ("IPO") of 13,000,000 shares of the
Company's common stock. Subsequent to the IPO, CVS owned approximately 32.5% of
the Company's common stock, having retained 6,267,758 shares. During 1997, CVS
sold its remaining shares of the Company's common stock.
During 1996, CVS acquired 100 shares of common stock of Linens 'n Things
Center, Inc. ("LNT Center"), a newly formed California corporation, for
$130,010,000. In June 1996, CVS contributed all outstanding shares of common
stock of Bloomington, MN., L.T., Inc. to LNT Center. In addition, CVS made a
capital contribution of $28,000,000 to LNT Center during October, 1996.
Subsequently, CVS contributed all outstanding shares of common stock of LNT
Center to Linens 'n Things, Inc., a newly formed Delaware corporation. The
accompanying consolidated financial statements are presented as if Linens 'n
Things, Inc. had existed and owned LNT Center and Bloomington, MN., L.T., Inc.
throughout 1996 and 1995.
Immediately prior to the consummation of the IPO, the authorized capital
stock of the Company was changed from 100 shares of common stock, par value $.01
per share, to 60 million shares of common stock, par value $.01 per share, and
each issued and outstanding share of common stock was converted into 192,677.58
shares of common stock.
3. Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
Basis of Presentation
The consolidated financial statements include those of Linens 'n Things, Inc.
and its wholly-owned subsidiaries. All intercompany balances and transactions
have been eliminated.
Accounting Changes
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share" ("SFAS No. 128")
which requires a dual presentation of earnings per share--basic and diluted.
Basic earnings per share has been computed by dividing net income by the
weighted average number of shares outstanding of 19,289,000 in 1997 and
19,268,000 in 1996 and 1995. Diluted earnings per share has been computed by
dividing net income by the weighted average number of shares outstanding
including the dilutive effects of stock options and deferred stock grants. The
total shares outstanding for the diluted earnings per share calculation were
19,769,000 in 1997, 19,279,000 in 1996 and 19,268,000 in 1995. For the periods
prior to the IPO, the weighted average shares assumed are based on the actual
shares outstanding at the time of the IPO.
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). As permitted under SFAS No. 123, the
Company elected not to adopt the fair value based method of accounting for its
stock-based compensation plans, but will account for such compensation under the
provisions of Accounting Principles Board Opinion No. 25 ("APB No. 25"). The
Company has, however, complied with the disclosure requirements of SFAS No. 123.
Effective October 1, 1995, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS No. 121").
Effective January 1, 1995, the Company changed its policy from capitalizing
internally developed software costs to expensing them as incurred. The Company
believes that this change results in a better matching of revenues and expenses.
The impact on 1995 as a result of this change, exclusive of the cumulative
effect of $0.3 million (before income tax effect), was to reduce net income by
$0.2 million.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value Of Financial Instruments,"
requires disclosure of the fair value of certain financial instruments. Cash and
cash equivalents, accounts receivable, accounts payable and accrued expenses are
reflected in the consolidated
<PAGE>
p23
(Linens 'n Things, Inc. & Subsidiaries)
financial statements at carrying value which approximates fair value due to the
short-term nature of these instruments. The carrying value of the Company's
borrowings approximates the fair value based on the current rates available to
the Company for similar instruments.
Cash and Cash Equivalents
The Company's cash management program utilizes controlled disbursement
accounts. Accordingly, all book overdraft balances have been reclassified to
current liabilities. Cash equivalents are considered, in general, to be those
securities with maturities of three months or less when purchased.
Inventories
Inventories consist of finished goods merchandise purchased from domestic and
foreign vendors and are carried at the lower of cost or market. Inventories are
determined on the retail inventory method valued on a first-in, first-out (FIFO)
basis.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of the assets (40 years for
building and 5 to 15 years for furniture, fixtures and equipment). Capitalized
software costs are amortized on a straight-line basis over their estimated
useful lives of 5 years, beginning in the year placed in service. Leasehold
improvements are amortized over the shorter of the related lease term or the
economic lives of the related assets. Fully depreciated property and equipment
is removed from the asset and related accumulated depreciation accounts.
Maintenance and repairs are charged directly to expense as incurred. Major
renewals or replacements are capitalized after making the necessary adjustments
to the asset and accumulated depreciation accounts of the items renewed or
replaced.
Impairment of Long-Lived Assets
When changes in circumstance warrant measurement, impairment losses for store
fixed assets are calculated by comparing the present value of projected
individual store cash flows over the lease term to the asset carrying values.
Deferred Charges
Deferred charges, principally beneficial leasehold costs, are amortized on a
straight-line basis, generally over the remaining life of the leasehold
acquired.
Goodwill
The excess of acquisition costs over the fair value of net assets acquired is
amortized on a straight-line basis not to exceed 40 years. Impairment is
assessed based on the profitability of the related business relative to planned
levels.
Store Opening and Closing Costs
New store opening costs are charged to expense as incurred. In the event a
store is closed before its lease has expired, the total lease obligation, less
sublease rental income, is provided for in the year of closing.
Advertising Costs
The Company charges production costs of advertising to expense the first time
the advertising takes place.
Income Taxes
The Company and CVS have entered into a tax disaffiliation agreement. Under
the agreement, the Company is generally responsible for any of its tax with
respect to periods prior to the IPO, determined as if on a separate company
basis. For periods subsequent to the IPO, the Company files its own federal and
state tax returns.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in statutory tax rates is recognized in
income in the period that includes the enactment date.
Use of Estimates in the Preparation of
Financial Statements
The preparation of financial statements in conformity with 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 of
<PAGE>
p24
(Linens 'n Things, Inc. & Subsidiaries)
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain reclassifications were made to the 1996 consolidated financial
statements in order to conform to the 1997 presentation.
4. Strategic Program and Asset Impairment Charge
- --------------------------------------------------------------------------------
During the fourth quarter of 1995, CVS announced a comprehensive strategic
program (the "CVS Strategic Program") which resulted, insofar as it relates to
the Company, in the Company recording a pretax charge of $23.4 million in the
fourth quarter of 1995. The pretax charge of $23.4 million consisted of: (i)
restructuring charges of $9.5 million consisting of estimated tenancy costs
($3.8 million) and asset write-offs ($5.0 million) associated with the closing
of six unprofitable stores and asset write-offs related to management
information systems outsourcing ($0.7 million); (ii) asset write-offs and other
non-cash charges totaling $12.5 million consisting primarily of the write-off of
certain non-productive assets, as well as costs associated with the changeover
to the Company's new distribution network relating to the opening of the
distribution center; and (iii) a non-cash asset impairment charge of $1.4
million due to the early adoption of SFAS No. 121 relating to store fixtures and
leasehold improvements. The charge resulted from the Company grouping assets at
a lower level than under its previous accounting policy regarding asset
impairment. Factors leading to impairment were a combination of historical
losses, anticipated future losses and inadequate cash flows. The net sales and
operating losses in 1995 of the stores to be closed were approximately $14.3
million and $1.5 million, respectively.
Of the six stores to be closed pursuant to the restructuring, five were
closed in 1996 and the remaining store closed in early 1997. The restructuring
reserve balance was completely utilized in 1997.
5. Accounts Receivable, Net
- --------------------------------------------------------------------------------
Accounts receivable, net, consisted of the following
at December 31 (in thousands): 1997 1996
- --------------------------------------------------------------------------------
Credit and charge card receivables $ 4,299 $ 3,379
Due from landlords 5,708 10,536
Other, net of allowance 3,757 3,469
- --------------------------------------------------------------------------------
$13,764 $17,384
- --------------------------------------------------------------------------------
6. Prepaid Expenses and Other Current Assets
- --------------------------------------------------------------------------------
Prepaid expenses and other current assets
consisted of the following
at December 31 (in thousands): 1997 1996
- --------------------------------------------------------------------------------
Deferred income taxes $ 8,658 $ 6,650
Other 4,400 3,710
- --------------------------------------------------------------------------------
$13,058 $10,360
- --------------------------------------------------------------------------------
7. Property and Equipment
- --------------------------------------------------------------------------------
Property and equipment consisted of the following
at December 31 (in thousands): 1997 1996
- --------------------------------------------------------------------------------
Land $ 430 $ 430
Building 4,760 4,760
Furniture, fixtures and equipment 139,827 118,072
Leasehold improvements 53,311 46,454
Computer software 6,813 6,331
- --------------------------------------------------------------------------------
205,141 176,047
Less accumulated depreciation
and amortization 50,661 37,539
- --------------------------------------------------------------------------------
$154,480 $138,508
- --------------------------------------------------------------------------------
8. Accrued Expenses and Other Current Liabilities
- --------------------------------------------------------------------------------
Accrued expenses and other current liabilities
consisted of the following
at December 31 (in thousands): 1997 1996
- --------------------------------------------------------------------------------
Income taxes payable $12,383 $ 994
Other taxes payable 10,987 8,678
Salaries and employee benefits 8,148 7,347
Restructuring reserves -- 1,878
Other 36,581 31,784
- --------------------------------------------------------------------------------
$68,099 $50,681
- --------------------------------------------------------------------------------
9. Short-Term Borrowing Arrangements
- --------------------------------------------------------------------------------
Prior to the IPO, all financing was provided by CVS. Interest rates charged
on borrowings from CVS were based on CVS' commercial paper borrowing rates. In
connection with the IPO, the Company repaid all indebtedness to CVS and entered
into a three-year, $125.0 million senior revolving credit facility agreement
(the "Credit Agreement"). 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
<PAGE>
p25
(Linens 'n Things, Inc. & Subsidiaries)
leverage ratio, as defined in the Credit Agreement. As of December 31, 1997 and
1996, the Company was in compliance with all terms and conditions of the Credit
Agreement. The Credit Agreement also allows for $20.0 million in borrowings from
uncommitted lines outside of the Credit Agreement.
Interest on all borrowings is determined based upon several alternative rates
set forth in the Credit Agreement. As of December 31, 1997, there were no
borrowings under the Credit Agreement but $1.7 million of letters of credit were
outstanding under the Credit Agreement. The letters of credit were used to
guarantee payment of certain self-insurance obligations. The Company is not
obligated under any formal or informal compensating balance requirements.
10. Long-Term Note
- --------------------------------------------------------------------------------
In conjunction with the IPO, the Company issued a four-year, $13.5 million
subordinated note (the "Note") to CVS. The Note contained no principal
amortization prior to maturity in December 2000, and required quarterly interest
payments at the 90-day LIBOR rate plus the applicable spread under the Credit
Agreement described above. The Note also provided for forgiveness by CVS, at
varying amounts, based upon the proceeds from any sales by CVS of the Company's
common stock together with the market value of any common stock which CVS
continued to own at December 31, 1997. In May 1997, CVS sold 6,267,658 of its
remaining shares of common stock, representing substantially all of its
holdings. As a result of the net proceeds received, $3.5 million was forgiven
and contributed as equity by CVS. In July 1997, the Company prepaid the
remaining $10.0 million to CVS utilizing cash flows from operations. The Note
contained no prepayment penalties. In 1997, the average borrowing rate for the
Note through the date of its repayment was 7.2%.
11. Deferred Income Taxes and Other Long-Term Liabilities
- --------------------------------------------------------------------------------
Deferred income taxes and other long-term
liabilities consisted of the following
at December 31 (in thousands): 1997 1996
- --------------------------------------------------------------------------------
Deferred income taxes $15,369 $10,684
Other 10,178 6,836
- --------------------------------------------------------------------------------
$25,547 $17,520
- --------------------------------------------------------------------------------
12. Leases
- --------------------------------------------------------------------------------
The Company has noncancelable operating leases, primarily for retail stores,
which expire through 2022. The leases generally contain renewal options for
periods ranging from 5 to 15 years and require the Company to pay costs such as
real estate taxes and common area maintenance. Contingent rentals are paid based
on a percentage of net sales. Net rental expense for all operating leases for
the years ended December 31 was as follows (in thousands):
1997 1996 1995
- --------------------------------------------------------------------------------
Minimum rentals $70,269 $53,264 $38,788
Contingent rentals 116 210 201
- --------------------------------------------------------------------------------
70,385 53,474 38,989
Less sublease rentals 572 151 151
- --------------------------------------------------------------------------------
$69,813 $53,323 $38,838
- --------------------------------------------------------------------------------
At December 31, 1997, the future minimum rental payments required under
operating leases and the future minimum sublease rentals excluding lease
obligations for closed stores were as follows (in thousands):
Year
- --------------------------------------------------------------------------------
1998 $ 71,249
1999 70,466
2000 71,189
2001 71,754
2002 72,334
Thereafter 691,765
- --------------------------------------------------------------------------------
$1,048,757
- --------------------------------------------------------------------------------
Total future minimum sublease rentals $ 5,400
- --------------------------------------------------------------------------------
In addition, as of February 4, 1998, the Company had fully executed leases
for 20 stores planned for opening in 1998.
13. Stock Incentive Plans
- --------------------------------------------------------------------------------
Concurrent with the IPO, the Company adopted the 1996 Incentive Compensation
Plan (the "Plan"), which provides for the granting of options, deferred stock
grants and other stock-based awards, up to a maximum of 2,312,132 shares of
common stock, to key employees. The Company also adopted the 1996 Non-Employee
Directors Stock Plan (the "Directors' Plan"), which provides for the granting of
options and stock unit grants to
<PAGE>
p26
(Linens 'n Things, Inc. & Subsidiaries)
non-employee directors ("eligible directors"), up to a maximum of 200,000
shares. The Company had reserved a total of 2,512,132 shares for issuance under
these plans.
Stock options and grants under the Plan and the Directors' Plan are awarded
at the fair market value of the shares at the date of grant. The right to
exercise options generally commences one to four years after, and expires ten
years after, the grant date, provided the optionee or eligible director
continues to be employed by, or remains in service as director to, the Company.
Under the Directors' Plan, any person who becomes an eligible director
currently receives an initial option grant to purchase 7,000 shares of common
stock, and, at the date of each annual shareholders meeting thereafter, will
receive an option grant to purchase 700 shares and a stock unit grant for 700
shares.
As of December 31, 1997, 109,585 deferred stock grants were outstanding under
the Plan and the Directors' Plan. During 1997, 41,219 grants were released,
2,800 grants were awarded and 14,062 grants were canceled under the Plan and the
Directors' Plan.
As of December 31, 1997, 1,276,209 options were outstanding under the Plan.
During 1997, 372,591 options were granted, 7,662 options were exercised, 83,050
options were canceled and 234,340 options granted were exercisable at December
31, 1997. As of December 31, 1997, 23,100 stock options were outstanding under
the Directors' Plan. During 1997, 9,100 options were granted, no stock options
were exercised or canceled and 3,500 stock options were exercisable at December
31, 1997.
The following tables summarize information about stock option transactions
for 1997, and outstanding and exercisable at December 31, 1997 for the Plan and
Directors' Plan:
Number Weighted-
of Average
Shares Exercise Price
- --------------------------------------------------------------------------------
Balance at IPO date and
December 31, 1996 1,008,330 $15.50
Options granted 381,691 $34.01
Options exercised 7,662 $15.50
Options canceled 83,050 $15.55
- --------------------------------------------------------------------------------
Balance at December 31, 1997 1,299,309 $20.94
- --------------------------------------------------------------------------------
Options Exercisable as of
December 31, 1997 237,840 $15.50
- --------------------------------------------------------------------------------
Options Outstanding
-----------------------------------------------------------
Weighted-
Outstanding Average Weighted-
Range of as of Remaining Average
Exercise Price Dec. 31, 1997 Contractual Life Exercise Price
- --------------------------------------------------------------------------------
$15.50-$16.19 918,118 8.9 years $15.50
$16.20-$20.23 7,000 9.0 years $18.38
$20.24-$24.28 16,300 9.3 years $23.38
$24.29-$28.33 2,300 9.6 years $28.09
$28.34-$32.38 300 9.5 years $29.25
$32.39-$36.42 355,291 9.9 years $34.87
- --------------------------------------------------------------------------------
Total 1,299,309 9.2 years $20.94
- --------------------------------------------------------------------------------
The fair value of each stock option grant is estimated on the date of grant
using the Black-Scholes option pricing model using the following assumptions for
grants:
December 31, 1997 1996
- --------------------------------------------------------------------------------
Expected life (years) 5.0 5.0
Expected volatility 45.0% 45.0%
Risk-free interest rate 5.7% 6.0%
Expected dividend yield 0.0% 0.0%
- --------------------------------------------------------------------------------
The Company applies APB No. 25 and related interpretations in accounting for
its stock-based compensation plans. Accordingly, no compensation cost has been
recognized in connection with these plans in the accompanying financial
statements. 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. 123:
(in millions, except per share data) 1997 1996
- --------------------------------------------------------------------------------
Net income:
As reported $ 25.8 $ 15.0
Pro forma $ 24.9 $ 14.9
Net income per share of common stock:
Basic
As reported $ 1.34 $ 0.78
Pro forma $ 1.29 $ 0.77
Diluted
As reported $ 1.30 $ 0.78
Pro forma $ 1.26 $ 0.77
- --------------------------------------------------------------------------------
<PAGE>
p27
(Linens 'n Things, Inc. & Subsidiaries)
The effects of applying SFAS No. 123 in this pro forma disclosure are not
necessarily indicative of future amounts.
14. Employee Benefit Plans
- --------------------------------------------------------------------------------
Upon completion of the IPO, the Company discontinued participation in CVS'
401(k) profit-sharing plan. On December 1, 1996, the Company adopted a
401(k)savings plan. All employees who were eligible to participate in the 401(k)
profit-sharing plan administered by CVS prior to the IPO were immediately
eligible to participate in the new plan. All other employees become eligible
upon completion of twelve months of service within which 1,000 hours are worked,
provided the employee is at least 21 years of age. Participants may contribute
between 2% and 15% of annual earnings, subject to statutory limitations. Company
contributions for the matching component of both plans amounted to approximately
$1.2 million, $0.3 million and $0.6 million for the years ended December 31,
1997, 1996 and 1995, respectively.
15. Income Taxes
- --------------------------------------------------------------------------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities at December 31 were as follows
(in thousands):
1997 1996
- --------------------------------------------------------------------------------
Deferred tax assets:
Employee benefits $ 5,346 $ 4,011
Inventories 4,920 4,313
Other 1,767 1,297
- --------------------------------------------------------------------------------
Total deferred tax assets 12,033 9,621
Deferred tax liabilities:
Property and equipment 18,744 13,655
- --------------------------------------------------------------------------------
Net deferred tax liability $ 6,711 $ 4,034
- --------------------------------------------------------------------------------
Based on the Company's historical and current pretax earnings, management
believes it is more likely than not that the Company will realize the deferred
tax assets.
The provision for income taxes comprised the following for the years ended:
December 31 (in thousands): 1997 1996 1995
- --------------------------------------------------------------------------------
Current:
Federal $ 12,102 $ 3,030 $ 2,565
State 3,472 1,106 914
- --------------------------------------------------------------------------------
15,574 4,136 3,479
- --------------------------------------------------------------------------------
Deferred:
Federal 2,416 5,484 (2,143)
State 714 1,332 (228)
- --------------------------------------------------------------------------------
3,130 6,816 (2,371)
- --------------------------------------------------------------------------------
Total $ 18,704 $ 10,952 $ 1,108
- --------------------------------------------------------------------------------
The following is a reconciliation between the statutory Federal income tax
rate and the effective rate for the years ended:
December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Effective tax rate 42.0% 42.1% 103.2%
State income taxes, net of
Federal benefit (6.1) (6.1) (41.5)
Goodwill (0.7) (1.1) (27.8)
Other (0.2) 0.1 1.1
- --------------------------------------------------------------------------------
Statutory Federal income
tax rate 35.0% 35.0% 35.0%
- --------------------------------------------------------------------------------
16. Related Party Transactions
Prior to the IPO, CVS provided financing and cash management for the Company,
allocated certain costs to the Company for services provided, and charged the
Company for costs related to participation in certain employee benefit programs.
Such charges terminated upon the completion of the IPO and have been replaced by
costs of the Company's own programs. Allocations to the Company by CVS were
based on the Company's share of costs paid by CVS on its behalf for consolidated
programs. Such allocations may not have been reflective of the costs which would
have been incurred if the Company operated on a stand-alone basis. Management
believes that the basis for allocations was reasonable. If the Company had
operated on a stand-alone basis for the years ended December 31, 1996 and 1995,
it would have incurred a net increase in expense of an estimated
<PAGE>
p28
(Linens 'n Things, Inc. & Subsidiaries)
$755,000 pretax, in each such years. The following is a summary of the amounts
charged or allocated to the Company:
Administrative Costs
CVS allocated various administrative costs to the Company. Allocations were
based on the Company's ratable share of costs incurred by CVS on behalf of the
Company for the combined programs. The total costs allocated to the Company for
the years ended December 31, 1996 and 1995 were approximately $0.9 million and
$3.0 million, respectively.
In addition, CVS guarantees the leases of certain stores operated by the
Company and prior to the IPO, charged a fee for that service which amounted to
approximately $0.3 million for each of the years ended December 31, 1996 and
1995.
Borrowings
The weighted average interest rate on borrowings from CVS and other
subsidiary divisions for the years ended December 31, 1996 and 1995 was 6.2% and
6.5%, respectively. The related interest expense recognized by the Company on
such borrowings was $4.6 million and $7.1 million, respectively.
Employee Stock Ownership Plan
The Company's employees participated in CVS' Employee Stock Ownership Plan
("ESOP"). The ESOP was a defined contribution plan for all employees meeting
certain eligibility requirements.
CVS charged compensation expense to the Company based upon total payments due
to the ESOP. The charge allocated to the Company was based on the Company's
proportionate share of qualifying compensation expense and did not reflect the
manner in which CVS funded these costs or the related tax benefits realized by
CVS. As a result of the Company's allocation from CVS, compensation expense of
approximately $1.5 million and $1.0 million was recognized for the years ended
December 31, 1996 and 1995, respectively.
These costs, with the exception of interest expense, are included in selling,
general and administrative expenses in the Consolidated Statements of
Operations.
17. Commitments and Contingencies
- --------------------------------------------------------------------------------
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
18. Summary of Quarterly Results (unaudited)
- --------------------------------------------------------------------------------
(in thousands,
except per First Second Third Fourth
share data) Quarter Quarter Quarter Quarter Year
- --------------------------------------------------------------------------------
Net sales
1997 $179,911 $185,723 $225,239 $283,351 $874,224
1996 138,167 147,649 180,438 229,853 696,107
Gross profit
1997 68,315 72,519 89,246 116,220 346,300
1996 50,498 56,252 69,159 94,002 269,911
Net income (loss)
1997 352 990 7,532 16,916 25,790
1996 (1,786) (411) 4,966 12,270 15,039
Net income (loss)
per share
Basic
1997 0.02 0.05 0.39 0.88 1.34
1996 (0.09) (0.02) 0.26 0.64 0.78
Diluted
1997 0.02 0.05 0.38 0.85 1.30
1996 (0.09) (0.02) 0.26 0.64 0.78
- --------------------------------------------------------------------------------
19. Market Information
- --------------------------------------------------------------------------------
The Company's common stock is listed on the New York Stock Exchange. Its
trading symbol is LIN. The Company has not paid a dividend on its common stock.
The high and low trading price of the Company's common stock, beginning November
26, 1996, the date of the IPO, through December 31, 1997 is as follows:
For the Year Ended December 31, 1997 High Low
- --------------------------------------------------------------------------------
First Quarter $26 $17 1/2
Second Quarter 29 1/4 18 1/4
Third Quarter 36 1/4 26
Fourth Quarter 44 1/2 30 9/16
For the Year Ended December 31, 1996 High Low
- --------------------------------------------------------------------------------
Fourth Quarter (from November 26, 1996) $19 3/4 $15 1/2
At December 31, 1997, there were approximately 4,125 beneficial holders.
<PAGE>
p 29
(Linens 'n Things, Inc. & Subsidiaries)
Management's Responsibility for Financial Reporting
The integrity and objectivity of the financial statements and related
financial information in this report are the responsibility of the management of
the Company. The financial statements have been prepared in conformity with
generally accepted accounting principles and include, when necessary, the best
estimates and judgments of management.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance, at appropriate cost, that assets are safeguarded,
transactions are executed in accordance with management's authorization, and the
accounting records provide a reasonable basis for the preparation of the
financial statements. The system of internal accounting controls is continually
reviewed by management and improved and modified as necessary in response to
changing business conditions and recommendations of the Company's independent
auditors.
The Audit Committee of the Board of Directors, currently consisting solely of
outside non-management directors, will meet periodically with management and the
independent auditors to review matters relating to the Company's financial
reporting, the adequacy of internal accounting controls and the scope and
results of audit work. The independent auditors have free access to the Audit
Committee.
KPMG Peat Marwick LLP, certified public accountants, are engaged to audit the
consolidated financial statements of the Company. Their Independent Auditors'
Report, which is based on an audit made in conformity with generally accepted
auditing standards, expresses an opinion as to the fair presentation of these
financial statements.
/s/ Norman Axelrod
Norman Axelrod
Chairman, Chief Executive Officer and President
/s/ William T. Giles
William T. Giles
Chief Financial Officer
February 4, 1998
<PAGE>
p30
Independent Auditors' Report
To the Board of Directors and Shareholders
Linens 'n Things, Inc.
We have audited the accompanying consolidated balance sheets of Linens 'n
Things, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Linens 'n
Things, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
As discussed in the notes to the consolidated financial statements, the
Company has adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," effective October 1, 1995 and changed its policy for accounting
for the costs of internally developed software effective January 1, 1995.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
New York, New York
February 4, 1998
