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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 1, 2000
(NO FEE REQUIRED)
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
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6 BRIGHTON ROAD
CLIFTON, NEW JERSEY 07015
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 778-1300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
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The aggregate market value of voting stock held by non-affiliates of
the Registrant on March 15, 2000, based on the closing sale price on the New
York Stock Exchange on such date, was approximately $1,046 million.
The number of outstanding shares of the Registrant's common stock, $0.01 par
value, as of March 15, 2000 was 39,480,474.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended January 1, 2000 are incorporated by reference into Part II, and portions
of the Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders
are incorporated by reference into Part III.
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TABLE OF CONTENTS
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FORM 10-K
ITEM NO. NAME OF ITEM PAGE
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PART I
Item 1. Business................................................................................ 3
Item 2. Properties.............................................................................. 11
Item 3. Legal Proceedings....................................................................... 11
Item 4. Submission of Matters to a Vote of
Security Holders..................................................................... 11
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters...................................................... 12
Item 6. Selected Financial Data................................................................. 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................................................... 12
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk................................................................. 12
Item 8. Financial Statements and Supplementary
Data................................................................................. 12
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure........................................................................... 12
PART III
Item 10. Directors and Executive Officers of
the Registrant....................................................................... 13
Item 11. Executive Compensation.................................................................. 13
Item 12. Security Ownership of Certain Beneficial
Owners and Management................................................................ 13
Item 13. Certain Relationships and Related
Transactions......................................................................... 13
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................ 14
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Linens 'n Things, Inc. and its subsidiaries ("Linens 'n Things" or the
"Company") is one of the leading, national large format retailers of home
textiles, housewares and home accessories operating 230 stores in 40 states as
of fiscal year end 1999. The Company's current store prototype ranges between
35,000 and 40,000 gross square feet in size and such stores are located in strip
centers and, to a lesser extent, in malls and as stand-alone stores. The
Company's business strategy is to offer a broad selection of high quality, brand
name merchandise at exceptional everyday values, provide superior guest service
and maintain low operating costs.
Linens 'n Things' extensive selection of over 30,000 stock keeping
units ("SKUs") in its superstores is driven by the Company's commitment to
offering a broad and deep selection of high quality, brand name "linens" (e.g.,
bedding, towels and pillows) and "things" (e.g., housewares and home
accessories) merchandise. Brand names sold by the Company include Wamsutta,
Martex, Waverly, Laura Ashley, Royal Velvet, Croscill, Braun, Krups, Calphalon
and Henckels. The Company also sells an increasing amount of merchandise under
its own private label (approximately 10% of sales) which is designed to
supplement the Company's offering of brand name products by offering high
quality merchandise at value prices. The Company's merchandise offering is
coupled with a "won't be undersold" everyday low pricing strategy.
From its founding in 1975 through the late 1980's, the Company operated
a chain of traditional stores ranging between 7,500 and 10,000 gross square feet
in size. Beginning in 1990, the Company introduced its superstore format, which
has evolved from 20,000 gross square feet in size to its current size ranging
from 30,000 to 60,000 gross square feet. This superstore format offers a broad
merchandise selection in a more visually appealing, guest friendly format. The
Company's introduction of superstores has resulted in the closing or relocation
of most of the Company's traditional stores through fiscal year end 1999. As a
result of superstore openings and traditional store closings, the Company's
gross square footage almost tripled from 2.9 million to 7.9 million over the
last five years although its store base only increased 59% from 145 to 230
during this period.
As part of this strategy, the Company instituted centralized management
and operating programs and invested significant capital in its distribution and
management information systems infrastructure in order to control operating
expenses as the Company grows. In addition, as part of its strategic initiative
to capitalize on customer demand for one-stop shopping destinations, the Company
has balanced its merchandise mix from being driven primarily by the "linens"
side of its business to a fuller selection of "linens" and "things." The Company
estimates that the "things" side of its business has increased from less than
10% of net sales in fiscal 1991 to approximately 40% in fiscal 1999.
The Company was a wholly-owned subsidiary of CVS Corporation ("CVS"),
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, on a pre-split basis. Immediately subsequent to the IPO, CVS owned
approximately 32.5% of the Company's common stock, having retained 6,267,758
shares, on a pre-split basis. During 1997, CVS sold substantially all of its
remaining shares of the Company's common stock in a public offering. At December
31, 1997, CVS held no shares of the Company's common stock. Unless otherwise
indicated, all share information is adjusted to reflect the Company's
two-for-one common stock split effected in May 1998.
EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL
The following table sets forth information regarding the executive officers of
the Company:
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NAME AGE POSITION
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Norman Axelrod.................... 47 Chairman, Chief Executive Officer and President
Steven B. Silverstein............. 40 Executive Vice President, Chief Merchandising Officer
Hugh J. Scullin................... 51 Senior Vice President, Store Operations
Brian D. Silva ................... 43 Senior Vice President, Human Resources and Corporate Secretary
William T. Giles.................. 40 Vice President, Chief Financial Officer
</TABLE>
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Mr. Axelrod has been Chief Executive Officer and President of the
Company since 1988 and was elected to the additional position of Chairman of the
Board of Directors of the Company effective as of January 1997. Prior to joining
Linens 'n Things, Mr. Axelrod held various management positions at
Bloomingdale's from 1976 to 1988 including: Buyer, Divisional Merchandise
Manager, Vice President/Merchandise Manager and Senior Vice President/General
Merchandise Manager. Mr. Axelrod earned his B.S. from Lehigh University and his
M.B.A. from New York University.
Mr. Silverstein joined Linens 'n Things in 1992 as Vice President,
General Merchandise Manager, was promoted to Senior Vice President, General
Merchandise Manager in 1993, and was promoted to Executive Vice President, Chief
Merchandising Officer in 1998. Prior to joining Linens 'n Things, Mr.
Silverstein held various management positions at Bloomingdale's from 1985 to
1992 including Merchandise Vice President of Home Textiles. He received his B.A.
from Cornell University and his M.B.A. from Wharton Business School.
Mr. Scullin joined Linens 'n Things in 1989 as Vice President, Store
Operations. Mr. Scullin has been Senior Vice President, Store Operations since
1994. From 1978 to 1987, Mr. Scullin held various management positions with The
Gap, Inc., including Zone Vice President at both The Gap and Banana Republic
from 1984 to 1987. From 1987 to 1989, Mr. Scullin was Vice President of Stores
with Alcott and Andrews. Mr. Scullin graduated from St. Joseph's University with
a B.S. in Marketing Management.
Mr. Silva joined Linens 'n Things in 1995 as Vice President, Human
Resources and was promoted to Senior Vice President, Human Resources and
Corporate Secretary in 1997. Mr. Silva was Assistant Vice President, Human
Resources at The Guardian, an insurance and financial services company, from
1986 to 1995. He holds an M.A. in Organizational Development from Columbia
University and an M.S. in Human Resources Management from New York Institute of
Technology. Mr. Silva received his B.A. from St. John's University.
Mr. Giles joined Linens 'n Things in 1991 as Assistant Controller, was
promoted to Vice President, Finance and Controller in 1994 and was promoted to
Vice President, Chief Financial Officer in 1997. From 1981 to 1990, Mr. Giles
was with PriceWaterhouse LLP. From 1990 to 1991, Mr. Giles held the position of
Director of Financial Reporting with Melville Corporation. Mr. Giles is a
certified public accountant and member of the American Institute of Certified
Public Accountants. He graduated from Alfred University with a B.A. in
Accounting and Management.
The following table sets forth information regarding another key manager of the
Company:
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NAME AGE POSITION
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Matthew J. Meaney................. 53 Vice President, Management Information Systems
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Mr. Meaney joined Linens 'n Things in 1991 as Vice President,
Management Information Systems. From 1985 to 1991, Mr. Meaney was Vice President
of Management Information Systems for Laura Ashley, Inc. Mr. Meaney received a
B.S. in Economics from St. Peter's College and an M.B.A. in Finance from Seton
Hall University.
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BUSINESS STRATEGY
The Company's business strategy is to offer a broad and deep selection
of high quality, brand name merchandise at exceptional everyday values, provide
superior guest service and maintain low operating costs. Key elements of the
Company's business strategy are:
OFFER A BROAD SELECTION OF QUALITY NAME BRANDS AT EXCEPTIONAL EVERYDAY
VALUES. Linens 'n Things' merchandising strategy is to offer the largest breadth
of selection in high quality, brand name fashion home textiles, housewares and
home accessories at exceptional everyday values. The Company offers over 30,000
SKUs in its superstores across six departments, including bath, home
accessories, housewares, storage, top of the bed and window treatments. The
Company is one of the largest retailers of brand names, including Wamsutta,
Martex, Waverly, Laura Ashley, Royal Velvet, Croscill, Braun, Krups, Calphalon
and Henckels. The Company also sells an increasing amount of merchandise under
its own private label which is designed to supplement the Company's offering of
brand name products by offering high quality merchandise at value prices.
Merchandise and sample brands offered in each major department are
highlighted below:
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DEPARTMENT ITEMS SOLD SAMPLE BRANDS
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Bath Towels, shower curtains, waste baskets, Fieldcrest, Wamsutta, Martex, Royal
hampers, bathroom rugs and wall hardware Velvet, Springmaid and Guess
Home Accessories Decorative pillows, napkins, tablecloths, Waverly, Laura Ashley and Guess
placemats, lamps, gifts, picture frames
and framed art
Housewares Cookware, cutlery, kitchen gadgets, small Braun, Krups, Calphalon, Cuisinart,
electric appliances (such as blenders and Henckels, Mikasa, Circulon, Farberware,
coffee grinders), dinnerware, flatware Black & Decker, Kitchen Aid,
and glassware Copco and International Silver
Storage Closet-related items (such as hangers, Rubbermaid and Closetmaid
organizers and shoe racks)
Top of the Bed Sheets, comforters, comforter covers, Wamsutta, Laura Ashley, Revman,
bedspreads, bed pillows, blankets and Croscill, Fieldcrest, Springmaid,
mattress pads Guess, Royal Sateen and Beautyrest
Window Treatment Curtains, valances and window hardware Croscill, Graber, Waverly and Laura Ashley
</TABLE>
PROVIDE SUPERIOR GUEST SERVICE AND SHOPPING CONVENIENCE. To enhance
guest satisfaction and loyalty, Linens 'n Things strives to provide prompt,
knowledgeable sales assistance and enthusiastic guest service. Linens 'n Things
emphasizes competitive wages, training and personnel development in order to
attract and retain well-qualified, highly motivated employees committed to
providing superior guest service. Linens 'n Things also endeavors to provide
more knowledgeable sales associates by providing training through various
programs which include management training, daily sales associate meetings and
in-store product seminars.
In addition, the Company has taken initiatives to enhance the speed of
its guest service, including enhancing credit card authorization and upgrading
its point-of-sale ("POS") system. The Company has also transferred the inventory
and receiving responsibilities from the stores to the distribution centers
thereby allowing associates to direct their focus to the selling floor, which
has enhanced the guest's shopping experience. The Company provides gift registry
services in its stores nationwide to further serve its guests. In 1999, the
Company offered the convenience of an electronic gift card to its guests.
The Company's superstore format is designed to save the guest time by
having merchandise visible and accessible on the selling floor for immediate
purchase. The Company believes its knowledgeable sales staff and efficient guest
service, together with the Company's liberal return policy, create a positive
shopping experience that engenders guest loyalty.
MAINTAIN LOW OPERATING COSTS. A cornerstone of the Company's business
strategy is its commitment to maintain low operating costs. In addition to
savings realized through sales volume efficiencies, operational efficiencies are
expected to be achieved through the streamlining of the Company's centralized
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merchandising structure, the use of integrated management information systems
and the utilization of the distribution centers.
GROWTH STRATEGY
NEW SUPERSTORE EXPANSION. The Company operates in a large,
highly-fragmented industry and has a market share of less than two percent of
the industry. The Company's expansion strategy is to increase market share in
existing markets and to penetrate new markets in which the Company believes it
can become a leading operator of home furnishings superstores. Markets for new
superstores are selected on the basis of demographic factors, such as income,
population and number of households. The Company's stores are located
predominantly in power strip centers and, to a lesser extent, in malls and as
stand-alone stores. The Company generally seeks to operate stores in the United
States in geographic trading areas of 200,000 persons within a ten-mile radius
and with demographic characteristics that match the Company's target profile.
During the first quarter of fiscal 1999, the Company entered into
certain lease commitments in Canada. As part of the Company's overall store
opening schedule, it expects to open several new stores in Canada in the year
2000, with the first Canadian store opening in the spring of 2000. The
Company continues to review its expansion into Canada and does not expect any
material impact on operations for fiscal 2000.
The following table sets forth information concerning the Company's
expansion program during the past five years:
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SQUARE FOOTAGE (IN 000'S) STORE COUNT
FISCAL ------------------------- -----------------------
YEAR OPENINGS CLOSINGS BEGIN YEAR END YEAR BEGIN YEAR END YEAR
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1995 28 18 2,865 3,691 145 155
1996 36 22 3,691 4,727 155 169
1997 25 18 4,727 5,493 169 176
1998 32 12 5,493 6,487 176 196
1999 43 9 6,487 7,925 196 230
</TABLE>
INCREASE PRODUCTIVITY OF EXISTING STORE BASE. The Company is committed
to increasing its net sales per square foot, inventory turnover ratio and return
on invested capital. The Company believes the following initiatives will best
position it to achieve these goals:
ENHANCE MERCHANDISE MIX AND PRESENTATION. The Company continues
to explore opportunities to increase sales in its "things" merchandise
without sacrificing market share or guest image in the "linens" side of
the business. The Company expects these opportunities to positively
impact net sales per square foot, the average net sale per guest and
inventory turnover, since "things" merchandise tends to be more impulse
driven merchandise as compared to the "linens" portion of the business.
The Company is consistently introducing new products that it expects
will increase sales and generate additional guest traffic.
In addition, the Company intends to continue improving its
merchandising presentation techniques, space planning and store layout
to further improve the productivity of its existing and future
superstore locations. The Company periodically restyles its stores to
incorporate new offerings and realigns its store space with its growth
segments. The Company expects that the addition of in-store guest
services, such as gift registry, will further improve its store
productivity.
INCREASE OPERATING EFFICIENCIES. As part of its strategy to
increase operating efficiencies, the Company has invested significant
capital in building a centralized infrastructure, including two
distribution centers and a management information system, which it
believes will allow it to maintain low operating costs as it pursues its
superstore expansion strategy. In 1995, the Company began full operation
of its first distribution center in Greensboro, North Carolina. In June
1999, the Company began operation of its second distribution center in
southern New Jersey. By the end of fiscal 1999, approximately 85% of all
merchandise was being received at the distribution centers. Management
believes that the increased utilization of the distribution centers has
resulted in lower average freight costs, more efficient scheduling of
inventory shipments to the stores, better in-stock positions and
improved information flow. The Company believes that the transfer of
inventory receiving responsibilities from the stores to the distribution
centers allows the store sales associates to direct their focus to the
sales floor, thereby increasing the level of guest service. The
warehouse portion of the distribution centers provides the Company
flexibility to manage safety stock and take advantage of opportunistic
purchases. The Company's ability to effectively manage its inventory is
also enhanced by a centralized merchandising management team and its
management information systems which allow the Company to more
accurately monitor and better balance inventory levels and improve
in-stock positions in its stores.
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INDUSTRY
According to Industry Reports, total industry sales of products sold in
the Company's stores, which primarily includes home textiles, housewares and
decorative furnishings categories, were estimated to be over $76 billion in
1998. The market for home furnishings is large, highly-fragmented and
competitive. Specialty superstores are the fastest growing channel of
distribution in this market. In fiscal 1999, the Company estimates that the
three largest specialty superstore retailers of fashion home textiles (which
includes the Company, Bed Bath & Beyond, Inc. and Home Place of America, Inc.)
had aggregate sales representing only approximately 5% of the industry's total
unit sales.
The Company competes with many different types of retailers that sell
many or most of the items sold by the Company, including department stores, mass
merchandisers, specialty retail stores and other retailers. Linens 'n Things
generally classifies its competition as follows:
DEPARTMENT STORES: This category includes national and regional
department stores such as J.C. Penney Company Inc., Sears, Roebuck and Co.,
Dillard Department Stores, Inc., and the department store chains operated by
Federated Department Stores, Inc. and The May Department Store Company. These
retailers offer name brand merchandise as well as their own private label
furnishings in a high service environment. Department stores also offer certain
designer merchandise, such as Ralph Lauren, which is not generally distributed
through the specialty and mass merchandise distribution channels. In general,
the department stores offer a more limited selection of merchandise than the
Company. The prices offered by department stores during off-sale periods
generally are significantly higher than those of the Company and during on-sale
periods are comparable to or slightly higher than those of the Company.
MASS MERCHANDISERS: This category includes companies such as Wal-Mart
Stores, Inc., the Target Stores division of Target Corporations and Kmart
Corporation. Fashion home furnishings generally represent only a small portion
of the total merchandise sales in these stores. The Company's competitive
advantage is that these stores generally offer a more limited merchandise
selection with fewer high quality name brands and lower quality merchandise at
lower price points. In addition, these mass merchandisers typically have more
limited customer service staffing than the Company.
SPECIALTY STORES/RETAILERS: This category includes large format home
furnishings retailers including Bed Bath & Beyond, Inc. and Home Place of
America, Inc. and smaller niche retailers such as Crate & Barrel, Lechters, Inc.
and Williams-Sonoma, Inc. The Company estimates that the large format stores
range in size from approximately 15,000 to 70,000 gross square feet and offer a
home furnishings merchandise selection of approximately 15,000 to 40,000 SKUs.
These retailers attempt to develop loyal customers and increase customer traffic
by providing a single outlet to satisfy the customer's household needs. The
niche retailers are typically smaller in size than the large format superstores
and offer a broad assortment within a specific niche.
OTHER RETAILERS: This category includes mail order retailers, such as
Spiegel Inc. and Domestications, off-price retailers, such as Kohl's
Corporation, the T.J. Maxx and Marshall's divisions of the TJX Companies,
Inc. and local "mom and pop" retail stores. Both mail order retailers and
smaller local retailers generally offer a more limited selection of
merchandise. Off-price retailers typically offer close-out or out of season
name brand merchandise at competitive prices.
MERCHANDISING
The Company offers quality home textiles, housewares and home
accessories at exceptional everyday values. The Company's strategy consists
of a commitment to offer a breadth and depth of selection and to create a
merchandise presentation that makes it easy to shop in a visually pleasing
environment. The stores feature a "racetrack" layout, enabling the guest to
visualize and purchase fully coordinated and accessorized ensembles. Seasonal
merchandise is featured at the front of every store to create variety and
excitement and to capitalize on key selling seasons including back-to-school
and holiday events.
The Company's extensive merchandise offering of over 30,000 SKUs
enables its guests to select from a wide assortment of styles, brands, colors
and designs within each of the Company's major product lines. The Company is
committed to maintaining a consistent in-stock inventory position. This
presentation of merchandise enhances the guest's impression of a dominant
selection of merchandise in an easy-to-shop environment. The Company's broad
and deep merchandise offering is coupled with everyday low prices that are
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substantially below regular department store prices and comparable with or
slightly below department store sale prices. The Company believes that the
uniform application of its everyday low price policy is essential to
maintaining the integrity of its strategy. This is an important factor in
establishing its reputation as a price leader and in helping to build guest
loyalty. In addition, the Company offers, on a regular basis, "special"
merchandise which it obtains primarily through opportunistic purchasing to
enhance its high value perception among its guests.
CUSTOMER SERVICE
Linens 'n Things treats every customer as a guest. The Company's
philosophy supports enhancing the guest's entire shopping experience and
believes that all elements of service differentiate it from the competition. To
facilitate the ease of shopping, the assisted self-service culture is
complemented by trained department specialists, zoned floor coverage, product
information displays and videos, self-demonstrations and in-store product
seminars. This philosophy is designed to encourage guest loyalty as well as to
continually develop knowledgeable Company associates. The entire store team is
hired and trained to be highly visible in order to assist guests with their
selections. The ability to assist guests has been augmented by the transfer of
inventory receiving responsibilities from the stores, allowing sales associates
to focus on the sales floor. Sophisticated management systems that provide
efficient guest service and liberal return procedures are geared toward making
each guest's visit a convenient, efficient and pleasant experience.
ADVERTISING
Advertising programs are focused on building and strengthening the
Linens 'n Things concept and image. Because of the Company's commitment to
exceptional everyday values, advertising vehicles are aggressively used in
positioning the Company among new and existing guests by communicating price,
value and breadth and depth of selection. The Company focuses its advertising
programs during key selling seasons such as back-to-school and holidays.
To reach its guests, the Company primarily uses full color inserts in
newspapers which are also supplemented by direct mail marketing initiatives. In
addition, the Company periodically advertises on television during peak seasonal
periods or for promotional events. Grand opening promotional events are used to
support new stores, with more emphasis placed on those located in new markets.
PURCHASING AND SUPPLIERS
The merchandising mix for each store is selected by the central buying
staff in consultation with district store managers. The Company purchases its
merchandise from approximately 1,000 suppliers. Springs Industries, Inc.,
through its various operating companies, supplied approximately 10% of the
Company's total purchases in fiscal 1999. In fiscal 1999, the Company purchased
a significant number of products from other key suppliers. Due to its breadth
and depth of selection, the Company is often one of the largest customers for
certain of its vendors. The Company believes that this buying power and its
ability to make centralized purchases generally allow it to acquire products at
favorable terms.
DISTRIBUTION
The Company operates two distribution centers. The first is located
in Greensboro, North Carolina and began operation in 1995 and the second is
located in southern New Jersey and began operation in June 1999. The Company
believes the utilization of the centralized distribution centers has resulted
in lower average freight expense, more timely control of inventory shipments
to stores, better in-stock positions and improved information flow. In
addition, transferring inventory receiving responsibilities from the stores
to the distribution centers allows the sales associates to direct their focus
to the selling floor, thereby ehhancing the guest's shopping experience. The
Company believes strong distribution support for its stores is a critical
element to its growth strategy and is central to its ability to maintain a
low cost operating structure.
The Company manages the distribution process centrally from its
corporate headquarters. Purchase orders issued by Linens 'n Things are
electronically transmitted to all of its suppliers. By the end of fiscal 1999,
the Company received approximately 85% of its total inventory through its
distribution centers. The balance of the Company's merchandise is directly
shipped to individual stores. The Company plans to continue efforts to ship as
much merchandise through the distribution centers as possible to ensure all
benefits of the Company's logistics strategy are fully leveraged. Continued
growth will also facilitate new uses of Electronic Data Interchange technologies
between Linens 'n Things and its suppliers
<PAGE>
to exploit the most productive and beneficial use of its assets and resources.
In order to realize greater efficiency, the Company also uses third party
delivery services to ship its merchandise from the distribution center to its
stores.
MANAGEMENT INFORMATION SYSTEMS
Over the last several years, the Company has made significant
investments in technology to improve guest service, gain efficiencies and
reduce operating costs. Linens 'n Things has installed a customized IBM
AS/400 management information system, which integrates all major aspects of
the Company's business, including sales, distribution, purchasing, inventory
control, merchandise planning and replenishment and financial systems. The
Company utilizes POS terminals with price look-up capabilities for both
inventory and sales transactions on a SKU basis, which the Company
continually upgrades. Information obtained daily by the system results in
automatic inventory replenishment in response to specific requirements of
each store.
In fiscal 1999, the Company introduced handheld radio frequency devices
in some of its stores. These devices enable the sales associates to perform a
variety of "back office" tasks such as checking inventory, verifying prices
and determining what items are on order, without having to leave the selling
floor. In addition, a company-wide intranet was launched that permits
instant, paperless communications between the corporate headquarters and the
entire store chain.
The Company believes its management information systems have fully
integrated the Company's stores, headquarters and distribution process. The
Company continually evaluates and upgrades its management information systems
to enhance the quantity, quality and timeliness of information available to
management.
STORE MANAGEMENT AND OPERATIONS
The Company places a strong emphasis on its people, their development and
their opportunity for advancement, particularly at the store level. The
Company's commitment to maintaining a high internal promotion rate is best
exemplified through the practice of opening each new store with a seasoned
management crew. As a result, the vast majority of General Managers opening a
new store have significant experience with the Company. Additionally, the
structured management training program requires that each new manager learn all
facets of the business within the framework of a fully operational store. This
program includes, among other things, product knowledge, merchandise
presentation, business and sales perspective, employee relations and manpower
planning, complemented at the associate level through daily in-store product
seminars and structured register training materials and proficiencies. The
Company believes that its policy of promoting from within, as well as the
opportunities for advancement generated by its ongoing store expansion program,
serve as incentives to attract and retain quality individuals, which the Company
believes results in lower turnover.
Linens 'n Things' stores are open seven days a week, generally from 9:30
a.m. to 9:00 p.m. Monday through Saturday and 11:00 a.m. to 6:00 p.m. on Sunday,
unless affected by local laws.
INFLATION AND SEASONALITY
The Company does not believe that its operating results have been
materially affected by inflation during the past year. 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.
EMPLOYEES
As of January 1, 2000, the Company employed approximately 11,900 people of
whom approximately 5,000 were full-time employees and 6,900 were part-time
employees. None of the Company's employees are represented by unions, and the
Company believes that it has a good relationship with its employees.
COMPETITION
The Company believes that it will continue to face competition from
retailers in all four of the categories referred to in "Business--Industry." The
home textiles industry is becoming increasingly competitive and as the Company
expands into new markets, it will face new competitors. The visibility of the
Company may encourage additional competitors or existing competitors to imitate
the Company's format and methods.
The Company believes that the ability to compete successfully in its
markets is determined by several factors, including price, breadth and quality
of product selection, in-stock availability of merchandise, effective
merchandise presentation, guest service and superior store locations. The
Company believes that it is well positioned to compete on the basis of these
factors. Nevertheless, there can be no assurance that any or all of the factors
that enable the Company to compete favorably will not be adopted by companies
having greater financial and other resources than the Company.
TRADE NAMES AND SERVICE MARKS
The Company uses the "Linens 'n Things" name as a trade name and as a
service mark in connection with retail services. The Company has registered the
"Linens 'n Things" logo as a service mark with the United States Patent and
Trademark Office. The Company has also filed for registration with the Canada
Patent and Trademark Office. Management believes that the name "Linens 'n
Things" is an important element of the Company's business.
FORWARD-LOOKING STATEMENTS
This Form 10-K (including the information incorporated herein by
reference) 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 such 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
home furnishings retailers, availability of suitable future store locations and
schedules 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>
ITEM 2. PROPERTIES
As of January 1, 2000 the Company operated 230 retail stores in 40 states.
The Company currently leases all of its existing stores and expects that its
policy of leasing rather than owning will continue as it expands. The Company's
leases provide for original lease terms that generally range from 10 to 20 years
and certain of the leases provide for renewal options that range from 5 to 15
years at increased rents. Certain of the leases provide for scheduled rent
increases and certain of the leases provide for contingent rent (based upon
store sales exceeding stipulated amounts). CVS guarantees the leases of certain
stores that were open prior to the Company's 1996 IPO. Following the IPO, CVS no
longer enters into commitments to guarantee future leases on behalf of the
Company.
The Company owns its distribution center in Greensboro, North Carolina.
The Company leases its corporate headquarters in Clifton, New Jersey and its
distribution center in southern New Jersey.
The table below sets forth the number of stores located in each state as
of January 1, 2000:
<TABLE>
<CAPTION>
STATE NUMBER OF STORES STATE NUMBER OF STORES
----- ---------------- ----- ----------------
<S> <C> <C> <C>
Alabama 1 Nebraska 1
Arizona 5 Nevada 2
Arkansas 1 New Hampshire 3
California 28 New Jersey 11
Colorado 5 New Mexico 2
Connecticut 7 New York 12
Florida 20 North Carolina 7
Georgia 10 Ohio 4
Idaho 1 Oklahoma 1
Illinois 15 Oregon 4
Indiana 3 Pennsylvania 5
Kansas 3 Rhode Island 1
Kentucky 1 South Carolina 1
Louisiana 2 Tennessee 4
Maine 2 Texas 20
Maryland 4 Utah 3
Massachusetts 8 Virginia 11
Michigan 7 Washington 6
Minnesota 5 West Virginia 1
Missouri 2 Wisconsin 1
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings against the Company. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended January 1, 2000.
PART II
<PAGE>
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Linens 'n Things' common stock is listed on the New York Stock Exchange.
Its trading symbol is LIN. At January 1, 2000 there were approximately 9,300
beneficial shareholders. The high and low trading price of the Company's common
stock for each quarter (adjusted to give effect to the Company's two-for-one
common stock split effected in May 1998) is as follows:
FOR FISCAL 1999 HIGH LOW
--------------- ---- ---
First Quarter.................. $48 1/4 $34 3/16
Second Quarter............. 52 1/16 37 5/8
Third Quarter.................. 49 1/2 30 5/8
Fourth Quarter................. 41 7/16 22 7/16
FOR FISCAL 1998 HIGH LOW
--------------- ---- ---
First Quarter.................. $28 1/2 $19 1/2
Second Quarter................. 34 11/16 27 1/16
Third Quarter.................. 35 7/8 23
Fourth Quarter................. 40 5/8 16 5/8
The Company paid no dividends on its common stock in fiscal 1999 and
fiscal 1998. Management of the Company currently intends to retain its earnings
to finance the growth and development of its business and does not currently
anticipate paying cash dividends in the foreseeable future. The payment of any
future dividends will be at the discretion of the Company's Board of Directors
and will depend upon, among other things, the future earnings, operations,
capital requirements and financial condition of the Company, satisfying all
requirements under its bank financing agreement and such other factors as the
Company's Board of Directors may consider relevant. In addition, the Company's
revolving credit facility currently prohibits the Company from paying cash
dividends.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference
to the Five-Year Financial Summary appearing on page 20 of the Company's
Annual Report to Shareholders for the fiscal year ended January 1, 2000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information required by this Item is incorporated by reference to
pages 21 through 23 of the Company's Annual Report to Shareholders for the
fiscal year ended January 1, 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial information required by this
Item are incorporated by reference to pages 24 through 34 and page 36 of the
Company's Annual Report to Shareholders for the fiscal year ended January 1,
2000. These financial statements are indexed under Item 14(a)(1). See also
the financial statement schedule that is included herein and is indexed under
Item 14(a)(2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There were no disagreements between the Company and its independent
public accountants on matters of accounting principles or practices for fiscal
1999.
PART III
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item concerning the Company's
directors is incorporated by reference to the Company's Proxy Statement to be
mailed to shareholders for the Company's 2000 Annual Meeting of Shareholders.
The information required by this Item concerning the Company's
executive officers is contained in Part I, Item 1, "Business - Executive
Officers and Certain Key Personnel."
The information required by this Item with respect to Section 16
reporting is incorporated by reference to the Company's Proxy Statement for the
Company's 2000 Annual Meeting of Shareholders, under the heading "Section 16(a)
Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the Company's Proxy Statement for the 2000 Annual Meeting of Shareholders, under
the headings "Director Compensation - Attendance; Committees" and "Executive
Compensation", other than information included therein under the subcaptions
"Report on Compensation of Executive Officers" and "Performance Graph" which are
not incorporated herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the Company's Proxy Statement for the 2000 Annual Meeting of Shareholders, under
the heading "Beneficial Ownership of Common Stock."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the Company's Proxy Statement for the 2000 Annual Meeting of Shareholders, under
the heading "Certain Transactions with Related Parties."
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report.
1. FINANCIAL STATEMENTS:
The following Financial Statements are incorporated by reference to the
Company's Annual Report to Shareholders for the fiscal year ended January 1,
2000.
<TABLE>
<CAPTION>
PAGES IN ANNUAL REPORT
TO SHAREHOLDERS
---------------
<S> <C>
Consolidated Statements of Operations -
for the fiscal years ended January 1, 2000, December 31, 1998 and December 31, 1997...... 24
Consolidated Balance Sheets -
as of January 1, 2000 and December 31, 1998.............................................. 25
Consolidated Statements of Shareholders' Equity -
for the fiscal years ended January 1, 2000, December 31, 1998 and December 31, 1997...... 26
Consolidated Statements of Cash Flows -
for the fiscal years ended January 1, 2000, December 31, 1998 and December 31, 1997...... 27
Notes to Consolidated Financial Statements............................................... 28 through 34
Independent Auditors' Report............................................................. 36
</TABLE>
2. SCHEDULES:
The supplementary income statement schedule is included in this Report.
3. EXHIBITS:
The Exhibits on the accompanying Exhibit Index are filed as part of, or
incorporated by reference into, this Annual Report on Form 10-K.
<PAGE>
SCHEDULE 1
LINENS 'N THINGS, INC. AND SUBSIDIARIES
SUPPLEMENTARY INCOME STATEMENT INFORMATION
(IN THOUSANDS)
FISCAL FISCAL FISCAL
YEAR ENDED YEAR ENDED YEAR ENDED
ITEM JANUARY 1, 2000 DECEMBER 31, 1998 DECEMBER 31, 1997
---- --------------- ----------------- -----------------
Advertising Costs $35,566 $28,913 $25,161
------- ------- -------
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
3.1 Amended and Restated Certificate of Incorporation,
as amended (1),(4)
3.2 By-Laws of the Registrant(1)
4 Specimen Certificate of Common Stock(1)
10.1 Transitional Services Agreement between the Registrant and
CVS Corporation(1)
10.2 Stockholder Agreement between the Registrant and CVS
Corporation(1)
10.3 Tax Disaffiliation Agreement between the Registrant and CVS
Corporation(1)
10.4 Credit Facility, as amended (1),(5)
10.5 Employment Agreement with Norman Axelrod(*)(1)
10.8 Employment Agreement with Steven B. Silverstein(*)(1)
10.9 Employment Agreement with Hugh J. Scullin(*)(1)
10.10 1996 Incentive Compensation Plan(*)(1)
10.11 1996 Non-Employee Director Stock Plan(*)(1)
10.12 Supplemental Executive Retirement Plan(*)(6)
10.13 Split-Dollar Agreement between the Registrant and
Norman Axelrod(*)(6)
10.14 Split-Dollar Collateral Assigment between the Registrant and
Norman Axelrod(*)(6)
11 Computation of Net Income (Loss) Per Common Share(2)
12 Computation of Ratio of Earnings to Fixed Charges(2)
13 Annual Report to Shareholders for 1999 fiscal year(**)
21 List of Subsidiaries(3)
23a Consent of KPMG LLP(2)
27 Financial Data Schedule (filed electronically with SEC only)(2)
- --------------------------------------------------------------------------------
(1) Incorporated by reference to the Exhibits filed with the Company's
Registration Statement on Form S-1 (No. 333-12267), which Registration
Statement became effective on November 26, 1996.
(2) Filed with this Form 10-K.
(3) Incorporated by reference to Exhibit 21 to the Company's 1996 Annual
Report on Form 10-K.
(4) Incorporated by reference to a Current Report on Form 8-K dated May 6,
1999.
(5) Incorporated by reference to a Current Report on Form 8-K dated March 31,
1998.
(6) Incorporated by reference to a Current Report on Form 8-K dated March 27,
2000.
(*) Management contract or compensatory plan or arrangement.
(**) With the exception of the information incorporated by reference to the
Annual Report to Shareholders in Items 6, 7, and 8 of Part II and Item 14
of Part IV of this Form 10-K, the Annual Report to Shareholders is not
deemed filed as part of this Form 10-K.
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated December 15, 1999,
setting forth a change in the Company's fiscal year from a calendar year
ending December 31, 1999 to a 52/53 week calendar year, with the current
fiscal year ending on Saturday, January 1, 2000 rather than December 31,
1999.
The Company filed a Current Report on Form 8-K dated March 27, 2000,
concerning the Company's adoption of a Supplemental Executive Retirement
Plan and documents related thereto.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
LINENS 'N THINGS, INC.
(Registrant)
By: /s/ Norman Axelrod
------------------------------------
NORMAN AXELROD
CHAIRMAN, CHIEF EXECUTIVE OFFICER
AND PRESIDENT
Dated: March 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on its behalf of the Registrant in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
---------------- ------- ------
<S> <C> <C>
/s/ Norman Axelrod
- ------------------------------------ Chairman, Chief Executive March 29, 2000
Norman Axelrod Officer and President
/s/ Philip E. Beekman
- ------------------------------------ Director March 29, 2000
Philip E. Beekman
/s/ Harold F. Compton
- ------------------------------------ Director March 29, 2000
Harold F. Compton
/s/ Charles C. Conaway
- ------------------------------------ Director March 29, 2000
Charles C. Conaway
/s/ Stanley P. Goldstein
- ------------------------------------ Director March 29, 2000
Stanley P. Goldstein
/s/ William T. Giles
- ------------------------------------ Vice President, March 29, 2000
William T. Giles Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
</TABLE>
<PAGE>
FIVE-YEAR FINANCIAL SUMMARY (IN THOUSANDS, EXCEPT PER SHARE AND SELECTED
OPERATING DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Year Ended JANUARY 1, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000(1) 1998(1) 1997(1) 1996(1) 1995(2)
- --------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Net sales .............................. $1,300,632 $1,066,194 $ 874,224 $ 696,107 $ 555,095
Operating profit ....................... 84,552 61,988 45,507 30,683 8,133
Net income (loss) ...................... 52,052 38,062 25,790 15,039 (212)
Net income (loss) per share(3).......... $ 1.27 $ 0.94 $ 0.65 $ 0.39 $ (0.01)
Weighted average shares outstanding(4).. 40,907 40,407 39,537 38,558 38,536
BALANCE SHEET DATA:
Total assets ........................... $ 679,916 $ 560,844 $ 472,099 $ 423,957 $ 343,522
Working capital ........................ 181,380 154,893 123,375 113,582 69,399
Total long-term debt ................... -- -- -- 13,500 --
Shareholders' equity ................... $ 383,962 $ 323,576 $ 280,035 $ 249,727 $ 76,678
SELECTED OPERATING DATA:
Number of stores ....................... 230 196 176 169 155
Total gross square footage (000's)...... 7,925 6,487 5,493 4,727 3,691
Increase (decrease) in comparable
store net sales ..................... 5.4% 8.3% 6.6% 1.1% (1.5%)
</TABLE>
(1) REFLECTS DILUTED EARNINGS PER SHARE FOR FISCAL YEAR ENDED 1999, 1998, 1997
AND 1996 IN ACCORDANCE WITH STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
("SFAS") NO. 128, "EARNINGS PER SHARE" ("SFAS NO. 128"). BASIC EARNINGS PER
SHARE FOR FISCAL YEAR ENDED 1999, 1998, 1997 AND 1996 WAS $1.32, $0.98,
$0.67 AND $0.39, RESPECTIVELY, BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING
OF 39,339, 38,895, 38,578 AND 38,536, RESPECTIVELY.
(2) REFLECTS CERTAIN ONE-TIME SPECIAL CHARGES RELATED TO THE CVS STRATEGIC
PROGRAM. OPERATING PROFIT IN 1995, EXCLUDING THE EFFECT OF THESE CHARGES,
WOULD HAVE BEEN $31.5 MILLION.
(3) UNLESS OTHERWISE STATED, ALL REFERENCES TO COMMON SHARES OUTSTANDING AND
INCOME PER SHARE IN THE CONSOLIDATED FINANCIAL STATEMENTS, NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS, AND MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ARE ON A POST-SPLIT BASIS.
(4) 1995 REFLECTS THE ACTUAL SHARES ISSUED UPON THE COMPLETION OF THE COMPANY'S
INITIAL PUBLIC OFFERING ON NOVEMBER 26, 1996 ADJUSTED FOR THE STOCK SPLIT IN
MAY 1998.
<PAGE>
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 consolidated statements of operations for the periods
indicated:
JAN 1, DEC 31, DEC 31,
Fiscal Year Ended 2000 1998 1997
- ------------------------------------------------------------------------------
PERCENTAGE OF NET SALES
Net sales ......................... 100.0% 100.0% 100.0%
Cost of sales, including buying and
warehousing costs ............... 59.4 60.0 60.4
----- ----- -----
Gross profit ...................... 40.6 40.0 39.6
Selling, general and administrative
expenses ........................ 34.1 34.2 34.4
----- ----- -----
Operating profit .................. 6.5 5.8 5.2
Interest expense, net ............. 0.0 0.0 0.1
----- ----- -----
Income before income taxes ........ 6.5 5.8 5.1
Provision for income taxes ........ 2.5 2.2 2.1
----- ----- -----
Net income ........................ 4.0% 3.6% 3.0%
FISCAL YEAR ENDED JANUARY 1, 2000 COMPARED WITH
FISCAL YEAR ENDED DECEMBER 31, 1998
NET SALES
Net sales for fiscal 1999 were $1,300.6 million, an increase of 22.0% over
fiscal 1998 sales of $1,066.2 million, primarily as a result of new store
openings and strong comparable store net sales. The Company opened 43
superstores and closed 9 stores in fiscal 1999, as compared with opening 32
superstores and closing 12 stores in fiscal 1998. At fiscal year end 1999, the
Company operated 230 stores as compared with 196 stores at fiscal year end 1998.
Comparable store net sales increased 5.4% in fiscal 1999 compared with 8.3% in
fiscal 1998. Comparable store net sales were driven predominately by higher
consumer traffic.
The Company's average net sales per store increased to $6.2 million in fiscal
1999 up from $5.9 million in fiscal 1998. This increase was due to strong
comparable store net sales increases. For the fiscal year ended 1999, net sales
of "linens" merchandise increased approximately 20% over the prior year, while
net sales of "things" merchandise increased approximately 30% over the prior
year. The greater increase in net sales for "things" merchandise primarily
resulted from the continued expansion of product categories within the "things"
business.
GROSS PROFIT
Gross profit for fiscal 1999 was $528.2 million, or 40.6% of net sales, as
compared with $427.1 million, or 40.0% of net sales, in fiscal 1998. This
increase as a percentage of net sales resulted from improved selling mix,
improvements in buying, and lower freight and related logistics costs from the
leveraging of the Company's logistics network.
EXPENSES
Selling, general and administrative expenses ("S,G&A") for fiscal 1999 were
$443.6 million, or 34.1% of net sales, as compared with $365.1 million, or 34.2%
of net sales, in fiscal 1998. Occupancy expenses continue to leverage as a
result of a 5.4% comparable store net sales increase, which was offset in part
due to investments in store payroll in order to provide better guest service.
Operating profit for fiscal 1999 increased to $84.6 million, or 6.5% of net
sales, up from $62.0 million, or 5.8% of net sales, during fiscal 1998.
<PAGE>
Net interest expense in fiscal 1999 decreased to $43,000 from $83,000 during
fiscal 1998. This decrease was due to improved earnings as well as improved
working capital management.
The Company's income tax expense for fiscal 1999 was $32.5 million, as compared
with $23.8 million during fiscal 1998. The Company's effective tax rate was
38.4% in fiscal 1999 as compared with 38.5% in fiscal 1998.
NET INCOME
Net income for fiscal 1999 was $52.1 million, or 4.0% of net sales as compared
with $38.1 million, or 3.6% of net sales in fiscal 1998.
FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED WITH FISCAL YEAR
ENDED DECEMBER 31, 1997
NET SALES
Net sales for fiscal 1998 were $1,066.2 million, an increase of 22.0% over
fiscal 1997 sales of $874.2 million, primarily as a result of new store openings
and increased comparable store net sales. The Company opened 32 superstores and
closed 12 stores in fiscal 1998, as compared with opening 25 superstores and
closing 18 stores in fiscal 1997. For fiscal year end 1998, the Company operated
196 stores as compared with 176 stores at fiscal year end 1997. Comparable store
net sales increased 8.3% in fiscal 1998 compared with 6.6% in fiscal 1997.
Comparable store net sales were driven not only by higher consumer traffic, but
by an increase in average transaction, which reflects the increased focus the
Company has placed on providing better guest service as well as the continued
expansion of "things" merchandise.
The Company's average net sales per store increased to $5.9 million in fiscal
1998 up from $5.2 million in fiscal 1997. This increase was due to strong
comparable store net sales increases and the continued closing of lower volume
traditional stores. For the fiscal year ended 1998, net sales of "linens"
merchandise increased approximately 20% over the prior year, while net sales of
"things" merchandise increased approximately 30% over the prior year. The
greater increase in net sales for "things" merchandise primarily resulted from
the continued expansion of product categories within the "things" business.
GROSS PROFIT
Gross profit for fiscal 1998 was $427.1 million, or 40.0% of net sales, as
compared with $346.3 million, or 39.6% of net sales, in fiscal 1997. This
increase as a percentage of net sales resulted from improved selling mix,
improvements in buying and lower freight costs from the leveraging of the
Company's logistics network.
EXPENSES
Selling, general and administrative expenses for fiscal 1998 were $365.1
million, or 34.2% of net sales, as compared with $300.8 million, or 34.4% of net
sales, in fiscal 1997. S,G&A expenses were leveraged as a result of an 8.3%
comparable store net sales increase, which was offset in part by increased store
openings as well as an investment in store payroll in order to provide better
guest service.
Operating profit for fiscal 1998 increased to $62.0 million, or 5.8% of net
sales, up from $45.5 million, or 5.2% of net sales, during fiscal 1997.
Net interest expense in fiscal 1998 decreased to $83,000 from $1.0 million, or
0.1% of net sales, during fiscal 1997. This decrease was due to improved
earnings and working capital management as well as payment of the CVS Note in
fiscal 1997.
The Company's income tax expense for fiscal 1998 was $23.8 million, as compared
with $18.7 million during fiscal 1997. Through planning initiatives implemented
in fiscal 1998, the Company's effective tax rate was reduced to 38.5% from 42.0%
in fiscal 1997.
NET INCOME
Net income for fiscal 1998 was $38.1 million, or 3.6% of net sales as compared
with $25.8 million, or 3.0% of net sales in fiscal 1997.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements are primarily for investments in new stores,
new store inventory purchases and seasonal working capital, as well as the
second distribution center, which opened in June 1999. These requirements are
funded through a combination of internally generated cash from operations,
credit extended by suppliers and short-term borrowings.
The Company has available a three-year, $90 million senior revolving credit
facility agreement (the "Credit Agreement") with third party institutional
lenders expiring March 31, 2001. The amount of borrowings can be increased up to
$125 million provided certain terms and conditions contained in the Credit
Agreement are met. 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 defined in
the Credit Agreement. At the end of fiscal 1999, the Company was in compliance
with the terms of the Credit Agreement. The Credit Agreement also allows for up
to $25 million in borrowings from uncommitted lines of credit outside of the
Credit Agreement. At various times throughout fiscal 1999 and 1998, the Company
did borrow against the Credit Agreement for seasonal working capital needs. At
the end of fiscal 1999, the Company had no borrowings under the Credit Agreement
or against the uncommitted lines of credit. 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 fiscal year ended 1999 was
$36.7 million as compared with $27.7 million for the same period in fiscal 1998.
This change was primarily a result of an increase in earnings, and an increase
in accounts payable which was due to the timing of vendor payments. This
increase was partially offset by a decrease in accrued expenses and an increase
in inventory. The increase in inventory levels over the prior year is a result
of new store openings, as well as the Company's decision to maintain and improve
its in-stock position, which is consistent with the Company's focus to improve
guest service.
Net cash used in investing activities for the fiscal year ended 1999 was $70.1
million, as compared with $46.3 million for the same period in fiscal 1998. This
was a result of an increase in new store openings in fiscal 1999 as well as
capital required for the second distribution center.
Net cash provided by financing activities for the fiscal year ended 1999 was
$36.5 million compared with $21.3 million for the same period in fiscal 1998.
Net cash provided by financing activities in fiscal 1999 was primarily
attributable to the timing of the settlement of vendor payments, as well as
proceeds and Federal tax benefits related to common stock exercised under stock
incentive plans.
THE YEAR 2000 ISSUE
To date, the Company has not experienced any disruptions to its business in
connection with Year 2000 matters. The Company will continue to monitor its
critical systems but does not currently anticipate any significant impacts due
to Year 2000 exposures from its internal systems as well as from the activities
of its suppliers. The Company's costs incurred associated with the Year 2000
issue were not material.
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 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.
<PAGE>
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 such forward-looking terminology as "expect," "believe," "may,"
"will," "intend" or similar statements or variations of such terms. Such
forward-looking statements involve certain substantial risks and uncertainties
including levels of sales, store traffic, acceptance of product offerings and
fashions, competitive pressures from other home furnishings retailers,
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>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------------------------
JAN 1, DEC 31, DEC 31,
FISCAL YEAR ENDED 2000 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES .................................. $1,300,632 $1,066,194 $ 874,224
Cost of sales, including buying and
warehousing costs ....................... 772,453 639,138 527,924
---------- ---------- ----------
GROSS PROFIT ............................... 528,179 427,056 346,300
Selling, general and administrative expenses 443,627 365,068 300,793
---------- ---------- ----------
OPERATING PROFIT ........................... 84,552 61,988 45,507
Interest expense, net ...................... 43 83 1,013
---------- ---------- ----------
Income before income taxes ................. 84,509 61,905 44,494
Provision for income taxes ................. 32,457 23,843 18,704
---------- ---------- ----------
NET INCOME ................................. $ 52,052 $ 38,062 $ 25,790
========== ========== ==========
Per share of common stock:
BASIC
Net income ................................. $ 1.32 $ 0.98 $ 0.67
---------- ---------- ----------
Weighted average shares outstanding ........ 39,339 38,895 38,578
DILUTED
Net income ................................. $ 1.27 $ 0.94 $ 0.65
---------- ---------- ----------
Weighted average shares outstanding ........ 40,907 40,407 39,537
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------------------
JAN 1, DEC 31,
2000 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................... $ 45,751 $ 42,638
Accounts receivable, net .......................... 20,836 22,814
Inventories ....................................... 342,681 271,389
Prepaid expenses and other current assets ......... 21,410 18,567
--------- ---------
TOTAL CURRENT ASSETS ................................ 430,678 355,408
Property and equipment, net ....................... 223,725 179,439
Goodwill, net of accumulated amortization of $7,364
in fiscal 1999 and $6,514 in fiscal 1998 ....... 19,826 20,676
Deferred charges and other noncurrent assets, net.. 5,687 5,321
--------- ---------
TOTAL ASSETS ............................................ $ 679,916 $ 560,844
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................... $ 144,884 $ 115,754
Accrued expenses and other current liabilities ...... 104,414 84,761
--------- ---------
TOTAL CURRENT LIABILITIES ............................. 249,298 200,515
Deferred income taxes and other long-term liabilities 46,656 36,753
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 at January 1, 2000 and 60,000,000 shares
authorized at December 31, 1998;
39,555,259 shares issued and 39,478,782 outstanding
at January 1, 2000 and 39,091,281 shares issued and
39,037,948 outstanding at December 31, 1998 ....... 396 391
Additional paid-in capital .......................... 220,751 211,378
Retained earnings ................................... 165,249 113,197
Treasury stock, at cost, 76,477 shares at
January 1, 2000 and 53,333 shares at
December 31, 1998 ................................. (2,434) (1,390)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ............................ 383,962 323,576
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .............. $ 679,916 $ 560,844
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL
--------------------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 .......... 38,535,516 $ 386 $ 199,996 $ 49,345 $ -- $ 249,727
Net income ............................ -- -- -- 25,790 -- 25,790
Common stock exercised under stock
incentive plans ..................... 98,324 -- 1,018 -- -- 1,018
Capital contribution by CVS ........... -- -- 3,500 -- -- 3,500
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1997 .......... 38,633,840 386 204,514 75,135 -- 280,035
Net income ............................ -- -- -- 38,062 -- 38,062
Common stock exercised under stock
incentive plans ..................... 457,441 5 6,864 -- -- 6,869
Purchase of treasury stock ............ (53,333) -- -- -- (1,390) (1,390)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1998 .......... 39,037,948 391 211,378 113,197 (1,390) 323,576
Net income ............................ -- -- -- 52,052 -- 52,052
Common stock exercised under stock
incentive plans ..................... 463,978 5 9,373 -- -- 9,378
Purchase of treasury stock ............ (23,144) -- -- -- (1,044) (1,044)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT JANUARY 1, 2000 ............ 39,478,782 $ 396 $ 220,751 $ 165,249 $ (2,434) $ 383,962
=========== =========== =========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
- ---------------------------------------------------------------------------------------------
JAN 1, DEC 31, DEC 31,
FISCAL YEAR ENDED 2000 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................ $ 52,052 $ 38,062 $ 25,790
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................... 26,521 21,308 17,978
Deferred income taxes ........................... 3,784 2,502 2,677
Loss on disposal of assets ...................... 868 1,560 2,912
Changes in assets and liabilities:
Decrease (increase) in accounts receivable .... 1,978 (9,050) 3,620
Increase in inventories ....................... (71,292) (48,201) (21,054)
Increase in prepaid expenses and other
current assets .............................. (1,551) (4,814) (690)
(Increase) decrease in deferred charges
and other noncurrent assets ................. (1,062) 175 (577)
Increase in accounts payable .................. 31,033 472 23,424
(Decrease) increase in accrued expenses
and other liabilities ....................... (5,618) 25,671 21,078
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ......... 36,713 27,685 75,158
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ............... (70,129) (46,272) (35,355)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock exercised under
stock incentive plans ........................... 9,378 6,869 1,018
Purchase of treasury stock ........................ (1,044) (1,390) --
Repayment of long-term note ....................... -- -- (10,000)
Increase (decrease) in book overdrafts ............ 28,195 15,864 (17,853)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 36,529 21,343 (26,835)
-------- -------- --------
Net increase in cash and cash equivalents ......... 3,113 2,756 12,968
Cash and cash equivalents at beginning of year .... 42,638 39,882 26,914
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR ............. $ 45,751 $ 42,638 $ 39,882
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
Interest (net of amounts capitalized) ............. $ 747 $ 727 $ 1,630
Income taxes ...................................... $ 20,889 $ 16,756 $ 4,377
- ---------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BUSINESS
Linens 'n Things, Inc. and subsidiaries (collectively the "Company")
operated 230 stores in 40 states across the United States as of fiscal year
ended 1999. The Company's stores emphasize a broad assortment of home
textiles, housewares and home accessories, carrying both national brand and
private label goods.
2. 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 significant intercompany
balances and transactions have been eliminated.
On December 15, 1999, the Board of Directors approved a change in the
Company's fiscal year from a calendar year ending December 31, 1999 to a
52/53 week calendar year, with the current fiscal year ending on Saturday,
January 1, 2000 rather than December 31, 1999.
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 which were
approximately 39,339,000 in fiscal 1999, 38,895,000 in fiscal 1998 and
38,578,000 in fiscal 1997. 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 approximately 40,907,000 in fiscal 1999, 40,407,000 in fiscal 1998 and
39,537,000 in fiscal 1997.
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.
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 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 of accounting.
<PAGE>
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 3 to 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.
DEFERRED RENT
The Company accounts for scheduled rent increases contained in its leases
on a straight-line basis over the noncancelable lease term.
SHAREHOLDERS' EQUITY
In April of 1999, the Company's Certificate of Incorporation was amended to
increase the number of authorized shares of common stock (par value $0.01
per share) from 60,000,000 shares to 135,000,000 shares.
On April 14, 1998, the Board of Directors of the Company approved a
two-for-one split of its common stock to be effected in the form of a stock
dividend. The stock dividend was one additional share of common stock for
each outstanding share of common stock and was distributed on May 7, 1998
to shareholders of record on April 24, 1998. Unless otherwise stated, all
references to common shares outstanding and income per share in the
consolidated financial statements, notes to consolidated financial
statements, and management's discussion and analysis of financial condition
and results of operations are on a post-split basis.
REVENUE RECOGNITION
The Company recognizes revenue at the time of sale of merchandise to its
customers.
<PAGE>
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 anticipated 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
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 expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications were made to the fiscal 1998 consolidated
financial statements in order to conform to the fiscal 1999 presentation.
3. ACCOUNTS RECEIVABLE, NET
FISCAL YEAR ENDED
ACCOUNTS RECEIVABLE, NET, CONSISTED
OF THE FOLLOWING (IN THOUSANDS): 1999 1998
- ------------------------------------------------------------------------------
Credit and charge card receivables ......... $ 6,457 $ 5,157
Due from landlords and vendors ............. 13,172 13,448
Other, net of allowance .................... 1,207 4,209
------- -------
$20,836 $22,814
- ------------------------------------------------------------------------------
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
FISCAL YEAR ENDED
PREPAID EXPENSES AND OTHER CURRENT ASSETS
CONSISTED OF THE FOLLOWING (IN THOUSANDS): 1999 1998
- ------------------------------------------------------------------------------
Deferred income taxes....................... $10,645 $ 9,353
Other....................................... 10,765 9,214
------- -------
$21,410 $18,567
- ------------------------------------------------------------------------------
<PAGE>
5. PROPERTY AND EQUIPMENT
FISCAL YEAR ENDED
PROPERTY AND EQUIPMENT CONSISTED
OF THE FOLLOWING (IN THOUSANDS): 1999 1998
- ------------------------------------------------------------------------------
Land............................... $ 430 $ 430
Building........................... 4,760 4,760
Furniture, fixtures and equipment.. 226,810 172,502
Leasehold improvements............. 74,320 59,745
Computer software.................. 7,829 9,086
-------- --------
314,149 246,523
Less accumulated depreciation
and amortization................... 90,424 67,084
-------- --------
$223,725 $179,439
- ------------------------------------------------------------------------------
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
FISCAL YEAR ENDED
ACCRUED EXPENSES AND OTHER CURRENT
LIABILITIES CONSISTED OF THE FOLLOWING 1999 1998
(IN THOUSANDS):
- ------------------------------------------------------------------------------
Income taxes payable .................. $ 16,778 $ 13,754
Other taxes payable ................... 16,508 15,512
Salaries and employee benefits ........ 15,565 7,794
Other ................................. 55,563 47,701
-------- --------
$104,414 $ 84,761
- ------------------------------------------------------------------------------
7. SHORT-TERM BORROWING ARRANGEMENTS
The Company has available a three-year, $90 million senior revolving credit
facility agreement (the "Credit Agreement") with third party institutional
lenders expiring March 31, 2001. The amount of borrowings can be increased up to
$125 million provided certain terms and conditions contained in the Credit
Agreement are met. Interest on all borrowings is determined based upon several
alternative rates as stipulated in the Credit Agreement. 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 defined in the Credit Agreement. At the
end of fiscal 1999, the Company was in compliance with the terms of the Credit
Agreement. The Credit Agreement also allows for up to $25 million in borrowings
from uncommitted lines of credit outside of the Credit Agreement. At various
times throughout fiscal 1999 and 1998, the Company did borrow against the Credit
Agreement for seasonal working capital needs. At the end of fiscal 1999, the
Company had no borrowings under the Credit Agreement or against the uncommitted
lines of credit. The Company is not obligated under any formal or informal
compensating balance requirements.
8. DEFERRED INCOME TAXES AND OTHER LONG-TERM
LIABILITIES
- ------------------------------------------------------------------------------
DEFERRED INCOME TAXES AND OTHER FISCAL YEAR ENDED
LONG-TERM LIABILITIES CONSISTED OF
THE FOLLOWING (IN THOUSANDS): 1999 1998
- ------------------------------------------------------------------------------
Deferred income taxes........... $ 23,642 $ 18,566
Other........................... 23,014 18,187
-------- --------
$ 46,656 $ 36,753
- ------------------------------------------------------------------------------
9. 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
<PAGE>
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
was as follows (in thousands):
FISCAL YEAR ENDED
- ---------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------
Minimum rentals $101,575 $ 83,881 $ 70,269
Contingent rentals 212 139 116
-------- -------- --------
101,787 84,020 70,385
Less sublease rentals 577 563 572
-------- -------- --------
$101,210 $ 83,457 $ 69,813
- ---------------------------------------------------------------------------
At fiscal year end 1999, 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):
FISCAL YEAR
- ----------------------------------------------------------------
2000..................................... $ 109,483
2001..................................... 110,109
2002..................................... 110,801
2003..................................... 109,099
2004..................................... 106,324
Thereafter............................... 949,979
-----------
$ 1,495,795
-----------
Total future minimum sublease rentals $ 4,520
-----------
- ----------------------------------------------------------------
In addition, as of February 2, 2000, the Company had fully executed leases for
30 stores planned to open in fiscal 2000.
10. STOCK INCENTIVE PLANS
The 1996 Incentive Compensation Plan (the "Plan"), provides for the granting of
options, deferred stock grants and other stock-based awards, up to a maximum of
4,624,264 shares of common stock, to key employees. The 1996 Non-Employee
Directors Stock Plan (the "Directors' Plan"), provides for the granting of
options and stock unit grants to non-employee directors ("eligible directors"),
up to a maximum of 400,000 shares. The Company had reserved a total of 5,024,264
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 five years after, and generally 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 6,000 shares of common stock, and,
at the date of each annual shareholders meeting thereafter, will receive an
option grant to purchase 2,000 shares and a stock unit grant for 400 shares.
At fiscal year end 1999, 187,966 deferred stock grants were outstanding under
the Plan and the Directors' Plan. During fiscal 1999, 71,759 grants were
released, 74,664 grants were awarded and 12,604 grants were canceled under the
Plan and the Directors' Plan.
At fiscal year end 1999, 3,240,632 stock options were outstanding under the
Plan. During fiscal 1999, 777,450 options were granted, 390,038 options were
exercised, 68,413 options were canceled and 1,020,680 options granted were
exercisable at fiscal year end 1999. At fiscal year end 1999, 68,200 stock
options were outstanding under the Directors' Plan. During fiscal 1999,
<PAGE>
8,000 options were granted, no stock options were exercised or canceled and
34,768 stock options were exercisable at fiscal year end 1999.
The following tables summarize information about stock option transactions for
the Plan and the Directors' Plan:
NUMBER OF WEIGHTED-
SHARES AVERAGE
EXERCISE PRICE
- ---------------------------------------------------------------------
Balance at December 31, 1996 2,016,660 $ 7.75
Options granted 763,382 $ 17.01
Options exercised 15,324 $ 7.75
Options canceled 166,100 $ 7.78
--------- ---------
Balance at December 31, 1997 2,598,618 $ 10.47
--------- ---------
Options granted 853,708 $ 30.31
Options exercised 378,611 $ 7.86
Options canceled 91,882 $ 12.56
--------- ---------
Balance at December 31, 1998 2,981,833 $ 16.39
--------- ---------
Options granted 785,450 $ 31.52
Options exercised 390,038 $ 10.10
Options canceled 68,413 $ 18.48
--------- ---------
Balance at January 1, 2000 3,308,832 $ 20.71
--------- ---------
- ---------------------------------------------------------------------
Options Exercisable as of:
December 31, 1997 475,680 $ 7.75
December 31, 1998 720,616 $ 10.03
January 1, 2000 1,055,448 $ 12.25
- ---------------------------------------------------------------------
Options Outstanding
-----------------------------------------------------
OUTSTANDING WEIGHTED-AVERAGE
RANGE OF AS OF REMAINING WEIGHTED-AVERAGE
EXERCISE PRICE JANUARY 1, 2000 CONTRACTUAL LIFE EXERCISE PRICE
- ---------------------------------------------------------------------------
$7.75- $9.75 1,088,711 6.9 years $ 7.77
$9.76-$14.62 17,100 7.4 years $12.34
$14.63-$19.50 612,505 7.9 years $17.44
$19.51-$24.37 200 8.1 years $20.23
$24.38-$29.25 37,859 5.3 years $26.19
$29.26-$34.12 1,509,882 9.3 years $30.83
$34.13-$39.00 10,175 9.5 years $36.55
$39.01-$43.87 21,600 9.4 years $40.22
$43.88-$48.75 10,800 9.3 years $45.20
--------- --------- ------
TOTAL 3,308,832 8.2 years $20.71
========= ========= ======
<PAGE>
Options Exercisable
-------------------------------------------
RANGE OF OUTSTANDING AS OF WEIGHTED-AVERAGE
EXERCISE PRICE JANUARY 1, 2000 EXERCISE PRICE
- ----------------------------------------------------------------
$ 7.75-$ 9.75 666,545 $ 7.77
$ 9.76-$14.62 7,200 $12.58
$14.63-$19.50 295,874 $17.44
$19.51-$24.37 50 $20.23
$24.38-$29.25 28,334 $26.10
$29.26-$34.12 56,920 $30.73
$34.13-$39.00 400 $35.56
$39.01-$43.87 125 $39.97
----------- ------
Total 1,055,448 $12.25
----------- ------
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:
FISCAL YEAR ENDED 1999 1998 1997
- ----------------------------------------------------------------------
Expected life (years)......... 4.5 4.5 5.0
Expected volatility........... 45.0% 45.0% 45.0%
Risk-free interest rate....... 6.2% 4.7% 5.7%
Expected dividend yield....... 0.0% 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 consolidated
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:
FISCAL YEAR ENDED
- ----------------------------------------------------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 1999 1998 1997
- ----------------------------------------------------------------------------
NET INCOME:
As reported...................... $52.1 $38.1 $25.8
Pro forma........................ $49.3 $36.2 $24.9
NET INCOME PER SHARE OF COMMON STOCK:
Basic:
As reported...................... $1.32 $0.98 $0.67
Pro forma........................ $1.25 $0.93 $0.65
Diluted:
As reported...................... $1.27 $0.94 $0.65
Pro forma........................ $1.20 $0.89 $0.63
The effects of applying SFAS No. 123 in this pro forma disclosure are not
necessarily indicative of future amounts.
11. EMPLOYEE BENEFIT PLANS
On December 1, 1996, the Company adopted a 401(k) savings plan. All 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 amounted
to approximately $1.9 million, $1.7 million and $1.2 million for the fiscal
years ended 1999, 1998 and 1997, respectively.
<PAGE>
12. 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 were as follows (in
thousands):
Fiscal Year Ended 1999 1998
- ---------------------------------------------------------------------
DEFERRED TAX ASSETS:
Employee benefits......... $ 6,150 $ 5,178
Inventories............... 5,460 5,222
Other..................... 2,154 1,989
------- -------
TOTAL DEFERRED TAX ASSETS...... 13,764 12,389
DEFERRED TAX LIABILITIES:
Property and equipment.... 26,761 21,602
------- -------
NET DEFERRED TAX LIABILITY..... $12,997 $ 9,213
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:
FISCAL YEAR ENDED
- ----------------------------------------------------------------------
(IN THOUSANDS): 1999 1998 1997
- ----------------------------------------------------------------------
CURRENT:
Federal.......... $25,449 $19,032 $12,102
State............ 3,224 2,399 3,472
------- ------- -------
28,673 21,431 15,574
------- ------- -------
DEFERRED:
Federal.......... 3,328 2,148 2,416
State............ 456 264 714
------- ------- -------
3,784 2,412 3,130
------- ------- -------
TOTAL $32,457 $23,843 $18,704
- ------------------------------------------------------------------------------
The following is a reconciliation between the statutory Federal income tax rate
and the effective rate for:
FISCAL YEAR ENDED
-----------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------
Effective tax rate........ 38.4% 38.5% 42.0%
State income taxes, net of
Federal benefit......... (2.8) (2.8) (6.1)
Goodwill.................. (0.4) (0.5) (0.7)
Other..................... (0.2) (0.2) (0.2)
----- ----- -----
Statutory Federal income
tax rate................ 35.0% 35.0% 35.0%
------------------------------------------------------------------------------
<PAGE>
13. 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.
14. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT FIRST SECOND THIRD FOURTH FISCAL
PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER YEAR
- ---------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
NET SALES
1999 ................ $ 273,540 $ 271,628 $ 341,122 $ 414,342 $1,300,632
1998 ................ 218,037 222,094 278,642 347,421 1,066,194
GROSS PROFIT
1999 ................ 106,692 110,895 137,236 173,356 528,179
1998 ................ 83,330 88,876 111,192 143,658 427,056
NET INCOME
1999 ................ 3,595 5,103 14,662 28,692 52,052
1998 ................ 1,475 2,826 11,018 22,743 38,062
NET INCOME PER SHARE
BASIC(1)
1999 ................ $ 0.09 $ 0.13 $ 0.37 $ 0.73 $ 1.32
1998 ................ 0.04 0.07 0.28 0.58 0.98
DILUTED(1)
1999 ................ $ 0.09 $ 0.12 $ 0.36 $ 0.70 $ 1.27
1998 ................ 0.04 0.07 0.27 0.56 0.94
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) NET INCOME PER SHARE AMOUNTS FOR EACH QUARTER ARE REQUIRED TO BE COMPUTED
INDEPENDENTLY AND MAY NOT EQUAL THE AMOUNT COMPUTED FOR THE FISCAL YEAR.
15. MARKET INFORMATION (unaudited)
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 for each quarter is as
follows:
FOR FISCAL 1999
- ---------------
HIGH LOW
---- ---
First Quarter.............. $48 1/4 $34 3/16
Second Quarter............. 52 1/16 37 5/8
Third Quarter.............. 49 1/2 30 5/8
Fourth Quarter............. 41 7/16 22 7/16
FOR FISCAL 1998
- ---------------
HIGH LOW
---- ---
First Quarter.............. $28 1/2 $19 1/2
Second Quarter............. 34 11/16 27 1/16
Third Quarter.............. 35 7/8 23
Fourth Quarter............. 40 5/8 16 5/8
<PAGE>
At fiscal year end 1999, there were approximately 9,300 beneficial shareholders.
<PAGE>
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, 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 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
Vice President, Chief Financial Officer
February 2, 2000
<PAGE>
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 January 1, 2000 and December 31, 1998, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended January 1, 2000.
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 January 1, 2000 and December 31, 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended January 1, 2000 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
- ----------------------------
KPMG LLP
New York, New York
February 2, 2000
<PAGE>
EXHIBIT 11
LINENS 'N THINGS, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BASIC
- -----
Weighted average number of shares outstanding .. 39,339 38,895 38,578 38,536 38,536
======== ======== ======== ======== ========
Net income (loss) before cumulative effect of
change in accounting principle ............... $ 52,052 $ 38,062 $ 25,790 $ 15,039 $ (34)
Cumulative effect of change in accounting
principle .................................... -- -- -- -- 178
-------- -------- -------- -------- --------
Net income (loss) applicable to common shares .. $ 52,052 $ 38,062 $ 25,790 $ 15,039 $ (212)
======== ======== ======== ======== ========
Per share amounts
Net income (loss) before cumulative effect of
change in accounting principle ............. $ 1.32 $ 0.98 $ 0.67 $ 0.39 $ (0.00)
Cumulative effect of change in accounting
principle .................................. -- -- -- -- 0.01
-------- -------- -------- -------- --------
Net income (loss) per share .................... $ 1.32 $ 0.98 $ 0.67 $ 0.39 $ (0.01)
======== ======== ======== ======== ========
DILUTED
- -------
Weighted average number of shares outstanding
and diluted common share equivalents ........... 40,907 40,407 39,537 38,558 38,536
======== ======== ======== ======== ========
Net income (loss) before cumulative effect of
change in accounting principle ............... $ 52,052 $ 38,062 $ 25,790 $ 15,039 $ (34)
Cumulative effect of change in accounting
principle .................................... -- -- -- -- 178
-------- -------- -------- -------- --------
Net income (loss) applicable to common shares .. $ 52,052 $ 38,062 $ 25,790 $ 15,039 $ (212)
======== ======== ======== ======== ========
Per share amounts
Net income (loss) before cumulative effect of
change in accounting principle ............. $ 1.27 $ 0.94 $ 0.65 $ 0.39 $ (0.00)
Cumulative effect of change in accounting
principle .................................. -- -- -- -- 0.01
-------- -------- -------- -------- --------
Net income (loss) per share .................... $ 1.27 $ 0.94 $ 0.65 $ 0.39 $ (0.01)
======== ======== ======== ======== ========
</TABLE>
<PAGE>
EXHIBIT 12
LINENS 'N THINGS, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF
EARNINGS TO FIXED CHARGES
($ in thousands, except Ratio of Earnings to Fixed Charges)
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET EARNINGS
Net income (loss) .............................. $ 52,052 $ 38,062 $ 25,790 $ 15,039 $ (34)
Income taxes ................................... 32,457 23,843 18,704 10,952 1,108
Interest expense, excluding capitalized interest 554 594 1,405 4,692 7,059
Portion of rents deemed representative
of interest factor (1/3) .................... 33,737 27,819 23,271 17,774 12,946
-------- -------- -------- -------- --------
$118,800 $ 90,318 $ 69,170 $ 48,457 $ 21,079
======== ======== ======== ======== ========
FIXED CHARGES
Gross interest expense ......................... $ 1,070 $ 774 $ 1,574 $ 4,692 $ 7,059
Portion of rents deemed representative
of interest factor (1/3) .................... 33,737 27,819 23,271 17,774 12,946
-------- -------- -------- -------- --------
$ 34,807 $ 28,593 $ 24,845 $ 22,466 $ 20,005
======== ======== ======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES ............. 3.41 3.16 2.78 2.16 1.05
</TABLE>
<PAGE>
EXHIBIT 23A
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Linens 'n Things, Inc.:
We consent to incorporation by reference in the Registration Statements Numbers
333-71903, 333-55803, 333-26827 and 333-26819 on Form S-8 of Linens 'n Things,
Inc. and Subsidiaries of our report dated February 2, 2000, relating to the
consolidated balance sheets of Linens 'n Things, Inc. and Subsidiaries as of
January 1, 2000 and December 31, 1998, and the related consolidated statements
of operations, shareholders' equity, and cash flows for each of the years in the
three-year period ended January 1, 2000, which report appears in the January 1,
2000 Annual Report on Form 10-K of Linens 'n Things, Inc.
/s/ KPMG LLP
KPMG LLP
New York, New York
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> JAN-01-2000
<CASH> 45,751
<SECURITIES> 0
<RECEIVABLES> 20,836
<ALLOWANCES> 0
<INVENTORY> 342,681
<CURRENT-ASSETS> 430,678
<PP&E> 314,149
<DEPRECIATION> 90,424
<TOTAL-ASSETS> 679,916
<CURRENT-LIABILITIES> 249,298
<BONDS> 0
0
0
<COMMON> 396
<OTHER-SE> 383,566
<TOTAL-LIABILITY-AND-EQUITY> 679,916
<SALES> 1,300,632
<TOTAL-REVENUES> 1,300,632
<CGS> 772,453
<TOTAL-COSTS> 443,627
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43
<INCOME-PRETAX> 84,509
<INCOME-TAX> 32,457
<INCOME-CONTINUING> 52,052
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,052
<EPS-BASIC> 1.32
<EPS-DILUTED> 1.27
</TABLE>
