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<SEC-DOCUMENT>0000950123-96-005902.txt : 19961027

<SEC-HEADER>0000950123-96-005902.hdr.sgml : 19961027

ACCESSION NUMBER:     0000950123-96-005902

CONFORMED SUBMISSION TYPE:   S-1/A

PUBLIC DOCUMENT COUNT:       11

FILED AS OF DATE:     19961024

SROS:         NONE

 

FILER:

 

    COMPANY DATA:

       COMPANY CONFORMED NAME:          LINENS N THINGS INC

       CENTRAL INDEX KEY:           0001023052

       STANDARD INDUSTRIAL CLASSIFICATION:    RETAIL-HOME FURNITURE, FURNISHINGS & EQUIPMENT STORES [5700]

 

    FILING VALUES:

       FORM TYPE:    S-1/A

       SEC ACT:      1933 Act

       SEC FILE NUMBER:  333-12267

       FILM NUMBER:      96647490

 

    BUSINESS ADDRESS:

       STREET 1:     6 BRIGHTON RD

       CITY:         CLIFTON

       STATE:        NJ

       ZIP:          07015

       BUSINESS PHONE:       2017781300

 

    MAIL ADDRESS:

       STREET 1:     6 BRIGHTON RD

       CITY:         CLIFTON

       STATE:        NJ

       ZIP:          07015

</SEC-HEADER>

<DOCUMENT>

<TYPE>S-1/A

<SEQUENCE>1

<DESCRIPTION>LINENS 'N THINGS, INC.

<TEXT>

 

<PAGE>   1

 

  

    AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 24, 1996

   

 

  

                                                      REGISTRATION NO. 333-12267

   

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                      ------------------------------------

  

                                AMENDMENT NO. 1

   

  

                                       to

   

                                    FORM S-1

                             REGISTRATION STATEMENT

                                   UNDER THE

                             SECURITIES ACT OF 1933

                      ------------------------------------

                             LINENS 'N THINGS, INC.

 

             (Exact name of Registrant as specified in its charter)

 

<TABLE>

<S>                                   <C>                                   <C>

             DELAWARE                                5700                               22-3463939

     (State of Incorporation)            (Primary Standard Industrial                (I.R.S. Employer

                                         Classification Code Number)               Identification No.)

</TABLE>

 

                                6 BRIGHTON ROAD

                               CLIFTON, NJ 07015

                                 (201) 778-1300

  (Address, including zip code, and telephone number, including area code, of

                   registrant's principal executive offices)

                      ------------------------------------

 

                                 NORMAN AXELROD

                     CHIEF EXECUTIVE OFFICER AND PRESIDENT

                                6 BRIGHTON ROAD

                               CLIFTON, NJ 07015

                                 (201) 778-1300

 (Name, address, including zip code, and telephone number, including area code,

                             of agent for service)

                      ------------------------------------

 

                                   COPIES TO:

 

<TABLE>

<S>                                   <C>                                   <C>

     SARAH JONES BESHAR, ESQ.                                                     ROGER H. KIMMEL, ESQ.

      DAVIS POLK & WARDWELL                                                          LATHAM & WATKINS

       450 LEXINGTON AVENUE                                                          885 THIRD AVENUE

        NEW YORK, NY 10017                                                          NEW YORK, NY 10022

          (212) 450-4000                                                              (212) 906-1200

</TABLE>

 

                      ------------------------------------

 

     APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as

practicable after the Registration Statement becomes effective.

     If any of the securities being registered on this form are to be offered on

a delayed or continuous basis pursuant to Rule 415 under the Securities Act of

1933, check the following box. / /

     If this form is filed to register additional securities for an offering

pursuant to Rule 462(b) under the Securities Act, please check the following box

and list the Securities Act registration statement number of the earlier

effective registration statement for the same offering. / /

     If this Form is a post-effective amendment filed pursuant to Rule 462(c)

under the Securities Act, check the following box and list the Securities Act

registration statement number of the earlier effective registration statement

for the same offering. / /

     If delivery of the prospectus is expected to be made pursuant to Rule 434,

please check the following box. / /

                      ------------------------------------

 

                        CALCULATION OF REGISTRATION FEE

 

  

<TABLE>

<S>                                       <C>               <C>               <C>               <C>

- --------------------------------------------------------------------------------

                                                             PROPOSED MAXIMUM  PROPOSED MAXIMUM     AMOUNT OF

          TITLE OF EACH CLASS                AMOUNT TO BE     OFFERING PRICE  AGGREGATE OFFERING    REGISTRATION

     OF SECURITIES TO BE REGISTERED         REGISTERED(1)      PER UNIT(2)          PRICE             FEE(3)

- ------------------------------------------------------------------------------------------------------------------

Common Stock, par value $.01 per

  share.................................      13,800,000          $17.00         $234,600,000        $71,091

</TABLE>

   

 

- --------------------------------------------------------------------------------

 

  

(1) Includes 1,800,000 shares which the Underwriters have the right to purchase

    to cover over-allotments.

   

 

  

(2) Estimated solely for the purpose of computing the amount of the registration

    fee pursuant to Rule 457(a) under the Securities Act of 1933.

   

 

  

(3) A filing fee of $94,828 was paid in connection with the initial filing of

    this Registration Statement on September 18, 1996.

   

                      ------------------------------------

 

     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR

DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL

FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION

STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF

THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME

EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),

MAY DETERMINE.

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------

<PAGE>   2

 

     INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A

     REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE

     SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR

     MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT

     BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR

     THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE

     SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE

     UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS

     OF ANY SUCH STATE.

 

  

                 SUBJECT TO COMPLETION, DATED OCTOBER 24, 1996

   

 

  

                               12,000,000 Shares

   

  

                                     [LOGO]

   

 

                                  Common Stock

 

                           (par value $.01 per share)

                               ------------------

 

  

All of the shares of Common Stock (the "Common Stock") of Linens 'n Things, Inc.

("Linens 'n Things" or the "Company") offered hereby (the "Offering") are

  being sold by the Selling Shareholder named herein under "Principal and

     Selling Shareholder." The Company will not receive any proceeds from

     the sale of shares by the Selling Shareholder. Prior to the Offering,

      there has been no public market for the Common Stock. It is

        anticipated that the initial public offering price will be

        between $15.00 and $17.00 per share. For information relating

           to factors considered in determining the initial public

                      offering price, see "Underwriting."

 

Application has been made to list the Common Stock on the New York Stock

    Exchange under the proposed symbol "LIN", subject to official notice of

 issuance.

   

                               ------------------

 

  

FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH

   AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" BEGINNING ON PAGE 8

                                    HEREIN.

   

                               ------------------

 

  

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND

    EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR

       HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE

          SECURITIES COMMISSION PASSED UPON THE ACCURACY OR AD-

              EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION

                     TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

<TABLE>

<S>                                          <C>             <C>             <C>

                                                               Underwriting    Proceeds to

                                                 Price to     Discounts and      Selling

                                                  Public       Commissions    Shareholder(1)

                                             ------------------------------------------------

 Per Share...................................        $       $               $

 Total(2)....................................        $       $               $

</TABLE>

   

 

  

(1) Before deduction of expenses payable by the Selling Shareholder estimated at

    $1,040,000.

   

  

(2) The Selling Shareholder has granted the Underwriters an option, exercisable

    for 30 days from the date of this Prospectus, to purchase a maximum of

    1,800,000 additional shares in order to cover over-allotments of shares. If

    the option is exercised in full, the total Price to Public will be

    $          , Underwriting Discounts and Commissions will be $          and

    Proceeds to the Selling Shareholder will be $          .

   

                               ------------------

 

     The shares will be offered by the several Underwriters when, as and if

delivered to and accepted by the Underwriters and subject to their right to

reject orders in whole or part. It is expected that the shares will be ready for

delivery on or about           , 1996, against payment in immediately available

funds.

CS First Boston  Donaldson, Lufkin & Jenrette

                                                 Securities  Corporation

                The date of this Prospectus is           , 1996.

<PAGE>   3

 

  

                          [IMAGE MATERIAL APPEARS HERE

   

  

                    CONSISTING OF A MAP OF THE UNITED STATES

   

  

                         WITH CURRENT STORE LOCATIONS.]

   

 

  

                          [IMAGE MATERIAL APPEARS HERE

   

  

                          CONSISTING OF VARIOUS PHOTOS

   

                     DISPLAYING THE COMPANY'S MERCHANDISE.]

 

 

 

 

  

     IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT

TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF

THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN

MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE

OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE

DISCONTINUED AT ANY TIME.

   

 

     DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING

IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE

ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES 10B-6,

10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

<PAGE>   4

 

                               PROSPECTUS SUMMARY

 

  

     The following summary is qualified in its entirety by, and should be read

in conjunction with, the more detailed information and financial statements

appearing elsewhere in this Prospectus. Unless otherwise indicated, the

information in this Prospectus assumes the Underwriters' over-allotment option

is not exercised. All pro forma information in this Prospectus gives effect to:

(i) the Reorganization (as defined in "Capitalization") and (ii) the Offering.

For information relating to factors considered in determining the initial

offering price of the Common Stock offered hereby, see "Underwriting."

   

 

                                  THE COMPANY

 

  

     Linens 'n Things, Inc. (with its subsidiaries and its predecessors, "Linens

'n Things" or the "Company") is one of the leading, national large format

retailers of home textiles, housewares and home accessories operating in 33

states. According to Home Textiles Today, Linens 'n Things was the largest

specialty retailer (as measured by sales) in the home linens category in 1995.

As of September 28, 1996, the Company operated 117 superstores averaging

approximately 32,000 gross square feet in size and 39 smaller traditional stores

averaging approximately 10,000 gross square feet in size. The Company's newest

superstores range between 35,000 and 40,000 gross square feet in size and are

located in strip malls or power center locations. The Company's business

strategy is to offer a broad assortment of high quality, brand name merchandise

at everyday low prices, provide efficient customer service and maintain low

operating costs.

   

 

     Linens 'n Things' extensive selection of over 25,000 stock keeping units

("SKUs") in its superstores is driven by the Company's commitment to offering a

broad and deep assortment of high quality, brand name "linens" (e.g., bedding,

towels and pillows) and "things" (e.g., housewares and home accessories). Brand

names sold by the Company include Wamsutta, Cannon, Laura Ashley, Martex,

Waverly, Royal Velvet, Braun, Krups, Calphalon and Henckel. 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 with price points substantially below

regular department store prices and comparable with or below department store

sale prices.

 

  

     From its founding in 1975 through the late 1980s, 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 of 35,000

to 40,000 gross square feet, offering a broad merchandise assortment in a more

visually appealing, customer friendly format. The Company's introduction of

superstores has resulted in the closing or relocation of 102 of the Company's

traditional stores through September 28, 1996. As a result of superstore

openings and traditional store closings, the Company's gross square footage more

than tripled from 1.2 million to 4.1 million between January 1991 and September

28, 1996, although its store base only increased 11%, from 141 to 156 during

this period. Over this same period, the Company's net sales increased from

$202.1 million for the year ended December 31, 1990 to $643.7 million for the

twelve months ended September 28, 1996. 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 assortment of "linens" and "things."

The Company estimates that the "things" side of its business has increased from

less than 10% of net sales in 1991 to 35% in 1996.

   

 

     Key components of the Company's strategy to increase sales and

profitability are: (i) new superstore expansion and (ii) increasing productivity

of the existing store base. Principal elements of the Company's growth strategy

are highlighted as follows:

 

  

     NEW SUPERSTORE EXPANSION.  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. Management believes that the new markets will be primarily located

in the western region of the United States in trading areas of 200,000 persons

within a ten-mile radius and with demographic characteristics that match the

Company's target profile. The Company believes that it is well-

   

 

                                        3

<PAGE>   5

 

  

positioned to take advantage of the continued market share gain by the

superstore chains in the home furnishings sector. The Company believes there is

an opportunity to more than triple the number of its current prototype

superstores across the country, providing the Company with significant growth

opportunities to profitably enter new markets, as well as backfill in existing

markets. In 1996, the Company plans to open 36 superstores, of which 18 have

already been opened, and close 18 stores (primarily traditional stores), of

which 17 stores have already been closed. In 1997, the Company plans to open 20

to 25 superstores and close approximately 10 to 12 stores (primarily traditional

stores).

   

 

     INCREASE PRODUCTIVITY OF EXISTING STORE BASE.  The Company is committed to

increasing its sales per square foot, inventory turnover ratio and return on

invested capital. The Company believes the following initiatives will allow it

to achieve this goal:

 

  

     Enhance Merchandise Mix and Presentation.  The Company continues to explore

     opportunities to increase sales of "things" merchandise while maintaining

     the strength of its "linens" side of the business. The Company's long-term

     goal is to increase the sales of "things" merchandise to approximately 50%

     of net sales as part of its strategic initiative to capitalize on customer

     demand for one-stop shopping destinations. The Company expects this shift

     to positively impact net sales per square foot and inventory turnover since

     "things" merchandise tends to be more impulse driven merchandise as

     compared to the "linens" portion of the business and therefore increases

     the average sale per customer. In addition, sales of "things" merchandise

     typically result in higher margins than "linens" products. The Company

     intends to continue improving its merchandising presentation and

     techniques, space planning and store layout to further improve the

     productivity of its existing and future superstore locations.

   

 

     Increase Operating Efficiencies.  As part of its strategy to increase

     operating efficiencies, the Company has invested significant capital in

     building a centralized infrastructure, including a distribution center and

     a management information system, which it believes will allow it to

     maintain low operating costs as it pursues its superstore expansion

     strategy. In July 1995, the Company began full operations of its 275,000

     square foot distribution center in Greensboro, North Carolina. Management

     estimates that by the end of 1996 approximately 80% of merchandise will be

     received at the Company's distribution center, as compared to approximately

     20% received at the distribution center in 1995. Management believes that

     the increased utilization of the distribution center will result in lower

     average freight costs, more efficient scheduling of inventory shipments to

     the stores, improved inventory turnover, better in-stock positions and

     improved information flow. In addition, the Company believes that the

     transfer of inventory receiving responsibilities from the stores to the

     distribution center allows the store sales associates to redirect their

     focus to the sales floor, thereby increasing the level of customer service.

     The Company's ability to effectively manage its inventory is also enhanced

     by a centralized merchandising management team and its MIS system which

     allows the Company to more accurately monitor and better balance inventory

     levels and improve in-stock positions in its stores.

 

  

     Continue Conversion of Store Base to Superstore Format.  As of September

     28, 1996, the Company operated 117 superstores, representing 75% of its

     total stores, and 39 traditional stores. The Company plans to close or

     relocate approximately 12 of the 39 traditional stores by the end of 1997.

     Although the remaining traditional stores are currently profitable, the

     Company's long-term plans include closing most of the remaining traditional

     stores as opportunities arise.

   

 

     The Company was founded in 1975 and was operated as a private company until

it was acquired in 1983 by Melville Corporation (which plans to be known as "CVS

Corporation" by the end of 1996) (together with its subsidiaries, "CVS"). The

Company's corporate offices are located at 6 Brighton Road, Clifton, New Jersey

07015, and its telephone number is (201) 778-1300.

 

                                        4

<PAGE>   6

 

                                  THE OFFERING

 

  

Common Stock offered by the

  Selling Shareholder......  12,000,000 shares

   

 

  

Common Stock to be

outstanding after the

  Offering(1)..............  19,595,476 shares

   

 

Dividend policy............  After the completion of the Offering, the Company

                             intends to retain all earnings for the foreseeable

                             future for use in the operation and expansion of

                             its business and, accordingly, the Company

                             currently has no plans to pay cash dividends on the

                             Common Stock. See "Dividend Policy."

 

Proposed New York Stock

  Exchange symbol..........  "LIN"

- ---------------

 

  

(1) Excludes approximately 195,955 shares of restricted stock awards and 979,774

     shares issuable upon the exercise of stock options to be granted prior to

     completion of the Offering. See "Underwriting" and "Management--1996

     Incentive Compensation Plan" and "Management--1996 Non-Employee Director

     Stock Plan."

   

 

                                        5

<PAGE>   7

 

                      SUMMARY FINANCIAL AND OPERATING DATA

 

  

<TABLE>

<CAPTION>

                                                                                               THIRTY-NINE WEEKS ENDED(1)

                                                 YEAR ENDED DECEMBER 31,                     ------------------------------

                                 --------------------------------------------------------    SEPTEMBER 30,    SEPTEMBER 28,

                                   1991        1992        1993        1994        1995          1995             1996

                                 --------    --------    --------    --------    --------    -------------    -------------

<S>                              <C>         <C>         <C>         <C>         <C>         <C>              <C>

                                                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND SELECTED OPERATING DATA)

CONSOLIDATED STATEMENTS OF

  OPERATIONS DATA:

  Net sales..................... $221,360    $270,889    $333,178    $440,118    $555,095      $ 377,638        $ 466,254

  Gross profit..................   89,985     108,794     133,871     174,397     209,933(2)     145,349          175,909

  Selling, general &

    administrative expense......   82,666      95,904     112,135     142,155     190,826(2)     131,360          166,615

  Restructuring and asset

    impairment charges..........       --      13,100(3)       --          --      10,974(2)          --               --

  Operating profit (loss).......    7,319        (210)(3)   21,736     32,242       8,133(2)      13,989            9,294

Interest expense, net...........    1,610       1,301       1,398       3,170       7,059          5,137            4,464

  Income (loss) before provision

    for income taxes and

    cumulative effect of change

    in accounting principle.....    5,709      (1,511)     20,338      29,072       1,074          8,852            4,830

  Net income (loss).............    3,758      (1,201)     11,719      17,198        (212)         4,925            2,769

PRO FORMA:

  Net income (loss) per share... $   0.19    $  (0.06)   $   0.60    $   0.88    $  (0.01)     $    0.26        $    0.14

  Weighted average number of

    shares outstanding

    (000's).....................   19,595      19,595      19,595      19,595      19,595         19,595           19,595

SELECTED OPERATING DATA:

  Number of stores:

    At beginning of period......      141         143         144         143         145            145              155

    Opened during period........       12          22          20          29          28             17               18

    Closed during period........       10          21          21          27          18             16               17

                                 --------    --------    --------    --------    --------       --------         --------

    At end of period:

      Traditional stores........      133         119          98          71          54             56               39

      Superstores...............       10          25          45          74         101             90              117

                                 --------    --------    --------    --------    --------       --------         --------

    Total stores................      143         144         143         145         155            146              156

                                 ========    ========    ========    ========    ========       ========         ========

  Total gross square feet of

    store space (000's)(4)......    1,350       1,633       2,078       2,865       3,691          3,233            4,147

  Net sales per gross square

    foot(4)(5).................. $    188    $    185    $    187    $    190    $    178      $     182(6)     $     171(6)

  Increase (decrease) in

    comparable store net

    sales(7)....................    (1.1%)       7.5%        5.0%        5.4%       (1.5%)(8)       (0.6%)(8)       (0.6%)(8)

</TABLE>

   

 

  

<TABLE>

<CAPTION>

                                                                                            SEPTEMBER 28, 1996

                                                                                      ------------------------------

                                                                                         ACTUAL        PRO FORMA(9)

                                                                                      -------------    -------------

<S>                                                                                   <C>              <C>

                                                                                              (DOLLARS IN THOUSANDS)

BALANCE SHEET DATA:

  Working capital....................................................................   $ 118,103        $ 114,603

  Total assets.......................................................................     399,801          399,956

  Total debt(10).....................................................................      61,498           28,153

  Shareholders' equity(10)...........................................................     209,457          239,457

</TABLE>

   

 

                                        6

<PAGE>   8

 

- ---------------

 

 (1)  The operating results for interim periods are not necessarily indicative

     of the results that may be expected for a full year. The Company's quarters

     end on the Saturday nearest to the end of the last month of such quarter,

     except the fourth quarter which ends on December 31.

 

 (2)  Reflects certain one-time special charges related to the CVS Strategic

     Program (as defined in "Management's Discussion and Analysis of Financial

     Condition and Results of Operations"). Gross profit and operating profit in

     1995 excluding the effect of these charges would have been $218.1 million

     and $31.5 million, respectively. See "Management's Discussion and Analysis

     of Financial Condition and Results of Operations."

 

 (3)  Reflects a $13.1 million realignment charge associated with the

     anticipated costs of closing 66 traditional stores from 1993 to 1995. This

     charge includes the write-down of fixed assets, lease settlement costs,

     severance and inventory liquidation costs. Operating profit in 1992

     excluding the effect of this charge would have been $12.9 million.

 

 (4)  Store space includes the storage, receiving and office space that

     generally occupies 10% to 15% of total store space. All numbers provided

     for the end of the respective periods.

 

  

 (5)  Net sales per square foot is the result of dividing net sales for the

     period by the average of gross square footage at the beginning of the year

     and at the end of each interim quarterly and year period.

   

 

  

 (6)  Amounts for interim periods are calculated based on annual net sales for

     the 52 weeks ending at the end of such interim period.

   

 

  

 (7)  New store net sales become comparable in the first full month following 13

     full months of operations. Stores that undergo major expansion or that are

     relocated are not included in the comparable store base. Comparable store

     net sales include traditional stores and superstores.

   

 

  

 (8)  The decrease in comparable store net sales during 1995 and the thirty-nine

     weeks of 1996 was primarily due to new competitive intrusions in existing

     markets during the second half of 1995 and the first half of 1996 at

     approximately 40% of the Company's superstores included in the comparable

     store base which previously had limited competition from other superstores.

     For the third quarter of 1996, comparable store net sales increased 2.9%.

     See "Management's Discussion and Analysis of Financial Condition and

     Results of Operations."

   

 

  

 (9) Pro forma to give effect to the Reorganization. See "Capitalization."

   

 

  

(10) Prior to the Offering, total debt consists of short-term intercompany

     indebtedness due primarily to CVS. The amount of short-term debt at

     September 28, 1996 reflects a $130.0 million capital contribution from CVS

     in May 1996 used to repay a portion of the Company's intercompany

     indebtedness to CVS. On October 11, 1996, CVS made a capital contribution

     to the Company in the amount of $30.0 million to reduce a corresponding

     amount of intercompany indebtedness due to CVS. At the time of the

     Offering, total debt will consist of a $13.5 million subordinated note

     issued to CVS and the balance of short-term debt to be outstanding under

     the Revolving Credit Facility (as defined herein). See "Capitalization."

   

 

                                        7

<PAGE>   9

 

                                  RISK FACTORS

 

     Prospective investors should carefully consider the factors set forth

below, as well as other information contained in this Prospectus, in evaluating

an investment in the Common Stock.

 

LACK OF OPERATING HISTORY AS A STAND-ALONE COMPANY

 

  

     The Company has not operated as a stand-alone or public company, and the

historical financial data reflects periods during which the Company did not

operate as an independent company and, accordingly, certain allocations were

made in preparing such financial data. The Company is subject to the risks and

uncertainties associated with any newly independent company. Prior to the date

of the Offering, the Company had access to financial and other support from CVS.

Following the consummation of the Offering, the Company will no longer be able

to rely on CVS for financial support or benefit from its relationship with CVS

to obtain credit or receive favorable terms for the purchase of certain limited

goods and services. Accordingly, in the future, the costs of financing of the

Company may be higher than historical costs reflected in the Company's financial

statements. See "Management's Discussion and Analysis of Financial Condition and

Results of Operations."

   

 

  

     Prior to the Offering, CVS has acted as the guarantor with regard to

substantially all of the Company's store leases. After the Offering, CVS will

remain obligated under its guarantees of the Company's store leases where CVS

has guaranteed such leases in the past (including extensions and renewals

relating to such leases) and will guarantee certain new leases identified in the

Stockholder Agreement (as defined below) (the "CVS Lease Guarantees"). Except

for the foregoing, CVS will no longer enter into any guarantees of leases on

behalf of the Company. Pursuant to a stockholder agreement to be entered into

between the Company and CVS (the "Stockholder Agreement") at the time of the

Offering, the Company has agreed to indemnify CVS with respect to all losses

incurred by CVS in connection with the Company's failure to pay or otherwise

perform under the guaranteed leases. See "--Control of the Company by CVS;

Possible Conflicts of Interest" and "Relationship with CVS--Real Estate and

Certain Administrative Costs." There can be no assurance in the future that

store leases will be available, or that the Company will be able to secure

leases, on similar terms or in as desirable locations, as those that were

available to the Company in the past.

   

 

  

     Prior to the Offering, CVS provided certain administrative functions to the

Company, most of which will be terminated following the completion of the

Offering. CVS will continue to provide certain services to the Company pursuant

to a transitional services agreement and the Stockholder Agreement. Although

management believes that the costs of the services to be provided by CVS

pursuant to these agreements are competitive with costs for similar services

provided by third parties, the stockholder and transitional services agreements

will not result from arm's length negotiations. See "Relationship with CVS." In

the future, certain of the costs associated with the administrative services and

other costs to the Company may be higher than the historical costs reflected in

the Company's financial statements. See "Management's Discussion and Analysis of

Financial Condition and Results of Operations."

   

 

RISKS OF GROWTH STRATEGY

 

  

     The growth of the Company is dependent, in large part, upon the Company's

ability to successfully execute its expansion program and to increase

productivity of the existing store base. In 1996, pursuant to the expansion

program the Company plans to open 36 superstores, of which 18 have been opened

as of September 28, 1996, and close 18 stores (primarily traditional stores), of

which 17 stores have been closed as of such date. During 1997, the Company plans

to open 20 to 25 superstores and close approximately 10 to 12 stores (primarily

traditional stores). See "Business--Growth Strategy--New Store Expansion." The

success of the Company's expansion program will be dependent upon, among other

things, the identification of suitable markets and sites for new superstores,

negotiation of leases on acceptable terms, construction or renovation of sites

and obtaining financing for those sites. In addition, the Company must be able

to hire, train and retain competent managers and personnel and manage the

systems and operational components of its growth. The failure of the Company to

open new superstores on a timely basis, obtain acceptance in markets in which it

currently has limited or no presence, attract qualified management and personnel

or appropriately

   

 

                                        8

<PAGE>   10

 

  

adjust operational systems and procedures would adversely affect the Company's

future operating results. In addition, there can be no assurance that as the

Company opens new superstores in existing markets, that these new stores will

not have an adverse effect on comparable store net sales at already existing

stores in these markets. In addition, the Company plans to increase productivity

at the existing store base in part by enhancing its merchandise and presentation

mix. There is no assurance that the Company will be able to increase store

profitability by enhancing its merchandise and presentation mix. See

"Business--Growth Strategy--Increase Productivity of Existing Store Base." There

can be no assurance that the Company will be able to successfully implement its

growth strategies, continue to introduce the superstore format or maintain its

current growth levels.

   

 

COMPETITION

 

  

     The market for home textiles, housewares and home accessories is fragmented

and highly competitive. 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, mail order and

other retailers. Many of the Company's competitors have substantially greater

financial and other resources than the Company, including, in some cases, more

profitable store economics or better name recognition. See "Business--Industry"

and "Business--Competition." In addition, there can be no assurance that

additional competitors will not enter the Company's existing or planned new

markets. Increased competition by existing or future competitors, resulting in

the Company reducing prices in an effort to gain or retain market share, could

result in reductions in the Company's sales and profitability which could have a

material adverse effect on the Company's business and financial condition. In

the second half of 1995 and the first half of 1996, the Company experienced

relatively higher new competitive intrusions in existing markets at

approximately 40% of its superstores included in the comparable store base which

previously had limited competition from other superstores. See "Management's

Discussion and Analysis of Financial Condition and Results of

Operations--Results of Operations."

   

 

RELIANCE ON SYSTEMS AND DISTRIBUTION CENTER

 

     The Company relies upon its existing management information systems in

operating and monitoring all major aspects of the Company's business, including

sales, warehousing, distribution, purchasing, inventory control, merchandise

planning and replenishment, as well as various financial systems. Any disruption

in the operation of the Company's management information systems, or the

Company's failure to continue to upgrade, integrate or expend capital on such

systems as its business expands, would have a material adverse effect upon the

Company. In addition, the Company is committed to a centralized distribution

strategy and, as a result, began full operations of its new distribution center

in July 1995. As of the end of 1995, only 20% of the Company's inventory was

received through the distribution center, which amount is projected to increase

to 80% by the end of 1996. Despite the limited operating history of the

Company's distribution center, management believes the systems and controls

related to the distribution center are fully integrated and are adequate to

support the Company's growth over the next few years. Any disruption in the

operations of the distribution center would have a material adverse effect on

the Company's business. See "Business--Growth Strategy--Increase Productivity of

Existing Store Base" and "Business--Management Information Systems."

 

EFFECT OF ECONOMIC CONDITIONS AND CONSUMER TRENDS

 

     The success of the Company's operations depends upon a number of factors

relating to consumer spending, including future economic conditions affecting

disposable consumer income such as employment, business conditions, interest

rates and taxation. If existing economic conditions deteriorate, consumer

spending may decline, thereby adversely affecting the Company's business and

results of operations.

 

     In addition, the success of the Company depends on its ability to

anticipate and respond to changing merchandise trends and consumer demands in a

timely manner. If the Company miscalculates either the market for its

merchandise or its customers' purchasing habits, it may be required to sell a

significant amount of inventory at reduced margins. These outcomes may have a

material adverse effect on the Company's operating results and financial

condition. See "Management's Discussion and Analysis of Financial Condition and

Results of Operations."

 

                                        9

<PAGE>   11

 

RELIANCE ON KEY VENDORS

 

     The Company purchases its inventory from approximately 1,000 suppliers and

has no long-term purchase commitments or exclusive contracts with any vendor or

supplier. Springs Industries, Inc., through its various operating companies,

supplied approximately 15% of the Company's total purchases in 1995. The Company

also purchases significant amounts of products from other key suppliers, none of

which supplied greater than 10% of the Company's purchases in 1995. The

Company's results of operations could be adversely affected by a disruption in

purchases from any of these key suppliers. In addition, many of the Company's

key suppliers currently provide the Company with certain incentives, such as

volume purchasing allowances, trade discounts, cooperative advertising and other

purchasing incentives. A reduction or discontinuance of these incentives could

have a material adverse effect on the Company. Although the Company believes

that its relationships with key vendors are good, the Company has no supply

contracts with any of its vendors, and any vendor could discontinue selling to

the Company at any time.

 

DEPENDENCE UPON KEY EMPLOYEES

 

     The Company's success is largely dependent on the efforts and abilities of

its executive officers, particularly, Norman Axelrod, Chief Executive Officer

and President. The loss of the services of Mr. Axelrod could have a material

adverse impact on the Company. Prior to the Offering, the Company will enter

into an employment agreement with Mr. Axelrod. The Company's success is also

dependent upon its ability to continue to attract and retain qualified employees

to meet the Company's needs for its planned expansion. See "Business--Business

Strategy" and "Management."

 

SEASONALITY AND QUARTERLY FLUCTUATIONS

 

     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, with a majority of net sales and net income for such quarters realized

in the fourth quarter. 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. In anticipation of its peak selling season, the Company

substantially increases its inventory levels and hires a significant number of

part-time employees. If for any reason the Company's sales during the fourth

quarter were substantially below expectations, the Company's annual results

would be adversely affected. See "Management's Discussion and Analysis of

Financial Condition and Results of Operations."

 

  

CONTROL OF THE COMPANY BY CVS; POSSIBLE CONFLICTS OF INTEREST

   

 

  

     Upon completion of the Offering, Nashua Hollis CVS, Inc. (a wholly owned,

indirect subsidiary of CVS), the Company's former parent and the Selling

Shareholder, will beneficially own 38.8% of the outstanding Common Stock (29.6%

if the Underwriters' over-allotment option is exercised in full). Consequently,

as a result of the ownership by CVS and its subsidiaries (the "CVS Group") of

the outstanding Common Stock, CVS will be in a position to significantly

influence the outcome of all matters requiring a shareholder vote, including the

election of directors. In addition, pursuant to the Company's Certificate of

Incorporation, CVS shall have the right to designate: (i) two members of the

Board of Directors of the Company so long as the CVS Group in aggregate owns at

least 15% of the total votes represented by the total outstanding voting stock

("Total Voting Power"); (ii) one member of the Board of Directors of the

Company, so long as the CVS Group in aggregate owns at least 5% but less than

15% of the Total Voting Power; and (iii) zero members of the Board of Directors

of the Company as soon as the CVS Group in aggregate owns less than 5% of the

Total Voting Power. The share ownership of CVS may also make any takeover of the

Company pursuant to a tender offer more difficult if CVS failed to accept such

an offer. In addition, pursuant to the Stockholder Agreement no person or group

shall become the beneficial owner of a majority of the Common Stock of the

Company ("Majority Beneficial Ownership") unless: (i) CVS has received prior

written notice that such person or group proposes to acquire Majority Beneficial

Ownership; and (ii) prior to such acquisition such person or group provides to

CVS (unless waived by CVS in writing) a guarantee of the

   

 

                                       10

<PAGE>   12

 

  

obligations of the Company under the Stockholder Agreement to indemnify the CVS

Group in respect of the CVS Lease Guarantees. Upon such person or group

acquiring Majority Beneficial Ownership, CVS may terminate the provision of any

or all of its services under the Transitional Services Agreement (as defined

herein). See "Relationship with CVS--Real Estate and Certain Administrative

Costs." The Stockholder Agreement also provides that if the Company desires to

register any shares of Common Stock for its own account during the period after

the Offering and before CVS has exercised its first right to demand registration

("First CVS Registration") of its shares of the Company's Common Stock under the

Securities Act of 1933, as amended (the "Securities Act"): (i) the Company is

required to notify CVS of its desire to register such shares; and (ii) if after

receipt of such notice CVS elects to then proceed with such First CVS

Registration, the Company may include its securities in such First CVS

Registration (provided that if, in the good faith view of the managing

underwriter of such offering, all or a part of such securities to be included

for the Company's account cannot be sold and the inclusion thereof would be

likely to have an adverse effect on the pricing, timing or distribution of the

offering of Company securities by the CVS Group, then the inclusion of such

securities or part thereof for the Company's account will not be permitted). If

after receipt of such notice CVS does not elect to then proceed with such First

CVS Registration, the Company may proceed with its offering. If CVS exercises

its First CVS Registration right prior to the Company notifying CVS of its

desire to sell shares of Common Stock for its own account, in accordance with

the procedures described above, the Company may not, without the prior written

consent of CVS, register such shares in connection with the First CVS

Registration. The First CVS Registration right expires on December 31, 1997

after which time CVS would have two customary "demand" registration rights.

After the Offering, the Company will have subordinated debt outstanding of $13.5

million to CVS. See "Management's Discussion and Analysis of Financial Condition

and Results of Operations." As a result of CVS's ownership of Common Stock and

its position as a creditor of the Company, various conflicts of interest may

arise upon completion of the Offering. See "Principal and Selling Shareholder,"

"Relationship with CVS" and "Description of Capital Stock."

   

 

  

SHARES ELIGIBLE FOR FUTURE SALE

   

 

  

     Upon completion of the Offering, the Company will have 19,595,476 shares of

Common Stock outstanding. Of these shares, the 12,000,000 shares of Common Stock

sold in the Offering (13,800,000 shares if the Underwriters' over-allotment

option is exercised in full) will be freely tradeable without restriction under

the Securities Act of 1933, as amended (the "Securities Act"), except any such

shares which may be acquired by an "affiliate" of the Company. The remaining

7,595,476 shares of Common Stock held by CVS are subject to a "lock-up"

agreement whereby CVS has agreed not to sell any shares of Common Stock without

the prior consent of CS First Boston Corporation ("CS First Boston") for a

period of 180 days from the date of this Prospectus. Upon completion of the

180-day period, or earlier if permitted by CS First Boston, 7,595,476 shares of

Common Stock held by CVS will be eligible for sale in the public market, subject

to compliance with the resale volume limitations and other restrictions of Rule

144 under the Securities Act. CVS has publicly announced its intention to

dispose of, subject to market conditions, all of its remaining shares of Common

Stock in the Company in 1997. Except for certain rights of the Company to

register shares of Common Stock for its own account as described above in

"--Control of the Company by CVS; Possible Conflicts of Interest," herein, the

Company may not, without the prior written consent of CVS, register such shares

in connection with the First CVS Registration. See "Relationship with CVS--The

Stockholder Agreement." Future sales of the shares of Common Stock held by

existing shareholders could have an adverse effect on the price of the Common

Stock and could impair the Company's ability to raise capital through an

offering of equity securities. See "Shares Eligible for Future Sale" and

"Underwriting."

   

 

                                       11

<PAGE>   13

 

LACK OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE

 

     Prior to the Offering, there has been no public market for the Common

Stock. Application has been made to list the Common Stock on the New York Stock

Exchange. However, there can be no assurance that an active trading market will

develop or be sustained or that shares of the Common Stock will be able to be

resold at or above the initial public offering price. The initial public

offering price will be determined by negotiations among CVS, the Company and the

representatives of the Underwriters. See "Underwriting." The market price of the

Common Stock also could be subject to significant fluctuations in response to

operating results and other factors. In addition, the stock market in recent

years has experienced price and volume fluctuations that often have been

unrelated or disproportionate to the operating performance of companies. These

fluctuations, as well as general economic and market conditions, may adversely

affect the market price of the Common Stock.

 

                                USE OF PROCEEDS

 

  

     The net proceeds to the Selling Shareholder from the Offering, after

deduction of the underwriting discount and estimated offering expenses are

estimated to be $179,440,000 ($206,512,000 if the Underwriters' overallotment

option is exercised in full), based upon the midpoint of the range of the

initial public offering price stated on the cover page hereof. The Company will

not receive any proceeds from the sale of shares of Common Stock by the Selling

Shareholder.

   

 

                                DIVIDEND POLICY

 

     The Company intends to retain all its earnings for the foreseeable future

for use in the operation and expansion of its business; accordingly, the Company

currently has no plans to pay cash dividends on the Common Stock. The payment of

any future cash dividends will be determined by the Board of Directors in light

of conditions then existing, including the Company's earnings, financial

condition and requirements, restrictions in financing agreements, business

conditions and other factors. The Company expects that its ability to pay

dividends will be restricted under its proposed new credit facility. See

"Management's Discussion and Analysis of Financial Condition and Results of

Operations--Liquidity and Capital Resources."

 

                                       12

<PAGE>   14

 

                                 CAPITALIZATION

 

  

     Prior to the Offering, Linens 'n Things was operated as a wholly owned,

indirect subsidiary of CVS. The following table sets forth (i) the

capitalization of the Company at September 28, 1996; and (ii) the capitalization

of the Company as of such date, giving effect to the reorganization of the

Company immediately prior to the Offering (the "Reorganization"). The

Reorganization will include the following: (i) CVS will make contributions in

the aggregate amount of $30 million and the Company will have outstanding $13.5

million of subordinated indebtedness to CVS; (ii) transfers of net assets and

liabilities between the Company and CVS related to certain CVS employee benefit

plans and other Company liabilities; and (iii) the merger of Linens 'n Things

Center, Inc. (a California company) into the Company and the filing of an

Amended and Restated Certificate of Incorporation which will be completed prior

to the Offering which will, among other things, (a) change the authorized share

capital of the Company from 100 shares of Class A Common, Voting, no par value

shares (the "Old Common Stock"), to 60,000,000 shares of Common Stock, par value

$.01 per share (the "Common Stock"), and (b) convert each issued and outstanding

share of Old Common Stock into 195,954.76 shares of Common Stock (subject to

rounding upward in the case of any fractional shares held by a shareholder). The

remaining intercompany balance as of the Offering will be repaid to CVS through

borrowings under the Revolving Credit Facility (as defined herein) or internally

generated funds. The actual amount of such repayment in connection with the

elimination of the intercompany balance will depend on the amount of the

intercompany balance (which balance will fluctuate based primarily on the amount

of working capital) as of the closing of the Offering. For additional

information on the elimination of intercompany balances, see "Management's

Discussion and Analysis of Financial Condition and Results of

Operations--Liquidity and Capital Resources."

   

 

     The capitalization table below should be read in conjunction with the

historical Consolidated Financial Statements and Notes thereto included

elsewhere in this Prospectus, "Management's Discussion and Analysis of Financial

Condition and Results of Operations."

 

  

<TABLE>

<CAPTION>

                                                                                   SEPTEMBER 28, 1996

                                                                                       (UNAUDITED)

                                                                                -------------------------

                                                                                 ACTUAL      PRO FORMA(1)

                                                                                --------     ------------

<S>                                                                             <C>          <C>

                                                                                           (IN THOUSANDS)

Short-term debt:

  Due to CVS................................................................    $ 61,498       $      0

  Revolving credit facility.................................................           0         14,653(2)

                                                                                --------       --------

     Total short-term debt..................................................      61,498         14,653

                                                                                --------       --------

Long-term debt:

  Revolving credit facility.................................................                          0

  Subordinated note.........................................................                     13,500

                                                                                --------       --------

     Total long-term debt...................................................           0         13,500

                                                                                --------       --------

     Total debt.............................................................      61,498         28,153

Shareholders' equity:

  Preferred Stock, $.01 par value, 1,000,000 shares authorized; none issued

     and outstanding........................................................          --              0

  Common Stock, par value $.01 per share; 100 shares authorized, issued and

     outstanding on an actual basis; 60,000,000 shares authorized,

     19,595,476 shares issued and outstanding on a pro forma basis(3).......          --            196

  Contributed capital.......................................................     172,382        202,186

  Retained earnings.........................................................      37,075         37,075

                                                                                --------       --------

     Total shareholders' equity.............................................     209,457        239,457

                                                                                --------       --------

     Total capitalization...................................................    $270,955       $267,610

                                                                                ========       ========

</TABLE>

   

 

- ---------------

 

(1) To reflect the capitalization of the Company after giving effect to the

     Reorganization.

 

  

(2) The actual amount drawn under the Revolving Credit Facility by the Company

     will depend on the amount of the intercompany balance as of the closing of

     the Offering. The Company does not expect that such amount will vary

     materially from the Pro Forma amount.

   

 

  

(3) Excludes approximately 195,995 shares of restricted stock awards and 979,774

    shares of Common Stock issuable upon the exercise of stock options to be

    granted prior to the completion of the Offering. See "Underwriting" and

    "Management--1996 Incentive Compensation Plan" and "Management--1996

    Non-Employee Director Stock Plan."

   

 

                                       13

<PAGE>   15

 

                     SELECTED FINANCIAL AND OPERATING DATA

 

     Prior to the Offering, the Company was operated as a wholly owned, indirect

subsidiary of CVS. The table below sets forth the selected historical

consolidated financial data for the Company. The historical financial data

presented below reflect periods during which the Company did not operate as an

independent company and, accordingly, certain allocations were made in preparing

such financial data. Therefore, such data may not reflect the results of

operations or the financial condition which would have resulted if the Company

had operated as a separate, independent company during such periods and are not

necessarily indicative of the Company's future results of operations or

financial condition.

 

   

     The selected financial data presented below under the captions "Income

Statement Data" and "Balance Sheet Data" have been derived from the Consolidated

Financial Statements of the Company which have been audited by KPMG Peat Marwick

LLP, whose report on the Consolidated Financial Statements as of December 31,

1994 and 1995 and for the years ended December 31, 1993, 1994 and 1995 is

included elsewhere in this Prospectus. The selected financial data as of

September 28, 1996 and for the thirty-nine weeks ended September 30, 1995 and

September 28, 1996 have been derived from unaudited consolidated financial

statements of the Company which are included elsewhere in this Prospectus and

include all adjustments consisting only of normal recurring adjustments

necessary for a fair presentation of the operating results and financial

position as of and for the unaudited periods. The information presented below

under the caption "Selected Operating Data" is unaudited. The selected financial

data should be read in conjunction with the consolidated financial statements as

of December 31, 1994 and 1995 and for the years ended December 31, 1993, 1994

and 1995, the related notes and the audit report thereto. See "Management's

Discussion and Analysis of Financial Condition and Results of Operations" and

"Consolidated Financial Statements." For information relating to factors

considered in determining the initial offering price of the Common Stock offered

hereby, see "Underwriting."

   

 

  

<TABLE>

<CAPTION>

                                                                                                 THIRTY-NINE WEEKS ENDED(1)

                                                      YEAR ENDED DECEMBER 31,                   -----------------------------

                                       ------------------------------------------------------   SEPTEMBER 30,   SEPTEMBER 28,

                                         1991       1992         1993       1994       1995         1995            1996

                                       --------   --------     --------   --------   --------   -------------   -------------

                                       (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND SELECTED OPERATING DATA)

<S>                                    <C>        <C>          <C>        <C>        <C>        <C>             <C>

INCOME STATEMENT DATA:

  Net sales........................... $221,360   $270,889     $333,178   $440,118   $555,095     $ 377,638       $ 466,254

  Cost of sales, including buying and

    warehousing costs.................  131,375    162,095      199,307    265,721    345,162(2)     232,289        290,345

                                       --------   --------     --------   --------   --------      --------        --------

  Gross profit........................   89,985    108,794      133,871    174,397    209,933(2)     145,349        175,909

  Selling, general and administrative

    expenses..........................   82,666     95,904      112,135    142,155    190,826(2)     131,360        166,615

  Restructuring and asset impairment

    charge............................       --     13,100(3)        --         --     10,974(2)          --             --

                                       --------   --------     --------   --------   --------      --------        --------

  Operating profit (loss).............    7,319       (210)(3)   21,736     32,242      8,133(2)      13,989          9,294

  Interest expense, net...............    1,610      1,301        1,398      3,170      7,059         5,137           4,464

                                       --------   --------     --------   --------   --------      --------        --------

  Income (loss) before provision for

    income taxes and cumulative effect

    of change in accounting

    principle.........................    5,709     (1,511)      20,338     29,072      1,074         8,852           4,830

  Provision for (benefit from) income

    taxes.............................    1,951       (310)       8,619     11,874      1,108         3,749           2,061

                                       --------   --------     --------   --------   --------      --------        --------

  Income (loss) before cumulative

    effect of change in accounting

    principle.........................    3,758     (1,201)      11,719     17,198        (34)        5,103           2,769

  Cumulative effect of change in

    accounting principle, net.........       --         --           --         --        178           178              --

                                       --------   --------     --------   --------   --------      --------        --------

  Net income (loss)................... $  3,758   $ (1,201)    $ 11,719   $ 17,198   $   (212)    $   4,925       $   2,769

                                       ========   ========     ========   ========   ========      ========        ========

PRO FORMA:

  Net income (loss) per share......... $   0.19   $  (0.06)    $   0.60   $   0.88   $  (0.01)    $    0.26       $    0.14

  Weighted average number of shares

    outstanding (000's)...............   19,595     19,595       19,595     19,595     19,595        19,595          19,595

</TABLE>

   

 

                                       14

<PAGE>   16

 

  

<TABLE>

<CAPTION>

                                                                                                 THIRTY-NINE WEEKS ENDED(1)

                                                      YEAR ENDED DECEMBER 31,                   -----------------------------

                                       ------------------------------------------------------   SEPTEMBER 30,   SEPTEMBER 28,

                                         1991       1992         1993       1994       1995         1995            1996

                                       --------   --------     --------   --------   --------   -------------   -------------

<S>                                    <C>        <C>          <C>        <C>        <C>        <C>             <C>

SELECTED OPERATING DATA:

  Number of stores:

    At beginning of period............      141        143          144        143        145           145             155

    Opened during period..............       12         22           20         29         28            17              18

    Closed during period..............       10         21           21         27         18            16              17

                                       --------   --------     --------   --------   --------      --------        --------

    At end of period:

      Traditional stores..............      133        119           98         71         54            56              39

      Superstores.....................       10         25           45         74        101            90             117

                                       --------   --------     --------   --------   --------      --------        --------

  Total stores........................      143        144          143        145        155           146             156

                                       ========   ========     ========   ========   ========      ========        ========

  Total gross square feet of store

    space (000's)(4)..................    1,350      1,633        2,078      2,865      3,691         3,233           4,147

  Net sales per gross square

    foot(4)(5)........................ $    188   $    185     $    187   $    190   $    178     $     182       $     171

  Increase (decrease) in comparable

    store net sales(7)................    (1.1%)      7.5%         5.0%       5.4%      (1.5%)(8)       (0.6%)(8)       (0.6%)(8)

</TABLE>

   

 

  

<TABLE>

<CAPTION>

                                                         DECEMBER 31,                                SEPTEMBER 28, 1996

                                   --------------------------------------------------------    ------------------------------

                                     1991        1992        1993        1994        1995         ACTUAL        PRO FORMA(9)

                                   --------    --------    --------    --------    --------    -------------    -------------

                                   (DOLLARS IN THOUSANDS)

<S>                                <C>         <C>         <C>         <C>         <C>         <C>              <C>

BALANCE SHEET DATA:

  Working capital................. $ 37,354    $ 34,606    $ 35,143    $ 42,315    $ 68,332      $ 118,103        $ 114,603

  Total assets....................  111,163     157,639     196,517     273,167     343,522        399,801          399,956

  Total debt(10)..................   22,760      31,180      44,620      67,452     118,652         61,498           28,153

  Shareholders' equity(10)........   41,104      65,171      74,340      85,819      76,678        209,457          239,457

</TABLE>

   

 

- ---------------

 

 (1) The operating results for the interim periods are not necessarily

     indicative of the results that may be expected for a full year. The

     Company's quarters end on the Saturday nearest to the end of the last month

     of such quarter, except the fourth quarter which ends on December 31.

 (2) Reflects certain one-time special charges related to the CVS Strategic

     Program (as defined in "Management's Discussion and Analysis of Financial

     Condition and Results of Operations"). Gross profit and operating profit in

     1995 excluding the effect of these charges would have been $218.1 million

     and $31.5 million, respectively. See "Management's Discussion and Analysis

     of Financial Condition and Results of Operations."

 (3) Reflects a $13.1 million realignment charge associated with the anticipated

     costs of closing 66 traditional stores from 1993 to 1995. This charge

     includes the write-down of fixed assets, lease settlement costs, severance

     and inventory liquidation costs. Operating profit in 1992 excluding the

     effect of this charge would have been $12.9 million.

 (4) Store space includes the storage, receiving and office space that generally

     occupies 10% to 15% of total store space. All numbers provided for the end

     of the respective periods.

 (5) Net sales per square foot is the result of dividing net sales for the

     period by the average of gross square footage at the beginning of the year

     and at the end of each interim quarterly and year period.

 (6) Amounts for interim periods are calculated based on annual net sales for

     the 52 weeks ending at the end of such interim period.

  

 (7) New store net sales become comparable in the first full month following 13

     full months of operations. Stores that undergo major expansion or that are

     relocated are not included in the comparable store base. Comparable store

     net sales include traditional stores and superstores.

   

  

 (8) The decrease in comparable store net sales during 1995 and the thirty-nine

     weeks of 1996 was primarily due to new competitive intrusions in existing

     markets during the second half of 1995 and the first half of 1996 at

     approximately 40% of the Company's superstores included in the comparable

     store base which previously had limited competition from other superstores.

     For the third quarter of 1996, comparable store net sales increased 2.9%.

     See "Management's Discussion and Analysis of Financial Condition and

     Results of Operations."

   

  

 (9) Pro forma to give effect to the Reorganization. See "Capitalization."

   

  

(10) Prior to the Offering, total debt consists of short-term intercompany

     indebtedness due primarily to CVS. The amount of short term debt at

     September 28, 1996 reflects a $130.0 million capital contribution from CVS

     in May 1996 used to repay a portion of the Company's intercompany

     indebtedness to CVS. On October 11, 1996, CVS made a capital contribution

     to the Company in the amount of $30.0 million to reduce a corresponding

     amount of intercompany indebtedness due to CVS. At the time of the

     Offering, total debt will consist of a $13.5 million subordinated note

     issued to CVS and the balance of short-term debt to be outstanding under

     the Revolving Credit Facility. See "Capitalization."

   

 

                                       15

<PAGE>   17

 

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF

                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

GENERAL

 

  

     Linens 'n Things, a leading specialty retailer of home textiles, housewares

and home accessories currently operating in 33 states, was founded in 1975 and

was operated as a private company until it was acquired by CVS in 1983. As of

September 28, 1996, the Company operated 117 superstores averaging approximately

32,000 gross square feet in size and 39 smaller traditional stores averaging

approximately 10,000 gross square feet in size. The Company's newest superstores

range between 35,000 and 40,000 gross square feet in size. The Company's

business strategy is to offer a broad assortment of high quality, brand name

merchandise at everyday low prices, provide efficient customer service and

maintain low operating costs.

   

 

  

     From its founding in 1975 through the late 1980s, 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 of 35,000

to 40,000 gross square feet, offering a broad merchandise assortment in a more

visually appealing, customer friendly format. The Company's introduction of

superstores has resulted in the closing or relocation of 102 of the Company's

traditional stores to date. As a result of superstore openings and traditional

store closings, the Company's gross square footage more than tripled from 1.2

million to 4.1 million between January 1991 and September 28, 1996, although its

store base only increased 11% from 141 to 156. Over this same period, the

Company's net sales increased from $202.1 million for the year ended December

31, 1990 to $643.7 million for the twelve months ended September 28, 1996. In

addition, as part of the 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

assortment of "linens" and "things." The Company believes that this shift will

positively impact net sales per square foot and inventory turnover since

"things" merchandise tends to be more impulse driven as compared to the "linens"

portion of the business and therefore increases the average net sale per

customer. In addition, sales of "things" merchandise typically result in higher

margins than "linens" products. The Company estimates that the "things" side of

its business has increased from less than 10% of net sales in 1991 to 35% in

1996.

   

 

     In July 1995, the Company began operations of its 275,000 square foot

state-of-the-art distribution center in Greensboro, North Carolina. After the

distribution center became fully operational in 1995, the Company's gross margin

was negatively affected by the following factors: (i) transitional costs

associated with the start-up of the distribution center and (ii) higher freight

and handling costs incurred given the less than full utilization of the

distribution center during its implementation phase. Management believes that

the utilization of the distribution center will result in lower average freight

costs, more timely control of inventory shipments to the stores, improved

inventory turnover, better in-stock positions and improved information flow. In

addition, the Company believes that the transfer of inventory receiving

responsibilities from the stores to the distribution center has allowed store

associates to redirect their focus to the sales floor, thereby increasing the

level of customer service. Management estimates that by the end of 1996

approximately 80% of merchandise will be received at the Company's distribution

center, as compared to approximately 20% received at the distribution center in

1995.

 

  

     In 1992, the Company established a realignment reserve of $13.1 million for

the anticipated costs of closing 66 traditional stores between 1993 and 1995.

   

 

   

     In 1994, CVS announced the initiation of a strategic review to increase its

sales and profits by examining the mix of its business. The review culminated in

the announcement, on October 24, 1995, of a comprehensive strategic program (the

"CVS Strategic Program"), which resulted in the Company recording a pre-tax

charge of $23.4 million in the fourth quarter of 1995. The CVS Strategic Program

and related pre-tax charge of $23.4 million, insofar as they relate to the

Company, consisted of: (i) restructuring charges of $9.5 million including

primarily estimated tenancy costs ($3.8 million) and asset write-offs associated

with the closing of six unprofitable stores ($5.0 million) and asset write-offs

related to management information systems outsourcing ($0.7 million); (ii) a

non-cash asset impairment charge of $1.4 million due to the early adoption of

Statement of Financial Accounting Standards No. 121 ("SFAS 121") "Accounting for

the Impairment of Long-Lived

   

 

                                       16

<PAGE>   18

 

  

Assets and for Long-Lived Assets to Be Disposed Of" relating to store fixtures

and leasehold improvements; and (iii) asset write-offs and other non-cash

charges totaling $12.5 million consisting primarily of the write-off of certain

non-productive assets, as well as costs associated with the changeover to the

Company's new distribution network relating to the opening of the distribution

center.

   

 

  

     In 1995, as part of a $9.5 million restructuring charge associated with the

CVS Strategic Program, the Company reserved $8.8 million for the anticipated

costs of closing six unprofitable stores. The $8.8 million cost, which consisted

of the write-off of fixed assets, lease acquisition costs and future lease

obligation costs associated with these stores, was higher than the usual such

closing costs because the Company elected to close these stores and terminate

these leases before their stated lease termination dates. The net sales and

operating losses in 1995 of the stores to be closed were approximately $14.3

million and $1.5 million, respectively. Accordingly, management believes that

the CVS Strategic Program will not have a significant impact on the Company's

future earnings or cash flows. Cash outflows relating to the lease obligation

costs totaling in the aggregate of $3.8 million will continue for the duration

of the lease terms ranging from 1997 to 2004 unless other terms are negotiated

with such landlords. Of the six stores included in the reserve, five will be

closed in 1996 and one will be closed in 1997.

   

 

  

     The SFAS No. 121 charge related entirely to assets to be held or used as

defined in SFAS No. 121. The charge resulted from the Company grouping assets at

a lower level than under its previous accounting policy regarding asset

impairment. Factors leading to impairment were a combination of historical

losses, anticipated future losses and inadequate cashflows.

   

 

  

     All charges relating to asset write-offs were non-cash charges based on

recorded net book values and estimated tenancy costs were non-cash charges based

on future lease obligations. The reduction in depreciation expense and

amortization expense in the future relating to the write-off of fixed assets and

lease acquisition costs is not expected to be material to the Company's results

of operations.

   

 

  

     Excluding these charges in connection with the CVS Strategic Program, gross

profit and operating profit would have been $218.1 million and $31.5 million in

1995, respectively, as compared to $209.9 million and $8.1 million,

respectively, reflected in the Company's consolidated statement of operations

for such year.

   

 

  

     The Company's policy for costs associated with stores closed in the normal

course of business is to charge such costs to current operations, and,

accordingly, the Company has not provided for any costs relating to future store

closings. Through September 28, 1996, in addition to the five stores mentioned

above, the Company has closed twelve additional traditional stores, and in the

remainder of 1996, the Company plans to close one additional store at an

estimated cost of $950,000. In 1997, the Company expects to close approximately

10 to 12 stores at a cost of approximately $4.0 to $5.0 million. As a result,

these store closing costs will adversely affect the Company's results of

operations in the periods in which they are closed. In addition, the Company

expects that continuing competitive intrusions in markets where certain of its

traditional stores operate will result in lower operating profit for those

stores than that previously experienced. The Company's long-term plans are to

close most of the remaining traditional stores as opportunities arise.

   

 

  

     As of September 28, 1996, five of the six stores included in the reserve

have been closed. Of the five stores closed, the Company negotiated with the

landlord on four of the stores to pay out any remaining lease obligation in a

lump sum. The Company will continue to pay a lease obligation for one store

through January 1997. One remaining store will close in January 1997 and unless

the terms thereof are renegotiated with the landlord the Company will have such

lease obligation through the year 2004. Management believes that the remaining

balance of $3.0 million as of September 28, 1996 relating to the restructuring

reserve will be adequate for all remaining liabilities.

   

 

  

     Effective January 1, 1995, the Company changed its policy from capitalizing

internally developed software costs to expensing them as incurred. The impact on

1995 as a result of this change exclusive of the cumulative effect of $0.3

million (before income tax effect) was to reduce net income by $0.2 million.

   

 

     The historical financial information presented herein reflects periods

during which the Company did not operate as an independent company, and

accordingly, certain allocations were made in preparing such

 

                                       17

<PAGE>   19

 

financial information. Such information may not necessarily reflect the results

of operations and financial condition of the Company which would have resulted

had the Company been an independent public company during the reporting periods.

In addition, operating and financing costs may be higher in future reporting

periods for the Company than such costs as reported in the financial information

included herein and as a result the Company's results of operations and

financial condition may be adversely affected. See "Risk Factors--Lack of

Operating History as a Stand-Alone Company."

 

  

     On a pro forma basis as if the Company had operated on a stand alone basis,

net income would have decreased by $438,000 and $24,000 for the year ended

December 31, 1995 and the thirty-nine weeks ended September 28, 1996,

respectively, as a result of an estimated pre-tax increase in expenses of

$755,000 and $42,000 during such periods, respectively. Such increase in

expenses consists of: (i) an elimination of CVS expense allocations, including

insurance costs, health and medical benefit costs, employee stock ownership plan

expenses and administrative overhead costs ($8,849,000 in 1995 and $8,798,000 in

1996); (ii) an addition of estimated stand-alone overhead costs to the Company

($9,637,000 in 1995 and $8,858,000 in 1996); and (iii) an elimination of

Company-owned life insurance expense ($33,000 in 1995 and $18,000 in 1996), as

if each expense or cost had occurred on January 1 of the applicable period. The

effective tax rate used in such adjustments was 42% which approximates the

Company's blended statutory rate.

   

 

RESULTS OF OPERATIONS

 

     The following table sets forth the percentage of net sales and percentage

change of certain items included in the Company's statements of operations for

the periods indicated:

 

  

<TABLE>

<CAPTION>

                                                                                                                   THIRTY-NINE

                                          YEAR ENDED DECEMBER       THIRTY-NINE WEEKS ENDED        YEAR ENDED      WEEKS ENDED

                                                  31,            -----------------------------    DECEMBER 31,    -------------

                                         ---------------------   SEPTEMBER 30,   SEPTEMBER 28,   --------------   SEPTEMBER 28,

                                         1993    1994    1995        1995            1996        1994     1995        1996

                                         -----   -----   -----   -------------   -------------   -----   ------   -------------

                                                                                                  PERCENTAGE CHANGE FROM PRIOR

                                                        PERCENTAGE OF NET SALES                    PERIOD INCREASE (DECREASE)

                                         -----------------------------------------------------   ------------------------------

<S>                                      <C>     <C>     <C>     <C>             <C>             <C>     <C>      <C>

Net sales............................... 100.0%  100.0%  100.0%      100.0%          100.0%       32.1%    26.1%       23.5%

Cost of sales, including buying and

  warehousing costs.....................  59.8    60.4    62.2        61.5            62.3        33.3     29.9        25.0

                                         -----   -----   -----       -----           -----       -----   ------       -----

Gross profit............................  40.2    39.6    37.8        38.5            37.7        30.3     20.4        21.0

Selling, general and administrative

  expenses..............................  33.7    32.3    34.3        34.8            35.7        26.8     34.2        26.8

Restructuring and asset impairment

  charges...............................    --      --     2.0          --              --          --       --          --

                                         -----   -----   -----       -----           -----       -----   ------       -----

Operating profit........................   6.5     7.3     1.5         3.7             2.0        48.3    (74.8)      (33.6)

Interest expense, net...................   0.4     0.7     1.3         1.4             1.0       126.8    122.7       (13.1)

Income before income taxes and

  cumulative effect of change in

  accounting principle..................   6.1     6.6     0.2         2.3             1.0        42.9    (96.3)      (45.4)

Provision for income taxes..............   2.6     2.7     0.2         1.0             0.4        37.8    (90.7)      (45.0)

Income (loss) before cumulative effect

  of change in accounting principle.....   3.5     3.9     0.0         1.3             0.6        46.8   (101.2)      (45.7)

Cumulative effect of change in

  accounting principle, net.............    --      --     0.0         0.0              --          --       --          --

                                         -----   -----   -----       -----           -----       -----   ------       -----

Net income (loss).......................   3.5%    3.9%    0.0%        1.3%            0.6%       46.8%  (101.2)%     (45.7)%

                                         =====   =====   =====       =====           =====       =====   ======       =====

</TABLE>

   

 

  

THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 1996 COMPARED TO THIRTY-NINE WEEKS ENDED

SEPTEMBER 30, 1995

   

 

  

     During the thirty-nine weeks ended September 28, 1996, the Company opened

18 superstores and closed 17 stores, as compared to opening 17 superstores and

closing 16 stores in the same period during 1995. At September 28, 1996, the

Company operated 156 stores, as compared to 146 at September 30, 1995, of which

117 were superstores, as compared to 90 superstores at September 30, 1995. Net

sales increased 23.5% to $466.3 million for the thirty-nine weeks ended

September 28, 1996, as compared to $377.6 million for the thirty-nine weeks

ended September 30, 1995, primarily as a result of new store openings.

Comparable store net sales for the thirty-nine weeks ended September 28, 1996

decreased slightly by 0.6%. Through June 1996, the Company's comparable store

net sales decreased below the same period in 1995 due primarily to increased

   

 

                                       18

<PAGE>   20

 

  

competitive intrusions at 40% of the Company's superstores in existing markets

which commenced primarily in mid-1995. For the third quarter of 1996, however,

the comparable store net sales increased 2.9% as a result of a strong

back-to-school selling season, as well as the diminishing effect of the prior

year's competitive intrusions. Management believes comparable store net sales

will continue to improve in relation to the prior year for the remainder of 1996

although there can be no assurance of such improvement. See "Risk Factors--

Risks of Growth Strategy."

   

 

  

     For the thirty-nine weeks ended September 28, 1996, the Company's average

net sales per superstore increased slightly to $5.4 million from $5.3 million

and its average net sales per traditional store decreased slightly to $1.7

million from $1.8 million, during the same period in the prior year. For the

fifty-two weeks ended September 28, 1996, average superstore net sales per

square foot decreased to $170 from $181 and average traditional store net sales

per square foot decreased to $178 from $189 for the same period as of the prior

year due to factors described in the preceding paragraph. For the thirty-nine

weeks ended September 28, 1996, net sales of the "linens" merchandise increased

approximately 19% over the same period in the prior year, while net sales of the

"things" merchandise increased approximately 35% for the same period. The

increase in "things" merchandise primarily resulted from the growth in the

number of superstore locations which carry a larger line of "things" products as

well as the overall expansion of the product categories in existing stores.

   

 

  

     Gross profit for the thirty-nine weeks ended September 28, 1996 was $175.9

million, or 37.7% of net sales, as compared to $145.3 million, or 38.5% of net

sales, in the same period during 1995. This decrease as a percentage of net

sales resulted from higher clearance markdowns during the first quarter and

slightly lower initial margin due to the shift in product selling mix offset by

reduced freight expenses as a percentage of net sales.

   

 

  

     For the thirty-nine weeks ended September 28, 1996, the Company's average

superstore gross margin was 38.3% as compared to 38.8% and average traditional

store gross margin was 33.1% as compared to 37.2% during the same period in the

prior year, for the reasons described above. Gross margins for both "linens" and

"things" merchandise declined consistent with the Company's consolidated

results. The gross margin for "things" merchandise was slightly higher than the

gross margin for "linens" merchandise for each such period.

   

 

  

     Selling, general and administrative expenses for the thirty-nine weeks

ended September 28, 1996 were $166.6 million or 35.7% of net sales, as compared

to $131.4 million, or 34.8% of net sales in the corresponding period during

1995. This increase as a percentage of net sales resulted primarily from

decreased leverage of fixed expenses, primarily occupancy costs, due to the

slight decrease in comparable store net sales over the same period in the prior

year.

   

 

  

     As a result of the factors described above, operating profit for the

thirty-nine weeks ended September 28, 1996 decreased to $9.3 million or 2.0% of

net sales, from $14.0 million, or 3.7% of net sales, during the same period in

1995.

   

 

  

     Net interest expense in the thirty-nine weeks ended September 28, 1996

decreased 13.1% to $4.5 million, or 1.0% of net sales, from $5.1 million, or

1.4% of net sales, during the same period in 1995. This decrease was due

primarily to a $130.0 million capital contribution from CVS in May 1996 which

was used to repay a portion of the Company's intercompany debt to CVS. This was

offset in part by an increase in the weighted average interest rate.

   

 

  

     The Company's income tax expense for the thirty-nine weeks ended September

28, 1996 was $2.1 million, as compared to $3.7 million during the same period in

1995.

   

 

  

     Effective January 1, 1995, the Company changed its policy from capitalizing

internally developed software costs to expensing them as incurred. The impact on

the thirty-nine weeks ended September 30, 1995 as a result of this change

exclusive of the cumulative effect of $0.3 million (before income tax effect)

was to reduce net income by $0.2 million.

   

 

  

     As a result of the factors described above, net income for the thirty-nine

weeks ended September 28, 1996 decreased 45.7% to $2.8 million, or 0.6% of net

sales, from $4.9 million, or 1.3% of net sales during the same period in 1995.

   

 

                                       19

<PAGE>   21

 

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

 

  

     During 1995, the Company opened 28 superstores and closed 18 stores, as

compared to opening 29 superstores and closing 27 stores in 1994. At the end of

1995, the Company operated 155 stores, as compared to 145 stores at the end of

1994, of which 101 were superstores, as compared to 74 superstores at the end of

1994. Net sales increased 26.1% to $555.1 million in 1995, as compared to $440.1

million in 1994, primarily as a result of new store openings. Comparable store

net sales in 1995 decreased 1.5% primarily due to new competitive intrusions in

existing markets at approximately 40% of the Company's superstores included in

the comparable store base which previously had limited competition from other

superstores, as well as to a general slowdown in the retail sector during 1995.

   

 

  

     In 1995, the Company's average net sales per superstore increased slightly

to $5.4 million from $5.1 million and its average net sales per traditional

store decreased slightly to $1.7 million from $1.9 million, during the same

period in the prior year. In 1995, average superstore net sales per square foot

decreased to $178 from $187 and average traditional store net sales per square

foot decreased to $177 from $195 for the same period in the prior year due to

factors described in the preceding paragraph. In 1995, net sales of the "linens"

merchandise increased approximately 19% over the same period in the prior year,

while net sales of the "things" merchandise increased approximately 45% for the

same period. The increase in "things" merchandise resulted from the growth in

the number of superstore locations which carry a larger line of "things"

products as well as the overall expansion of the product categories in existing

stores.

   

 

  

     Gross profit in 1995 was $209.9 million, or 37.8% of net sales, as compared

to $174.4 million, or 39.6% of net sales, in 1994. This decrease as a percentage

of net sales was primarily due to transitional costs associated with the

start-up of the distribution center. Excluding these costs, the Company's gross

profit would have been $218.1 million or 39.3% of net sales. The remaining

decrease is primarily attributable to higher freight and handling costs incurred

given the less than full usage of the distribution center during its

implementation phase and the Company's expansion to the western United States.

   

 

  

     In 1995, the Company's average superstore gross margin was 38.2% as

compared to 40.2% in 1994, and average traditional store gross margin was 36.3%

as compared to 38.7% during the same period in the prior year due to the factors

described above. Gross margins for both the "linens" and "things" merchandise

declined consistent with the Company's consolidated results. The gross margin

for "things" merchandise was slightly higher than the gross margin for "linens"

merchandise for each such period.

   

 

     Selling, general and administrative expenses in 1995 were $190.8 million,

or 34.3% of net sales, as compared to $142.2 million, or 32.3% of net sales, in

1994. This increase as a percentage of net sales was primarily attributable to

higher occupancy costs due to a higher proportion of superstores located in

prime real estate locations as compared to the prior year and lower fixed

expense leverage due to the decrease in comparable store net sales.

 

     In fourth quarter of 1995, the Company incurred a $11.0 million, or 2.0% of

net sales, pre-tax restructuring and asset impairment charge as a result of the

CVS Strategic Program. In connection with the CVS Strategic Program, six

underperforming stores were identified to be closed in 1996. The net sales and

operating losses in 1995 of these six stores aggregated approximately $14.3

million and $1.5 million, respectively.

 

     As a result of factors described above, operating profit in 1995 decreased

to $8.1 million, or 1.5% of net sales, from $32.2 million, or 7.3% of net sales,

in 1994. Excluding charges related to the CVS Strategic Program, operating

profit in 1995 would have been $31.5 million, or 5.7% of net sales.

 

     Interest expense in 1995 increased 122.7% to $7.1 million, or 1.3% of net

sales, from $3.2 million, or 0.7% of net sales, in 1994. This increase is

attributable to a higher level of intercompany debt due to CVS in 1995 relating

to capital expenditures and working capital increases in support of the

Company's store expansion program and capital expenditures in connection with

the purchase of material handling equipment for the distribution center. In

addition, there was a higher weighted average interest rate of 6.5% in 1995 as

compared to 4.9% in 1994.

 

                                       20

<PAGE>   22

 

     The Company's income tax expense in 1995 was $1.1 million, as compared to

$11.9 million in 1994. The Company's effective tax rate in 1995 was 103.2%, as

compared to 40.8% in 1994, primarily due to the effect of the Company's one-time

charges incurred in 1995. Excluding these charges, the Company's effective tax

rate would have been 42.3% in 1995. This increase was primarily attributable to

a decrease in earnings before taxes, while book to tax permanent differences

remained constant.

 

     Effective October 1, 1995, the Company adopted SFAS No. 121. As a result of

this adoption, the Company incurred a charge of $1.4 million in 1995.

 

  

     Effective January 1, 1995, the Company changed its policy from capitalizing

internally developed software costs to expensing them as incurred. The impact on

1995 as a result of this change exclusive of the cumulative effect of $0.3

million (before income tax effect) was to reduce net income by $0.2 million.

   

 

     As a result of factors described above, the Company incurred a net loss of

$212,000 in 1995, as compared to net income of $17.2 million, or 3.9% of net

sales, in 1994. Excluding one-time charges relating to the CVS Strategic

Program, the Company's net income would have been $14.1 million, or 2.5% of net

sales, in 1995.

 

YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993

 

  

     During 1994, the Company opened 29 superstores and closed 27 stores, as

compared to opening 20 superstores and closing 21 stores in 1993. At the end of

1994, the Company operated 145 stores, as compared to 143 stores at the end of

1993, of which 74 were superstores, as compared to 45 superstores in 1993. Net

sales increased 32.1% to $440.1 million in 1994, as compared to $333.2 million

in 1993, primarily attributable to new store openings and a 5.4% increase in

comparable store net sales primarily due to increased sales due to a higher

proportion of "things" merchandise.

   

 

     Gross profit in 1994 was $174.4 million, or 39.6% of net sales, as compared

to $133.9 million, or 40.2% of net sales, in 1993. This decrease as a percentage

of net sales was primarily attributable to certain costs associated with the

distribution center in 1994 and increased freight costs associated with the

Company's expansion to the western United States.

 

     Selling, general and administrative expenses in 1994 were $142.2 million,

or 32.3% of net sales, as compared to $112.1 million, or 33.7% of net sales, in

1993. This decrease as a percentage of net sales was primarily attributable to

increased leverage of fixed expenses due to higher comparable store net sales,

partially offset by pre-opening costs related to a higher number of new store

openings in this period as compared to the prior year.

 

     As a result of the factors described above, operating profit in 1994

increased 48.3% to $32.2 million, or 7.3% of net sales, from $21.7 million, or

6.5% of net sales, in 1993.

 

     Interest expense in 1994 increased 126.8% to $3.2 million, or 0.7% of net

sales, from $1.4 million, or 0.4% of net sales, in 1993. This increase is

primarily attributable to a higher level of intercompany debt due to CVS in 1994

as a result of capital expenditures and working capital in support of the

Company's store expansion program and to a higher weighted average interest rate

of 4.9% in 1994, as compared to 3.4% in 1993.

 

     The Company's income tax expense in 1994 was $11.9 million, as compared to

$8.6 million in 1993. The Company's effective tax rate in 1994 decreased to

40.8%, as compared to 42.4% in 1993. This decrease was primarily attributable to

an increase in earnings before taxes, while book to tax permanent differences

remained constant.

 

     As a result of the factors described above, net income in 1994 increased

46.8% to $17.2 million, or 3.9% of net sales, as compared to $11.7 million, or

3.5% of net sales, in 1993.

 

                                       21

<PAGE>   23

 

LIQUIDITY AND CAPITAL RESOURCES

 

     The Company's capital requirements have been used primarily for capital

investment in new stores, new store inventory purchases and seasonal working

capital. The capital requirements and working capital needs have been funded

through a combination of internally generated cash from operations, credit

extended by suppliers and intercompany borrowings from CVS.

 

  

     Net cash used in operating activities in 1995 was $12.1 million, as

compared to cash provided of $15.7 million in 1994. The operating cash usage

increase in 1995 was primarily due to decreased profitability and a slower rate

of inventory turnover. The increases in inventory and accounts payable balances

from 1993 to 1994 were inflated due to the Company's transition to its current

superstore prototype, a larger number of new store openings in the latter part

of the fourth quarter as compared to the prior year and the timing of vendor

payments. In addition, the change in accrued expenses resulted from the final

utilization of the 1992 realignment reserve for traditional store closings in

1995. For the thirty-nine weeks ended September 28, 1996, net cash used in

operating activities was $17.6 million, as compared to $16.4 million in the same

period of the previous year. This increase was primarily due to the decrease in

accounts payable caused by the timing of vendor payments, offset by a smaller

increase in inventory levels due to improved inventory management. The improved

management of inventory was the result of efficiencies achieved from the

Company's new distribution center and more conservative inventory purchasing in

1996 as compared to 1995 which was prompted in part by the Company's negative

comparable store net sales experience beginning in the second half of 1995.

   

 

  

     Net cash used in investing activities in 1995 was $41.3 million, as

compared to $39.1 million in 1994. This increase was primarily due to higher

capital expenditures associated with the Company's new 275,000 square foot

distribution center in Greensboro, North Carolina in 1995 as compared to 1994.

For the thirty-nine weeks ended September 28, 1996, net cash used in investing

activities was $39.9 million, as compared to $34.2 million in the same period of

the previous year. This increase in capital expenditures in 1996 related to an

increased number of scheduled new store openings during 1996, which was

partially offset by lower capital expenditures associated with the distribution

center in 1996 as compared to 1995.

   

 

  

     Net cash provided by financing activities in 1995 was $53.5 million, as

compared to $25.3 million in 1994. This increase was principally related to

CVS's funding of the Company's increased working capital needs. For the

thirty-nine weeks ended September 28, 1996, net cash provided by financing

activities was $56.2 million, as compared to $48.3 million in the same period of

the prior year. Net cash provided by financing activities in 1996 was primarily

the result of CVS's funding of the Company's capital investment activities.

Furthermore, the Company received a capital contribution of $130.0 million from

CVS in May 1996, which was used to repay a portion of the intercompany debt. The

increase was also attributable to the discontinuance of dividend payments to CVS

in 1996, offset by the effect of the timing of the settlement of vendor

payments.

   

 

  

     As of September 28, 1996, the Company owed CVS $61.5 million for

intercompany borrowings. The weighted average interest rate on these borrowings

from CVS for the thirty-nine weeks ended September 28, 1996 was 6.2%. The

weighted average interest rate on borrowings from CVS for the years ended

December 31, 1993, 1994 and 1995 was 3.4%, 4.9%, and 6.5%, respectively. In

connection with the Reorganization, intercompany balances between the Company

and CVS, will be eliminated prior to closing of the Offering as follows: CVS

will make contributions in the aggregate amount of $30 million to the Company,

and the Company will have outstanding $13.5 million subordinated indebtedness to

CVS pursuant to a note (the "Subordinated Note"). The Subordinated Note will

notionally consist of a $10 million tranche ("Tranche A") and a $3.5 million

tranche ("Tranche B"), each of which will be for a four year term at an interest

rate of 90-day LIBOR plus 1.375%. There will be no principal amortization prior

to maturity. If the net proceeds to CVS of the Offering plus the net proceeds

from any subsequent public or private sales of Common Stock by CVS, together

with the market value of the Common Stock of which CVS continues to be the

beneficial owner at December 31, 1997 (collectively, the "CVS Value") (i)

exceeds $375 million but is less than $400 million, then CVS would be required

to forgive 50% of the outstanding principal amount of Tranche A; (ii) exceeds

$400 million, then CVS would be required to forgive 75% of the outstanding

principal amount of Tranche A; and (iii) exceeds $450 million, then CVS would be

required to forgive 100% of the total

   

 

                                       22

<PAGE>   24

 

  

outstanding principal amount of Tranche A. CVS will be required to (i) forgive

50% of the outstanding principal amount of Tranche B at such time as the CVS

Value equals $330 million; (ii) forgive the remaining principal amount

proportionally if the CVS Value is between $330 million and $375 million; and

(iii) forgive the total outstanding principal amount of Tranche B if the CVS

Value exceeds $375 million. The remaining intercompany balance will be repaid to

CVS through borrowings under the Revolving Credit Facility or internally

generated funds. The actual amount of such repayment in connection with the

elimination of the intercompany balance will depend on the amount of the

intercompany balance (which balance will fluctuate based primarily on the amount

of working capital) as of the closing of the Offering. After the Reorganization

and the Offering, the Company will have an estimated $30 million of total debt

outstanding. See "Capitalization."

   

 

  

     The Company expects to receive commitments from certain financial

institutions for a $125 million three year senior revolving credit facility (the

"Revolving Credit Facility"). The Company will enter into the Revolving Credit

Facility prior to the Offering. The Revolving Credit Facility is anticipated to

contain customary events of default and a number of customary covenants,

including restrictions on liens and sales of assets, prohibitions on dividends

and certain changes in control, and maintenance of certain financial ratios.

Management expects the costs of the Revolving Credit Facility to be higher than

the historical costs of the Company's intercompany borrowings reflected in the

Company's historical financial statements. See "Risk Factors--Lack of Operating

History as a Stand-Alone Company." See Note 9 of the Notes to Consolidated

Financial Statements of the Company included herein.

   

 

  

     The Company's total capital expenditures are expected to be approximately

$43.0 to $45.0 million in 1996 (of which $39.9 million has already been expended

as of September 28, 1996) and $30.0 to $32.0 million in 1997. These capital

expenditures primarily relate to new store openings, remodels of existing store

locations and other capital investment activities. Management believes that the

Company's cash flow from operations and the Revolving Credit Facility will be

sufficient to fund anticipated capital expenditures and working capital

requirements for at least the next three years.

   

 

     The Company currently operates all of its stores on an operating lease

basis. Based upon the Company's prior experience, the Company estimates that the

net cost of opening a superstore 35,000 to 40,000 gross square feet in size is

$2.0 to $2.4 million. This amount includes $0.9 to $1.1 million of inventory

(net of vendor payables), $0.9 to $1.1 million for leasehold improvements and

fixtures and $225,000 to $250,000 for pre-opening expenses, which are expensed

as incurred. Based on historical performance, new stores are typically

profitable within their first full year of operations. Management estimates that

the costs of its planned store closings will be approximately $3.0 million in

1996 and $4.0 to $5.0 million in 1997.

 

INFLATION

 

     The Company does not believe that its operating results have been

materially affected by inflation during the preceding three years. There can be

no assurance, however, that the Company's operating results will not be affected

by inflation in the future.

 

SEASONALITY AND QUARTERLY RESULTS

 

     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, with a majority of net sales and net income for such quarters realized

in the fourth quarter. 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.

 

     Management anticipates that the Company's operating loss in the first

quarter of 1997 may be higher than the operating loss in the first quarter of

1996, due primarily to higher occupancy costs as a result of a higher proportion

of superstores located in prime real estate locations during the first quarter

of 1997 as compared to the same period of 1996. These occupancy costs are less

likely to be leveraged due to typically lower sales in the first quarter as

compared to other quarters.

 

                                       23

<PAGE>   25

 

  

     The following table sets forth certain unaudited financial information for

the Company in each quarter during 1994 and 1995 and the first three quarters of

1996. The unaudited quarterly information includes all normal recurring

adjustments which management considers necessary for a fair presentation of the

information shown. See "Risk Factors--Seasonality and Quarterly Fluctuations."

   

 

  

<TABLE>

<CAPTION>

                                       FIRST        SECOND       THIRD        FOURTH

               1994                   QUARTER      QUARTER      QUARTER      QUARTER        YEAR

- ----------------------------------    --------     --------     --------     --------     --------

                                      (DOLLARS IN THOUSANDS)

<S>                                   <C>          <C>          <C>          <C>          <C>

Net sales.........................    $ 87,170     $ 89,356     $120,138     $143,454     $440,118

Gross profit......................      33,593       35,191       47,538       58,075      174,397

Operating profit..................       2,197        2,927       10,240       16,878       32,242

Net income........................         959        1,242        5,394        9,603       17,198

Percentage increase in comparable

  store net sales.................         5.6%         3.8%         6.7%         5.7%         5.4%

Total stores (end of period)......         136          135          134          145          145

</TABLE>

   

 

  

<TABLE>

<CAPTION>

                                       FIRST        SECOND       THIRD        FOURTH

               1995                   QUARTER      QUARTER      QUARTER      QUARTER        YEAR

- ----------------------------------    --------     --------     --------     --------     --------

                                      (DOLLARS IN THOUSANDS)

<S>                                   <C>          <C>          <C>          <C>          <C>

Net sales.........................    $115,298     $124,290     $138,050     $177,457     $555,095

Gross profit......................      42,787       47,896       54,666       64,584(1)   209,933

Operating profit (loss)...........       2,890        4,667        6,432       (5,856)(1)    8,133

Net income (loss).................         682        1,644        2,599       (5,137)(1)     (212)

Percentage increase (decrease) in

  comparable store net sales......         1.4%         4.7%        (6.6%)(2)     (3.3%)(2)     (1.5%)(2)

Total stores (end of period)......         139          142          146          155          155

</TABLE>

   

 

  

<TABLE>

<CAPTION>

                                       FIRST        SECOND       THIRD

               1996                   QUARTER      QUARTER      QUARTER

- ----------------------------------    --------     --------     --------

                                      (DOLLARS IN THOUSANDS)

<S>                                   <C>          <C>          <C>          <C>          <C>

Net sales.........................    $138,167(2)  $147,649(2)  $180,438

Gross profit......................      50,498       56,252       69,159

Operating profit (loss)...........      (1,011)       1,026        9,279

Net income (loss).................      (1,786)        (411)       4,966

Percentage increase (decrease) in

  comparable store net sales......         1.7%(2)     (6.7%)(2)      2.9%

Total stores (end of period)......         148          155          156

</TABLE>

   

 

- ---------------

 

(1) Excluding the CVS Strategic Program, gross profit, operating profit and net

     income in the fourth quarter of 1995 would have been $72.8 million, $17.5

     million and $9.0 million, respectively.

 

  

(2) Comparable store net sales were negatively affected primarily due to new

     competitive intrusions in existing markets during the second half of 1995

     and the first half of 1996 at approximately 40% of the Company's

     superstores included in the comparable store base which previously had

     limited competition from other superstores. In addition, the fluctuation

     between the first and second quarter in 1996 is due in part to the

     inclusion of the Easter selling season in the first quarter of 1996, as

     compared to its inclusion in the second quarter in 1995. See "Management's

     Discussion and Analysis of Financial Condition and Results of Operations."

   

 

                                       24

<PAGE>   26

 

                                    BUSINESS

 

GENERAL

 

  

     Linens 'n Things is one of the leading, national large format retailers of

home textiles, housewares and home accessories operating in 33 states. According

to Home Textiles Today, Linens 'n Things was the largest specialty retailer (as

measured by sales) in the home linens category in 1995. As of September 28,

1996, the Company operated 117 superstores averaging approximately 32,000 gross

square feet in size and 39 smaller traditional stores averaging approximately

10,000 gross square feet in size. The Company's newest stores range between

35,000 and 40,000 gross square feet in size and are located in strip malls or

power center locations. The Company's business strategy is to offer a broad

assortment of high quality, brand name merchandise at everyday low prices,

provide efficient customer service and maintain low operating costs.

   

 

     Linens 'n Things' extensive selection of over 25,000 SKUs in its

superstores is driven by the Company's commitment to offering a broad and deep

assortment 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, Cannon, Laura Ashley, Martex,

Waverly, Royal Velvet, Braun, Krups, Calphalon and Henckel. 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 with price points substantially below

regular department store prices and comparable with or below department store

sale prices.

 

  

     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 of 35,000

to 40,000 gross square feet, offering a broad merchandise assortment in a more

visually appealing, customer friendly format. The Company's introduction of

superstores has resulted in the closing or relocation of 102 of the Company's

traditional stores through September 28, 1996. As a result of superstore

openings and traditional store closings, the Company's gross square footage more

than tripled from 1.2 million to 4.1 million between January 1991 and September

28, 1996, although its store base only increased 11% from 141 to 156 during this

period. Over this same period, the Company's net sales increased from $202.1

million for the year ended December 31, 1990 to $643.7 million for the twelve

months ended September 28, 1996. 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

assortment of "linens" and "things." The Company estimates that the "things"

side of its business has increased from less than 10% of net sales in 1991 to

35% in 1996.

   

 

BUSINESS STRATEGY

 

     The Company's business strategy is to offer a broad assortment of high

quality, brand name products at everyday low prices, provide efficient customer

service and maintain low operating costs. Key elements of the Company's business

strategy are as follows:

 

  

     Offer a Broad Assortment of Quality Name Brands at Everyday Low

Prices.  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 everyday low prices. The Company offers over

25,000 SKUs in its superstores across six departments, including bath, home

accessories, housewares, storage, top of the bed and window treatments. The

Company continues to explore opportunities to increase sales in its "things"

merchandise while maintaining the strength of its "linens" portion of the

business. The Company's long-term goal is to increase the sales of the "things"

merchandise to approximately 50% of net sales. See "--Growth Strategy--Increase

Productivity of Existing Store Base." The Company is one of the largest

retailers of brand names, including Wamsutta, Laura Ashley, Martex, Waverly,

Royal Velvet, Braun, Krups and Calphalon. The

   

 

                                       25

<PAGE>   27

 

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 believes its prices are typically well below the non-sale

prices offered by department stores and are comparable to or slightly below the

sale prices offered by such stores. In addition, the Company maintains a "won't

be undersold" approach which guarantees its customers prices as low as those

offered by any of its competitors.

 

     Provide Efficient Customer Service and Shopping Convenience.  To enhance

customer satisfaction and loyalty, Linens 'n Things strives to provide prompt,

knowledgeable sales assistance and enthusiastic customer 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 efficient customer 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

vendor product support seminars. In addition, the Company has taken initiatives

to enhance the speed of its customer service, including installing satellite

transmission for credit card authorizations and upgrading its current

point-of-sale ("POS") system. The customer's experience is also enhanced by the

availability of sales associates who, since the transfer of inventory and

receiving responsibilities from the stores to the distribution center, have

redirected their focus from the backroom to the selling floor. The Company's

superstore format is designed to save the customer time by having inventory

visible and accessible on the selling floor for immediate purchase. A number of

the superstores have additional in-store customer services, such as same day

monogramming, and the Company is currently in the process of implementing a

bridal registry service in all of its stores, which it expects will be completed

in 1997. The Company believes its knowledgeable sales staff and efficient

customer service, together with the Company's liberal return policy, create a

positive shopping experience which engenders customer loyalty.

 

     Maintain Low Operating Costs.  A cornerstone of the Company's business

strategy is its commitment to maintaining 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

merchandising structure, the use of integrated management information systems

and the utilization of the distribution center. The Company believes that its

significant investment in the technology of its management information systems

and in its distribution center will allow the Company to grow without requiring

significant additional capital contributions to its infrastructure through 1998.

See "Management's Discussion and Analysis of Financial Condition and Results of

Operations." The Company is able to limit its advertising expenses by relying

upon an everyday low price strategy which reduces the Company's need to

advertise sales.

 

GROWTH STRATEGY

 

  

     NEW SUPERSTORE EXPANSION.  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. Management believes that the new markets will be primarily located

in the western region of the United States in trading areas of 200,000 persons

within a ten-mile radius and with demographic characteristics that match the

Company's target profile. The Company believes that it is well-positioned to

take advantage of the continued market share gain by the superstore chains in

the home furnishings sector. The Company believes there is an opportunity to

more than triple the number of its current prototype superstores across the

country, providing the Company with significant growth opportunities to

profitably enter new markets, as well as backfill in existing markets. In 1996,

the Company plans to open 36 new superstores, of which 18 have already been

opened, and close 18 stores (primarily traditional stores), of which 17 stores

have already been closed. In 1997, the Company plans to open 20 to 25 new

superstores and close approximately 10 to 12 stores (primarily traditional

stores).

   

 

                                       26

<PAGE>   28

 

     The following table sets forth information concerning the Company's

expansion program during the most recent five years:

 

<TABLE>

<CAPTION>

                                          SQUARE FOOTAGE                STORE COUNT

                                      -----------------------     -----------------------

 YEAR       OPENINGS     CLOSINGS     BEGIN YEAR     END YEAR     BEGIN YEAR     END YEAR

- -------     --------     --------     ----------     --------     ----------     --------

<S>         <C>          <C>          <C>            <C>          <C>            <C>

1992           22           21         1,350         1,633           143           144

1993           20           21         1,633         2,078           144           143

1994           29           27         2,078         2,865           143           145

1995           28           18         2,865         3,691           145           155

1996(1)        36           18         3,691         4,836           155           173

</TABLE>

 

- ---------------

 

(1) Estimated

 

     Linens 'n Things focuses on opening new superstores in metropolitan areas

where it believes it can become a leading retailer of home-related products. The

Company's goal is to enter two to three new markets a year through its expansion

efforts. Markets for new superstores are selected on the basis of demographic

factors, such as income, population and number of households. Linens 'n Things

focuses its site locations on prime locations within trading areas of 200,000

persons within a ten-mile radius and demographic characteristics that match the

Company's target profile. 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 currently operates all of its superstores on an operating lease

basis. Based upon the Company's prior experience, the Company estimates that the

net cost of opening a superstore 35,000 to 40,000 gross square feet in size is

$2.0 to $2.4 million. This amount includes $0.9 to $1.1 million of inventory

(net of vendor payables), $0.9 to $1.1 million for leasehold improvements and

fixtures and $225,000 to $250,000 for pre-opening expenses, which are expensed

as incurred. Based on historical performance, new stores are typically

profitable within their first full year of operations. Management estimates that

the costs of its planned store closings will be approximately $3.0 million in

1996 and $4.0 to $5.0 million in 1997. The Company believes that its current

management infrastructure and management information systems, together with its

new distribution center, are capable of supporting planned expansion through

1998. See "Management's Discussion and Analysis of Financial Condition and

Results of Operations--General."

 

     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 allow it

to achieve these goals:

 

  

     Enhance Merchandise Mix and Presentation.  The Company continues to explore

opportunities to increase sales of "things" merchandise without sacrificing

market share or customer image in the "linens" side of the business. The

Company's long-term goal is to increase the sales of the "things" merchandise to

approximately 50% of net sales as part of its strategic initiative to capitalize

on customer demand for one-stop shopping destinations. The Company expects this

shift to positively impact net sales per square foot and inventory turnover

since "things" merchandise tends to be more impulse driven merchandise as

compared to the "linens" portion of the business and therefore increase the

average sale per customer. In addition, sales of "things" merchandise typically

result in higher margins than "linens" products. The Company plans on regularly

introducing new products which it expects will increase sales and generate

additional customer 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 realign its

store space with its growth segments. The Company expects that the addition of

in-store customer services, such as the bridal registry service, 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 a distribution center and a

 

                                       27

<PAGE>   29

 

management information system, which it believes will allow it to maintain low

operating costs as it pursues its superstore expansion strategy. In July 1995,

the Company began full operations of its 275,000 square foot distribution center

in Greensboro, North Carolina. Management estimates that by the end of 1996

approximately 80% of merchandise will be received at the distribution center, as

compared to approximately 20% of merchandise received at the Company's

distribution center in 1995. Management believes that the increased utilization

of the distribution center will result in lower average freight costs, more

efficient scheduling of inventory shipments to the stores, improved inventory

turnover, better in-stock positions and improved information flow. The Company

believes that the transfer of inventory receiving responsibilities from the

stores to the distribution center allows the store sales associates to redirect

their focus to the sales floor, thereby increasing the level of customer

service. The warehouse portion of the distribution center 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 MIS system which

allows the Company to more accurately monitor and better balance inventory

levels and improve in-stock positions in its stores.

 

  

     Continue Conversion of Store Base to Superstore Format.  As of September

28, 1996, the Company operated 117 superstores, representing 73% of its total

stores, and 39 traditional stores. The Company plans to close or relocate

approximately 12 of the 39 traditional stores by the end of 1997. Although the

remaining traditional stores are currently profitable, the Company's long-term

plans include closing most of the remaining traditional stores as opportunities

arise.

   

 

INDUSTRY

 

     According to U.S. Department of Commerce data, 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 $60

billion in 1995. The market for home furnishings is fragmented and highly

competitive. Specialty superstores are the fastest growing channel of

distribution in this market. In 1995, the three largest specialty superstore

retailers of fashion home textiles (including the Company) had aggregate sales

of approximately $1.4 billion, representing less than 3% 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 within one of the following categories:

 

     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 branded 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 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 Dayton Hudson Corporation and Kmart

Corporation. Fashion home furnishings represent only a small portion of the

total merchandise sales in these stores and reflect a significantly more limited

selection with fewer high quality name brands and lower quality merchandise at

lower price points than specialty stores or department stores. In addition,

these mass merchandisers typically have more limited customer services staffs

than the Company.

 

     Specialty Stores/Retailers:  This category includes large format home

furnishings retailers most similar to Linens 'n Things, including Bed Bath &

Beyond Inc., Home Place and Strouds, Inc. and smaller niche retailers such as

Crate & Barrel, Lechters, Inc. and Williams-Sonoma, Inc. The Company estimates

that large format stores range in size from approximately 30,000 to 50,000 gross

square feet and offer a home furnishings merchandise selection of approximately

20,000 to 30,000 SKUs. The Company believes that these retailers

 

                                       28

<PAGE>   30

 

have similar pricing on comparable brand name merchandise and that they compete

by attempting to develop loyal customers and increase customer traffic by

providing a single outlet to satisfy all the customer's household needs. The

niche retailers are typically smaller in size than the large format superstores

and offer a highly focused and broad assortment within a specific niche. The

prices offered by niche retailers are often higher than the large format

superstores and most do not maintain an everyday low price strategy.

 

     Other Retailers:  This category includes mail order retailers, such as

Spiegel Inc. and Domestications, off-price retailers, such as 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 brand name merchandise at prices which tend to be

higher than those of the Company. Off-price retailers typically offer close-out

or out of season brand name merchandise at competitive prices.

 

MERCHANDISING

 

     The Company offers quality home textiles, housewares and home accessories

at everyday low prices. The Company's strategy consists of a commitment to offer

a breadth and depth of selection and to create merchandise presentation that

makes it easy to shop in a visually pleasing environment. The stores feature a

"racetrack" layout, enabling the customer 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 25,000 SKUs enables

its customers 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 customer's impression of a dominant

assortment of merchandise in an easy to shop environment. The Company's broad

and deep merchandise offering is coupled with everyday low prices that are

substantially below regular department store prices and comparable with or

slightly below department store sale prices. The Company has adopted a "won't be

undersold" approach and believes that the uniform application of its everyday

low price policy is essential to maintaining the integrity of this policy. This

is an important factor in establishing its reputation as a price leader and in

helping to build customer loyalty. In addition, the Company offers on a regular

basis "special" purchases which it obtains primarily through opportunistic

purchasing to enhance its high value perception among its customers.

 

     The Company also sells an increasing amount of merchandise under its own

private label (approximately 10% of net sales) which is designed to supplement

the Company's offering of brand name products by offering high quality

merchandise at value prices. The Company believes its private label program will

continue to enhance customer awareness of its superstores and provides a

distinct competitive advantage. Merchandise directly imported represented

approximately 5% of net sales in 1995.

 

                                       29

<PAGE>   31

 

     Merchandise and sample brands offered in each major department are

highlighted below:

 

<TABLE>

<CAPTION>

     DEPARTMENT                       ITEMS SOLD                         SAMPLE BRANDS

- ---------------------    ------------------------------------    ------------------------------

<S>                      <C>                                     <C>

Bath                     Towels, shower curtains, waste          Fieldcrest, Martex, Royal

                         baskets, hampers, bathroom rugs and     Velvet and Springmaid.

                         wall hardware.

Home Accessories         Decorative pillows, napkins,            Dakotah, Waverly and Laura

                         tablecloths, placemats, lamps,          Ashley.

                         gifts, picture frames and framed

                         art.

Housewares               Cookware, cutlery, kitchen gadgets,     Braun, Krups, Calphalon,

                         small electric appliances (such as      Henckel, Mikasa, Circulon,

                         blenders and coffee grinders),          Faberware, Black & Decker,

                         dinnerware, flatware and glassware.     Kitchen Aid, Copco and

                                                                 International Silver.

Storage                  Closet-related items (such as           Rubbermaid and Closetmaid.

                         hangers, organizers and shoe racks).

Top of the Bed           Sheets, comforters, comforter           Wamsutta, Laura Ashley,

                         covers, bedspreads, bed pillows,        Revman, Croscill, Fieldcrest,

                         blankets and mattress pads.             Springmaid, Royal Sateen and

                                                                 Beautyrest.

Window Treatment         Curtains, valances and window           Croscill, Graber, Bali,

                         hardware.                               Waverly and Laura Ashley.

</TABLE>

 

  

     As part of a strategic effort to capitalize on consumer 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 assortment of

"linens" and "things." The Company estimates that the "things" side of its

business has increased from less than 10% of its net sales in 1991 to 35% in

1996. The Company continues to explore opportunities to increase sales of

"things" merchandise while maintaining the strength of its "linens" side of the

business. The Company's long-term goal is to increase the sales of "things"

merchandise to approximately 50% of net sales. See "--Growth Strategy--Increase

Productivity of Existing Store Base."

   

 

     The Company's "racetrack" layout allows customers to easily shop between

corresponding departments and stimulates impulse sales by encouraging the

customers to shop the entire store. The Company also believes its stores allow

customers to locate products easily and reinforce the customer's perception of

an extensive merchandise selection. In addition, the Company actively works with

vendors to improve the customers' in-store experience through designing

displays, unique packaging and product information signs that optimally showcase

its product offering and by training associates in product education in order to

maximize service to the customer.

 

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 them from the competition. To facilitate the

ease of shopping, the assisted self service culture is complimented by trained

department specialists, zoned floor coverage, product information displays and

videos, self demonstrations and vendor supported training seminars. This

philosophy is designed to encourage guest loyalty as well as continually develop

knowledgeable Company associates. A number of the superstores have in-store

services, such as monogramming, and the Company is currently in the process of

implementing a bridal registry service in all of its stores. 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 enhanced by the transfer

of inventory receiving responsibilities from the stores, allowing sales

associates to focus on the sales floor. Enhanced management

 

                                       30

<PAGE>   32

 

systems which provide efficient customer service and liberal return procedures

are geared toward making each guest's final impression of visiting a store a

convenient, efficient and pleasant experience.

 

ADVERTISING

 

     Advertising programs are focused on building and strengthening the Linens

'n Things superstore concept and image. Because of the Company's commitment to

everyday low prices, advertising vehicles are aggressively used in positioning

the Company among new and existing customers by communicating price, value and

breadth and depth of selection, with a "won't be undersold" approach. The

Company focuses its advertising programs during key selling seasons such as

back-to-school and holidays.

 

     The Company primarily uses full color inserts in newspapers to reach its

customers. In addition, the Company periodically advertises on television and

radio during peak seasonal periods or promotional events. Grand opening

promotional events are used to support new stores, with more emphasis placed on

those located in new markets. The Company's marketing programs are targeted at

its primary customer base of women, age 35-55, with household income greater

than $50,000.

 

STORES

 

  

     The Company's 156 stores are located in 33 states, principally in suburban

areas of medium and large sized cities. Store locations are targeted primarily

for power strip centers and mall-proximate sites in densely populated areas

within trading areas of 200,000 persons within a ten-mile radius.

   

 

     The Company's superstores range in size from 19,000 to 50,000 gross square

feet, but are predominantly between 35,000 and 40,000 gross square feet in size.

The Company's traditional stores range in size from 7,500 to 10,000 gross square

feet. In both superstores and traditional stores, approximately 85% to 90% of

store space is used for selling areas and the balance for storage, receiving and

office space.

 

  

     For a list of current store locations as of September 28, 1996, see the

inside front cover of this prospectus.

   

 

PURCHASING AND SUPPLIERS

 

     The Company maintains its own central buying staff, comprised of one Senior

Vice President, two Vice Presidents and twelve Buyers. 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 15% of the Company's total purchases in 1995. In 1995,

the Company purchased a significant amount of products from other key suppliers.

See "Risk Factors--Reliance on Key Vendors." Due to its breadth 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. In

addition, the Company has established programs with certain vendors that allow

merchandise to be shipped floor-ready and pre-ticketed with the Company's price

labels, increasing overall operating efficiency. In 1995, approximately 95% of

the Company's merchandise was purchased in the United States.

 

DISTRIBUTION

 

     In 1995, the Company began full operations of its 275,000 square foot

state-of-the-art distribution center in Greensboro, North Carolina. The system

that supports this facility was designed to use the latest electronic data

interchange ("EDI") capabilities to optimize allocation of product to the

locations that achieve the highest sales and inventory productivity potential.

Management believes that the utilization of the centralized distribution center

has resulted in lower average freight expense, more timely control of inventory

shipment to stores, improved inventory turnover, better in-stock positions and

improved information flow. In addition, the transfer of inventory receiving

responsibilities from the stores to the distribution center allows the sales

associates to redirect their focus to the sales floor, thereby increasing the

level of customer service. 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.

 

                                       31

<PAGE>   33

 

     The Company manages the distribution process centrally from its corporate

headquarters. Purchase orders issued by Linens 'n Things are electronically

transmitted to the majority of its suppliers. By the end of 1996, the Company

anticipates that 80% of its total inventory will be received through the

distribution center. 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 center as possible to ensure all

benefits of the Company's logistics strategy are fully leveraged. Continued

growth will also facilitate new uses of EDI technologies between Linens 'n

Things and its suppliers to exploit the most productive and beneficial use of

its assets and resources.

 

  

     As of September 28, 1996, the distribution center was utilized at

approximately 50% of capacity. Management estimates that the distribution center

can support the Company's growth through the end of 1998. As the Company

continues to open more superstores in the western United States, another

distribution center may be necessary or desirable to support the further growth

of the Company. Such a distribution center would further increase freight

savings and reduce transit time to the western stores. In order to realize

greater efficiency, the Company uses third party delivery services to ship its

merchandise from the distribution center to its stores.

   

 

MANAGEMENT INFORMATION SYSTEMS

 

  

     Over the last three years, the Company has made significant investment in

technology to improve customer service, gain efficiencies and reduce operating

costs. Linens 'n Things has installed a customized IBM AS400 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 is currently in the process

of upgrading. Information obtained daily by the system results in automatic

inventory replenishment in response to specific requirements of each superstore.

The upgraded terminals will also enable the store operator to initiate the

credit approval process and will have the capability to support the Company's

planned bridal registry service. The Company has further integrated its planning

process through a comprehensive EDI system used for substantially all purchase

orders, invoices and bills of lading and which, combined with automatic shipping

notice technology used in the distribution systems, creates additional

efficiencies by capturing data through bar codes thereby reducing clerical

errors and inventory shrinkage.

   

 

     The Company believes its management information systems have fully

integrated the Company's stores, distribution and home office. The Company

continually evaluates and upgrades its management information systems on a

regular basis to enhance the quantity, quality and timeliness of information

available to management.

 

STORE MANAGEMENT AND OPERATIONS

 

     Each superstore is staffed with one General Manager, two to four

Merchandise Managers and one Receiving Manager. The operations of each store are

supervised by one of 19 District Managers and one of three Zone Vice Presidents.

Each Zone Vice President reports to the Senior Vice President of Store

Operations.

 

     The Company places a strong emphasis on its people, their development and

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,

who participate in training at an existing store immediately prior to the new

opening. As a result, the vast majority of General Managers opening a new store

have significant experience at the Company. Additionally, the structured

management training program requires each new associate to 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,

complimented at the associate level through daily product knowledge seminars and

structured register training materials and proficiencies. The Company believes

that its policy of promoting from within

 

                                       32

<PAGE>   34

 

the Company, 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 10:00

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.

 

EMPLOYEES

 

  

     As of September 1996, the Company employed approximately 6,500 people of

whom approximately 2,800 were full-time employees and 3,700 were part-time

employees. Less than 6% of employees are non-store personnel. None of the

Company's employees are represented by unions, and the Company believes that its

relationship with its employees is good.

   

 

COMPETITION

 

  

     The Company believes that although it will continue to face competition

from retailers in all four of the categories referred to in

"Business--Industry," its most significant competition is from the large format

specialty stores. The home textiles industry is becoming increasingly

competitive as several specialty retailers are in the process of expanding into

new markets. In addition, as the Company expands into new markets, it will face

new competitors. In the second half of 1995 and the first half of 1996, the

Company experienced relatively higher new competitive intrusions in existing

markets at approximately 40% of the superstores included in the comparable store

base which previously had limited competition from other superstores, negatively

impacting comparable store net sales. The visibility of the Company may

encourage additional competitors or may encourage existing competitors to

imitate the Company's format and methods. If any of the Company's major

competitors seek to gain or retain market share by reducing prices, the Company

may be required to reduce its prices in order to remain competitive.

   

 

     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, customer 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.

 

PROPERTIES

 

     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 5 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 (which, in the case of fixed increases, the Company accounts for on a

straight line basis over the noncancelable lease term) and certain of the leases

provide for contingent rent (based upon store sales exceeding stipulated

amounts). Prior to the Offering, CVS has acted as guarantor on substantially all

of the Company's store leases. After the Offering, although CVS will continue to

guarantee the Company's current store leases where CVS has guaranteed such

leases in the past (including extensions and renewals relating to certain of

such leases), CVS will no longer enter into commitments to guarantee future

leases on behalf of the Company. See "Risk Factors--Lack of Operating History as

a Stand-Alone Company."

 

     The Company owns its 275,000 square foot distribution center in North

Carolina. The Company leases its 59,000 square foot corporate office in Clifton,

New Jersey.

 

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

 

                                       33

<PAGE>   35

 

disposition of these matters will not have a material adverse effect on the

Company's consolidated financial position, results of operations or liquidity.

 

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. Management believes that the name Linens 'n Things is an

important element of the Company's business.

 

                                       34

<PAGE>   36

 

                                   MANAGEMENT

 

EXECUTIVE OFFICERS AND DIRECTORS

 

     The following table sets forth information regarding the executive officers

and directors of the Company.

 

  

<TABLE>

<CAPTION>

             NAME                 AGE                           POSITION

- ------------------------------    ----    ----------------------------------------------------

<S>                               <C>     <C>

Norman Axelrod................      44    Chief Executive Officer, President and Director

James M. Tomaszewski..........      47    Senior Vice President, Chief Financial Officer

Steven B. Silverstein.........      36    Senior Vice President, General Merchandise Manager

Hugh J. Scullin...............      47    Senior Vice President, Store Operations

Stanley P. Goldstein..........      61    Director

Charles C. Conaway............      36    Director

</TABLE>

   

 

     Mr. Axelrod has been Chief Executive Officer and President of the Company

since 1988. Prior to joining Linens 'n Things, Mr. Axelrod held various

management positions at Bloomingdale's between 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. Tomaszewski has served as Senior Vice President, Chief Financial

Officer since joining Linens 'n Things in 1994. Mr. Tomaszewski began his career

with J.L. Hudsons Department Store in Detroit in 1970. In 1982, he was promoted

to Vice President Controller of Diamonds Department Store in Tempe, Arizona. In

1985, he joined Filene's Department Store as Vice President, Controller, and

later that year he was promoted to Senior Vice President & Chief Financial

Officer for Filene's Basement. In 1987, Mr. Tomaszewski joined Lechmere's in

Boston as Senior Vice President and Chief Financial Officer. In 1992, he was

promoted to Executive Vice President Retail Operations at Lechmere's and elected

to Lechmere's Board of Directors. Mr. Tomaszewski has a B.S. in Finance and

Economics and an M.B.A. in Finance from Wayne State University.

   

 

     Mr. Silverstein joined Linens 'n Things in 1992 as Vice President, General

Merchandise Manager. Prior to joining Linens 'n Things, Mr. Silverstein was

Merchandise Vice President of Home Textiles at Bloomingdales from 1985 to 1992.

Mr. Silverstein has been Senior Vice President, General Merchandise Manager

since 1993. 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. Goldstein is Chairman and Chief Executive Officer of CVS. Mr. Goldstein

has served in various capacities at CVS since 1969. He served as President of

CVS from January 1987 to January 1994 and as Executive Vice President of CVS

from 1984 to December 1986. Prior to that, he served as President of CVS

Corporation which was a division of Melville Corporation. Mr. Goldstein also

serves on the board of NYNEX.

   

 

     Mr. Conaway has served as Director since 1996. Prior to joining CVS, he

held the position of Executive Vice President and Chief Operating Officer for

Reliable Drug Stores, Inc. Mr. Conaway joined CVS in 1992 as the Senior Vice

President, Pharmacy. Mr. Conaway has been Executive Vice President and Chief

Financial Officer of CVS since 1995. Mr. Conaway holds a B.S. in Accounting from

Michigan State University and an M.B.A. from the University of Michigan.

 

  

     The Board of Directors, which is expected to consist of seven members, will

be divided into three classes, with each class holding office for staggered

three-year terms. The terms of Messrs. Axelrod and Goldstein and one additional

director will expire at the 1997 annual meeting of the Company's shareholders,

the terms of Mr. Conaway and one additional director will expire at the 1998

annual meeting of the Company's

   

 

                                       35

<PAGE>   37

 

  

shareholders and the terms of the remaining additional directors will expire at

the 1999 annual meeting of the Company's shareholders. The Company's officers

are elected by the Board of Directors for one-year terms and serve at the

discretion of the Board of Directors. After the Offering, the Company will

appoint four additional directors to the Board of Directors, none of which will

be associated with CVS or management of the Company.

   

 

  

     At the time of the Offering, the Stockholder Agreement provides that CVS

shall have the right to designate (i) two members of the Board of Directors of

the Company so long as CVS in aggregate owns at least 15% of the total votes

represented by the total outstanding voting stock, (ii) one member of the Board

of Directors of the Company, so long as CVS in aggregate owns at least 5% but

less than 15% of the total outstanding voting stock, and (iii) zero members of

the Board of Directors of the Company as soon as CVS in aggregate owns less than

5% of the total outstanding voting stock.

   

 

KEY MANAGERS

 

     The following table sets forth information regarding the key managers of

the Company.

 

<TABLE>

<CAPTION>

             NAME                 AGE                           POSITION

- ------------------------------    ---     ----------------------------------------------------

<S>                               <C>     <C>

William T. Giles..............    37      Vice President, Finance, Controller

Matthew J. Meaney.............    50      Vice President, Management Information Systems

Brian D. Silva................    40      Vice President, Human Resources

Dominick J. Trapasso..........    43      Vice President, Logistics

</TABLE>

 

     Mr. Giles joined Linens 'n Things in 1991 as Assistant Controller and was

promoted to Vice President of Finance and Controller in 1994. From 1981 to 1990

, Mr. Giles was with Price Waterhouse. 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.

 

     Mr. Meaney joined Linens 'n Things in 1991 as Vice President of Management

Information Services. From 1985 to 1991, Mr. Meaney was Vice President of

Management Information Services 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.

 

     Mr. Silva has been Vice President, Human Resources, since joining Linens 'n

Things in 1995. 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.A.

in Human Resources Management from New York Institute of Technology. Mr. Silva

received his B.A. from St. John's University.

 

     Mr. Trapasso has been Vice President, Logistics since joining Linens 'n

Things in 1993. From 1979 to 1986, he was employed with John Wanamaker as

Director, Warehouse, Distribution. From 1986 to 1993, he was Senior Vice

President Distribution, Transportation at Charming Shoppes, Inc. Mr. Trapasso

received his B.A. from New York University.

 

COMPENSATION OF DIRECTORS

 

  

     Directors who are not currently receiving compensation as officers or

employees of the Company or any of its affiliates will be paid an annual

retainer fee of $10,000 and a $750 fee for each meeting of the Company Board or

any committee that they attend. Non-employee directors will also participate in

the 1996 Non-Employee Director Stock Plan. See "--1996 Non-Employee Director

Stock Plan."

   

 

                                       36

<PAGE>   38

 

EXECUTIVE COMPENSATION

 

     The following tables set forth the compensation paid or accrued by the

Company during 1995 to its executive officers.

 

                           SUMMARY COMPENSATION TABLE

 

  

<TABLE>

<CAPTION>

                                                                LONG TERM COMPENSATION

                                                             ----------------------------

                                                                        AWARDS

                                                             ----------------------------

                                              ANNUAL         RESTRICTED                          ALL

                                           COMPENSATION        STOCK         SECURITIES         OTHER

                                         ----------------     AWARD(S)       UNDERLYING      COMPENSATION

     NAME AND PRINCIPAL POSITION         SALARY     BONUS      ($)(1)      OPTIONS (#)(2)       ($)(3)

- --------------------------------------   -------    -----    ----------    --------------    ------------

<S>                                      <C>        <C>      <C>           <C>               <C>

Norman Axelrod........................   455,000       0       750,004         65,000            6,918

Chief Executive Officer and President

Steven B. Silverstein.................   265,000       0       200,031         20,000            7,069

Senior Vice President,

General Merchandise Manager

James M. Tomaszewski..................   264,000       0       100,016         15,000            5,373

Senior Vice President,

Chief Financial Officer

Hugh J. Scullin.......................   210,000       0             0          6,000            8,519

Senior Vice President, Store

Operations

</TABLE>

   

 

- ---------------

 

  

(1) All restricted stock disclosed in the table is CVS restricted stock which is

     subject to a four year vesting period from date of grant which was April

     11, 1995. On December 31, 1995 Messrs. Axelrod, Silverstein and Tomaszewski

     had the right to receive 25,011, 7,538 and 2,676 shares, having a market

     value on December 31, 1995 (based on the value of CVS common stock on that

     date of $30.875) of $772,214, $232,735 and $82,621, respectively. As of the

     date of the Offering, all shares of restricted stock will be vested, except

     that with respect to Mr. Axelrod, all shares which have not vested as of

     the closing of the Offering will be cancelled.

   

 

  

(2) These options are multi-year grants to buy CVS common stock which become

     exercisable in one-third increments over a three year period, except for

     Mr. Scullin who received a traditional grant which is fully exercisable one

     year after the grant date. An additional one-third of the options granted

     to Messrs. Silverstein and Tomaszewski will become vested and remain

     exercisable for the 90 day period following the Offering. In the case of

     Mr. Scullin, his options are fully exercisable for the 90 day period

     following the Offering. In the case of Mr. Axelrod, his options are fully

     exercisable following the Offering until December 31, 1999.

   

 

(3) Includes $3,918, $4,069, $2,373 and $5,519 contributed under the CVS 401K

     Profit Sharing Plan for Messrs. Axelrod, Silverstein, Tomaszewski and

     Scullin, respectively, and 56.13 ESOP shares (with a value of $3,000)

     contributed under the CVS Employee Stock Ownership Plan for each of these

     named executives.

 

                                       37

<PAGE>   39

 

                             OPTION GRANTS IN 1995

 

  

<TABLE>

<CAPTION>

                                                            INDIVIDUAL GRANTS(1)

                            ------------------------------------------------------------------------------------

                            NUMBER OF

                            SECURITIES      % OF TOTAL

                            UNDERLYING       OPTIONS

                             OPTIONS        GRANTED TO         EXERCISE                             GRANT DATE

                             GRANTED        EMPLOYEES        OR BASE PRICE                         PRESENT VALUE

          NAME                  #         IN FISCAL YEAR        ($/SH)         EXPIRATION DATE         $(2)

- ------------------------    ---------     --------------     -------------     ---------------     -------------

<S>                         <C>           <C>                <C>               <C>                 <C>

Norman Axelrod..........      65,000           2.1%             $37.375           4/10/2005          $ 595,197

Steven B. Silverstein...      20,000            .6%             $37.375           4/10/2005          $ 183,137

James M. Tomaszewski....      15,000            .5%             $37.375           4/10/2005          $ 137,353

Hugh J. Scullin.........       6,000            .2%             $36.250           3/29/2005          $  51,960

</TABLE>

   

 

- ---------------

 

  

(1) These options are multi-year grants to buy CVS stock that become exercisable

     in one-third increments over a three-year period, except for Mr. Scullin

     who received a traditional grant which is fully exercisable one year after

     the grant date. An additional one-third of the options granted to Messrs.

     Silverstein and Tomaszewski will become vested and remain exercisable for

     the 90 day period following the Offering. Mr. Axelrod's options are fully

     exercisable following the Offering until December 31, 1999. All of the

     options were awarded at fair market value on the date of grant.

   

 

(2) The hypothetical present values on grant date are calculated using the

     Black-Scholes option pricing model which for 1995 grants was determined

     based on the following six inputs: (1) the option exercise price is $37.375

     ($36.250 in the case of Mr. Scullin); (2) the fair value of the stock under

     option at the time of grant is also $37.375 ($36.250 in the case of Mr.

     Scullin); (3) the dividend yield is 4.07% (4.19% in the case of Mr.

     Scullin) which equals the $1.52 dividend to be paid to shareholders during

     the year prior to the date of grant of the option divided by the stock

     price of $37.375 ($36.250 in the case of Mr. Scullin); (4) the option term

     is 10 years; (5) the volatility of the stock is 19.27%, based on an

     analysis of weekly closing stock prices and dividends paid during the

     three-year period prior to the grant of the options; and (6) the assumed

     risk-free rate of interest is 7.32%, equivalent to a 10 year treasury yield

     at the time of grant of the options. No other discounts or any other

     restrictions related to vesting or the likelihood of vesting were applied.

 

      AGGREGATED OPTION EXERCISES IN 1995 AND 1995 YEAR-END OPTION VALUES

 

<TABLE>

<CAPTION>

                                                                    NUMBER OF SECURITIES     VALUE OF UNEXERCISED

                                                                         UNDERLYING              IN-THE-MONEY

                                                                   UNEXERCISED OPTIONS AT     OPTIONS AT FY-END

                                                                         FY-END (#)                  ($)

                                                     VALUED        ----------------------    --------------------

                              SHARES ACQUIRED       REALIZED            EXERCISABLE/             EXERCISABLE/

           NAME               ON EXERCISE (#)         ($)              UNEXERCISABLE            UNEXERCISABLE

- ---------------------------   ---------------    --------------    ----------------------    --------------------

<S>                           <C>                <C>               <C>                       <C>

Norman Axelrod.............           0                 0               42,000/65,000                 0/0

Steven B. Silverstein......           0                 0                8,500/20,000                 0/0

James M. Tomaszewski.......           0                 0                7,500/15,000                 0/0

Hugh J. Scullin............           0                 0                13,500/6,000                 0/0

</TABLE>

 

  

EMPLOYMENT AGREEMENTS

   

 

  

     Prior to the Offering, the Company expects to enter into employment

agreements (each referred to in this section individually as an "Employment

Agreement" and collectively as the "Employment Agreements"), effective on the

date of the Offering, with the Named Executive Officers. The following briefly

summarizes the principal terms of such Employment Agreements and is qualified by

reference to the full text of the Employment Agreements.

   

 

  

     The period of employment under the Employment Agreements extends initially

for four years subject to automatic one-year extensions at the end of the

initial term unless either party gives notice of non-renewal at

   

 

                                       38

<PAGE>   40

 

  

least 180 days prior to expiration of the term. The Employment Agreements

generally provide for payment of an annual base salary that will be reviewed

each year, but may not be decreased from the amount in effect in the previous

year. Initially, base salary will be $475,000, $275,000, $279,000 and $210,000

for Messrs. Axelrod, Silverstein, Tomaszewski and Scullin, respectively, and

there will be an annual bonus of a minimum of 55% and a maximum of 110% of base

salary for Mr. Axelrod and 40% of base salary for the other Named Executive

Officers. The Employment Agreements also generally provide for (i) continued

payment of base salary, incentive compensation, and other benefits for 24 months

in the case of Mr. Axelrod and for 12 months in the case of the other Named

Executive Officers in the event the executive's employment is terminated other

than in connection with a termination by the Company for "cause" or voluntary

termination by the executive without "good reason;" (ii) other restrictive

covenants including non-disclosure, non-solicitation of employees and

availability for litigation support; (iii) participation in certain benefit

plans and programs (including pension benefits, disability and life insurance,

and medical benefits); (iv) annual and long-term incentive compensation

opportunities; and (v) deferred compensation arrangements (including in the case

of Mr. Axelrod an initial crediting to a deferred compensation account of

approximately $1,800,000 in lieu of certain accumulated pension benefits,

outstanding CVS restricted stock awards and outstanding CVS stock options).

   

 

  

     In the event of a change in control, the Employment Agreements generally

provide lump sum severance benefits equal to 2 times (2.99 for Mr. Axelrod) base

salary and target bonus and continued participation in a certain welfare benefit

plan for 24 months (36 months for Mr. Axelrod). In addition, in the case of

voluntary termination the Company may elect to pay the executive a lump sum

amount equal to base salary plus target annual bonus in exchange for the

executive's agreement not to compete with the Company for a period of one year.

Upon a termination for cause, the executives have agreed not to compete with the

Company for a period of one year.

   

 

  

     A "change in control" is defined in generally the same manner as under the

1996 Incentive Compensation Plan, as described below. "Good reason" is defined

generally as demotion, reduction in compensation, unapproved relocation in the

case of Mr. Axelrod or a material breach of the Employment Agreement by the

Company. "Cause" is defined generally as a breach of the restrictive covenants

referred to in clause (ii) above, certain felony convictions, or willful acts or

gross negligence that are materially damaging to the Company.

   

 

  

     If payments under the Employment Agreements following a change in control

are subject to the "golden parachute" excise tax, the Company will make an

additional "gross-up" payment sufficient to ensure that the net after-tax amount

retained by the executive (taking into account all taxes, including those on the

gross-up payment) is the same as would have been the case had such excise tax

not applied. The Employment Agreements obligate the Company to indemnify the

executives to the fullest extent permitted by law, including the advancement of

expenses, and provide that the Company generally will reimburse an executive for

expenses incurred in seeking enforcement of the Employment Agreement, unless the

executive's assertion of such rights is in bad faith or is frivolous.

   

 

  

     The Employment Agreement with Mr. Axelrod relates to his employment as

President and Chief Executive Officer and his agreement to serve as a Director.

The Employment Agreements with the other Named Executive Officers relate to

their employment as senior executives of the Company.

   

 

  

1996 INCENTIVE COMPENSATION PLAN

   

 

     The Board of Directors of the Company intends to adopt, and Nashua Hollis

CVS, Inc., as sole shareholder intends to approve, the Company's 1996 Incentive

Compensation Plan (the "1996 ICP"). The Company's Board of Directors believes

that attracting and retaining key employees is essential to the Company's growth

and success. The following is a brief description of the material features of

the 1996 ICP. Such description is qualified in its entirety by reference to the

full text of the 1996 ICP.

 

     TYPES OF AWARDS.  The terms of the 1996 ICP provide for grants of stock

options, stock appreciation rights ("SARs"), restricted stock, deferred stock,

other stock-related awards, and performance or annual incentive awards that may

be settled in cash, stock, or other property ("Awards").

 

                                       39

<PAGE>   41

 

  

     SHARES SUBJECT TO THE 1996 ICP AND ANNUAL LIMITATIONS.  Under the 1996 ICP,

the total number of shares of the Company's Common Stock reserved and available

for delivery to participants in connection with Awards is (i) 2,351,458 shares,

plus (ii) 12% of the number of shares of Common Stock newly issued by the

Company or delivered out of treasury shares during the term of the Plan

(excluding any issuance or delivery in connection with Awards, or any other

compensation or benefit plan of the Company); provided, however, that the total

number of shares of Common Stock with respect to which incentive stock options

may be granted shall be 1,959,548 shares. Shares of Common Stock subject to an

Award that is canceled, expired, forfeited, settled in cash, or otherwise

terminated without a delivery of shares to the participant, including Common

Stock withheld or surrendered in payment of any exercise or purchase price of an

Award or taxes relating to an Award, will again be available for Awards under

the 1996 ICP. Common Stock issued under the 1996 ICP may be either newly issued

shares or treasury shares.

   

 

  

     In addition, the 1996 ICP imposes individual limitations on the amount of

certain Awards in order to comply with Section 162(m) of the Internal Revenue

Code (the "Code"). Under these limitations, during any fiscal year the number of

options, SARs, shares of restricted stock, shares of deferred stock, shares of

Common Stock issued as a bonus or in lieu of other Company obligations, and

other stock-based Awards granted to any one participant shall not exceed one

million shares for each type of such Award, subject to adjustment in certain

circumstances. The maximum amount that may be earned as a final annual incentive

award or other cash Award in any fiscal year by any one participant is $3

million, and the maximum amount that may be earned as a final performance award

or other cash Award in respect of a performance period by any one participant is

$5 million.

   

 

     The Committee is authorized to adjust the number and kind of shares subject

to the aggregate share limitations and annual limitations under the 1996 ICP and

subject to outstanding Awards (including adjustments to exercise prices and

number of shares of options and other affected terms of Awards) in the event

that a dividend or other distribution (whether in cash, shares, or other

property), recapitalization, forward or reverse split, reorganization, merger,

consolidation, spin-off, combination, repurchase, or share exchange, or other

similar corporate transaction or event affects the Common Stock so that an

adjustment is appropriate. The Committee is also authorized to adjust

performance conditions and other terms of Awards in response to these kinds of

events or in response to changes in applicable laws, regulations, or accounting

principles.

 

  

     ELIGIBILITY AND ADMINISTRATION.  Executive officers and other officers and

employees of the Company or any subsidiary, including any such person who may

also be a director of the Company, shall be eligible to be granted Awards under

the 1996 ICP. It is anticipated that approximately 175 persons will be granted

Awards under the 1996 ICP. The 1996 ICP will be administered by the Committee

except to the extent the Board elects to administer the 1996 ICP. The Committee

will be comprised of two or more directors designated by the Board each of whom,

unless otherwise determined by the Board, will be a "non-employee director" and

an "outside director" within the meaning of Rule 16b-3 under the Securities

Exchange Act of 1934 and Section 162(m) of the Internal Revenue Code,

respectively. Subject to the terms and conditions of the 1996 ICP, the Committee

is authorized to select participants, determine the type and number of Awards to

be granted and the number of shares of Common Stock to which Awards will relate,

specify times at which Awards will be exercisable or settleable (including

performance conditions that may be required as a condition thereof), set other

terms and conditions of such Awards, prescribe forms of Award agreements,

interpret and specify rules and regulations relating to the 1996 ICP, and make

all other determinations that may be necessary or advisable for the

administration of the 1996 ICP.

   

 

  

     STOCK OPTIONS AND SARS.  The Committee is authorized to grant stock

options, including both incentive stock options ("ISOs") and non-qualified stock

options, and SARs entitling the participant to receive the excess of the fair

market value of a share of Common Stock on the date of exercise over the grant

price of the SAR. The exercise price per share subject to an option and the

grant price of an SAR is determined by the Committee, but must not be less than

the fair market value of a share of Common Stock on the date of grant (except to

the extent of in-the-money awards or cash obligations surrendered by the

participant at the time of grant). The maximum term of each option or SAR may

not exceed ten years. Options may be exercised by payment of the exercise price

in cash, Common Stock, outstanding Awards, or other property (possibly

   

 

                                       40

<PAGE>   42

 

including notes or obligations to make payment on a deferred basis) having a

fair market value equal to the exercise price, as the Committee may determine

from time to time. Methods of exercise and settlement and other terms of the

SARs are determined by the Committee.

 

     RESTRICTED STOCK, DEFERRED STOCK AND DIVIDEND EQUIVALENTS.  The Committee

is authorized to grant restricted stock and deferred stock. Restricted stock is

a grant of Common Stock which may not be sold or disposed of, and which may be

forfeited in the event of certain terminations of employment and/or failure to

meet certain performance requirements, prior to the end of a restricted period

specified by the Committee. An Award of deferred stock confers upon a

participant the right to receive shares at the end of a specified deferral

period, subject to possible forfeiture of the Award in the event of certain

terminations of employment and/or failure to meet certain performance

requirements prior to the end of a specified restricted period (which restricted

period need not extend for the entire duration of the deferral period). The

Committee is authorized to grant dividend equivalents conferring on participants

the right to receive, currently or on a deferred basis, cash, shares, other

Awards, or other property equal in value to dividends paid on a specific number

of shares or other periodic payments.

 

     BONUS STOCK AND AWARDS IN LIEU OF CASH OBLIGATIONS AND OTHER STOCK-BASED

AWARDS.  The Committee is authorized to grant shares as a bonus free of

restrictions, or to grant shares or other Awards in lieu of Company obligations

to pay cash under other plans or compensatory arrangements, subject to such

terms as the Committee may specify. The 1996 ICP also authorizes the Committee

to grant other Awards that are denominated or payable in, valued by reference

to, or otherwise based on or related to shares.

 

     PERFORMANCE AWARDS, INCLUDING ANNUAL INCENTIVE AWARDS.  The right of a

participant to exercise or receive a grant or settlement of an Award, and the

timing thereof, may be subject to such performance conditions as may be

specified by the Committee. In addition, the 1996 ICP authorizes specific annual

incentive awards, which represent a conditional right to receive cash, shares or

other Awards upon achievement of pre-established performance goals during a

specified one-year period. Performance awards and annual incentive awards

granted to persons the Committee expects will, for the year in which a deduction

arises, be among the Chief Executive Officer and four other most highly

compensated executive officers (the "Named Executive Officers"), will, if so

intended by the Committee, be subject to provisions that should qualify such

Awards as "performance-based compensation" not subject to the limitation on tax

deductibility by the Company under Code Section 162(m).

 

     The performance goals to be achieved as a condition of payment or

settlement of a performance award or annual incentive award will consist of (i)

one or more business criteria and (ii) a targeted level or levels of performance

with respect to each such business criteria. In the case of performance awards

intended to meet the requirements of Code Section 162(m), the business criteria

used must be one of those specified in the 1996 ICP, although for other

participants the Committee may specify any other criteria. The business criteria

specified in the 1996 ICP are: (1) earnings per share; (2) revenues; (3) cash

flow; (4) cash flow return on investment; (5) return on assets, return on

investment, return on capital, return on equity; (6) economic value added; (7)

operating margin; (8) net income; pretax earnings; pretax earnings before

interest, depreciation and amortization; pretax operating earnings after

interest expense and before incentives, service fees, and extraordinary or

special items; operating earnings; (9) total stockholder return; and (10) any of

the above goals as compared to the performance of a published or special index

deemed applicable by the Committee including, but not limited to, the Standard &

Poor's 500 Stock Index. The Committee may, in its discretion, determine that the

amount payable as a final annual incentive or performance award will be

increased or reduced from the amount of any potential Award, but may not

exercise discretion to increase any such amount intended to qualify under Code

Section 162(m). Subject to the requirements of the 1996 ICP, the Committee will

determine other performance award and annual incentive award terms, including

the required levels of performance with respect to the business criteria, the

corresponding amounts payable upon achievement of such levels of performance,

termination and forfeiture provisions, and the form of settlement.

 

     OTHER TERMS OF AWARDS.  Awards may be settled in the form of cash, Common

Stock, other Awards, or other property, in the discretion of the Committee. The

Committee may require or permit participants to defer the settlement of all or

part of an Award in accordance with such terms and conditions as the Committee

may

 

                                       41

<PAGE>   43

 

establish, including payment or crediting of interest or dividend equivalents on

deferred amounts, and the crediting of earnings, gains, and losses based on

deemed investment of deferred amounts in specified investment vehicles. The

Committee is authorized to place cash, shares, or other property in trusts or

make other arrangements to provide for payment of the Company's obligations

under the 1996 ICP. Awards granted under the 1996 ICP generally may not be

pledged or otherwise encumbered and are not transferable except by will or by

the laws of descent and distribution, or to a designated beneficiary upon the

participant's death, except that the Committee may, in its discretion, permit

transfers for estate planning or other purposes. Awards under the 1996 ICP are

generally granted without a requirement that the participant pay consideration

in the form of cash or property for the grant (as distinguished from the

exercise), except to the extent required by law. The Committee may, however,

grant Awards in exchange for other Awards under the 1996 ICP, awards under other

Company plans, or other rights to payment from the Company, and may grant Awards

in addition to and in tandem with such other Awards, awards, or rights as well.

 

  

     CHANGE IN CONTROL.  The Committee may, in its discretion, accelerate the

exercisability, the lapsing of restrictions, or the expiration of deferral or

vesting periods of any Award, and such accelerated exercisability, lapse,

expiration and vesting shall occur automatically in the case of a "change in

control" of the Company except to the extent otherwise determined by the

Committee at the date of grant. In addition, the Committee may provide that the

performance goals relating to any performance-based award will be deemed to have

been met upon the occurrence of any change in control. Upon the occurrence of a

change in control, except to the extent otherwise determined by the Committee at

the date of grant, options may at the election of the participant be cashed out

based on a defined "change in control price," which will be the higher of (i)

the cash and fair market value of property that is the highest price per share

of Common Stock paid (including extraordinary dividends) in any change in

control or liquidation of shares of Common Stock following a sale of

substantially all of the assets of the Company, or (ii) the highest fair market

value per share of Common Stock (generally based on market prices) at any time

during the 60 days before and 60 days after a change in control. "Change in

control" is defined in the 1996 ICP to include a variety of events, including

significant changes in the stock ownership of the Company or a significant

subsidiary, changes in the Company's board of directors, certain mergers and

consolidations of the Company or a significant subsidiary, and the sale or

disposition of all or substantially all the consolidated assets of the Company.

   

 

     AMENDMENT AND TERMINATION OF THE 1996 ICP.  The Board of Directors may

amend, alter, suspend, discontinue, or terminate the 1996 ICP or the Committee's

authority to grant Awards without further stockholder approval, except

stockholder approval must be obtained for any amendment or alteration if

required by law or regulation or under the rules of any stock exchange or

automated quotation system on which the shares are then listed or quoted.

Stockholder approval will not be deemed to be required under laws or

regulations, such as those relating to ISOs, that condition favorable treatment

of participants on such approval, although the Board may, in its discretion,

seek stockholder approval in any circumstance in which it deems such approval

advisable. Unless earlier terminated by the Board, the 1996 ICP will terminate

at such time as no shares remain available for issuance under the 1996 ICP and

the Company has no further rights or obligations with respect to outstanding

Awards under the 1996 ICP.

 

  

     INITIAL AWARDS.  At or shortly following the Offering, it is anticipated

that the Compensation Committee will make the following restricted stock awards

("Founders Stock Awards") to each Named Executive Officer under the 1996 ICP:

Mr. Axelrod -- 62,500 shares, Mr. Tomaszewski -- 18,750 shares, Mr.

Silverstein -- 18,750 shares and Mr. Scullin -- 11,250 shares. It is expected

that such Founders Stock Awards will vest in 25% annual increments over a four

year period commencing on July 1, 1997.

   

 

  

     At or shortly following the Offering, it is also anticipated that the

Compensation Committee will make the following grants of non-qualified stock

options to each Named Executive Officer under the 1996 ICP: Mr.

Axelrod -- 400,000 options, Mr. Tomaszewski -- 75,000 options, Mr.

Silverstein -- 75,000 options and Mr. Scullin -- 45,000 options. It is expected

that such options will have an exercise price equal to the initial public

offering price of the Common Stock. It is expected that these options will

generally become exercisable in four equal installments based on continued

service with the Company during the five-year period following the grant date.

   

 

                                       42

<PAGE>   44

 

     FEDERAL INCOME TAX IMPLICATIONS OF THE 1996 ICP.  The following is a brief

description of the federal income tax consequences generally arising with

respect to Awards under the 1996 ICP.

 

     The grant of an option or SAR will create no tax consequences for the

participant or the Company. A participant will not recognize taxable income upon

exercising an ISO (except that the alternative minimum tax may apply). Upon

exercising an option other than an ISO, the participant must generally recognize

ordinary income equal to the difference between the exercise price and fair

market value of the freely transferable and nonforfeitable shares acquired on

the date of exercise. Upon exercising an SAR, the participant must generally

recognize ordinary income equal to the cash or the fair market value of the

freely transferable and nonforfeitable shares received.

 

     Upon a disposition of shares acquired upon exercise of an ISO before the

end of the applicable ISO holding periods, the participant must generally

recognize ordinary income equal to the lesser of (i) the fair market value of

the shares at the date of exercise of the ISO minus the exercise price, or (ii)

the amount realized upon the disposition of the ISO shares minus the exercise

price.

 

     Generally, for Awards granted under the 1996 ICP that result in the payment

or issuance of cash or shares or other property, the participant must recognize

ordinary income equal to the cash or the fair market value of shares or other

property received. With respect to Awards involving the issuance of shares or

other property that is restricted as to transferability and subject to a

substantial risk of forfeiture, the participant must generally recognize

ordinary income equal to the fair market value of the shares or other property

received at the first time the shares or other property becomes transferable or

is not subject to a substantial risk of forfeiture, whichever occurs earlier.

However, a participant may elect to be taxed at the time of receipt of shares or

other property rather than upon lapse of restrictions on transferability or

substantial risk of forfeiture. The Company generally will be entitled to a tax

deduction equal to the amount recognized as ordinary income by the participant

in connection with an option, SAR or the Award.

 

     The foregoing summary of the federal income tax consequences in respect of

the 1996 ICP is for general information only. Interested parties should consult

their own advisors as to specific tax consequences, including the application

and effect of foreign, state and local tax laws.

 

1996 NON-EMPLOYEE DIRECTOR STOCK PLAN

 

     The Board of Directors of the Company intends to adopt, and Nashua Hollis

CVS, Inc., as sole shareholder of the Company intends to approve, the 1996

Non-Employee Director Stock Plan (the "1996 Director Plan"). The 1996 Director

Plan is intended to assist the Company in attracting and retaining highly

qualified persons to serve as non-employee directors by providing a significant

portion of their total compensation in the form of Company Common Stock, thereby

more closely aligning such directors' current and ongoing interests with those

of the Company's shareholders.

 

     The following summary of the material terms of the 1996 Director Plan is

qualified in its entirety by reference to the full text of the 1996 Director

Plan.

 

     ELIGIBILITY.  Under the 1996 Director Plan, only directors who are not

employees of the Company or of any subsidiary or parent corporation of the

Company are "non-employee directors" eligible to participate in the Plan.

 

  

     OPTION GRANT.  An option to purchase 7,000 shares of Common Stock (an

"Option") will be automatically granted to each non-employee director upon the

later of the Offering or initial election to the Board. In addition, an Option

to purchase 700 shares of Common Stock will be granted to each director of the

Company who, at the close of business on the date of each annual meeting of the

Company's stockholders commencing with the calendar year following his or her

initial election to the Board, is then eligible to receive an Option grant under

the 1996 Director Plan. Options granted under the 1996 Director Plan will be

non-qualified stock options and will have the following principal terms and

conditions: (i) the exercise price per share of Common Stock purchasable under

an Option will be equal to 100% of the fair market value of Common Stock on the

date of grant of the Option; (ii) each Option will expire at the earliest of (a)

ten years after the date of grant, (b) 12 months after the non-employee director

ceases to serve as a director of the

   

 

                                       43

<PAGE>   45

 

  

Company for any reason other than death, disability, or retirement at or after

attaining age 65, or (c) immediately upon removal of the non-employee director

for cause; (iii) each Option will become exercisable as to 25% of the shares of

Common Stock relating to the Option on each of the first four anniversaries of

the date of grant, and will thereafter remain exercisable until the Option

expires; provided that an Option previously granted to a participant (a) will be

fully exercisable in the event of a "change in control" (as defined in the 1996

Director Plan), (b) will be fully exercisable after the non-employee director

ceases to serve as a director of the Company due to death, disability, or

retirement at or after attaining age 65 and (c) will be exercisable after the

non-employee director ceases to serve as a director of the Company for any

reason other than death, disability, or retirement at or after attaining age 65

only if the Option was exercisable at the date of such cessation of service; and

(iv) each Option may be exercised, in whole or in part, at such time as it is

exercisable and prior to its expiration by, among other things, giving written

notice of exercise to the Company specifying the number of shares to be

purchased and accompanied by payment in full of the exercise price in cash

(including by check) or by surrender of shares of Common Stock or a combination

thereof.

   

 

  

     STOCK UNIT GRANTS.  The 1996 Director Plan also provides for automatic

grants of 700 stock units ("Stock Units") to each non-employee director on the

Offering and thereafter to each person who, at the close of business on the date

of each annual meeting of the Company's stockholders commencing in 1997, is a

non-employee director. Each Stock Unit represents the right to receive one share

of Common Stock at the end of a specified period. One-half of such Stock Units

will be paid six months and a day after the grant date, provided the

non-employee director has not ceased to serve as a director for any reason other

than death, disability, or retirement at or after attaining age 65, except that

payment of such Stock Units shall be accelerated in the event of a change in

control. The remaining one-half of such Stock Units will be paid on the next

annual meeting of the Company's stockholders following the grant date, provided

the non-employee director has not ceased to serve as a director for any reason

other than death, disability, or retirement at or after attaining age 65, except

that payment of such Stock Units shall be accelerated in the event of a change

in control.

   

 

     DEFERRAL.  The 1996 Director Plan permits a non-employee director to elect

to defer receipt of all or a portion of the shares otherwise deliverable in

connection with Stock Units. The 1996 Director Plan also permits a non-employee

director to elect to defer receipt of fees otherwise payable in cash, with such

deferred amounts deemed invested in Stock Units. The director may make such

election for up to 100% of the fees otherwise payable to him or her, including

annual retainer fees, fees for attendance at meetings of the Board of Directors

or any committee and any other fees for service as director. If a director

elects to defer fees in the form of Stock Units, the Company will credit a

deferral account established for the director with a number of Stock Units equal

to the number of shares of Common Stock (including fractional shares) having an

aggregate fair market value at that date equal to the amount of fees deferred by

the director. The deferral period applicable to Stock Units will be as elected

by the director. However, all periods will end upon a change in control of the

Company.

 

     DIVIDENDS.  When, as, and if dividends are declared and paid on Common

Stock, dividend equivalents equal to the amount or value of any per share

dividend will be credited on each then outstanding Stock Unit. Such dividend

amounts will be deemed invested in non-forfeitable Stock Units, based on the

then-current fair market value of Common Stock.

 

  

     SHARES AVAILABLE FOR ISSUANCE.  A total of 200,000 shares of Common Stock

are reserved and available for issuance under the 1996 Director Plan. Such

shares may be authorized but unissued shares, treasury shares or shares acquired

in the market for the account of a director. If any Option or Stock Unit is

canceled or forfeited, the shares subject thereto will again be available for

issuance under the 1996 Director Plan. The aggregate number of shares of Common

Stock issuable under the 1996 Director Plan and the number of shares subject to

each automatic grant of Options or Stock Units will be appropriately adjusted by

the Board of Directors in the event of a recapitalization, reorganization,

merger, consolidation, spin-off, combination, repurchase, exchange of shares or

other securities of the Company, stock split or reverse split, stock dividend,

certain other extraordinary dividends, liquidation, dissolution, or other

similar corporate transaction or event

   

 

                                       44

<PAGE>   46

 

affecting the Common Stock, in order to prevent dilution or enlargement of

directors' rights under the 1996 Director Plan.

 

     ADMINISTRATION.  The 1996 Director Plan will be administered by the Board

of Directors. The 1996 Director Plan may be amended, altered, suspended,

discontinued or terminated by the Board of Directors without further stockholder

approval, unless such approval is required by law or regulation or under the

rules of any stock exchange or automated quotation system on which the Common

Stock is then listed or quoted. Stockholder approval will not be deemed to be

required under laws or regulations that condition favorable treatment of

participating directors on such approval, whether or not the amendment would

increase the cost of the 1996 Director Plan to the Company, although the Board

of Directors may, in its discretion, seek stockholder approval in any

circumstance in which it deems such approval advisable.

 

     EFFECTIVE AND TERMINATION DATES.  The 1996 Director Plan will become

effective upon the Offering. Unless earlier terminated by the Board of

Directors, the 1996 Director Plan will terminate when no shares remain available

under the 1996 Director Plan and the Company and directors have no further

rights and obligations under the 1996 Director Plan.

 

     FEDERAL INCOME TAX IMPLICATIONS OF THE 1996 DIRECTOR PLAN.  The federal

income tax consequences related to the grant and exercise of Options to

non-employee directors under the 1996 Director Plan are substantially similar to

the tax consequences described herein with respect to the grant of non-qualified

stock options under the 1996 Incentive Compensation Plan. Directors will

recognize ordinary income equal to the fair market value of Common Stock

received in connection with the payment of Stock Units, and the Company will be

entitled to a corresponding tax deduction at such time.

 

                                       45

<PAGE>   47

 

                       PRINCIPAL AND SELLING SHAREHOLDER

 

     The following table and the notes thereto set forth information as of

immediately prior to and immediately after completion of the Offering relating

to beneficial ownership (as defined in Rule 13d-3 of the Securities and Exchange

Act of 1934) of the Company's Common Stock by each director, the executive

officers and directors as a group and the Selling Shareholder:

 

  

<TABLE>

<CAPTION>

                                                   BENEFICIAL OWNERSHIP      BENEFICIAL OWNERSHIP

                                                   OF COMMON STOCK PRIOR       OF COMMON STOCK

                                                      TO OFFERING(1)          AFTER OFFERING(2)

                                                   ---------------------     --------------------

                                                   NUMBER OF                 NUMBER OF

                 SHAREHOLDERS                        SHARES      PERCENT      SHARES      PERCENT

- -----------------------------------------------    ----------    -------     ---------    -------

<S>                                                <C>           <C>         <C>          <C>

Nashua Hollis CVS, Inc.(3).....................    19,595,476      100.0%    7,595,476       38.8%

Norman Axelrod(4)..............................            --         --            --         --

Stanley P. Goldstein(5)........................            --         --            --         --

Charles C. Conaway(6)..........................            --         --            --         --

James M. Tomaszewski(7)........................            --         --            --         --

Steven B. Silverstein(8).......................            --         --            --         --

Hugh J. Scullin(9).............................            --         --            --         --

Executive Officers and Directors as a

  Group(10)....................................            --         --            --         --

</TABLE>

   

 

- ---------------

 

 (1) Common Stock will be the only class of equity securities outstanding

     immediately prior to completion of the Offering.

 

 (2) Assuming the Underwriters' over-allotment option is not exercised.

 

  

 (3) Nashua Hollis CVS, Inc. is a wholly owned, indirect, subsidiary of CVS. Its

     address is 670 White Plains Road, Suite 204, Scarsdale, New York 10583.

   

 

  

 (4) Excludes 400,000 shares of Common Stock subject to outstanding stock

     options which are not exercisable within 60 days of the date of this

     Prospectus and 62,500 shares of restricted stock grants.

   

 

  

 (5) Excludes 10,000 shares of Common Stock subject to outstanding stock options

     which are not exercisable within 60 days of the date of this Prospectus and

     700 shares of restricted stock grants.

   

 

  

 (6) Excludes 10,000 shares of Common Stock subject to outstanding stock options

     which are not exercisable within 60 days of the date of this Prospectus and

     700 shares of restricted stock grants.

   

 

  

 (7) Excludes 75,000 shares of Common Stock subject to outstanding stock options

     which are not exercisable within 60 days of the date of this Prospectus and

     18,750 shares of restricted stock grants.

   

 

  

 (8) Excludes 75,000 shares of Common Stock subject to outstanding stock options

     which are not exercisable within 60 days of the date of this Prospectus and

     18,750 shares of restricted stock grants.

   

 

  

 (9) Excludes 45,000 shares of Common Stock subject to outstanding stock options

     which are not exercisable within 60 days of the date of this Prospectus and

     11,250 shares of restricted stock grants.

   

 

  

(10) Excludes an aggregate of 615,000 shares of Common Stock subject to

     outstanding stock options which are not exercisable within 60 days of the

     date of this Prospectus and 112,650 shares of restricted stock grants.

   

 

                             RELATIONSHIP WITH CVS

 

  

     The Company was acquired by CVS in 1983. Upon completion of the Offering,

CVS will own approximately 38.8% of the Common Stock of the Company (29.6% if

the Underwriters' over-allotment option is exercised in full) and will initially

have the right to designate two members of the Board of Directors of the

Company. See "Management." This section describes certain arrangements between

CVS and the Company that have existed prior to the Offering and that will be in

effect after the Offering.

   

 

                                       46

<PAGE>   48

 

  REAL ESTATE AND CERTAIN ADMINISTRATIVE COSTS

 

     CVS has historically allocated real estate service costs and various other

administrative expenses to the Company. Allocations were based on the Company's

ratable share of expense incurred by CVS on behalf of the Company for the

combined programs. The total costs allocated to the Company for the years ended

December 31, 1993, 1994 and 1995 was approximately $2.7 million, $3.3 million

and $3.0 million, respectively. After the Offering, CVS will no longer provide

the real estate and, except for the transitional services referred to below, the

administrative services to the Company.

 

  

     In addition, a subsidiary of CVS has guaranteed the leases of certain

stores operated by the Company and charges a fee for that service which amounted

to approximately $0.2 million, $0.3 million and $0.3 million for the years ended

December 31, 1993, 1994 and 1995, respectively. After the Offering, CVS will

remain obligated under its guarantees of the Company's store leases where CVS

has guaranteed such leases in the past (including extensions and renewals

relating to such leases) and will guarantee certain new leases identified in the

Stockholder Agreement. Except for the foregoing, CVS will no longer enter into

any guarantees of leases on behalf of the Company. The Company will agree to

indemnify CVS under the Stockholder Agreement for any losses arising in

connection therewith.

   

 

  

     CVS and the Company intend to enter into a transitional services agreement

(the "Transitional Services Agreement") effective concurrently with the Offering

under which CVS agrees to provide or cause to be provided to the Company certain

specified services for a transitional period after the Offering. The

transitional services to be provided by CVS will be check authorization and

collection, insurance claims administration and VSAT satellite communications

system services (the "Services"). The Transitional Services Agreement provides

that the Services will be provided in exchange for fees based on CVS's usual and

customary charges for such Services. The period for which CVS will provide the

Services will vary depending on the type of Service, but will in no event exceed

eighteen months. Pursuant to the Stockholder Agreement, CVS may terminate the

provision of any or all of the Services if a person or group acquires Majority

Beneficial Ownership. In addition, at the request of the Company, CVS will

continue to provide for a period ending no later than May 31, 1997

administrative services under certain welfare benefit plans in respect of

employees of the Company as of the Offering, with the cost of such services to

be paid by the Company.

   

 

  FINANCING

 

  

     The weighted average interest rate on borrowings from CVS for the

thirty-nine weeks ended September 28, 1996 was 6.2% and for the years ended

December 31, 1993, 1994 and 1995 was 3.4%, 4.9% and 6.5%, respectively. The

related interest expense recognized by the Company on such borrowings was $1.4

million, $3.2 million and $7.1 million, respectively. Concurrently with the

Offering, the Company will have outstanding $13.5 million of subordinated

indebtedness to CVS. The Subordinated Note will notionally consist of a $10

million tranche ("Tranche A") and a $3.5 million tranche ("Tranche B"), each of

which will be for a four year term at an interest rate of 90-day LIBOR plus

1.375%. There will be no principal amortization prior to maturity. If the net

proceeds to CVS of the Offering plus the net proceeds from any subsequent public

or private sales of Common Stock by CVS, together with the market value of the

Common Stock of which CVS continues to be the beneficial owner at December 31,

1997 (collectively, the "CVS Value") (i) exceeds $375 million but is less than

$400 million, then CVS would be required to forgive 50% of the outstanding

principal amount of Tranche A; (ii) exceeds $400 million, then CVS would be

required to forgive 75% of the outstanding principal amount of Tranche A; and

(iii) exceeds $450 million, then CVS would be required to forgive 100% of the

total outstanding principal amount of Tranche A. CVS will be required to (i)

forgive 50% of the outstanding principal amount of Tranche B at such time as the

CVS Value equals $330 million; (ii) forgive the remaining principal amount

proportionally if the CVS Value is between $330 million and $375 million; and

(iii) forgive the total outstanding principal amount of Tranche B if the CVS

Value exceeds $375 million. With the exception of the Subordinated Note,

subsequent to the Offering, the Company will no longer receive financing

assistance support from CVS. See "Management's Discussion and Analysis of

Financial Condition and Results of Operations--Liquidity and Capital Resources."

   

 

                                       47

<PAGE>   49

 

  THE STOCKHOLDER AGREEMENT

 

  

     The Company and CVS intend to enter into the Stockholder Agreement

effective concurrently with the Offering under which the Company and CVS will

agree to certain arrangements. The Stockholder Agreement provides that the

Company and CVS will indemnify each other against certain liabilities. In

addition, pursuant to the Stockholder Agreement no person or group shall acquire

Majority Beneficial Ownership unless (i) CVS received prior written notice that

such person or group proposes to acquire Majority Beneficial Ownership and (ii)

prior to such acquisition such person or group provides to CVS (unless waived by

CVS in writing) a guarantee of the obligations of the Company under the

Stockholder Agreement to indemnify the CVS Group in respect of the CVS Lease

Guarantees. Upon such person or group acquiring Majority Beneficial Ownership,

CVS may terminate the provision of any or all of its services under the

Transitional Services Agreement (as defined herein). See "--Real Estate and

Certain Administrative Costs." The Stockholder Agreement provides that, at the

request of CVS, the Company will use its best efforts to effect registration

under the applicable federal and state securities laws of the shares of the

Common Stock held by CVS for sale in accordance with certain specified methods

described in the Stockholder Agreement on two occasions, and will take such

other action necessary to permit the sale thereof in other jurisdictions,

subject to certain limitations specified in the Stockholder Agreement. The

Stockholder Agreement also provides that if the Company desires to register any

shares of Common Stock for its own account during the period after the Offering

and before CVS has exercised its First CVS Registration of its shares of the

Company's Common Stock under the Securities Act: (i) the Company is required to

notify CVS of its desire to register such shares; and (ii) if after receipt of

such notice CVS elects to then proceed with such First CVS Registration, the

Company may include its securities in such First CVS Registration (provided that

if in the good faith view of the managing underwriter of such offering all or a

part of such securities to be included for the Company's account cannot be sold

and the inclusion thereof would be likely to have an adverse effect on the

pricing, timing or distribution of the offering of Company securities by the CVS

Group, then the inclusion of such securities or part thereof for the Company's

account will not be permitted). If after receipt of such notice CVS does not

elect to then proceed with such First CVS Registration, the Company may proceed

with its offering. If CVS exercises its First CVS Registration right prior to

the Company notifying CVS of its desire to sell shares of Common Stock for its

own account, in accordance with the procedures described above, the Company may

not, without prior written consent of CVS, register such shares in connection

with the First CVS Registration. The First CVS Registration right expires on

December 31, 1997 after which time CVS would have two customary "demand"

registration rights. CVS will also have the right, which it may exercise from

time to time, to include the shares of the Common Stock (and any other

securities issued in respect of or in exchange for such shares) held by it in

certain other registrations of the Common Stock initiated by the Company on its

own behalf or on behalf of its other shareholders. CVS may transfer certain of

its registration rights to purchasers of the Company's Common Stock from CVS,

which transferees may collectively exercise "demand" registration rights on not

more than two occasions. Without the written consent of CVS, the Company may not

grant to any person registration rights entitling such person to request that

the Company effect, prior to January 1, 1998, a registration of Company

securities under the Securities Act for the account of such person. Such rights

are subject to a "lock-up" agreement whereby CVS has agreed not to sell any

shares of Common Stock without the prior consent of CS First Boston for a period

of 180 days from the date of this Prospectus. See "Underwriting."

   

 

     The Stockholder Agreement provides that generally CVS will cease to have

any liability under its employee benefit plans with respect to employees and

former employees of the Company after the Offering, except that (i) options and

other outstanding stock based awards in respect to CVS stock will continue to

operate in accordance with their terms; (ii) the full account balances of

current employees of the Company in CVS's 401(k) profit sharing plan will be

transferred to a similar successor plan of the Company; and (iii) employees of

the Company will be entitled to exercise applicable distribution rights under

CVS's employee stock ownership plan.

 

                                       48

<PAGE>   50

 

  TERMS OF THE TAX DISAFFILIATION AGREEMENT

 

     Prior to the completion of the Offering, CVS and the Company will enter

into a tax disaffiliation agreement (the "Tax Disaffiliation Agreement") that

will set forth each party's rights and obligations with respect to payments and

refunds, if any, with respect to taxes for periods before and after the

completion of the Offering and related matters such as the filing of tax returns

and the conduct of audits or other proceedings involving claims made by taxing

authorities.

 

     In general, CVS will be responsible for filing consolidated federal and

consolidated, combined or unitary state income tax returns for periods through

the date on which the Offering is completed, and paying the associated taxes.

The Company will reimburse CVS for the portion of such taxes, if any, relating

to the Company's businesses, provided, however, that with respect to any

combined and unitary state income taxes based in part on allocation percentages,

the Company will reimburse CVS for the portion of such taxes attributable to the

Company's businesses' contribution to the relevant allocation percentage. The

Company will be reimbursed, however, for tax attributes, such as net operating

losses and foreign tax credits, when and to the extent that they are used on a

consolidated, combined or unitary basis. The Company will be responsible for

filing, and paying the taxes associated with, all other tax returns for tax

periods (or portions thereof) relating solely to the Company's businesses. CVS,

however, will be responsible for preparing all income tax returns to be filed by

the Company for tax periods that end on or before the date on which the Offering

is completed.

 

     In general, the Company will agree to indemnify CVS for taxes relating to a

tax period (or portion thereof) ending on or before the completion of the

Offering to the extent such taxes are attributable to the Company's businesses

or, in the case of any combined and unitary state income taxes based in part on

allocation percentages, to the extent such taxes are attributable to

contribution of the Company's businesses to the relevant allocation percentage

and CVS will agree to indemnify the Company for all other taxes relating to a

tax period (or portion thereof) ending on or before the completion of the

Offering. The Tax Disaffiliation Agreement will also provide that CVS will

generally pay to the Company the net benefit realized by CVS relating to the

Company's businesses from the carryback to tax periods or portions thereof

ending on or before the completion of the Offering of certain tax attributes of

the Company arising in tax periods or portions thereof beginning after the

completion of the Offering.

 

     The Company and CVS will agree not to take (or omit to take) any action

that results in any increased liability relating to a tax period (or portion

thereof) ending on or before the completion of the Offering. The Company and CVS

will each agree to indemnify the other for liabilities arising as a result of

the breach of this agreement. The Company will also agree to indemnify CVS for

liabilities resulting from a breach by the Company of a similar agreement and

certain other agreements contained in the Tax Disaffiliation Agreement among

Footstar, Inc., Melville Corporation (CVS's predecessor) and their respective

affiliates, to which the Company will continue to be a party after completion of

the Offering.

 

                                       49

<PAGE>   51

 

                        SHARES ELIGIBLE FOR FUTURE SALE

 

  

     Upon completion of the Offering, the Company will have outstanding

19,595,476 shares of Common Stock. Of these shares, the 12,000,000 shares of

Common Stock sold in the Offering will be immediately freely tradable without

restriction under the Securities Act except for any shares purchased by an

"affiliate" of the Company (as that term is defined under the rules and

regulations of the Securities Act), which will be subject to the resale

limitations of Rule 144 adopted under the Securities Act. The remaining

7,595,476 shares of Common Stock held by CVS upon completion of the Offering are

"restricted securities" for purposes of Rule 144 and may not be resold in a

public distribution except in compliance with the registration requirements of

the Securities Act or pursuant to Rule 144. The share numbers in this section

assume that the Underwriters' over-allotment options are not exercised.

   

 

  

     In general, under Rule 144, as currently in effect, a shareholder (or

shareholders whose shares are aggregated) who has beneficially owned for at

least two years shares of Common Stock which are treated as "restricted

securities," including persons who may be deemed affiliates of the company,

would be entitled to sell, within any three-month period, a number of shares

that does not exceed the greater of 1% of the then outstanding shares of Common

Stock (195,955 shares immediately after completion of the Offering) or the

average weekly reported trading volume in the Common Stock during the four

calendar weeks preceding the date on which notice of such sale is given,

provided certain manner of sale and notice requirements and requirements as to

the availability of current public information about the Company are satisfied

(which requirements as to the availability of current public information are

expected to be satisfied commencing 90 days after the date of this Prospectus).

In addition, affiliates of the Company must comply with the restrictions and

requirements of Rule 144, other than the two-year holding period requirement, in

order to sell shares of Common Stock which are not "restricted securities" (such

as shares acquired by affiliates in the Offering). Under Rule 144(k) a

shareholder who is deemed not to have been an affiliate of the Company at any

time during the 90 days preceding a sale by him, and who has beneficially owned

for at least three years shares of Common Stock which are treated as "restricted

securities," would be entitled to sell such shares, without regard to the

foregoing restrictions and requirements.

   

 

  

     The Company and CVS have agreed pursuant to the Underwriting Agreement that

they will not, with certain limited exceptions, sell any Common Stock without

the prior consent of CS First Boston for a period of 180 days from the date of

this Prospectus. After the expiration of such 180-day period, or earlier if

permitted by CS First Boston, the 7,595,476 shares of Common Stock held by CVS

will become available for sale subject to the applicable resale limitations of

Rule 144.

   

 

  

     In addition, upon completion of the Offering, CVS will have certain rights

to register its shares of Common Stock under the Securities Act at the expense

of the Company. See "Relationship with CVS--The Stockholder Agreement." CVS has

publicly announced its intention to dispose of, subject to market conditions,

all of its remaining shares of Common Stock in the Company in 1997. The

Stockholder Agreement provides that, at the request of CVS, the Company will use

its best efforts to effect registration under the applicable federal and state

securities laws of the shares of the Common Stock held by CVS for sale in

accordance with certain specified methods described in the Stockholder Agreement

on two occasions, and will take such other action necessary to permit the sale

thereof in other jurisdictions, subject to certain limitations specified in the

Stockholder Agreement. The Stockholder Agreement also provides that if the

Company desires to register any shares of Common Stock for its own account,

during the period after the Offering and before CVS has exercised its First CVS

Registration of its shares of the Company's Common Stock under the Securities

Act: (i) the Company is required to notify CVS of its desire to register such

shares; and (ii) if after receipt of such notice CVS elects to then proceed with

such First CVS Registration, the Company may include its securities in such

First CVS Registration (provided that if in the good faith view of the managing

underwriter of such offering all or a part of such securities to be included for

the Company's account cannot be sold and the inclusion thereof would be likely

to have an adverse effect on the pricing, timing or distribution of the offering

of Company securities by the CVS Group, then the inclusion of such securities or

part thereof for the Company's account will not be permitted). If after receipt

of such notice CVS does not elect to then proceed with such First CVS

Registration, the Company may proceed with its offering. If CVS exercises its

First CVS Registration right prior to the Company notifying CVS of its desire to

sell shares of Common Stock

   

 

                                       50

<PAGE>   52

 

  

for its own account, in accordance with the procedures described above, the

Company may not without prior written consent of CVS, register such shares in

connection with the First CVS Registration. The First CVS Registration right

expires on December 31, 1997 after which time CVS would have two customary

"demand" registration rights. CVS will also have the right, which it may

exercise from time to time, to include the shares of the Common Stock (and any

other securities issued in respect of or in exchange for such shares) held by it

in certain other registrations of the Common Stock initiated by the Company on

its own behalf or on behalf of its other shareholders.

   

 

     The Company expects, after completion of the Offering, to file a

Registration Statement under the Securities Act to register the issuance of

shares of Common Stock issuable under its stock-based compensation plans. See

"Management--1996 Incentive Compensation Plan and 1996 Non-Employee Director

Stock Plan." Shares of Common Stock issued under these plans after the effective

date of such Registration Statement, other than shares held by affiliates of the

Company, will be eligible for resale in the public market without restriction.

 

     Prior to the Offering, there has been no public market for the Common

Stock. The Company can make no prediction as to the effect, if any, that sales

of shares of Common Stock or the availability of shares for sale will have on

the market price prevailing from time to time. Nevertheless, sales of

substantial amounts of the Common Stock in the public market could adversely

affect the market price of the Common Stock and could impair the Company's

future ability to raise capital through an offering of equity securities.

 

                                       51

<PAGE>   53

 

                          DESCRIPTION OF CAPITAL STOCK

 

GENERAL

 

  

     The authorized capital stock of the Company consists of 1,000,000 shares

Preferred Stock, par value $.01 per share and 60,000,000 shares of Common Stock,

par value $.01 per share. As of the date of this Prospectus, the Company had

shares of Common Stock and no shares of Preferred Stock outstanding.

   

 

PREFERRED STOCK

 

     The Board of Directors has the authority, subject to any limitations

prescribed by law, to issue the Preferred Stock in one or more series and to fix

the rights, preferences, privileges and restrictions thereof, including dividend

rights, dividend rates, conversion rights, voting rights, terms of redemption,

redemption prices, liquidation preferences and the number of shares constituting

any series or the designation of such series, without further vote or action by

the shareholders of the Company. The issuance of Preferred Stock may have the

effect of delaying, deferring or preventing a change in control of the Company

without further action by the shareholders and may adversely affect the voting

and other rights of the holders of Common Stock. At present, the Company has no

plans to issue any of the Preferred Stock.

 

COMMON STOCK

 

  

     Each holder of Common Stock is entitled to one vote per share on all

matters submitted to a vote of shareholders, including the election of

directors. The Common Stock does not have cumulative voting rights, which means

that the holders of a majority of the shares voting for election of directors

can elect all members of the Board of Directors. Under Delaware State law, the

approval of the holders of a majority of all outstanding stock is required to

effect a merger of the Company, the disposition of all or substantially all of

the Company's assets or for certain other actions. See "Risk Factors--Control of

the Company by CVS" and "Principal and Selling Shareholder." Subject to the

preferential rights of the holders of shares of Preferred Stock, if any, the

holders of Common Stock are entitled to share ratably in such dividends, if any,

as may be declared and paid by the Board of Directors out of funds legally

available therefor. See "Dividend Policy." Upon liquidation or dissolution of

the Company, the holders of Common Stock of the Company will be entitled to

share ratably in the assets of the Company legally available for distribution to

shareholders after payment of liabilities and subject to the prior rights of any

holders of Preferred Stock then outstanding. Holders of Common Stock have no

conversion, sinking fund, redemption, preemptive or subscription rights. The

shares of Common Stock presently issued and outstanding are, and the Common

Stock to be issued in connection with the Offering will be, when issued and paid

for, fully paid and nonassessable. The rights, preferences and privileges of

holders of Common Stock are subject to the rights of the holders of shares of

any series of Preferred Stock which the Company may issue in the future.

   

 

CERTAIN PROVISIONS OF LAW

 

     Following the consummation of the Offering, the Company will be subject to

the "Business Combination" provisions of the Delaware General Corporation Law.

In general, such provisions prohibit a publicly held Delaware corporation from

engaging in various "business combination" transactions with any "interested

stockholder" for a period of three years after the date of the transaction which

the person became an "interested stockholder," unless (i) the transaction is

approved by the Board of Directors prior to the date the "interested

stockholder" obtained such status, (ii) upon consummation of the transaction in

which resulted in the shareholder becoming an "interested shareholder," the

"interested stockholder," owned at least 85% of the voting stock of the

corporation outstanding at the time the transaction commenced, excluding for

purposes of determining the number of shares outstanding those shares owned by

(a) persons who are directors and also officers and (b) employee stock plans in

which employee participants do not have the right to determine confidentially

whether shares held subject to the plan will be tendered in a tender or exchange

offer, or (iii) on or subsequent to such date the "business combination" is

approved by the board of directors and authorized at an annual or special

meeting of shareholders by the affirmative vote of at least 66 2/3% of the

outstanding voting stock which is not owned by the "interested shareholder." A

"business combination" is defined to include

 

                                       52

<PAGE>   54

 

mergers, asset sales and other transactions resulting in financial benefit to a

stockholder. In general, an "interested stockholder" is a Person who, together

with affiliates and associates, owns (or within three years, did own) 15% or

more of a corporation's voting stock. The statute could prohibit or delay

mergers or other takeover or change in control attempts with respect to the

Company and, accordingly, may discourage attempts to acquire the Company.

 

TRANSFER AGENT

 

  

     The transfer agent for the Company's Common Stock is the First National

Bank of Boston.

   

 

                                  UNDERWRITING

 

  

     Under the terms and subject to the conditions contained in an Underwriting

Agreement dated November   , 1996 (the "Underwriting Agreement"), the

Underwriters named below (the "Underwriters"), for whom CS First Boston and

Donaldson, Lufkin & Jenrette Securities Corporation are acting as

representatives (the "Representatives"), have severally but not jointly agreed

to purchase from the Selling Shareholder the following respective numbers of

shares of Common Stock:

   

 

  

<TABLE>

<CAPTION>

                                                                       NUMBER OF

                                  UNDERWRITER                            SHARES

            -------------------------------------------------------    ----------

            <S>                                                        <C>

            CS First Boston Corporation............................

            Donaldson, Lufkin & Jenrette Securities Corporation....

 

                                                                       ----------

                      Total........................................    12,000,000

                                                                        =========

</TABLE>

   

 

     The Underwriting Agreement provides that the obligations of the

Underwriters are subject to certain conditions precedent and that the

Underwriters will be obligated to purchase all of the shares of Common Stock

offered hereby (other than those shares covered by the over-allotment option

described below) if any are purchased. The Underwriting Agreement provides that,

in the event of a default by an Underwriter, in certain circumstances the

purchase commitments of the nondefaulting Underwriters may be increased or the

Underwriting Agreement may be terminated.

 

  

     The Selling Shareholder has granted to the Underwriters an option, expiring

at the close of business on the 30th day after the date of this Prospectus, to

purchase up to 1,800,000 additional shares at the initial public offering price

less the underwriting discounts and commissions, all as set forth on the cover

page of this Prospectus. Such option may be exercised only to cover

over-allotments in the sale of the shares of Common Stock. To the extent such

option is exercised, each Underwriter will become obligated, subject to certain

conditions, to purchase approximately the same percentage of such additional

shares of Common Stock as it was obligated to purchase pursuant to the

Underwriting Agreement.

   

 

     The Company and the Selling Shareholder have been advised by the

Representatives that the Underwriters propose to offer shares of Common Stock to

the public initially at the public offering price set forth on the cover page of

this Prospectus and, through the Representatives, to certain dealers at such

price less a concession of $          per share, and the Underwriters and such

dealers may allow a discount of

 

                                       53

<PAGE>   55

 

$          per share on sales to certain other dealers. After the initial public

offering, the public offering price and concession and discount to dealers may

be changed by the Representatives.

 

     The Representatives have informed the Company and CVS that they do not

expect discretionary sales by the Underwriters to exceed 5% of the shares of

Common Stock being offered hereby.

 

     The Company and CVS have agreed that they will not offer, sell, contract to

sell, announce their intention to sell, pledge or otherwise dispose of, directly

or indirectly, or file with the Securities Exchange Commission a registration

statement under the Securities Act relating to, any shares of its Common Stock

or securities convertible or exchangeable into or exercisable for any shares of

Common Stock without the prior written consent of CS First Boston for a period

of 180 days from the date of this Prospectus.

 

     The Company and CVS have agreed to indemnify the Underwriters against

certain liabilities, including civil liabilities under the Securities Act, or

contribute to payments which the Underwriters may be required to make in respect

thereof.

 

  

     The Underwriters have reserved for sale, at the initial public offering

price up to 600,000 shares of Common Stock (5% of the shares offered in the

Offering) for employees, directors and certain other persons associated with the

Company who have expressed an interest in purchasing such shares of Common Stock

in the Offering. The number of shares available for sale to the general public

in the Offering will be reduced to the extent such persons purchase such

reserved shares. Any reserved shares not so purchased will be offered by the

Underwriters to the general public on the same terms as the other shares offered

hereby.

   

 

  

     Application has been made to list the shares of Common Stock on the New

York Stock Exchange, subject to official notice of issuance, under the symbol

"LIN". In order to meet the requirements for listing the Common Stock on the New

York Stock Exchange, the Underwriters will undertake to sell lots of 100 or more

shares to a minimum of 2,000 beneficial owners.

   

 

     Prior to the Offering, there has been no public market for the Common

Stock. The initial price to the public for the shares of Common Stock has been

negotiated among the Company, CVS and the Representatives. Such initial price is

based on, among other things in addition to prevailing market conditions, the

Company's financial and operating history and condition, its prospects and the

prospects for its industry in general, the management of the Company and the

market prices for securities of companies in businesses similar to that of the

Company.

 

     Certain of the Underwriters and their affiliates have provided from time to

time, and expect to provide in the future, various investment banking and

commercial banking services for CVS, for which such Underwriters have received

and will receive customary fees and commissions.

 

                          NOTICE TO CANADIAN RESIDENTS

 

RESALE RESTRICTIONS

 

     The distribution of the Common Stock in Canada is being made only on a

private placement basis exempt from the requirement that the Company prepare and

file a prospectus with the securities regulatory authorities in each province

where trades of Common Stock are effected. Accordingly, any resale of the Common

Stock in Canada must be made in accordance with applicable securities laws which

will vary depending on the relevant jurisdiction, and which may require resales

to be made in accordance with available statutory exemptions or pursuant to a

discretionary exemption granted by the applicable Canadian securities regulatory

authority. Purchasers are advised to seek legal advice prior to any resale of

the Common Stock.

 

REPRESENTATIONS OF PURCHASERS

 

     Each purchaser of Common Stock in Canada who receives a purchase

confirmation will be deemed to represent to the Company, the Selling Shareholder

and the dealer from whom such purchase confirmation is received that (i) such

purchaser is entitled under applicable provincial securities laws to purchase

such

 

                                       54

<PAGE>   56

 

Common Stock without the benefit of a prospectus qualified under such securities

laws, (ii) where required by law, that such purchaser is purchasing as principal

and not as agent and (iii) such purchaser has reviewed the text above under

"Resale Restrictions."

 

RIGHT OF ACTION AND ENFORCEMENT

 

     The securities being offered are those of a foreign issuer and Ontario

purchasers will not receive the contractual right of action prescribed by

Section 32 of the Regulation under the Securities Act (Ontario). As a result,

Ontario purchasers must rely on other remedies that may be available, including

common law rights of action for damages or rescission or rights of action under

the civil liability provisions of the U.S. federal securities laws.

 

     All of the Company's directors and officers as well as the experts named

herein may be located outside of Canada and, as a result, it may not be possible

for Ontario purchasers to effect service of process within Canada upon the

Company or such persons. All or a substantial portion of the assets of the

Company and such persons may be located outside of Canada and, as a result, it

may not be possible to satisfy a judgment against the Company or such persons in

Canada or to enforce a judgment obtained in Canadian courts against the Company

of such persons outside of Canada.

 

NOTICE TO BRITISH COLUMBIA RESIDENTS

 

     A purchaser of Common Stock to whom the Securities Act (British Columbia)

applies is advised that such purchaser is required to file with the British

Columbia Securities Commission a report within ten days of the sale of any

Common Stock acquired by such purchaser pursuant to the Offering. Such report

must be in the form attached to British Columbia Securities Commission Blanket

Order BOR #95/17, a copy of which may be obtained from the Company. Only one

such report must be filed in respect of Common Stock acquired on the same date

and under the same prospectus exemption.

 

                    CERTAIN U.S. FEDERAL TAX CONSIDERATIONS

                      FOR NON-U.S. HOLDERS OF COMMON STOCK

 

     The following is a general discussion of certain U.S. federal income and

estate tax consequences of the ownership and disposition of Common Stock by a

beneficial owner thereof that is a "Non-U.S. Holder." A "Non-U.S. Holder" is a

person or entity that, for U.S. federal income tax purposes, is a non-resident

alien individual, a foreign corporation, a foreign partnership, or a

non-resident fiduciary of a foreign estate or trust.

 

     This discussion is based on the Internal Revenue Code of 1986, as amended

(the "Code"), and administrative interpretations as of the date hereof, all of

which are subject to change, including changes with retroactive effect. This

discussion does not address all aspects of U.S. federal income and estate

taxation that may be relevant to Non-U.S. Holders in light of their particular

circumstances and does not address any tax consequences arising under the laws

of any state, local or foreign jurisdiction. Prospective holders should consult

their tax advisors with respect to the particular tax consequences to them of

owning and disposing of Common Stock, including the consequences under the laws

of any state, local or foreign jurisdiction.

 

  

     Proposed United States Treasury Regulations were issued in April 1996 (the

"Proposed Regulations") which, if adopted, would affect the United States

taxation of dividends paid to a Non-U.S. Holder on Common Stock. The Proposed

Regulations are generally proposed to be effective with respect to dividends

paid after December 31, 1997, subject to certain transition rules. The

discussion below is not intended to be a complete discussion of the provisions

of the Proposed Regulations, and prospective investors are urged to consult

their tax advisors with respect to the effect the Proposed Regulations would

have if adopted.

   

 

DIVIDENDS

 

     Subject to the discussion below, dividends, if any, paid to a Non-U.S.

Holder of Common Stock generally will be subject to withholding tax at a rate of

30% of the gross amount of the dividend or such lower rate as may be specified

by an applicable income tax treaty. For purposes of determining whether tax is

to be withheld at a 30% rate or at a reduced rate as specified by an income tax

treaty, in accordance with existing United States Treasury Regulations, the

Company ordinarily will presume that dividends paid to an address in a

 

                                       55

<PAGE>   57

 

foreign country are paid to a resident of such country absent knowledge that

such presumption is not warranted.

 

     Under the Proposed Regulations, to obtain a reduced rate of withholding

under a treaty, a Non-United States Holder would generally be required to

provide an Internal Revenue Service Form W-8 certifying such Non-United States

Holder's entitlement to benefits under a treaty. The Proposed Regulations would

also provide special rules to determine whether, for purposes of determining the

applicability of a tax treaty, dividends paid to a Non-United States Holder that

is an entity should be treated as paid to the entity or those holding an

interest in that entity.

 

     There will be no withholding tax on dividends paid to a Non-U.S. Holder

that are effectively connected with the Non-U.S. Holder's conduct of a trade or

business within the United States if a Form 4224 stating that the dividends are

so connected is filed with the Company or its Paying Agent. Instead, the

effectively connected dividends will be subject to regular U.S. income tax in

the same manner as if the Non-U.S. Holder were a U.S. resident. In addition to

the graduated tax described above, a non-U.S. corporation receiving effectively

connected dividends may be subject to a "branch profits tax" which is imposed,

under certain circumstances, at a rate of 30% (or such lower rate as may be

specified by an applicable treaty) of the non-U.S. corporation's effectively

connected earnings and profits, subject to certain adjustments.

 

     Generally, the Company must report to the U.S. Internal Revenue Service the

amount of dividends paid, the name and address of the recipient, and the amount,

if any, of tax withheld. A similar report is sent to the holder. Pursuant to tax

treaties or certain other agreements, the U.S. Internal Revenue Service may make

its reports available to tax authorities in the recipient's country of

residence.

 

     Dividends paid to a Non-U.S. Holder at an address within the United States

may be subject to backup withholding imposed at a rate of 31% if the Non-U.S.

Holder fails to establish that it is entitled to an exemption or to provide a

correct taxpayer identification number and certain other information to the

Company or its Paying Agent.

 

GAIN ON DISPOSITION OF COMMON STOCK

 

     A Non-U.S. Holder generally will not be subject to U.S. federal income tax

(and no tax will generally be withheld) with respect to gain realized on a sale

or other disposition of Common Stock unless (i) the gain is effectively

connected with a trade or business of such holder in the United States, (ii) in

the case of certain Non-U.S. Holders who are non-resident alien individuals and

hold the Common Stock as a capital asset, such individuals are present in the

United States for 183 or more days in the taxable year of the disposition, (iii)

the Non-U.S. Holder is subject to tax pursuant to the provisions of the Code

regarding the taxation of U.S. expatriates, or (iv) the Company is or has been a

"U.S. real property holding corporation" for federal income tax purposes and the

Non-U.S. Holder owned directly or pursuant to certain attribution rules more

than 5% of the Company's Common Stock (assuming the Common Stock is regularly

traded on an established securities market) at any time within the shorter of

the five-year period preceding such disposition or such holder's holding period.

The Company is not, and does not anticipate becoming, a U.S. real property

holding corporation.

 

INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING ON DISPOSITION OF

COMMON STOCK

 

     Under current United States federal income tax law, information reporting

and backup withholding imposed at a rate of 31% will apply to the proceeds of a

disposition of Common Stock paid to or through a U.S. office of a broker unless

the disposing holder certifies as to its non-U.S. status or otherwise

establishes an exemption. Generally, U.S. information reporting and backup

withholding will not apply to a payment of disposition proceeds if the payment

is made outside the United States through a non-U.S. office of a non-U.S.

broker. However, U.S. information reporting requirements (but not backup

withholding) will apply to a payment of disposition proceeds outside the United

States if the payment is made through an office outside the United States of a

broker that is (i) a U.S. person, (ii) a foreign person which derives 50% or

more of its gross income for certain periods from the conduct of a trade or

business in the United States or (iii) a "controlled foreign corporation" for

U.S. federal income tax purposes, unless the broker maintains documentary

evidence

 

                                       56

<PAGE>   58

 

that the holder is a Non-U.S. Holder and that certain conditions are met, or

that the holder otherwise is entitled to an exemption.

 

     The Proposed Regulations would, if adopted, alter the foregoing rules in

certain respects. Among other things, the Proposed Regulations would provide

certain presumptions under which a Non-United States Holder would be subject to

backup withholding and information reporting unless the Company receives

certification from the holder of non-U.S. status.

 

     Backup withholding is not an additional tax. Rather, the tax liability of

persons subject to backup withholding will be reduced by the amount of tax

withheld. If withholding results in an overpayment of taxes, a refund may be

obtained, provided that the required information is furnished to the U.S.

Internal Revenue Service.

 

FEDERAL ESTATE TAX

 

  

     An individual Non-U.S. Holder who at the time of death is treated as the

owner of, or has made certain lifetime transfers of, an interest in the Common

Stock will be required to include the value thereof in his gross estate for U.S.

federal estate tax purposes, and may be subject to U.S. federal estate tax

unless an applicable estate tax treaty provides otherwise.

   

 

                                 LEGAL MATTERS

 

     The validity of the shares of the Common Stock being offered hereby will be

passed upon for the Company and the Selling Shareholder by Davis Polk &

Wardwell. Certain legal matters relating to the Common Stock offered hereby will

be passed on for the Underwriters by Latham & Watkins, New York, New York.

 

                                    EXPERTS

 

     The consolidated financial statements of Linens 'n Things and its

subsidiaries as of December 31, 1994 and 1995 and for each of the years in the

three-year period ended December 31, 1995, included herein and elsewhere in this

Prospectus, have been included herein and in the registration statement in

reliance upon the reports of KPMG Peat Marwick LLP, independent certified public

accountants, appearing elsewhere herein, and upon the authority of said firm as

experts in accounting and auditing.

 

                             AVAILABLE INFORMATION

 

     The Company has filed with the Securities and Exchange Commission,

Washington, D.C. (the "Commission"), a Registration Statement under the

Securities Act, with respect to the Common Stock offered hereby. This Prospectus

does not contain all of the information set forth in the Registration Statement

and the exhibits and schedules thereto, as permitted by the Rules and

Regulations of the Commission. For further information with respect to the

Company and the Common Stock, reference is hereby made to such Registration

Statement and the exhibits and schedules filed therewith. Statements contained

in this Prospectus as to the contents of any contract or other document referred

to herein are not necessarily complete and where such contract or other document

is an exhibit to the Registration Statement, each such statement is qualified in

all respects by the provisions of such exhibit, to which reference is hereby

made for a full statement of the provisions thereof. The Registration Statement,

including the exhibits and schedules filed therewith, may be inspected without

charge at the public reference facilities maintained by the Commission at Room

1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the

Commission's regional offices located in New York (75 Park Place, 14th Floor,

New York, New York 10007) and Chicago (500 West Madison Street, Suite 1400,

Chicago, Illinois 60661). Copies of these documents may be obtained at

prescribed rates from the Public Reference Section of the Commission at Room

1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Such

material may be accessed electronically by means of the Commission's home page

on the Internet at http://www.sec.gov.

 

     The Company intends to furnish its shareholders annual reports containing

audited financial statements certified by its independent accountants and

quarterly reports for the first three quarters of each year containing unaudited

financial information.

 

                                       57

<PAGE>   59

 

                    LINENS 'N THINGS, INC. AND SUBSIDIARIES

                    (FORMERLY BLOOMINGTON, MN., L.T., INC.)

 

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

  

<TABLE>

<CAPTION>

                                                                                         PAGE

                                                                                       ------

<S>                                                                                    <C>

Independent Auditors' Report...........................................................    F-2

Consolidated Balance Sheets as of December 31, 1994, December 31, 1995, September 30,

  1995 and September 28, 1996..........................................................    F-3

Consolidated Statements of Operations for the fiscal years 1993, 1994 and 1995 and for

  the thirty-nine weeks ended September 30, 1995 and September 28, 1996................    F-4

Consolidated Statements of Shareholder's Equity for the fiscal years 1993, 1994 and

  1995 and for the thirty-nine weeks ended September 28, 1996..........................    F-5

Consolidated Statements of Cash Flows for the fiscal years 1993, 1994 and 1995 and for

  the thirty-nine weeks ended September 30, 1995 and September 28, 1996................    F-6

Notes to Consolidated Financial Statements.............................................    F-7

</TABLE>

   

 

                                       F-1

<PAGE>   60

 

  

WHEN THE TRANSACTION REFERRED TO IN PARAGRAPH 2 OF NOTE (11) OF THE NOTES TO

CONSOLIDATED FINANCIAL STATEMENTS HAS BEEN CONSUMMATED, WE WILL BE IN A POSITION

TO RENDER THE FOLLOWING REPORT:

   

 

                                                       /S/ KPMG PEAT MARWICK LLP

 

                          INDEPENDENT AUDITORS' REPORT

 

The Board of Directors and Shareholder

Linens 'n Things, Inc.

 

     We have audited the accompanying consolidated balance sheets of Linens 'n

Things, Inc. (formerly Bloomington, MN., L.T., Inc.) and Subsidiaries as of

December 31, 1994 and 1995 and the related consolidated statements of

operations, shareholder's equity and cash flows for each of the years in the

three-year period ended December 31, 1995. These consolidated financial

statements are the responsibility of the Company's management. Our

responsibility is to express an opinion on these consolidated financial

statements based on our audits.

 

     We conducted our audits in accordance with generally accepted auditing

standards. Those standards require that we plan and perform the audit to obtain

reasonable assurance about whether the financial statements are free of material

misstatement. An audit includes examining, on a test basis, evidence supporting

the amounts and disclosures in the financial statements. An audit also includes

assessing the accounting principles used and significant estimates made by

management, as well as evaluating the overall financial statement presentation.

We believe that our audits provide a reasonable basis for our opinion.

 

     In our opinion, the consolidated financial statements referred to above

present fairly, in all material respects, the financial position of Linens 'n

Things, Inc. and Subsidiaries as of December 31, 1994 and 1995, and the results

of their operations and their cash flows for each of the years in the three-year

period ended December 31, 1995 in conformity with generally accepted accounting

principles.

 

     As discussed in the notes to the consolidated financial statements, the

Company has adopted Statement of Financial Accounting Standards No. 121,

"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to

be Disposed Of," effective October 1, 1995 and changed its policy for accounting

for the costs of internally developed software effective January 1, 1995.

 

New York, New York

  

February 21, 1996, except as to paragraph 1 of note 11,

   

  

which is as of June 19, 1996

   

 

                                       F-2

<PAGE>   61

 

                    LINENS 'N THINGS, INC. AND SUBSIDIARIES

                    (FORMERLY BLOOMINGTON, MN., L.T., INC.)

 

                          CONSOLIDATED BALANCE SHEETS

                                 (IN THOUSANDS)

 

  

<TABLE>

<CAPTION>

                                                 DECEMBER 31,

                                             ---------------------     SEPTEMBER 30,     SEPTEMBER 28,

                                               1994         1995           1995              1996

                                             --------     --------     -------------     -------------

                                                                                 (UNAUDITED)

<S>                                          <C>          <C>          <C>               <C>

ASSETS

Current Assets:

  Cash...................................    $  4,106     $  4,222       $   1,835         $   2,899

  Accounts receivable (note 3)...........      12,022       13,955           8,420            13,991

  Inventories............................     130,560      176,893         176,756           206,764

  Prepaid expenses and other current

     assets (note 4).....................       5,753       11,076           8,292            10,119

                                             --------     --------        --------          --------

     Total current assets................     152,441      206,146         195,303           233,773