-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GSai9JkTsh65YkPQQRP3gu4kRAFh5HFZBvi2Rc2opITk3ksndFnSscYDr8Iwqd+m bs7x7CYw75MsusvmeyrTPw== 0000950123-96-005902.txt : 19961027 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 S-1/A 1 LINENS 'N THINGS, INC. 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) DELAWARE 5700 22-3463939 (State of Incorporation) (Primary Standard Industrial (I.R.S. Employer Classification Code Number) Identification No.)
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: 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
------------------------------------ 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 - -------------------------------------------------------------------------------- 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
- -------------------------------------------------------------------------------- (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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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. Underwriting Proceeds to Price to Discounts and Selling Public Commissions Shareholder(1) ------------------------------------------------ Per Share................................... $ $ $ Total(2).................................... $ $ $
(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. 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. 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 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 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 7 SUMMARY FINANCIAL AND OPERATING DATA
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) 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)
SEPTEMBER 28, 1996 ------------------------------ ACTUAL PRO FORMA(9) ------------- ------------- (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
6 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 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 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 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 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 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 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."
SEPTEMBER 28, 1996 (UNAUDITED) ------------------------- ACTUAL PRO FORMA(1) -------- ------------ (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 ======== ========
- --------------- (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 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."
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) 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
14 16
THIRTY-NINE WEEKS ENDED(1) YEAR ENDED DECEMBER 31, ----------------------------- ------------------------------------------------------ SEPTEMBER 30, SEPTEMBER 28, 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- ------------- ------------- 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)
DECEMBER 31, SEPTEMBER 28, 1996 -------------------------------------------------------- ------------------------------ 1991 1992 1993 1994 1995 ACTUAL PRO FORMA(9) -------- -------- -------- -------- -------- ------------- ------------- (DOLLARS IN THOUSANDS) 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
- --------------- (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 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 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 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:
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) ----------------------------------------------------- ------------------------------ 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)% ===== ===== ===== ===== ===== ===== ====== =====
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 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 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 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 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 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 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."
FIRST SECOND THIRD FOURTH 1994 QUARTER QUARTER QUARTER QUARTER YEAR - ---------------------------------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) 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
FIRST SECOND THIRD FOURTH 1995 QUARTER QUARTER QUARTER QUARTER YEAR - ---------------------------------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) 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
FIRST SECOND THIRD 1996 QUARTER QUARTER QUARTER - ---------------------------------- -------- -------- -------- (DOLLARS IN THOUSANDS) 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
- --------------- (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 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 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 28 The following table sets forth information concerning the Company's expansion program during the most recent five years:
SQUARE FOOTAGE STORE COUNT ----------------------- ----------------------- YEAR OPENINGS CLOSINGS BEGIN YEAR END YEAR BEGIN YEAR END YEAR - ------- -------- -------- ---------- -------- ---------- -------- 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
- --------------- (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 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 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 31 Merchandise and sample brands offered in each major department are highlighted below:
DEPARTMENT ITEMS SOLD SAMPLE BRANDS - --------------------- ------------------------------------ ------------------------------ 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.
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 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 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 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 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 36 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth information regarding the executive officers and directors of the Company.
NAME AGE POSITION - ------------------------------ ---- ---------------------------------------------------- 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
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 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.
NAME AGE POSITION - ------------------------------ --- ---------------------------------------------------- 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
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 $750 fee for each meeting of the Company Board or any committee that they attend. Non-employee directors will also participate in the 1996 Non-Employee Director Stock Plan. See "--1996 Non-Employee Director Stock Plan." 36 38 EXECUTIVE COMPENSATION The following tables set forth the compensation paid or accrued by the Company during 1995 to its executive officers. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ---------------------------- AWARDS ---------------------------- ANNUAL RESTRICTED ALL COMPENSATION STOCK SECURITIES OTHER ---------------- AWARD(S) UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION SALARY BONUS ($)(1) OPTIONS (#)(2) ($)(3) - -------------------------------------- ------- ----- ---------- -------------- ------------ 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
- --------------- (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 $3,000) contributed under the CVS Employee Stock Ownership Plan for each of these named executives. 37 39 OPTION GRANTS IN 1995
INDIVIDUAL GRANTS(1) ------------------------------------------------------------------------------------ NUMBER OF SECURITIES % OF TOTAL UNDERLYING OPTIONS OPTIONS GRANTED TO EXERCISE GRANT DATE GRANTED EMPLOYEES OR BASE PRICE PRESENT VALUE NAME # IN FISCAL YEAR ($/SH) EXPIRATION DATE $(2) - ------------------------ --------- -------------- ------------- --------------- ------------- 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
- --------------- (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 ($36.250 in the case of Mr. Scullin); (4) the option term is 10 years; (5) the volatility of the stock is 19.27%, based on an analysis of weekly closing stock prices and dividends paid during the three-year period prior to the grant of the options; and (6) the assumed risk-free rate of interest is 7.32%, equivalent to a 10 year treasury yield at the time of grant of the options. No other discounts or any other restrictions related to vesting or the likelihood of vesting were applied. AGGREGATED OPTION EXERCISES IN 1995 AND 1995 YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING IN-THE-MONEY UNEXERCISED OPTIONS AT OPTIONS AT FY-END FY-END (#) ($) VALUED ---------------------- -------------------- SHARES ACQUIRED REALIZED EXERCISABLE/ EXERCISABLE/ NAME ON EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE - --------------------------- --------------- -------------- ---------------------- -------------------- 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
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 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 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 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 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 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 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 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 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:
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 - ----------------------------------------------- ---------- ------- --------- ------- 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).................................... -- -- -- --
- --------------- (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 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 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 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 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 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 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 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:
NUMBER OF UNDERWRITER SHARES ------------------------------------------------------- ---------- CS First Boston Corporation............................ Donaldson, Lufkin & Jenrette Securities Corporation.... ---------- Total........................................ 12,000,000 =========
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 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 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 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 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 59 LINENS 'N THINGS, INC. AND SUBSIDIARIES (FORMERLY BLOOMINGTON, MN., L.T., INC.) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ------ 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
F-1 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 61 LINENS 'N THINGS, INC. AND SUBSIDIARIES (FORMERLY BLOOMINGTON, MN., L.T., INC.) CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, --------------------- SEPTEMBER 30, SEPTEMBER 28, 1994 1995 1995 1996 -------- -------- ------------- ------------- (UNAUDITED) 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 -------- -------- -------- -------- Property and equipment, net (note 5)... 86,721 107,542 110,866 137,262 Goodwill, net of accumulated amortization of $3,115 at December 31, 1994, $3,965 at December 31, 1995, $3,750 at September 30, 1995 and $4,603 at September 28, 1996.... 24,075 23,225 23,438 22,588 Deferred charges and other noncurrent assets, net......................... 9,930 6,609 9,352 6,178 -------- -------- -------- -------- Total Assets........................... $273,167 $343,522 $ 338,959 $ 399,801 ======== ======== ======== ======== LIABILITIES AND SHAREHOLDER'S EQUITY Current Liabilities: Accounts payable....................... $ 73,209 $ 96,496 $ 87,252 $ 80,774 Accrued expenses and other current liabilities (note 6)................ 36,917 41,318 31,277 34,896 Due to parent and other divisions (note 9).................................. 67,452 118,652 125,733 61,498 -------- -------- -------- -------- Total current liabilities........... 177,578 256,466 244,262 177,168 -------- -------- -------- -------- Deferred income taxes and other long-term liabilities............... 9,770 10,378 10,095 13,176 -------- -------- -------- -------- Total liabilities................... 187,348 266,844 254,357 190,344 -------- -------- -------- -------- Shareholder's equity: Common stock, $.01 par value; 100 shares authorized, issued and outstanding (note 11)............... -- -- -- -- Contributed capital (note 11).......... 42,372 42,372 42,372 172,382 Retained earnings...................... 43,447 34,306 42,230 37,075 -------- -------- -------- -------- Total shareholder's equity.......... 85,819 76,678 84,602 209,457 -------- -------- -------- -------- Total liabilities and shareholder's equity............................ $273,167 $343,522 $ 338,959 $ 399,801 ======== ======== ======== ========
See accompanying notes to consolidated financial statements. F-3 62 LINENS 'N THINGS, INC. AND SUBSIDIARIES (FORMERLY BLOOMINGTON, MN., L.T., INC.) CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THIRTY-NINE WEEKS ENDED YEAR ENDED DECEMBER 31, ------------------------------ -------------------------------- SEPTEMBER 30, SEPTEMBER 28, 1993 1994 1995 1995 1996 -------- -------- -------- ------------- ------------- (UNAUDITED) Net sales.......................... $333,178 $440,118 $555,095 $ 377,638 $ 466,254 Cost of sales, including buying and warehousing costs................ 199,307 265,721 345,162 232,289 290,345 -------- -------- -------- -------- -------- Gross profit..................... 133,871 174,397 209,933 145,349 175,909 Selling, general and administrative expenses......................... 112,135 142,155 190,826 131,360 166,615 Restructuring and asset impairment charges (note 2)................. -- -- 10,974 -- -- -------- -------- -------- -------- -------- Operating profit................. 21,736 32,242 8,133 13,989 9,294 Interest expense, net.............. 1,398 3,170 7,059 5,137 4,464 -------- -------- -------- -------- -------- Income before income taxes and cumulative effect of change in accounting principle.......... 20,338 29,072 1,074 8,852 4,830 Provision for income taxes (note 8)............................... 8,619 11,874 1,108 3,749 2,061 -------- -------- -------- -------- -------- Income (loss) before cumulative effect of change in accounting principle..................... 11,719 17,198 (34) 5,103 2,769 Cumulative effect of change in accounting principle, net (note 1)............................... -- -- 178 178 -- -------- -------- -------- -------- -------- Net income (loss).................. $ 11,719 $ 17,198 $ (212) $ 4,925 $ 2,769 ======== ======== ======== ======== ======== Pro Forma (unaudited): Net income (loss) per share...... Average shares outstanding.......
See accompanying notes to consolidated financial statements. F-4 63 LINENS 'N THINGS, INC. AND SUBSIDIARIES (FORMERLY BLOOMINGTON, MN., L.T., INC.) CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (IN THOUSANDS EXCEPT NUMBER OF SHARES)
COMMON STOCK ------------------ CONTRIBUTED RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL ------ -------- ----------- ------- -------- Balance at December 31, 1992 (note 11).... 100 $ -- $ 42,372 $22,798 $ 65,170 Net income.............................. -- -- -- 11,719 11,719 Dividends paid to Parent................ -- -- -- (2,549) (2,549) ------ -------- ----------- ------- -------- Balance at December 31, 1993.............. 100 -- 42,372 31,968 74,340 Net income.............................. -- -- -- 17,198 17,198 Dividends paid to Parent................ -- -- -- (5,719) (5,719) ------ -------- ----------- ------- -------- Balance at December 31, 1994.............. 100 -- 42,372 43,447 85,819 Net loss................................ -- -- -- (212) (212) Dividends paid to Parent................ -- -- -- (8,929) (8,929) ------ -------- ----------- ------- -------- Balance at December 31, 1995.............. 100 -- 42,372 34,306 76,678 Net income (unaudited).................. -- -- -- 2,769 2,769 Common Stock issued by Linens 'n Things Center, Inc. (unaudited) (note 11)... -- -- 130,010 -- 130,010 ------ -------- ----------- ------- -------- Balance at September 28, 1996 (unaudited)............................. 100 $ -- $ 172,382 $37,075 $209,457 ===== ======== ======== ======= ========
See accompanying notes to consolidated financial statements. F-5 64 LINENS 'N THINGS, INC. AND SUBSIDIARIES (FORMERLY BLOOMINGTON, MN., L.T., INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THIRTY-NINE WEEKS ENDED YEAR ENDED DECEMBER 31, ----------------------------- ------------------------------ SEPTEMBER 30, SEPTEMBER 28, 1993 1994 1995 1995 1996 -------- -------- -------- ------------- ------------- (UNAUDITED) Cash flows from operating activities: Net income (loss)..................... $ 11,719 $ 17,198 $ (212) $ 4,925 $ 2,769 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization...... 7,356 9,588 12,862 9,560 10,760 Restructuring and asset impairment charges.......................... -- -- 10,974 -- -- Cumulative effect of change in accounting principle............. -- -- 294 -- -- Deferred income taxes.............. 2,735 3,580 (3,296) 55 2,595 Loss on disposal of assets......... 1,145 2,928 3,817 1,945 602 Changes in assets and liabilities: Accounts receivable.............. (1,692) (6,122) (1,933) 3,602 (36) Inventories...................... (17,847) (42,171) (46,333) (46,196) (29,871) Prepaid expenses and other current assets................ 28 421 (1,928) (2,594) 1,032 Deferred charges and other noncurrent assets............. (1,675) (318) 567 (213) (100) Accounts payable................. 12,680 24,946 17,246 23,528 295 Accrued expenses and other liabilities................... 2,919 5,625 (4,135) (10,972) (5,663) -------- -------- -------- ------------- ------------- Net cash provided by (used in) operating activities............................ 17,368 15,675 (12,077) (16,360) (17,617) -------- -------- -------- ------------- ------------- Cash flows from investing activities: Additions to property and equipment..... (30,636) (39,074) (41,329) (34,222) (39,915) Cash flows from financing activities: Increase (decrease) in due to parent and other divisions................ 13,440 22,832 51,200 58,281 (57,154) Issuance of Common Stock by Linens 'n Things Center, Inc................. -- -- -- -- 130,010 Dividends paid to parent.............. (2,549) (5,719) (8,929) (6,142) -- Increase (decrease) in book overdrafts......................... 1,716 8,169 11,251 (3,828) (16,647) -------- -------- -------- ------------- ------------- Net cash provided by financing activities......................... 12,607 25,282 53,522 48,311 56,209 -------- -------- -------- ------------- ------------- Net (decrease) increase in cash....... (661) 1,883 116 (2,271) (1,323) Cash: Beginning of period................... 2,884 2,223 4,106 $ 4,106 $ 4,222 -------- -------- -------- ------------- ------------- End of period......................... $ 2,223 $ 4,106 $ 4,222 $ 1,835 $ 2,899 ======== ======== ======== ========== ========== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest (net of amounts capitalized)....................... $ 1,536 $ 3,360 $ 7,339 $ 5,371 $ 4,702 ======== ======== ======== ========== ========== Income taxes.......................... $ 1,464 $ 9,014 $ 7,214 $ 4,848 $ 1,029 ======== ======== ======== ========== ==========
See accompanying notes to consolidated financial statements. F-6 65 LINENS 'N THINGS, INC. AND SUBSIDIARIES (FORMERLY BLOOMINGTON, MN., L.T., INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) BASIS OF PRESENTATION (SEE NOTE 11) The consolidated financial statements include those of Linens 'n Things, Inc. (formerly Bloomington, MN., L.T., Inc.) and Subsidiaries (collectively, the "Company"), a wholly owned, indirect subsidiary of CVS Corporation ("CVS" or the "Parent"), formerly Melville Corporation. All intercompany balances and transactions have been eliminated. The Parent allocates certain costs to its subsidiaries, including the Company. A summary of the amounts allocated to the Company for the years ended December 31, are as follows:
(IN THOUSANDS) ---------------------------- 1993 1994 1995 ------ ------ ------ Cost of Employee Stock Ownership Plan.......................... $ 697 $ 719 $1,016 Administrative costs........................................... 2,700 3,336 3,021 ------ ------ ------ Total........................................................ $3,397 $4,055 $4,037 ====== ====== ======
Allocations to the Company by CVS are based on the Company's share of costs paid by the Parent on its behalf for consolidated programs. Such allocations may not be reflective of the costs which would be incurred if the Company operated on a stand-alone basis or which will be incurred in the future. Management believes that the basis for allocations was reasonable. If the Company had operated on a stand alone basis for the years ended December 31, 1993, 1994 and 1995, it would have incurred a net increase in expense of an estimated $755,000 pre-tax, in each such years. (B) BUSINESS The Company operated 145 and 155 stores selling brand name domestics, accessories and selected home furnishings as of December 31, 1994 and 1995, respectively, all of which were located in the United States. (C) ACCOUNTING CHANGES Effective October 1, 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). Effective January 1, 1995, the Company changed its policy from capitalizing internally developed software costs to expensing them as incurred. The Company believes that this change results in a better matching of revenues and expenses. The impact on 1995 as a result of this change exclusive of the cumulative effect of $0.3 million (before income tax effect) was to reduce net income by $0.2 million. Effective January 1, 1993, the Company adopted SFAS No. 109 "Accounting for Income Taxes," the cumulative effect of which was immaterial to the consolidated financial statements and therefore is not presented separately. (D) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. F-7 66 LINENS 'N THINGS, INC. AND SUBSIDIARIES (FORMERLY BLOOMINGTON, MN., L.T., INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) (E) CASH The Company's cash management program utilizes zero balance accounts. Accordingly, all book overdraft balances have been reclassified to current liabilities. (F) INVENTORIES Inventories consist of finished goods merchandise purchased from domestic and foreign vendors and are carried at the lower of cost or market. Inventories are determined on the retail inventory method valued on a first-in, first-out (FIFO) basis. (G) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization of property and equipment is computed on a straight-line basis, generally over the estimated useful lives of the assets or, when applicable, the life of the lease, whichever is shorter. Capitalized software costs are amortized on a straight-line basis over their estimated useful lives, beginning in the year placed in service. Fully depreciated property and equipment is removed from the cost and related accumulated depreciation accounts. Maintenance and repairs are charged directly to expense as incurred. Major renewals or replacements are capitalized after making the necessary adjustment to the asset and accumulated depreciation accounts of the items renewed or replaced. (H) IMPAIRMENT OF LONG-LIVED ASSETS When changes in circumstance warrant measurement, impairment losses for store fixed assets are calculated by comparing the present value of projected individual store cash flows over the lease term to the asset carrying values. (I) DEFERRED CHARGES Deferred charges, principally beneficial leasehold costs, are amortized on a straight-line basis, generally over the remaining life of the leasehold acquired. (J) GOODWILL The excess of acquisition costs over the fair value of net assets acquired is amortized on a straight-line basis not to exceed 40 years. Impairment is assessed based on the profitability of the related business relative to planned levels. (K) STORE OPENING AND CLOSING COSTS New store opening costs are charged to expense as incurred. In the event a store is closed before its lease has expired, the total lease obligation, less sublease rental income, is provided for in the year of closing. (L) ADVERTISING COSTS The Company charges production costs of advertising to expense the first time the advertising takes place. Advertising costs for the years ended December 31, 1993, 1994 and 1995 were $10.7 million, $12.2 million and $16.9 million, respectively. F-8 67 LINENS 'N THINGS, INC. AND SUBSIDIARIES (FORMERLY BLOOMINGTON, MN., L.T., INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) (M) INCOME TAXES The Parent and its subsidiaries, including the Company, file a consolidated Federal income tax return and, where applicable, group state and local returns. The provision for Federal income taxes recorded by the Company represents the amount calculated on a separate return basis in accordance with a tax sharing agreement with the Parent. State income taxes represent actual amounts paid or payable by the Company. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (N) INTERIM FINANCIAL STATEMENTS The accompanying consolidated balance sheets as of September 30, 1995 and September 28, 1996 and the related consolidated statements of operations and cash flows for the thirty-nine weeks ended September 30, 1995 and September 28, 1996 and consolidated statement of shareholder's equity for the thirty-nine weeks ended September 28, 1996 are unaudited. The unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, include all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation for the period presented. The results of operations for the thirty-nine weeks ended September 30, 1995 and September 28, 1996 are not necessarily indicative of results to be achieved for the full fiscal years. (2) STRATEGIC PROGRAM AND ASSET IMPAIRMENT CHARGES On October 24, 1995, CVS announced a comprehensive strategic program. In connection with the initiation of the plan, the Company recorded a pre-tax charge of $11.0 million. Asset write-offs included in the charge totaled $7.1 million, while the balance will require cash outlays, primarily in 1996. In connection with the various components of the plan, six stores will be closed and approximately 45 store employees will be terminated. The components of the restructuring and asset impairment charges as of December 31, 1995 and the amounts remaining were as follows (in thousands):
RECORDED REMAINING -------- --------- Lease obligations and fixed asset and lease acquisition cost write-offs for store closings....................................... $ 8,809 $ 3,800 Asset write-offs relating to MIS outsourcing.......................... 690 -- Severance and other employee benefit vesting.......................... 35 35 -------- --------- 9,534 3,835 Asset impairment charge in connection with the adoption of SFAS No. 121................................................................. 1,440 -- -------- --------- $ 10,974 $ 3,835 ======== ========
F-9 68 LINENS 'N THINGS, INC. AND SUBSIDIARIES (FORMERLY BLOOMINGTON, MN., L.T., INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (2) STRATEGIC PROGRAM AND ASSET IMPAIRMENT CHARGES--(CONTINUED) The SFAS No. 121 charge related entirely to assets to be held or used as defined in SFAS No. 121. These assets consisted of store fixtures and leasehold improvements. The charge resulted from the Company grouping assets at a lower level than under its previous accounting policy regarding asset impairment. Factors leading to impairment were a combination of historical losses, anticipated future losses and inadequate cashflows. The net sales and operating losses in 1995 of the stores to be closed were approximately $14.3 million and $1.5 million, respectively. Through December 31, 1995, no stores have been closed and no associates have been terminated in connection with the restructuring plan. (3) ACCOUNTS RECEIVABLE Accounts receivable consisted of the following (in thousands):
DECEMBER 31, ------------------- 1994 1995 ------- ------- Credit and charge card receivables..................................... $ 3,547 $ 5,353 Due from vendors....................................................... 1,098 3,835 Due from landlords..................................................... 7,107 4,069 Other, net of allowance................................................ 270 698 ------- ------- Total................................................................ $12,022 $13,955 ======= =======
(4) PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets consisted of the following (in thousands):
DECEMBER 31, ------------------- 1994 1995 ------- ------- Deferred income taxes.................................................. $ 4,928 $ 8,323 Other.................................................................. 825 2,753 ------- ------- Total.................................................................. $ 5,753 $11,076 ======= =======
F-10 69 LINENS 'N THINGS, INC. AND SUBSIDIARIES (FORMERLY BLOOMINGTON, MN., L.T., INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (5) PROPERTY AND EQUIPMENT Property and equipment consisted of the following (in thousands):
DECEMBER 31 -------------------- 1994 1995 ------- -------- Land.................................................................. $ 430 $ 430 Building.............................................................. 4,760 4,760 Store equipment....................................................... 62,779 79,402 Furniture and fixtures................................................ 7,074 10,390 Leasehold improvements................................................ 28,027 35,034 Computer software..................................................... 4,193 4,404 ------- -------- 107,263 134,420 Less accumulated depreciation and amortization........................ 20,542 26,878 ------- -------- Total............................................................ $86,721 $107,542 ======= ========
(6) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consisted of the following (in thousands):
DECEMBER 31, -------------------- 1994 1995 ------- -------- Federal income taxes payable.......................................... $ 3,275 $ 713 Taxes other than Federal income taxes................................. 8,475 7,810 Rent.................................................................. 2,950 6,082 Salaries and compensated absences..................................... 3,042 3,014 Restructuring reserves................................................ 2,387 3,835 Other................................................................. 16,788 19,864 ------- ------- Total............................................................ $36,917 $41,318 ======= =======
(7) LEASES The Company has noncancelable operating leases, primarily for retail stores, which expire through 2015. The leases generally contain renewal options for periods ranging from five to fifteen years and require the Company to pay costs such as real estate taxes and common area maintenance. Contingent rentals are paid based on a percentage of sales. Net rental expense for all operating leases for the years ended December 31, 1993, 1994 and 1995 was as follows (in thousands):
DECEMBER 31, DECEMBER 31, DECEMBER 31, 1993 1994 1995 ------------ ------------ ------------ Minimum rentals..................................... $ 20,642 $ 28,065 $ 38,788 Contingent rentals.................................. 710 492 201 ---------- ---------- ---------- 21,352 28,557 38,989 Less sublease rentals............................... 41 45 151 ---------- ---------- ---------- Total............................................. $ 21,311 $ 28,512 $ 38,838 ========== ========== ==========
F-11 70 LINENS 'N THINGS, INC. AND SUBSIDIARIES (FORMERLY BLOOMINGTON, MN., L.T., INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (7) LEASES--(CONTINUED) At December 31, 1995, the future minimum rental payments required under operating leases and the future minimum sublease rentals excluding lease obligations for closed stores were as follows (in thousands):
OPERATING YEAR LEASES -------------------------------------------------------- -------- 1996.................................................... $ 55,095 1997.................................................... 54,095 1998.................................................... 53,099 1999.................................................... 54,981 2000.................................................... 53,363 Thereafter.............................................. 492,227 -------- Total................................................... $762,860 ======== Total future minimum sublease rentals................... $ 440 ========
(8) INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities at December 31 were as follows (in thousands):
DECEMBER 31, DECEMBER 31, 1994 1995 ------------ ------------ Deferred tax assets: Employee benefits.............................................. $ 1,222 $ 1,030 Inventories.................................................... 3,941 5,156 Other.......................................................... 161 872 -------- ------- Total deferred tax assets................................... 5,324 7,058 Deferred tax liabilities: Property and equipment......................................... 8,312 6,750 -------- ------- Net deferred tax (liabilities) assets....................... $ (2,988) $ 308 ======== =======
Based on the Company's historical and current pretax earnings, management believes it is more likely than not that the Company will realize the net deferred tax assets. F-12 71 LINENS 'N THINGS, INC. AND SUBSIDIARIES (FORMERLY BLOOMINGTON, MN., L.T., INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (8) INCOME TAXES--(CONTINUED) The provision for income taxes comprised the following (in thousands):
YEAR ENDED ---------------------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, 1993 1994 1995 ------------ ------------ ------------ Current: Federal........................................... $ 3,424 $ 6,161 $ 2,565 State............................................. 1,345 1,272 914 -------- -------- -------- 4,769 7,433 3,479 -------- -------- -------- Deferred: Federal........................................... 3,217 3,580 (2,143) State............................................. 633 861 (228) -------- -------- -------- 3,850 4,441 (2,371) -------- -------- -------- Total.......................................... $ 8,619 $ 11,874 $ 1,108 ======== ======== ========
The following is a reconciliation between the statutory Federal income tax rate and the effective rate for the years ended December 31, 1993, 1994 and 1995:
DECEMBER 31, DECEMBER 31, DECEMBER 31, 1993 1994 1995 ------------ ------------ ------------ Effective tax rate.................................. 42.4% 40.8% 103.2% State income taxes, net of Federal benefit.......... (6.3) (4.8) (41.5) Goodwill............................................ (1.5) (1.0) (27.8) Meals and entertainment............................. (0.1) (0.2) (5.1) Targeted job tax credit............................. 0.1 0.2 5.5 Other............................................... 0.4 -- 0.7 ----- ----- ------ Statutory Federal income tax rate................. 35.0% 35.0% 35.0% ===== ===== ======
(9) RELATED PARTY TRANSACTIONS 401(K) PROFIT SHARING PLAN The Parent has a qualified 401(k) Profit Sharing Plan available to full-time employees who meet the plan's eligibility requirements. This plan, which is a defined contribution plan, contains a profit sharing component with tax-deferred contributions to each employee based on certain performance criteria, and also permits employees to make contributions up to the maximum limits allowed by Internal Revenue Code Section 401(k). Under the 401(k) component, the Parent matches a portion of the employee's contribution under a predetermined formula based on the level of contribution and years of vesting. The Parent charges to its subsidiaries the portion of the expense related to these contributions based on the proportionate share of qualifying compensation at the Company to the total of all compensation for all plan participants. Contributions to the plan by the Company, for both profit sharing and matching of employee contributions, were approximately $0.6 million, $0.4 million and $0.6 million for the years ended December 31, 1993, 1994 and 1995, respectively. F-13 72 LINENS 'N THINGS, INC. AND SUBSIDIARIES (FORMERLY BLOOMINGTON, MN., L.T., INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (9) RELATED PARTY TRANSACTIONS--(CONTINUED) EMPLOYEE STOCK OWNERSHIP PLAN The Company's employees participate in the Parent's Employee Stock Ownership Plan ("ESOP"). The ESOP is a defined contribution plan for all employees meeting certain eligibility requirements. During 1989, the ESOP trust (the "Trust") borrowed $357.5 million at an interest rate of 8.6% through a 20-year loan guaranteed by the Parent. The Trust used the proceeds of the loan to purchase a new issue of convertible preference stock from the Parent. The Parent charges compensation expense to the Company based upon total payments due to the ESOP. The charge allocated to the Company is based on the Company's proportionate share of qualifying compensation expense and does not reflect the manner in which the Parent funds these costs or the related tax benefits realized by the Parent. As a result of the Company's allocation from the Parent, compensation expense of approximately $.7 million, $.7 million and $1.0 million was recognized for the years ended December 31, 1993, 1994 and 1995, respectively. ADMINISTRATIVE COSTS The Parent allocates real estate service costs and various other administrative expenses to the Company. Allocations are based on the Company's ratable share of expense incurred by the Parent 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 were approximately $2.7 million, $3.3 million and $3.0 million, respectively. In addition, Melville Realty Company, Inc., a subsidiary of the Parent, guarantees 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. BORROWINGS The weighted average interest rate on borrowings from the Parent and other divisions for the years ended December 31, 1993, 1994 and 1995, respectively, was 3.4%, 4.9% and 6.5%. The related interest expense recognized by the Company on such borrowings was $1.4 million, $3.2 million and $7.1 million, respectively. (10) COMMITMENTS AND CONTINGENCIES The Company had outstanding letters of credit amounting to approximately $2.7 million at December 31, 1995 which were used to guarantee certain foreign purchase contracts. The Company is not obligated under any formal or informal compensating balance requirements. The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. (11) SUBSEQUENT EVENTS During the thirty-nine weeks ended September 28, 1996, CVS acquired 100 shares of common stock of Linens 'n Things Center, Inc. ("LNT Center"), a newly formed California corporation, for $130,010,000. On June 19, 1996, CVS contributed all outstanding shares of common stock of Bloomington, MN., L.T., Inc. to LNT Center. F-14 73 LINENS 'N THINGS, INC. AND SUBSIDIARIES (FORMERLY BLOOMINGTON, MN., L.T., INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (11) SUBSEQUENT EVENTS--(CONTINUED) Prior to the Offering, CVS will merge LNT Center into a newly formed wholly owned Delaware corporation, Linens 'n Things, Inc. The accompanying consolidated financial statements are presented as if Linens 'n Things, Inc. had existed and owned LNT Center and Bloomington, MN., L.T., Inc. throughout 1993, 1994, and 1995. (12) CHANGE IN CAPITAL STRUCTURE (UNAUDITED) Immediately prior to the consummation of the Offering, the capital structure of the Company 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 million 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 195,955 shares of Common Stock. F-15 74 - ------------------------------------------------------ NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE. ------------------ TABLE OF CONTENTS
PAGE ------ Prospectus Summary..................... 3 Risk Factors........................... 8 Use of Proceeds........................ 12 Dividend Policy........................ 12 Capitalization......................... 13 Selected Financial and Operating Data................................. 14 Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 16 Business............................... 25 Management............................. 35 Principal and Selling Shareholder...... 46 Relationship with CVS.................. 46 Shares Eligible for Future Sale........ 50 Description of Capital Stock........... 52 Underwriting........................... 53 Notice to Canadian Residents........... 54 Certain U.S. Federal Tax Considerations for Non-U.S. Holders of Common Stock................................ 55 Legal Matters.......................... 57 Experts................................ 57 Available Information.................. 57 Index to Consolidated Financial Statements........................... F-1
UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED CS FIRST BOSTON SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------ ------------------------------------------------------ [LOGO] 12,000,000 Shares Common Stock ($.01 par value) P R O S P E C T U S CS First Boston Donaldson, Lufkin & Jenrette Securities Corporation ------------------------------------------------------ 75 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. SEC Registration Fee............................................. $ 94,828 NASD Filing Fee.................................................. 28,000 Transfer Agent's Fees............................................ 2,000 Printing and Engraving........................................... 110,000 Legal Fees....................................................... 500,000 Accounting Fees.................................................. 170,000 Blue Sky Fees.................................................... 15,000 NYSE Filing Fee.................................................. 116,100 Miscellaneous.................................................... 4,072 ---------- Total....................................................... $1,040,000 =========
Each of the amounts set forth above, other than the SEC Registration Fee and the NASD Filing Fee, is an estimate. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Act permits the Registrant to indemnify officers, directors or employees against expenses (including attorney's fees), judgments, fines and amounts paid in settlement in connection with legal proceedings "if [as to any officer, director or employee] he acted in good faith and in a manner he reasonably believed to be in, or not opposed to the best interests of the corporation, and, with respect to any criminal act or proceeding, had no reasonable cause to believe his conduct was unlawful," provided that with respect to actions by, or in the right of the corporation against, such individuals, indemnification is not permitted as to any matter as to which such person "shall have been adjudged to be liable to the corporation, unless, and only to the extent that, the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability, but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper." Individuals who are successful in the defense of such action are entitled to indemnity for such expenses reasonably incurred in connection therewith. The By-Laws of the Registrant require the Registrant to indemnify directors and officers against liabilities which they may incur under the circumstances set forth in the preceding paragraph. The Registrant maintains standard policies of insurance under which coverage is provided (a) to its directors and officers against loss rising from claims made by reason of breach of duty or other wrongful act, and (b) to the Registrant with respect to payments which may be made by the Registrant to such officers and directors pursuant to the above indemnification provision or otherwise as a matter of law. The proposed forms of Underwriting Agreement filed as Exhibit 1 to this Registration Statement provide for indemnification of directors and officers of the Registrant by the underwriters against certain liabilities. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Except for the issuance of common stock to CVS, the Company has not issued any securities in unregistered transactions. The issuance of such securities is exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof. II-1 76 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) The following exhibits are filed as part of this Amendment to the Registration Statement:
EXHIBIT NUMBER DESCRIPTION ------- ----------------------------------------------------------------------------- **1 Form of Underwriting Agreement *3.1 Certificate of Incorporation of the Registrant 3.2 Amended and Restated Certificate of Incorporation 3.3 By-Laws of the Registrant 4 Specimen Certificate of Common Stock **5 Opinion of Davis Polk & Wardwell 10.1 Form of Transitional Services Agreement between the Registrant and CVS Corporation 10.2 Form of Stockholder Agreement between the Registrant and CVS Corporation 10.3 Form of Tax Disaffiliation Agreement between the Registrant and CVS Corporation **10.4 Form of Subordinated Note between the Registrant and CVS **10.5 Credit Facility 10.6 Employment Agreement between Norman Axelrod and the Registrant **10.7 Employment Agreement between James M. Tomaszewski and the Registrant **10.8 Employment Agreement between Steven B. Silverstein and the Registrant **10.9 Employment Agreement between Hugh J. Scullin and the Registrant 10.10 1996 Incentive Compensation Plan 10.11 1996 Non-Employee Director Stock Plan **15 Letter re: Unaudited Interim Financial Information *21 List of Subsidiaries 23.1 Consent of KPMG Peat Marwick LLP **23.2 Consent of Davis Polk & Wardwell (included in Exhibit 5)
- --------------- *Previously filed. **To be filed by amendment (b) The following financial statement schedules are filed as part of this Registration Statement: Not applicable. ITEM 17. UNDERTAKINGS The undersigned registrant hereby undertakes: (a) The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and persons controlling the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification (other than by policies of insurance) is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-2 77 (c) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon rule 430A and contained in a form of prospectus filed by the registrant pursuant to rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 78 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Linens 'n Things, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Clifton, State of New Jersey, on the 24th day of October, 1996. LINENS 'N THINGS, INC. /s/ NORMAN AXELROD By: Norman Axelrod, President KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Norman Axelrod and Charles C. Conaway, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and revocation, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments filed pursuant to Rule 462) to this Registration Statement and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and things requisite and necessary to be done as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------------- ------------------------------------ ------------------- /s/ NORMAN AXELROD Chief Executive Officer, October 24, 1996 - ------------------------------------- President and Director Norman Axelrod * Senior Vice President, October 24, 1996 - ------------------------------------- Chief Financial Officer James M. Tomaszewski * Vice President of Finance, October 24, 1996 - ------------------------------------- Controller William T. Giles /s/ CHARLES C. CONAWAY Director October 24, 1996 - ------------------------------------- Charles C. Conaway /s/ STANLEY P. GOLDSTEIN Director October 24, 1996 - ------------------------------------- Stanley P. Goldstein *By: /s/ CHARLES C. CONAWAY - ------------------------------------- Charles C. Conaway Attorney-in-fact
II-4 79 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION SEQUENTIALLY NUMBERED PAGE - ------- ------------------------------------------------------------ -------------------------- **1 Form of Underwriting Agreement.............................. [Page numbers to come] *3.1 Certificate of Incorporation of the Registrant.............. 3.2 Amended and Restated Certificate of Incorporation........... 3.3 By-Laws of the Registrant................................... 4 Specimen Certificate of Common Stock........................ **5 Opinion of Davis Polk & Wardwell............................ 10.1 Form of Transitional Services Agreement between the Registrant and CVS Corporation.............................. 10.2 Form of Stockholder Agreement between the Registrant and CVS Corporation................................................. 10.3 Form of Tax Disaffiliation Agreement between the Registrant and CVS Corporation......................................... **10.4 Form of Subordinated Note between the Registrant and CVS.... **10.5 Credit Facility............................................. 10.6 Employment Agreement between Norman Axelrod and the Registrant.................................................. **10.7 Employment Agreement between James M. Tomaszewski and the Registrant.................................................. **10.8 Employment Agreement between Steven B. Silverstein and the Registrant.................................................. **10.9 Employment Agreement between Hugh J. Scullin and the Registrant.................................................. 10.10 1996 Incentive Compensation Plan............................ 10.11 1996 Non-Employee Director Stock Plan....................... **15 Letter re: Unaudited Interim Financial Information.......... *21 List of Subsidiaries........................................ 23.1 Consent of KPMG Peat Marwick LLP............................ **23.2 Consent of Davis Polk & Wardwell (included in Exhibit 5)....
- --------------- *Previously filed. **To be filed by amendment. E-1 EX-3.2 2 CERTIFICATE OF INCORPORATION-AMENDED AND RESTATED 1 Exhibit 3.2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF Linens 'n Things, Inc. Linens 'n Things, Inc., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), hereby certifies as follows: 1. The name of the Corporation is Linens 'n Things, Inc., and the name under which the Corporation was originally formed is Linens 'n Things, Inc. The Corporation's original certificate of incorporation was filed with the Secretary of State of Delaware on [date of incorporation of shell corporation], 1996. 2. This Amended and Restated Certificate of Incorporation (this "Restated Certificate") has been duly adopted and proposed to the sole stockholder of the Corporation by the Board of Directors of the Corporation, and has been approved and adopted by the sole stockholder of the Corporation, in accordance with Sections 242 and 245 of the General Corporation Law of the State of Delaware. 3. Pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware, this Amended and Restated Certificate of Incorporation restates and integrates and further amends the provisions of the Certificate of Incorporation of the Corporation. 4. The text of the Certificate of Incorporation as heretofore amended is hereby restated and further amended to read in its entirety as hereinafter set forth: FIRST: The name of the Corporation is Linens 'n Things, Inc. SECOND: The address of its registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company. 2 THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended ("Delaware Law"). FOURTH: (a) The total number of shares of stock which the Corporation shall have authority to issue is [Number], consisting of 60,000,000 shares of Common Stock, par value $.01 per share (the "Common Stock"), and 1,000,000 shares of Preferred Stock, par value $.01 per share (the "Preferred Stock"). (b) The Board of Directors is hereby empowered to authorize by resolution or resolutions from time to time the issuance of one or more classes or series of Preferred Stock and to fix the designations, powers, preferences and relative, participating, optional or other rights, if any, and the qualifications, limitations or restrictions thereof, if any, with respect to each such class or series of Preferred Stock and the number of shares constituting each such class or series, and to increase or decrease the number of shares of any such class or series to the extent permitted by Delaware Law. (c) Effective upon the filing of this Restated Certificate with the Secretary of State of the State of Delaware (the "Effective Time"), each share of Common Stock outstanding immediately prior to the Effective Time shall be, without further action by the Corporation or the holder thereof, changed and converted into the number of shares of Common Stock determined by multiplying such outstanding share of Common Stock by 195,954.76 (the "Stock Split Factor"). Each stock certificate representing shares of Common Stock outstanding immediately prior to the Effective Time shall automatically represent from and after the Effective Time that number of shares of Common Stock equal to the number of shares shown on the face of the certificate multiplied by the Stock Split Factor. (d) Notwithstanding the foregoing, in the event that the conversion of the Common Stock described above would result in any holder of shares of Common Stock holding a share of Common Stock that is not an integral multiple of one, the effect of the conversion shall be such that the shares of Common Stock issued as a result of the conversion shall be the integral multiple of one closest to the product of the Stock Split Factor times the number of shares of Common Stock held by such holder immediately prior to the Effective Time, with fractions of 0.50 and greater being rounded up to the next higher integral multiple of one and fractions less than 0.50 being rounded down to the next lower integral multiple of one. No consideration will be paid in lieu of fractions that are rounded down. 2 3 FIFTH: (a) The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. (b) The number of directors which shall constitute the whole Board shall be fixed from time to time by resolution of the Board of Directors but shall not be less than three nor more than ten; provided that so long as CVS Corporation, a Delaware corporation "(CVS"), is a Principal Stockholder (as defined below), the number of directors which shall constitute the whole Board shall be seven. (c) The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. Each director shall serve for a term ending on the date of the third annual meeting of stockholders next following the annual meeting at which such director was elected, provided that directors initially designated as Class I directors shall serve for a term ending on the date of the [1997] annual meeting, directors initially designated as Class II directors shall serve for a term ending on the [1998] annual meeting, and directors initially designated as Class III directors shall serve for a term ending on the date of the [1999] annual meeting. Notwithstanding the foregoing, each director shall hold office until such director's successor shall have been duly elected and qualified or until such director's earlier death, resignation or removal. In the event of any change in the number of directors, the Board of Directors shall apportion any newly created directorships among, or reduce the number of directorships in, such class or classes as shall equalize, as nearly as possible, the number of directors in each class. In no event will a decrease in the number of directors shorten the term of any incumbent director. (d) CVS shall have the right to designate the Applicable CVS Number (as defined below) of directors to the Board of Directors and the right to designate the class to which each such CVS designee shall be elected. In connection with each election of directors, the Corporation shall nominate each of the Applicable CVS Number of individuals designated by CVS (each, a "CVS Designee") as a director to the Board of Directors (in the class so designated by CVS) and shall recommend to the stockholders the election of each CVS Designee as a director (in the class so designated by CVS). (e) In the event of a decrease in the Applicable CVS Number at any time, (i) one or more (as appropriate) CVS Designees (selected by CVS as provided in clause (ii)) shall 3 4 automatically be deemed removed from the Board effective at such time, and (ii) CVS shall have the right to select the individual[s] to be removed if any CVS Designee is to remain as a director after giving effect to such decrease; provided that if after giving effect to such decrease the Applicable CVS Number is zero, one CVS Designee (selected by CVS) shall continue to serve as a director until the next annual meeting of stockholders. Except as aforesaid, (x) vacancies on the Board resulting from the removal, death, resignation or other departure of a CVS Designee may only be filled in the manner provided in the Stockholder Agreement dated as of _______, 1996 among CVS, Nashua Hollis CVS, Inc. and the Corporation (the "Stockholder Agreement"), and (y) each director who is a CVS Designee may only be removed in the manner provided in the Stockholder Agreement or as provided in clause (g) of this Article FIFTH. (f) Subject to clause (e) of this Article FIFTH, vacancies on the Board of Directors resulting from death, resignation, removal or otherwise and newly created directorships resulting from any increase in the number of directors may be filled solely by a majority of the directors then in office (although less than a quorum) or by the sole remaining director, Each director (including any CVS Designee) elected to fill a vacancy shall hold office for a term that shall coincide with the term of the Class to which such director shall have been elected. (g) Subject to clause (e) of this Article FIFTH in the case of CVS Designees, no director may be removed from office by the stockholders except for cause with the affirmative vote of the holders of not less than a majority of the total voting power of all outstanding securities of the Corporation then entitled to vote generally in the election of directors, voting together as a single class. (h) There shall be no cumulative voting in the election of directors. Election of directors need not be by written ballot unless the bylaws of the Corporation so provide. (i) Notwithstanding the foregoing, whenever the holders of one or more classes or series of Preferred Stock shall have the right, voting separately as a class or series, to elect directors, the election, term of office, filling of vacancies, removal and other features of such directorships shall be governed by the terms of the resolution or resolutions adopted by the Board of Directors pursuant to ARTICLE FOURTH applicable thereto, and such directors so elected shall not be subject to the provisions of this ARTICLE FIFTH unless otherwise provided therein. (j) For purposes of this Restated Certificate, the 4 5 following terms shall have the following respective meanings: (i) "Affiliate" has the meaning assigned to such term in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended. (ii) "Applicable CVS Number" shall be (i) [two], so long as the CVS Group in aggregate owns at least 15% of the total Voting Power, (ii) one, so long as the CVS Group in aggregate owns at least 5% but less than 15% of the total Voting Power, and (iii) zero, as soon as the CVS Group in aggregate owns less than 5% of the total Voting Power. (iii) "CVS Group" means CVS and its Affiliates. (iv) CVS shall constitute a "Principal Stockholder" so long as the CVS Group in aggregate owns at least 10% of the total Voting Power. (v) "Voting Power" means the number of votes represented by the total outstanding Voting Stock. (vi) "Voting Stock" means the stock of the Corporation of any class or series entitled to vote generally in the election of directors. SIXTH: The Board of Directors shall have the power to adopt, amend or repeal the bylaws of the Corporation. SEVENTH: Any action required or permitted to be taken at any annual or special meeting of stockholders may be taken only upon the vote of stockholders at an annual or special meeting duly noticed and called in accordance with Delaware Law and may not be taken by written consent of stockholders without a meeting. EIGHTH: Special meetings of the stockholders may be called by the Board of Directors, the Chairman of the Board of Directors, the President or the Secretary of the Corporation and may not be called by any other person. Notwithstanding the foregoing, (i) for so long as CVS is a Principal Stockholder, special meetings of the stockholders may be called by CVS, and (ii) whenever holders of one or more classes or series of Preferred Stock shall have the right, voting separately as a class or series, to elect directors, such holders may call, pursuant to the terms of the resolution or resolutions adopted by the Board of Directors pursuant to ARTICLE FOURTH, special meetings of holders of such Preferred Stock. NINTH: (1) A director of the Corporation shall, to 5 6 the fullest extent permitted by Delaware Law, not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. (2) (a) Each person (and the heirs, executors or administrators of such person) who was or is a party or is threatened to be made a party to, or is involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, shall be indemnified and held harmless by the Corporation to the fullest extent permitted by Delaware Law. The right to indemnification conferred in this ARTICLE NINTH shall also include the right to be paid by the Corporation the expenses incurred in connection with any such proceeding in advance of its final disposition to the fullest extent authorized by Delaware Law. The right to indemnification conferred in this ARTICLE NINTH shall be a contract right. (b) The Corporation may, by action of its Board of Directors, provide indemnification to such of the employees and agents of the Corporation to such extent and to such effect as the Board of Directors shall determine to be appropriate and authorized by Delaware Law. (3) The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss incurred by such person in any such capacity or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under Delaware Law. (4) The rights and authority conferred in this ARTICLE NINTH shall not be exclusive of any other right which any person may otherwise have or hereafter acquire. (5) Neither the amendment nor repeal of this ARTICLE NINTH, nor the adoption of any provision of this Certificate of Incorporation or the bylaws of the Corporation, nor, to the fullest extent permitted by Delaware Law, any modification of law, shall eliminate or reduce the effect of this ARTICLE NINTH in respect of any acts or omissions occurring prior to such amendment, repeal, adoption or modification. 6 7 TENTH: The Corporation reserves the right to amend this Certificate of Incorporation in any manner permitted by Delaware Law and all rights and powers conferred upon stockholders, directors and officers herein are granted subject to this reservation. Notwithstanding the foregoing, the provisions set forth in ARTICLE FIFTH through ARTICLE TENTH, inclusive, may not be repealed or amended in any respect, and no other provision may be adopted, amended or repealed which would have the effect of modifying or permitting the circumvention of the provisions set forth in ARTICLE FIFTH through ARTICLE TENTH, inclusive, unless such action is approved by the affirmative vote of the holders of not less than 80% of the total voting power of all outstanding securities of the Corporation then entitled to vote generally in the election of directors, voting together as a single class. 7 8 IN WITNESS WHEREOF, the undersigned has caused this Restated Certificate to be signed on its behalf as of the __th day of __________, 1996. LINENS 'N THINGS, INC. By: --------------------------- Name: Title: Attest: ------------------------------ Name: Title: 8 EX-3.3 3 BY-LAWS OF THE REGISTRANT 1 Exhibit 3.3 BYLAWS OF Linens 'n Things, Inc. * * * * * ARTICLE I OFFICES Section 1. Registered Office. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware. Section 2. Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. Section 3. Books. The books of the Corporation may be kept within or without of the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. Time and Place of Meetings. All meetings of stockholders shall be held at such place, either within or without the State of Delaware, on such date and at such time as may be determined from time to time by the Board of Directors (or the Chairman of the Board in the absence of a designation by the Board of Directors). Section 2. Annual Meetings. Annual meetings of stockholders, commencing with the year 1997, shall be held to elect directors and transact such other business as may properly be brought before the meeting. 2 Section 3. Special Meetings. Special meetings of stockholders may be called by the Board of Directors or the Chairman of the Board of Directors, the President or the Secretary of the Corporation and may not be called by any other person. Notwithstanding the foregoing, (i) for so long as CVS Corporation ("CVS") is a Principal Stockholder (as defined in the certificate of incorporation), special meetings of the stockholders may be called by CVS, and (ii) whenever holders of one or more classes or series of Preferred Stock shall have the right, voting separately as a class or series, to elect directors, such holders may call, pursuant to the terms of the resolution or resolutions adopted by the Board of Directors pursuant to Article Four of the certificate of incorporation, special meetings of holders of such Preferred Stock. Section 4. Notice of Meetings and Adjourned Meetings; Waivers of Notice. (a) Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended ("Delaware Law"), such notice shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder of record entitled to vote at such meeting. Unless these bylaws otherwise require, when a meeting is adjourned to another time or place (whether or not a quorum is present), notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 30 days, or after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. (b) A written waiver of any such notice signed by the person entitled thereto, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. 2 3 Section 5. Quorum. Unless otherwise provided under the certificate of incorporation or these bylaws and subject to Delaware Law, the presence, in person or by proxy, of the holders of a majority of the outstanding capital stock of the Corporation entitled to vote at a meeting of stockholders shall constitute a quorum for the transaction of business. Section 6. Voting. (a) Unless otherwise provided in the certificate of incorporation and subject to Delaware Law, each stockholder shall be entitled to one vote for each outstanding share of capital stock of the Corporation held by such stockholder. Unless otherwise provided in Delaware Law, the certificate of incorporation or these bylaws, the affirmative vote of a majority of the shares of capital stock of the Corporation present, in person or by proxy, at a meeting of stockholders and entitled to vote on the subject matter shall be the act of the stockholders. (b) Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to a corporate action in writing without a meeting may authorize another person or persons to act for him or her by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. Section 7. No Action by Consent. Any action required or permitted to be taken at any annual or special meeting of stockholders may be taken only upon the vote of stockholders at an annual or special meeting duly noticed and called in accordance with Delaware Law and may not be taken by written consent of stockholders without a meeting. Section 8. Organization. At each meeting of stockholders, the Chairman of the Board, if one shall have been elected, (or in his or her absence or if one shall not have been elected, the President) shall act as chair of the meeting. The Secretary (or in his or her absence or inability to act, the person whom the chair of the meeting shall appoint secretary of the meeting) shall act as secretary of the meeting and keep the minutes thereof. Section 9. Order of Business. The order of business and rules of conduct at all meetings of stockholders shall be as determined by the chair of the meeting. Section 10. Notice of Business. At any meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting (a) by or at the direction of the Board of Directors or (b) in the case of an annual meeting of stockholders, by any stockholder of the 3 4 Corporation who is a stockholder of record at the time of giving of the notice provided for in this Section 11, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this Section 11. For business to be properly brought by a stockholder before an annual meeting of stockholders, the stockholder must have given timely notice thereof in writing to the secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be received no later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was given or made. A stockholder's notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the meeting (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the stockholder and (d) any material interest of the stockholder in such business. Notwithstanding anything in the bylaws to the contrary, no business shall be conducted at a stockholder meeting except in accordance with the procedures set forth in this Section 11, provided that CVS shall not be required to comply with this Section 11 so long as it is a Principal Stockholder. The chair of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of the bylaws, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing, provisions of this Section 11, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, and the rules and regulations thereunder with respect to the matters set forth in this Section 11. ARTICLE III DIRECTORS Section 1. General Powers. Except as otherwise provided in Delaware Law or the certificate of incorporation, 4 5 the business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. Section 2. Number, Classes, Term of Office, etc. Except as otherwise provided in the certificate of incorporation, the number of directors which shall constitute the whole Board shall be fixed from time to time by resolution of the Board of Directors but shall not be less than three nor more than ten. The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. Except as otherwise provided in the certificate of incorporation, each director shall serve for a term ending on the date of the third annual meeting of stockholders next following the annual meeting at which such director was elected. Notwithstanding the foregoing, each director shall hold office until such director's successor shall have been duly elected and qualified or until such director's earlier death, resignation or removal. Directors need not be stockholders. The provisions of this Section 2 shall be subject, in each case, to the rights of holders of one or more series of Preferred Stock of the Corporation with respect to the election of directors set forth in Section 15 of this Article III. Section 3. Quorum and Manner of Acting. Unless the certificate of incorporation or these bylaws require a greater number, a majority of the total number of directors (so long as such majority includes a director that is a CVS Designee in the event that CVS is then a Principal Stockholder (as each such capitalized term is defined in the certificate of incorporation)) shall constitute a quorum for the transaction of business, and the affirmative vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. When a meeting is adjourned to another time or place (whether or not a quorum is present), notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Board of Directors may transact any business which might have been transacted at the original meeting. If a quorum shall not be present at any meeting of the Board of Directors the directors present thereat may adjourn the meeting, from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 4. Time and Place of Meetings. The Board of Directors shall hold its meetings at such place, either within or without the State of Delaware, and at such time as 5 6 may be determined from time to time by the Board of Directors (or the Chairman in the absence of a determination by the Board of Directors). Section 5. Annual Meeting. The Board of Directors shall meet for the purpose of electing officers and transacting other business, as soon as practicable after each annual meeting of stockholders, on the same day and at the same place where such annual meeting shall be held. Notice of such meeting need not be given. In the event such annual meeting is not so held, the annual meeting of the Board of Directors may be held at such place either within or without the State of Delaware, on such date and at such time as shall be specified in a notice thereof given as hereinafter provided in Section 7 of this Article III or in a waiver of notice thereof signed by any director who chooses to waive the requirement of notice. Section 6. Regular Meetings. After the place and time of regular meetings of the Board of Directors shall have been determined and notice thereof shall have been once given to each member of the Board of Directors, regular meetings may be held without further notice being given. Section 7. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board or the President and shall be called by the Chairman of the Board, President or Secretary on the written request of (i) three directors or (ii) so long as CVS is a Principal Stockholder, of any director who is a designee of CVS. Notice of special meetings of the Board of Directors shall be given to each director at least three days before the date of the meeting in such manner as is determined by the Board of Directors. Section 8. Committees. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation, adopting an agreement of merger or 6 7 consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the bylaws of the Corporation; and unless the resolution of the Board of Directors or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. Section 9. Action by Consent. Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. Section 10. Telephonic Meetings. Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. Section 11. Resignation. Any director may resign at any time by giving written notice to the Board of Directors or to the Secretary of the Corporation. The resignation of any director shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 12. Vacancies. Unless otherwise provided in the certificate of incorporation or the Stockholder Agreement dated as of _____, 1996 among CVS, Nashua Hollis CVS, Inc. and the Corporation (the "Stockholder Agreement"), vacancies on the Board of Directors resulting from death, resignation, removal or otherwise and newly created directorships resulting from any increase in the number of directors may be filled solely by a majority of the directors then in office (although less than a quorum) or by the sole remaining director. Whenever the holders of any class or 7 8 classes of stock or series thereof are entitled to elect one or more directors by the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. Each director elected to fill a vacancy shall hold office for a term that shall coincide with the term of the Class to which such director shall have been elected. If there are no directors in office, then an election of directors may be held in accordance with Delaware Law. Unless otherwise provided in the certificate of incorporation, when one or more directors shall resign from the Board, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have the power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in the filling of the other vacancies. Section 13. Removal. Except as provided in the certificate of incorporation or the Stockholder Agreement, no director may be removed from office by the stockholders except for cause with the affirmative vote of the holders of not less than a majority of the total voting power of all outstanding securities of the corporation then entitled to vote generally in the election of directors, voting together as a single class. Section 14. Compensation. Unless otherwise restricted by the certificate of incorporation or these bylaws, the Board of Directors shall have authority to fix the compensation of directors, including fees and reimbursement of expenses. Section 15. Preferred Directors. Notwithstanding anything else contained herein, whenever the holders of one or more classes or series of Preferred Stock shall have the right, voting separately as a class or series, to elect directors, the election, term of office, filling of vacancies, removal and other features of such directorships shall be governed by the terms of the resolutions adopted by the Board of Directors pursuant to the certificate of incorporation applicable thereto, and such directors so elected shall not be subject to the provisions of Sections 2, 12 and 13 of this Article III unless otherwise provided therein (but shall be subject to the rights of CVS relating to the designation and election of directors as provided in the certificate of incorporation and the Stockholder Agreement). 8 9 ARTICLE IV OFFICERS Section 1. Principal Officers. The principal officers of the Corporation shall be a Chairman of the Board, a Chief Executive Officer, a President, one or more Vice Presidents, a Treasurer and a Secretary who shall have the duty, among other things, to record the proceedings of the meetings of stockholders and directors in a book kept for that purpose. The Corporation may also have such other principal officers, including one or more Controllers, as the Board may in its discretion appoint. One person may hold the offices and perform the duties of any two or more of said offices, except that no one person shall hold the offices and perform the duties of President and Secretary. Section 2. Election and Term of Office. The principal officers of the Corporation shall be elected annually by the Board of Directors at the annual meeting thereof. Each such officer shall hold office until his or her successor is elected and qualified, or until his or her earlier death, resignation or removal. Any vacancy in any office shall be filled in such manner as the Board of Directors shall determine. Section 3. Subordinate Officers. In addition to the principal officers enumerated in Section 1 of this Article IV, the Corporation may have one or more Assistant Treasurers, Assistant Secretaries and Assistant Controllers and such other subordinate officers, agents and employees as the Board of Directors may deem necessary, each of whom shall hold office for such period as the Board of Directors may from time to time determine. The Board of Directors may delegate to any principal officer the power to appoint and to remove any such subordinate officers, agents or employees. Section 4. Removal. Except as otherwise permitted with respect to subordinate officers, any officer may be removed, with or without cause, at any time, by resolution adopted by the Board of Directors. Section 5. Resignations. Any officer may resign at any time by giving written notice to the Board of Directors (or to a principal officer if the Board of Directors has delegated to such principal officer the power to appoint and to remove such officer). The resignation of any officer shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice; and unless otherwise specified therein, the acceptance of such 9 10 resignation shall not be necessary to make it effective. Section 6. Powers and Duties. The officers of the Corporation shall have such powers and perform such duties incident to each of their respective offices and such other duties as may from time to time be conferred upon or assigned to them by the Board of Directors. ARTICLE V GENERAL PROVISIONS Section 1. Fixing the Record Date. (a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 60 nor less than 10 days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day preceding the day on which notice is given, or, if notice is waived, at the close of business on the day preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided that the Board of Directors may fix a new record date for the adjourned meeting. (b) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. Section 2. Dividends. Subject to limitations contained in Delaware Law and the certificate of incorporation, the Board of Directors may declare and pay dividends upon the shares of capital stock of the Corporation, 10 11 which dividends may be paid in cash, in property or in shares of the capital stock of the Corporation. Section 3. Corporate Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed, affixed or otherwise reproduced. Section 4. Voting of Stock Owned by the Corporation. Unless otherwise ordered by the Board of Directors, the Chairman of the Board may authorize any person, on behalf of the Corporation, to attend, vote at and grant proxies to be used at any meeting of stockholders of any corporation (except this Corporation) in which the Corporation may hold stock. Section 5. Fiscal Year. The fiscal year of the Corporation shall commence on January 1 and end on December 31 of each year. Section 6. Amendments. These bylaws or any of them, may be altered, amended or repealed, or new bylaws may be made, by the Board of Directors. 11 EX-4 4 SPECIMEN CERTIFICATE OF COMMON STOCK 1 EXHIBIT 4 TEMPORARY CERTIFICATE - EXCHANGEABLE FOR DEFINITIVE ENGRAVED CERTIFICATE WHEN READY FOR DELIVERY NUMBER [Linens'n Things Logo] SHARES COMMON STOCK LINENS'N THINGS, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE PAR VALUE CUSIP 535.679.104 $.01 EACH THIS CERTIFICATE IS TRANSFERABLE IN BOSTON, MASSACHUSETTS SEE REVERSE FOR OR NEW YORK, NEW YORK CERTAIN DEFINITIONS
THIS CERTIFIES THAT IS THE OWNER OF FULLY-PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF LINENS'N THINGS TRANSFERABLE UPON THE BOOKS OF THE CORPORATION IN PERSON OR BY ATTORNEY UPON SURRENDER OF THIS CERTIFICATE DULY ENDORSED OR ASSIGNED. THIS CERTIFICATE AND THE SHARES REPRESENTED HEREBY ARE SUBJECT TO THE LAWS OF THE STATE OF DELAWARE AND TO THE CERTIFICATE OF INCORPORATION AND AMENDMENTS THEREOF AND BY-LAWS OF THE CORPORATION. THIS CERTIFICATE IS NOT VALID UNTIL COUNTERSIGNED BY THE TRANSFER AGENT AND REGISTERED BY THE REGISTRAR. IN WITNESS WHEREOF, LINENS'N THINGS HAS CAUSED ITS FACSIMILE CORPORATE SEAL TO BE HEREUNTO AFFIXED AND THE CERTIFICATE TO BE SIGNED BY THE FACSIMILE SIGNATURES OF ITS DULY AUTHORIZED OFFICERS. DATED: /s/ James M. Tomaszewski /s/ Norman Axelrod - -------------------------- ------------------------- James M. Tomaszewski Norman Axelrod SENIOR VICE PRESIDENT, [SEAL] PRESIDENT AND CHIEF CHIEF FINANCIAL OFFICER EXECUTIVE OFFICER COUNTERSIGNED AND REGISTERED: THE FIRST NATIONAL BANK OF BOSTON TRANSFER AGENT AND REGISTRAR BY /s/ Mary Penezic AUTHORIZED SIGNATURE 2 LINENS 'N THINGS, INC. The Company is authorized to issue more than one class or series of stock. Upon written request the Company will furnish without charge to each stockholder a copy of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common UNIF GIFT MIN ACT -- .............. Custodian ................ TEN ENT -- as tenants by the entireties (Cust) (Minor) JT TEN -- as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act .................................... in common (State)
Additional abbreviations may also be used though not in the above list. For value received, _______________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE __________________________________________ __________________________________________ ______________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE) _______________________________________________________________________________ _______________________________________________________________________________ _________________________________________________________________________Shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint _______________________________________________________________________Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated ______________________________ _______________________________________________________ NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. SIGNATURE(S) GUARANTEED: ______________________________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATION AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM, PURSUANT TO SEC. RULE 17Ad-15. ______________________________________________ AMERICAN BANK NOTE COMPANY OCT 21, 1996 fm 3504 ATLANTIC AVENUE SUITE 12 LONG BEACH, CA 90807 047043bk (310) 989-2933 (FAX) (310) 426-7450 Proof ___ NEW ______________________________________________ EX-10.1 5 TRANSITIONAL SERVICES AGREEMENT 1 Exhibit 10.1 TRANSITIONAL SERVICES AGREEMENT This Agreement dated as of __________, 1996 is between Melville Corporation, a New York corporation, to be known as CVS Corporation ("CVS"), and Linens 'n Things, Inc., a Delaware corporation ("Linens"). WITNESSETH: WHEREAS, Linens is presently a wholly owned Subsidiary of CVS; WHEREAS, after the issuance and sale on the date hereof of Common Stock, $0.01 par value per share (the "Common Stock"), of Linens to the public in an initial public offering (the "Initial Public Offering") registered under the Securities Act of 1933, as amended, CVS will own approximately ___% of the outstanding Common Stock of Linens; WHEREAS, CVS and Linens are concurrently herewith entering into the Stockholder Agreement and the Tax Disaffiliation Agreement; WHEREAS, the parties hereto desire to set forth herein the transitional services to be performed by CVS hereunder in order to allow for an orderly transition of ownership of the Linens business (as currently conducted, the "Business") to the public following the Initial Public Offering; NOW, THEREFORE, in consideration of the foregoing and the agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the parties hereto agree as follows: 1. DEFINITIONS (a) As used herein, the following terms shall have the following meanings: "Agreement" means this Transitional Services Agreement including all Exhibits hereto, as amended from time to time. "Costs" means any and all (i) actual costs incurred by CVS or its Affiliates in connection with or with respect to performing the CVS Services hereunder (including all costs and charges referred to in the Exhibits hereto) and (ii) incremental 2 costs of performing or providing any Service hereunder that are incurred as a result of or otherwise arise from any third party consent required in connection with (x) the provision of such Service hereunder or (y) the performance by CVS of its obligations hereunder. "CVS Services" or "Services" means the services (and related agreements) set forth on Exhibits A-1, A-2 and A-3 hereto. "Initial Public Offering Date" means the business day as of which the Initial Public Offering shall be effected. "Term" means, with respect to any Service, the term applicable to the provision of such Service hereunder as determined pursuant to Section 4. (b) Capitalized terms used herein and not otherwise defined herein are used herein as defined in the Stockholder Agreement dated as of the date hereof between CVS, Nashua Hollis and Linens. 2. PROVISION OF SERVICES (a) During the Term applicable to the provision or performance of each CVS Service to be provided or performed by CVS (or an Affiliate) to Linens with respect to the Business hereunder (as set forth in Exhibits A-1, A-2 and A-3 hereto), Linens shall purchase and pay for, and CVS (or such Affiliate) shall provide and perform, each such CVS Service, upon the terms and conditions set forth in this Agreement (including the applicable Exhibits hereto). (b) All Services provided or performed by CVS or its Affiliates hereunder shall be performed in a manner consistent with past practice applicable to the provision or performance of such Services by CVS or its Affiliates with respect to the Business. (c) Each of CVS and Linens will use reasonable efforts to complete the transition as promptly as practicable. 3. SERVICE CHARGES Linens shall pay or reimburse CVS for all Costs attributable to the provision or performance by CVS of CVS Services hereunder. Such payment or reimbursement shall be made as provided in Section 5. 2 3 4. TERM OF PROVISION OF SERVICES The obligation of CVS to provide or perform any Service hereunder shall terminate on the last day of the term for which such Service is required to be provided or performed hereunder (as specified in the applicable Exhibit hereto), after giving effect to the valid exercise of any extension option with respect to, or termination of, the term applicable to the provision or performance of such Service. 5. PAYMENT TERMS All Costs required to be paid or reimbursed to CVS hereunder shall be invoiced monthly by CVS. Invoiced amounts shall be due and payable thirty (30) days from date of receipt of invoice. 6. INSPECTION (a) Linens shall, during normal business hours and with reasonable prior notice to CVS, have reasonable access to the properties, offices, books and records of CVS for the purpose of observing that Services are being procured or performed in accordance with the terms of this Agreement and past practices relevant to the procurement or performance of such Services with respect to the Business and to verify Cost amounts. (b) CVS and Linens shall, from time to time but not more often than once each month, review the basis and amounts of Costs charged hereunder. In the course of such review, the parties shall in good faith, other than with respect to Costs paid or payable to outside vendors as provided in Exhibit A-1, (i) establish principles for determining Costs to be charged hereunder on a prospective basis and (ii) determine the amount of any adjustment, if any, payable by a party to the other with respect to Costs charged and reimbursed in respect of any preceding period. 7. FORCE MAJEURE CVS shall not be liable to Linens or any other Person for any delay or default in performance where occasioned by any cause of any kind or extent beyond CVS's control including, by way of example, but not limitation, any act of God, any act, regulation or law of any government, war, civil commotion, destruction of production facilities or materials by fire, earthquake or storm, labor disturbance, epidemic, equipment breakdown or failure, failure to obtain any third party or governmental consent required to perform Services hereunder, or failure of suppliers, public utilities or common carriers ("Force Majeure"). CVS shall promptly notify Linens in writing of the Force Majeure causing delay or 3 4 default in performance, the probable extent to which it will be unable to perform, and the actions it intends to take to remove such Force Majeure, to the extent reasonably possible to do so. CVS shall take reasonable action within its control to alleviate the Force Majeure causing delay or default in performance (it being understood that any costs or expenses incurred by CVS in connection therewith shall constitute Costs for purposes of this Agreement). 8. ASSIGNMENT No party hereto may assign its rights or delegate its obligations hereunder without the prior written consent of the other parties, and any attempted assignment or delegation without such consent shall be void. Any Services required to be performed by CVS hereunder may be performed by an Affiliate of CVS, provided that CVS shall not thereby be relieved of its obligations hereunder. For purposes of this Agreement, Linens shall not be considered to be an Affiliate of CVS. 9. DEFAULT If Linens shall be in default of any payment or indemnity obligation hereunder, CVS may terminate this Agreement by giving thirty (30) days' written notice to Linens, specifying the basis for termination, provided if within thirty (30) days after receipt of such notice Linens shall cure the default by making the required payment, such notice shall cease to be operational and this Agreement shall continue in full force. The right of CVS to terminate this Agreement, as provided in this Section 9, shall not be affected in any way by its waiver of, or failure to take action with respect to, any previous payment defaults. Notwithstanding the foregoing, the occurrence of any of the following events with respect to a party hereto shall be deemed to constitute a default which shall give rise to an immediate right of the other party to terminate this Agreement without notice: the making of a general assignment for the benefit of creditors, insolvency, the institution of bankruptcy, reorganization, liquidation or receivership proceedings by or against a party hereto and, if instituted against such party, its consent thereto or the failure to cause such proceedings to be discharged within thirty (30) days thereafter. The remedies provided for in this Section 9 are not intended to be exclusive, and shall be in addition to any rights and remedies which the parties have at law or in equity. 4 5 10. EXCULPATION; INDEMNIFICATION (a) Neither CVS nor any of its Affiliates nor any officer, director, employee or agent of CVS or any such Affiliate (each, an "Indemnified Party") shall be liable to any other party or Person for any damages, losses, liabilities or expenses directly or indirectly arising out of, relating to or in connection with this Agreement or the performance or non-performance of Services hereunder, except to the extent such damages, losses, liabilities or expenses are attributable to such Indemnified Party's gross negligence or wilful misconduct. (b) Linens shall indemnify each Indemnified Party for, and hold each Indemnified Party harmless from and against, any and all damages, losses, liabilities and expenses (including all reasonable legal fees and expenses with respect thereto) ("Damages") arising out of, relating to or in connection with this Agreement or the performance or non-performance of Services hereunder, except to the extent such Damages are attributable to such Indemnified Party's wilful misconduct. 11. MISCELLANEOUS (a) Notices. All notices, statements or other communications hereunder shall be in writing (including telecopy or similar transmission) and shall be delivered as provided hereunder. A notice shall be deemed to have been received by a party if delivered by (i) overnight courier, on the date of actual delivery to the recipient's address (evidenced by confirmation of delivery from the courier service making such delivery), (ii) mail, three business days after being sent, if sent by registered or certified mail, with first-class postage prepaid, or (iii) telecopier, upon receipt (evidenced by receipt of a transmission confirmation form or the recipient's confirmation of receipt). Notices shall be delivered to each party at the following addresses or at such other 5 6 address as may be designated by such party by notice in writing sent in like manner. For Linens: Linens 'n Things, Inc. 6 Brighton Road Clifton, NJ 07015 Attention: Telecopier: (201) 778-1300 With a copy to: For CVS: CVS Corporation One CVS Drive Woonsocket, Rhode Island Attention: Chief Financial Officer Telecopier: 401- With a copy to: Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 Telecopier: 212-450-4800 Attention: Dennis S. Hersch (b) Entire Agreement; Amendments. This Agreement and the exhibits hereto constitute the entire understanding of the parties with respect to the subject matter hereof and thereof and supersede all prior agreements, understandings and negotiations, both written and oral, between the parties with respect to the subject matter hereof and thereof. This Agreement may not be amended except by written agreement executed by each of the parties hereto. (c) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York (without regard to its conflict of laws provisions). (d) Independent Contractors. The parties hereto are independent contractors. Nothing in this Agreement is intended or shall be deemed to constitute a partnership, agency, franchise or joint venture relationship between the parties. No party shall incur any debts or make any commitments for the other, except to the extent, if at all, specifically provided herein. (e) No Waiver. Any party's failure to insist upon strict performance of any provision of this Agreement shall not be deemed to be a waiver thereof. No waiver shall be effective unless specifically made in writing and signed by a duly authorized representative of the party granting such waiver. 6 7 (f) Severability. If it shall be determined by court order not subject to appeal or discretionary review that any provision or wording of this Agreement shall be invalid or unenforceable under applicable law, such invalidity or unenforceability shall not invalidate the entire Agreement and shall be construed so as to limit any term or provision so as to make it enforceable or valid within the requirements of applicable law, and, in the event such term or provision cannot be so limited, this Agreement shall be construed to omit such invalid or unenforceable provisions. (g) Counterparts. This Agreement may be signed in any number of counterparts and by the different parties on separate counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. (h) Headings. The paragraph headings used herein have been inserted for convenience only and shall not be used in any way to construe or interpret this Agreement or performance (i) Effective Date. This Agreement shall become effective on the Initial Public Offering Date. 7 8 IN WITNESS WHEREOF, the parties have caused this Transitional Services Agreement to be executed as of the day and year first above written. [CVS] CORPORATION By __________________________ Name: Title: LINENS 'N THINGS, INC. By _________________________ Name: Title: 8 9 EXHIBIT A Services Provided by CVS to Linens with respect to the Business Capitalized terms used in this Exhibit A and not defined herein are used as defined in the related Transitional Services Agreement dated as of _________, 1996 (the "Agreement"). 10 EXHIBIT A-1 BAD DEBT COLLECTION AND PREVENTION SERVICES AND RELATED AGREEMENTS Linens has requested that CVS provide transitional services to Linens pertaining to (i) check authorization, (ii) credit transaction routing, (iii) check collection and reporting, and (iv) bad debt collection and prevention ((i), (ii), (iii) and (iv) collectively being the "Check Services"). On the terms and conditions set forth in this Exhibit and the Agreement and for the Term set forth below, CVS will provide to Linens, and Linens will purchase from CVS, the Check Services with respect to the Linens Business, including services by CVS (i) using CVS's software system for bad debt collection, check authorization and credit transaction routing (the "Bad Debt System") and (ii) providing unlimited access to the negative check file and the positive check file with respect to the Linens Business only. Access by Linens to the negative check file can be continued by Linens only so long as Linens continues to perform its obligations under the ETC/SCAN Service Agreement (the "ETC Agreement") (since Electronic Transaction Corporation ("ETC") is the owner of the negative check file). ETC has agreed to allow Linens to continue to obtain services under the ETC Agreement during the transition period, and ETC has informally advised that such continued services will be at the same ETC rates as have heretofore been applicable to the Linens Business (since CVS's original agreement with ETC covers Linens). Notwithstanding anything else contained in this Exhibit or the Agreement, CVS will have no obligation to provide Linens with any access to the negative check file (or access at such existing rates) if ETC does not permit Linens such access (or such access at such existing rates) or Linens otherwise does not continue to have any rights under the ETC Agreement. Ownership of all technology, software, intellectual property, know-how, systems and other proprietary rights relating to the Check Services (including without limitation the Bad Debt System) vest in and shall remain with the CVS Group, and no Person in the Linens Group shall 2 11 assert any ownership interest therein. No assignment or transfer to any Person in the Linens Group of any right or license in or to any such technology, software, intellectual property, know-how, systems or other proprietary right owned, licensed or held for use by the CVS Group shall occur or be deemed to occur by virtue of or in connection with the provision of Services by CVS hereunder. Information relating to Linens customers will be treated confidentially so as to preserve confidentiality from, and preclude any use by, CVS and its Affiliates, except that CVS shall have unlimited access to Linens's positive check file. In addition, Linens will have unlimited access to CVS's positive check file, as these positive check files are presently mutually inclusive. Separate collection letters and telephone collection calls will be made on Linens bad checks. Charges for services will be (1) $.02 per check authorization request, (2) $.02 per credit card routing request and (3) $5.78 per returned item received, provided that such charges shall be subject to increase in the event of any increase in Melville's internal costs with respect to the related services. At Linens' expense, CVS will provide to Linens, if requested by Linens, a copy of the information in the negative and positive check files that has been contributed by Linens. CVS will use reasonable efforts to accommodate any required or requested modification of CVS's Check Authorization, Credit Routing and/or Collection Management Systems, provided that Linens will be responsible for all additional costs, as approved by Linens, associated with each such modification unless such modification is required under the ETC Agreement and CVS would have made such modification regardless of services related to this Agreement. All funds recovered or collected by CVS or its designated Collection Agencies pursuant to the provision of services hereunder will be deposited into a Bank of Boston recovery account that will be opened and maintained at Linens's expense. Linens may request that additional collection agencies be approved by CVS, and CVS will give reasonable consideration to such requests. 3 12 Linens agrees to direct all customer inquiries, correspondence and payments concerning returned checks to the Collections Department, 200 Brickstone Square, P.O. Box 9031, Andover, MA 01810 or to telephone (508) 474-7200. TERM The term for the provision and purchase of Check Services hereunder shall be from the Initial Public Offering Date until the first anniversary of the Initial Public Offering Date; provided that (i) Linens may terminate the Check Services by giving CVS 60 days' written notice of such termination and (ii) CVS may terminate the Check Services hereunder (x) if at any time such termination is required (or continued provision of Check Services would result in any penalty or other burdensome consequence or requirement being imposed) by any federal or state regulatory agency or (y) as provided in Section 3.04 of the Agreement. 4 13 EXHIBIT A-2 INSURANCE CLAIMS ADMINISTRATION SERVICES AND RELATED AGREEMENTS On the terms and conditions set forth in this Exhibit and the Agreement and for the Term set forth below, CVS will provide to Linens, and Linens will purchase from CVS, claims administration services ("Claims Services") relating to Linens worker's compensation, general liability and property insurance claims made prior to the Initial Public Offering Date. CVS shall maintain a special bank account (the "Claims Account") for claims payment in connection with Claims Services. CVS shall, on a regular basis, render a statement to Linens of the amount of each claim to be paid pursuant to the provision of Claims Services hereunder. Linens shall, promptly upon receipt of such statement, deposit (by wire transfer) the aggregate amount of the claims covered by such statement into the Claims Account. CVS shall make payment of claims by checks drawn on the Claims Account, but shall only release such checks once funds therefor have been so deposited by Linens into the Claims Account. In addition, CVS shall allow Linens and/or its agents reasonable access to its books and records relating to Claims Services in order to perform claim reviews. Within 30 days after the later of (i) the Initial Public Offering Date and (ii) receipt by Linens of an invoice therefor from CVS, Linens shall reimburse CVS for all claims handling charges and loss disbursements made prior to the Initial Public Offering Date (whether billed or unbilled by the Initial Public Offering Date). Additionally, following the close of each month CVS will invoice Linens for all claims reported to CVS during such month. Upon termination of the Term relating to Claims Services, all fees and charges due and owed by Linens through termination will be paid within 30 days after the later of (x) the termination date and (y) receipt by Linens of an invoice therefor from CVS. TERM The term for the provision and purchase of Claims Services hereunder shall be from the Initial Public Offering Date until the first anniversary of the Initial Public Offering 5 14 Date, unless theretofore terminated by CVS as provided in Section 3.04 of the Agreement or terminated by Linens upon 30 days' notice to CVS. Upon termination, at Linens' expense and with CVS' cooperation, all open and outstanding claims will be copied and moved to a third party processor of Linens' choosing. Additionally, upon termination Linens will make arrangements at its expense for moving and storing of all closed claims previously handled by the CVS claims unit within a reasonable period of time not to exceed 60 days. CLAIMS RUNOUT For a period of at least five years after the Initial Public Offering Date, the Linens Group will continue to have insurance coverage with respect to claims made (i.e. claims runout) after the Initial Public Offering Date in respect of claims or losses incurred or events occurring prior to the Initial Public Offering Date (i) to the extent such claims or losses are covered under Melville Corporation insurance policies under which the Linens Group or the Business had coverage up to the Initial Public Offering Date and (ii) on the terms in effect under such policies at the time such pre-Initial Public Offering claims or losses were incurred or events occurred. Notwithstanding anything else contained herein, CVS will be liable for any deductible or retention amounts under its directors and officers liability insurance policies with respect to claims under such policies in respect of individuals who were officers, directors and/or employees of the CVS Group prior to the Initial Public Offering and arising from acts, omissions or events occurring prior to the Initial Public Offering. 6 15 EXHIBIT A-3 VSAT/HUB SERVICES PROVISION OF SERVICES AND RELATED AGREEMENTS It is acknowledged by the parties that (i) the Hughes satellite is owned by Hughes, (ii) the VSAT and HUB equipment located at CVS or Linens offices and/or at store locations has been outsourced to and is currently owned by Lockheed, and (iii) services relating to such VSAT and HUB equipment with respect to the Business have prior to the date hereof been provided by Lockheed. It is possible that after the date hereof CVS may (but shall not be obligated to) reacquire such VSAT and HUB equipment from Lockheed, terminate such outsourcing arrangement with Lockheed and again operate such VSAT and HUB systems internally. In the event such reacquisition and internal operation is implemented by CVS by the first anniversary of the Initial Public Offering Date, CVS agrees to provide to the Linens Group services relating to such VSAT and HUB equipment with respect to the Business, on a transitional basis for a reasonable period of time (not to exceed six months) at market rates, to enable Linens during such time period to enter into an alternative arrangement for the procurement of VSAT and HUB services from a third party other than CVS. Linens agrees that if CVS does not implement such reacquisition and internal operation by the first anniversary of the Initial Public Offering Date (whether because CVS continues its outsourcing arrangement with Lockheed, enters into a new outsourcing arrangement, or otherwise), CVS will have no obligation to procure VSAT or HUB services for, or provide VSAT or HUB services to, Linens, and Linens will itself be responsible for procuring VSAT and HUB services from a third party provider other than CVS. 7 EX-10.2 6 STOCKHOLDER AGREEMENT 1 Exhibit 10.2 STOCKHOLDER AGREEMENT STOCKHOLDER AGREEMENT dated as of [ ], 1996 (the "Agreement") between Melville Corporation, a New York corporation, to be known as CVS Corporation ("CVS"), Nashua Hollis CVS, Inc. ("Nashua Hollis"), and Linens 'n Things, Inc. ("Linens"), a Delaware corporation. W I T N E S S E T H: WHEREAS, Linens is presently a wholly owned Subsidiary of CVS; WHEREAS, after the sale on the date hereof of Common Stock, $0.01 par value per share (the "Common Stock"), of Linens to the public in an initial public offering (the "Initial Public Offering") registered under the Securities Act of 1933, as amended, CVS will own approximately __% of the outstanding Common Stock of Linens; WHEREAS, CVS and Linens are concurrently herewith entering into the Transitional Services Agreement and the Tax Disaffiliation Agreement; WHEREAS, the parties hereto desire to set forth herein certain matters relating to the relationship and the respective rights and obligations of the parties following the Initial Public Offering; NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I DEFINITIONS Section 1.01. Definitions. The following terms, as used herein, have the following meanings: "Action" means any claim, suit, action, arbitration, investigation or other proceeding by or before any court, governmental or other regulatory or administrative agency or commission or any other tribunal. "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with, such Person. For the purposes of 2 this definition, "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing; provided that, for purposes hereof, CVS and Linens will be deemed not to be Affiliates of each other. "Applicable CVS Number" has the meaning assigned to such term in the Linens Charter. "Commission" means the Securities and Exchange Commission. "Common Stock" has the meaning assigned thereto in the recitals above. "CVS Group" means CVS and its Subsidiaries (other than any Subsidiary or member of, or other entity in, the Linens Group). "CVS Liabilities" means all (i) Liabilities of the CVS Group under this Agreement and (ii) except as otherwise specifically provided herein or in the Tax Disaffiliation Agreement, other Liabilities that arise from or in connection with a Third Party Claim, whether arising before, on or after the Initial Public Offering Date, and that are of or relate to the CVS Group or arise from or in connection with the conduct of the businesses of the CVS Group (other than the Linens Business) or the ownership or use of assets in connection therewith. Notwithstanding the foregoing, "CVS Liabilities" shall exclude (x) any Liabilities for Taxes (since such Liabilities shall be governed by the Tax Disaffiliation Agreement) and (y) any Liabilities specifically retained or assumed by Linens pursuant to this Agreement. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, codes, plans, permits, licenses and governmental restrictions, whether now or hereafter in effect, relating to the environment, the effect of the environment on human health or to emissions, discharges, releases, manufacturing, storage, processing, distribution, use, treatment, disposal, transportation or handling of pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic, radioactive or hazardous substances or wastes or the clean-up or other remediation thereof. "Finally Determined" means, with respect to any Action 2 3 or other matter, that the outcome or resolution of such Action or matter has been judicially determined by judgment or order not subject to further appeal or discretionary review. "Group" means, as the context requires, the Linens Group or the CVS Group. "Guaranteed Lease" has the meaning assigned to such term in Section 3.01. "Indemnified Party" has the meaning set forth in Section 2.04. "Indemnifying Party" has the meaning set forth in Section 2.04. "Initial Public Offering Date" means the business day as of which the Initial Public Offering shall be effected. "Lease Guarantee" has the meaning assigned to such term in Section 3.01. "Liabilities" means any and all claims, debts, liabilities and obligations, absolute or contingent, matured or not matured, liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever arising, including all costs and expenses relating thereto, and including, without limitation, those debts, liabilities and obligations arising under this Agreement, any law, rule, regulation, any action, order, injunction or consent decree of any governmental agency or entity, or any award of any arbitrator of any kind, and those arising under any agreement, commitment or undertaking. "Linens Business" means the businesses and operations (including, without limitation, the home textiles and housewares- related purchasing, distribution and sales operations and activities) associated with Linens or otherwise of the Linens Group, in each case whether conducted prior to, on or after the Initial Public Offering Date. "Linens Charter" means the Amended and Restated Certificate of Incorporation of Linens in effect as of the date hereof. "Linens Group" means Linens and its Subsidiaries as of (and, except where the context clearly indicates otherwise, after) the Initial Public Offering Date (including all predecessors to such Persons). "Linens Liabilities" means all (i) Liabilities of the 3 4 Linens Group under this Agreement and (ii) except as otherwise specifically provided herein or in the Tax Disaffiliation Agreement, other Liabilities that arise from or in connection with a Third Party Claim, whether arising before, on or after the Initial Public Offering Date, and that are of or relate to the Linens Group or arise from or in connection with the conduct of the Linens Business or the ownership or use of assets in connection therewith, including without limitation any such Liabilities that arise under or relate to Environmental Laws. Notwithstanding the foregoing, "Linens Liabilities" shall exclude: (x) any Liabilities for Taxes (since such Liabilities shall be governed by the Tax Disaffiliation Agreement), (y) any Liabilities arising from shareholder derivative lawsuits against CVS, and (z) any Liabilities specifically retained or assumed by CVS pursuant to this Agreement. "Losses" means, with respect to any Person, any and all damage, loss, liability and expense incurred or suffered by such Person (including, without limitation, reasonable expenses of investigation and reasonable attorneys' fees and expenses in connection with any and all Actions or threatened Actions). "1933 Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "1934 Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "Person" means an individual, corporation, limited liability company, partnership, association, trust or other entity or organization, including a governmental or political subdivision or an agency or instrumentality thereof. "Principal Stockholder" has the meaning assigned to such term in the Linens Charter. "Prospectus" means the prospectus relating to the Registration Statement in the form first used to confirm the sale of shares of Common Stock in the Initial Public Offering. "Registration Statement" means the registration statement on Form S-1 filed with the Commission relating to the offering and sale of the shares of Common Stock of Linens in the Initial Public Offering. "Stockholder Documents" means all of the agreements and other documents entered into between Linens and CVS in connection with the Initial Public Offering as contemplated hereby, including, without limitation, this Agreement, the Transitional Services Agreement and the Tax Disaffiliation Agreement. 4 5 "Subsidiary" means, with respect to any Person, any other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person. "Tax" means Tax as such term is defined in the Tax Disaffiliation Agreement. "Tax Disaffiliation Agreement" means the Tax Disaffiliation Agreement dated as of the date hereof between CVS and Linens. "Third-Party Claim" has the meaning set forth in Section 2.05. ARTICLE II INDEMNIFICATION Section 2.01. Linens Indemnification of the CVS Group. (a) Subject to Section 2.03, on and after the Initial Public Offering Date, Linens shall indemnify, defend and hold harmless the CVS Group and the respective directors, officers and Affiliates of each Person in the CVS Group (the "CVS Indemnitees") from and against any and all Losses incurred or suffered by any of the CVS Indemnitees arising out of, or due to the failure of any Person in the Linens Group to pay, perform or otherwise discharge, any of the Linens Liabilities. (b) Subject to Section 2.03, Linens shall indemnify, defend and hold harmless each of the CVS Indemnitees and each Person, if any, who controls any CVS Indemnitee within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act from and against any and all Losses caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if Linens shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such Losses are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information furnished to Linens in writing by CVS expressly for use therein. (c) Subject to Section 2.03, on and after the Initial Public Offering Date, Linens shall indemnify, defend and hold 5 6 harmless each of the CVS Indemnitees and each Person, if any, who controls any CVS Indemnitee from and against any and all Losses incurred or suffered by any of the CVS Indemnitees (i) due to the failure of any Person in the Linens Group to pay, perform or otherwise discharge its obligations under any of the Guaranteed Leases or (ii) otherwise arising out of or with respect to any of the Guaranteed Leases or Lease Guarantees, except in the case of this clause (ii), to the extent Losses are attributable to any breach of any agreement or covenant by the CVS Group under any Lease Guarantee. Section 2.02. CVS Indemnification of Linens Group. (a) Subject to Section 2.03, on and after the Initial Public Offering Date, CVS shall indemnify, defend and hold harmless the Linens Group and the respective directors, officers and Affiliates of each Person in the Linens Group (the "Linens Indemnitees") from and against any and all Losses incurred or suffered by any of the Linens Indemnitees and arising out of, or due to the failure of any Person in the CVS Group to pay, perform or otherwise discharge, any of the CVS Liabilities. (b) Subject to Section 2.03, CVS shall indemnify, defend and hold harmless each of the Linens Indemnities and each Person, if any, who controls any Linens Indemnitee within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act from and against any and all Losses caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if Linens shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such Losses are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information furnished to Linens in writing by CVS expressly for use therein. (c) The parties agree that, for purposes of Sections 2.01(b) and 2.02(b) hereof, the only information furnished to Linens in writing by CVS expressly for use in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if Linens shall have furnished any amendments or supplements thereto) is the information contained therein under the following captions: "Risk Factors--Control of the Company by CVS" and "Relationship with CVS". Section 2.03. Insurance; Third Party Obligations; Tax 6 7 Benefits. Any indemnification pursuant to Sections 2.01 or 2.02 shall be paid net of the amount of any insurance or other amounts that would be payable by any third party to the Indemnified Party (as defined below) in the absence of this Agreement (irrespective of time of receipt of such insurance or other amounts) and net of any tax benefit to the Indemnified Party attributable to the relevant payment or Liability. It is expressly agreed that no insurer or any other third party shall be (i) entitled to a benefit it would not be entitled to receive in the absence of the foregoing indemnification provisions, (ii) relieved of the responsibility to pay any claims to which it is obligated or (iii) entitled to any subrogation rights with respect to any obligation hereunder. Section 2.04. Notice and Payment of Claims. If any CVS Indemnitee or Linens Indemnitee (the "Indemnified Party") determines that it is or may be entitled to indemnification by any party (the "Indemnifying Party") under Article II (other than in connection with any Action subject to Section 2.05), the Indemnified Party shall deliver to the Indemnifying Party a written notice specifying, to the extent reasonably practicable, the basis for its claim for indemnification and the amount for which the Indemnified Party reasonably believes it is entitled to be indemnified. Within 30 days after receipt of such notice, the Indemnifying Party shall pay the Indemnified Party such amount in cash or other immediately available funds unless the Indemnifying Party objects to the claim for indemnification or the amount thereof. If the Indemnifying Party does not give the Indemnified Party written notice objecting to such indemnity claim and setting forth the grounds therefore within such 30-day period, the Indemnifying Party shall be deemed to have acknowledged its liability for such claim and the Indemnified Party may exercise any and all of its rights under applicable law to collect such amount. In the event of such a timely objection by the Indemnifying Party, the amount, if any, that is Finally Determined to be required to be paid by the Indemnifying Party in respect of such indemnity claim shall be paid by the Indemnifying Party to the Indemnified Party in cash within 15 days after such indemnity claim has been so Finally Determined. Section 2.05. Notice and Defense of Third-Party Claims. Promptly following the earlier of (i) receipt of notice of the commencement by a third party of any Action against or otherwise involving any Indemnified Party or (ii) receipt of information from a third party alleging the existence of a claim against an Indemnified Party, in either case, with respect to which indemnification may be sought pursuant to this Agreement (a "Third-Party Claim"), the Indemnified Party shall give the Indemnifying Party written notice thereof. The failure of the Indemnified Party to give notice as provided in this Section 2.05 7 8 shall not relieve the Indemnifying Party of its obligations under this Agreement, except to the extent that the Indemnifying Party is prejudiced by such failure to give notice. Within 30 days after receipt of such notice, the Indemnifying Party may (i) by giving written notice thereof to the Indemnified Party, acknowledge liability for such indemnification claim and at its option elect to assume the defense of such Third-Party Claim at its sole cost and expense or (ii) object to the claim for indemnification set forth in the notice delivered by the Indemnified Party pursuant to the first sentence of this Section 2.05; provided that if the Indemnifying Party does not within such 30-day period give the Indemnified Party written notice objecting to such indemnification claim and setting forth the grounds therefor, the Indemnifying Party shall be deemed to have acknowledged its liability for such indemnification claim. If the Indemnifying Party has elected to assume the defense of a Third-Party Claim, (x) the defense shall be conducted by counsel retained by the Indemnifying Party and reasonably satisfactory to the Indemnified Party, provided that the Indemnified Party shall have the right to participate in such proceedings and to be represented by counsel of its own choosing at the Indemnified Party's sole cost and expense; and (y) the Indemnifying Party may settle or compromise the Third Party Claim without the prior written consent of the Indemnified Party so long as such settlement includes an unconditional release of the Indemnified Party from all claims that are the subject of such Third Party Claim, provided that the Indemnifying Party may not agree to any such settlement pursuant to which any remedy or relief, other than monetary damages for which the Indemnifying Party shall be responsible hereunder, shall be applied to or against the Indemnified Party, without the prior written consent of the Indemnified Party, which consent shall not be unreasonably withheld. If the Indemnifying Party does not assume the defense of a Third-Party Claim for which it has acknowledged liability for indemnification hereunder, the Indemnified Party may require the Indemnifying Party to reimburse it on a current basis for its reasonable expenses of investigation, reasonable attorney's fees and reasonable out-of-pocket expenses incurred in defending against such Third-Party Claim and the Indemnifying Party shall be bound by the result obtained with respect thereto by the Indemnified Party; provided that the Indemnifying Party shall not be liable for any settlement effected without its consent, which consent shall not be unreasonably withheld. The Indemnifying Party shall pay to the Indemnified Party in cash the amount, if any, for which the Indemnified Party is entitled to be indemnified hereunder within 15 days after such Third Party Claim has been Finally Determined, in the case of an indemnity claim as to which the Indemnifying Party has acknowledged liability or, in the case of any indemnity claim as to which the Indemnifying Party has not acknowledged liability, within 15 days after such 8 9 Indemnifying Party's objection to liability hereunder has been Finally Determined. Section 2.06. Certain Limitations on Claims. Notwithstanding anything else contained in this Agreement, no claim may be made under Section 2.01(a), 2.01 (b), 2.02(a) or 2.02(b): (a) in respect of any single Loss claim or item of $500 or less, provided that this clause (a) shall not preclude a claim under any such Section in an amount in excess of $500 that is made up of several related claims or items that individually are less than $500 in amount, or (b) if the Loss giving rise to such claim is incurred after the fifth anniversary of the date hereof. Section 2.07. Contribution. If for any reason the indemnification provided for in Section 2.01 or 2.02 is unavailable to any Indemnified Party, or insufficient to hold it harmless, then, subject to the provisions of the Underwriting Agreement relating to the Initial Public Offering, the Indemnifying Party shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses in such proportion as is appropriate to reflect all relevant equitable considerations. Section 2.08. Non-Exclusivity of Remedies. The remedies provided for in this Article II are not exclusive and shall not limit any rights or remedies which may otherwise be available to any Indemnified Party at law or in equity. ARTICLE III CERTAIN AGREEMENTS RELATING TO LEASES; OTHER AGREEMENTS Section 3.01. Continuity of Existing Lease Guarantees. With respect to each real estate lease under which any Person in the Linens Group is a lessee or sublessee and that is in effect prior to the date hereof (including, without limitation, the leases set forth in Schedule 3.01 hereto (the "Scheduled Leases")) and that remains in effect following the date hereof (i) without any renewal option having been exercised or (ii) except in the case of the Scheduled Leases, by reason of the exercise of any renewal option provided for in the terms of such lease as in effect as of the date hereof (collectively, the "Guaranteed Leases"), any lease guarantee of such Guaranteed Lease provided by CVS or any of its Affiliates and in effect as of the date hereof (a "Lease Guarantee") will remain in effect after the date hereof for the duration of the term of such lease and, except in the case of the Scheduled Leases, any extension thereof pursuant to the exercise of any such renewal option. CVS 9 10 and its Affiliates shall be indemnified against any Losses arising from such Guaranteed Leases or Lease Guarantees, as provided in Section 2.01(c). Section 3.02. No New CVS Lease Guarantees To be Furnished After The Initial Public Offering. Except as expressly provided otherwise in Section 3.01, to the extent that any guarantee is required to be provided after the date hereof with respect to any real estate or other lease entered into by a Person in the Linens Group, such guarantee shall not be furnished by any Person in the CVS Group. Section 3.03. Intercompany Accounts. All intercompany receivable, payable and loan balances in existence as of the date hereof between the CVS Group and Linens Group will be eliminated as provided in Schedule 3.03 hereto. Section 3.04. Certain Rights Upon a Third Party Obtaining Above a Specified Ownership Level of Linens Common Stock. (a) No Person or group (within the meaning of Section 13(d) under the 1934 Act) of Persons shall become the beneficial owner (within the meaning of Rule 13d-3 under the 1934 Act) of a majority of the Common Stock (such beneficial ownership level being "Majority Beneficial Ownership") unless (i) CVS shall have 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, in form and substance acceptable to CVS, of the obligations of Linens under Section 2.01(c) of this Agreement. In addition, upon any such Person or group acquiring Majority Beneficial Ownership, CVS may, at its election, forthwith terminate its provision of any or all of the Services under the Transitional Services Agreement. (b) As soon as Linens is aware or has reason to believe that any Person or group proposes to acquire (or is considering acquiring) Majority Beneficial Ownership, (i) Linens shall promptly provide written notice thereof to CVS and (ii) Linens shall promptly inform such Person or group in writing of the provisions of this Section 3.04. So long as (x) Linens has a class of its capital stock registered under Section 12 of the 1934 Act and (y) the aggregate future minimum lease payments under the Guaranteed Leases is greater than $50 million, Linens shall disclose the provisions of this Section 3.04 in each Linens' Annual Report on Form 10-K filed under the 1934 Act. Section 3.05. Intellectual Property Rights and Licenses. Except as expressly set forth in Schedule 3.05 hereto, neither Group shall have any right or license in or to any 10 11 technology, software, intellectual property (including any trademark, service mark, patent or copyright), know-how or other proprietary right owned, licensed or held for use by the other Group. [Note: Linens has mentioned that certain licenses may be requested, but no requested licenses have yet been specified by Linens.] ARTICLE IV REGISTRATION RIGHTS Section 4.01. General. Linens grants to CVS and each other Person in the CVS Group that agrees to be bound by the terms of Appendix A hereto the registration rights set forth in Appendix A hereto. CVS, Nashua Hollis and Linens hereby agree to the terms and provisions set forth in Appendix A hereto. ARTICLE V ACCESS TO INFORMATION Section 5.01. Provision of Corporate Records. Immediately prior to or as soon as practicable following the Initial Public Offering Date, each Group shall provide to the other Group all documents, contracts, books, records and data (including but not limited to minute books, stock registers, stock certificates and documents of title) in its possession relating to such other Group or such other Group's business and affairs; provided that if any such documents, contracts, books, records or data relate to both Groups or the business and operations of both Groups, each such Group shall provide to the other Group true and complete copies of such documents, contracts, books, records or data. Section 5.02. Access to Information. From and after the Initial Public Offering Date until the later of (a) two years after the date hereof and (b) the date CVS ceases to be a Principal Stockholder, each Group shall afford promptly to the other Group and its accountants, counsel and other designated representatives reasonable access during normal business hours to all documents, contracts, books, records, computer data and other data in such Group's possession relating to such other Group or the business and affairs of such other Group (other than data and information subject to an attorney/client or other privilege), insofar as such access is reasonably required by such other 11 12 Group, including, without limitation, for audit, accounting, litigation and disclosure and reporting purposes. Section 5.03. Litigation Cooperation. Each Group shall use reasonable efforts to make available to the other Group and its accountants, counsel, and other designated representatives, upon written request, its directors, officers, employees and representatives as witnesses, and shall otherwise cooperate with the other Group, to the extent reasonably required in connection with any legal, administrative or other proceedings arising out of either Group's business and operations prior to the Initial Public Offering Date in which the requesting party may from time to time be involved. Section 5.04. Reimbursement. Each Group providing information or witnesses to the other Group, or otherwise incurring any expense in connection with cooperating, under Sections 5.01, 5.02 or 5.03 shall be entitled to receive from the recipient thereof, upon the presentation of invoices therefor, payment for all out-of-pocket costs and expenses (excluding charges for employee time) as may be reasonably incurred in providing such information, witnesses or cooperation. Section 5.05. Retention of Records. Except as otherwise required by law or agreed to in writing, each party shall, and shall cause the members of its respective Group to, retain all information relating to the other Group's business and operations in accordance with the past practice of such party. Notwithstanding the foregoing, any party may destroy or otherwise dispose of any such information at any time, provided that, prior to such destruction or disposal, (i) such party shall provide not less than 90 days' prior written notice to the other party, specifying the information proposed to be destroyed or disposed of, and (ii) if the recipient of such notice shall request in writing prior to the scheduled date for such destruction or disposal that any of the information proposed to be destroyed or disposed of be delivered to such requesting party, the party proposing the destruction or disposal shall promptly arrange for the delivery of such of the information as was requested at the expense of the requesting party. Section 5.06. Confidentiality. Each party shall hold and shall cause its directors, officers, employees, agents, consultants and advisors ("Representatives") to hold in strict confidence all information (other than any such information relating solely to the business or affairs of such party) concerning the other party unless (i) such party is compelled to disclose such information by judicial or administrative process or, in the opinion of its counsel, by other requirements of law or (ii) such information can be shown to have been (A) in the 12 13 public domain through no fault of such party or (B) lawfully acquired after the date hereof on a non-confidential basis from other sources. Notwithstanding the foregoing, such party may disclose such information to its Representatives so long as such Persons are informed by such party of the confidential nature of such information and are directed by such party to treat such information confidentially. If such party or any of its Representatives becomes legally compelled to disclose any documents or information subject to this Section, such party will promptly notify the other party so that the other party may seek a protective order or other remedy or waive such party's compliance with this Section. If no such protective order or other remedy is obtained or waiver granted, such party will furnish only that portion of the information which it is advised by counsel is legally required and will exercise its reasonable efforts to obtain reliable assurance that confidential treatment will be accorded such information. Such party agrees to be responsible for any breach of this Section by it and its Representatives. Section 5.07. Inapplicability of Article V to Tax Matters. Notwithstanding anything to the contrary in Article V, Article V shall not apply with respect to information, records and other matters relating to Taxes, all of which shall be governed by the Tax Disaffiliation Agreement. ARTICLE VI EMPLOYEE MATTERS 6.01 With respect to employee matters and employee benefit arrangements, the parties hereto agree as set forth in Schedule 6.01. 13 14 ARTICLE VII CVS' GOVERNANCE RIGHTS Section 7.01. Appointment of Outside Directors. Within three months after the date hereof, the Board of Directors of Linens (the "Linens Board") shall fill [two] of the vacancies on the Linens Board with individuals who are not officers or employees of any entity in the CVS Group or the Linens Group. Section 7.02. CVS Designated Directors. CVS shall have the right to designate the Applicable CVS Number of directors to the Linens Board and the right to designate the class of the Linens Board to which each such CVS designee shall be elected. In connection with each election of directors, Linens shall nominate each of the Applicable CVS Number of individuals designated by CVS (each, a "CVS Designee") as a director to the Board of Directors and shall recommend to the stockholders the election of each CVS Designee as a director (in the class so designated by CVS). Within three months after the date hereof, the Linens Board shall fill one or more vacancies on the Linens Board with individuals who are CVS Designees so that, after giving effect thereto, the Applicable CVS Number of CVS Designees shall serve as directors on the Linens Board. Section 7.03. Removal of CVS Designees. In the event of a decrease in the Applicable CVS Number at any time, (i) one or more (as appropriate) CVS Designees (selected by CVS as provided in clause (ii)) shall automatically be deemed removed from the Board effective at such time, and (ii) CVS shall have the right to select the individual[s] to be removed if any CVS Designee is to remain as a director after giving effect to such decrease; provided that if after giving effect to such decrease the Applicable CVS Number is zero, one CVS Designee (selected by CVS) shall continue to serve as a director until the next annual meeting of stockholders. Except as aforesaid or as provided in clause (g) of Article FIFTH of the Linens Charter, no CVS Designee may be removed from the Linens Board except with the written consent of CVS. CVS shall have the right to remove any CVS Designee at any time (such removal to be effective upon delivery of notice thereof to Linens), and the vacancy resulting from such removal shall be filled as provided in Section 7.04. Section 7.04. Filling of Vacancy of CVS Designee. In the event that (i) there occurs at any time a vacancy in the Linens Board by reason of the death, retirement, resignation, removal or other departure of any CVS Designee and (ii) after giving effect to such vacancy the number of CVS Designees on the Linens Board is less than the Applicable CVS Number at such time, the Linens Board will act as promptly as practicable to fill such 14 15 vacancy with a CVS Designee (and will so fill multiple vacancies, if necessary) so that, after giving effect to the election of such CVS Designee as a director, the Applicable CVS Number of CVS Designees shall serve as directors on the Linens Board. ARTICLE VIII MISCELLANEOUS Section 8.01. Notices. All notices and other communications to any party hereunder shall be in writing (including telex, telecopy or similar writing) and shall be deemed given when received addressed as follows: If to CVS, to: CVS Corporation 1 CVS Drive Woonsocket, Rhode Island 02895 Telecopy: (401) 765-XXXX Attention: Chief Financial Officer and General Counsel With a copy to: Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 Telecopy: (212) 450-4800 Attention: Dennis S. Hersch If to Linens, to: Linens 'n Things, Inc. 6 Brighton Road Clifton, New Jersey 07015 Telecopy: (201) 778-1300 Attention: With a copy to: Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 Telecopy: (212) 450-4800 Attention: Dennis S. Hersch Any party may, by written notice so delivered to the other parties, change the address to which delivery of any notice shall 15 16 thereafter be made. Section 8.02. Amendments; No Waivers. (a) Any provision of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by CVS and Linens, or in the case of a waiver, by the party against whom the waiver is to be effective. (b) No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. Section 8.03. Expenses. Except as specifically provided otherwise in this Agreement, the Transitional Services Agreement or the Tax Disaffiliation Agreement (including, without limitation, in Article II, Sections 3.03, 5.04, 5.05 and 8.08(c) and Schedule 6.01 of this Agreement, and Sections __ of the Transitional Services Agreement), all costs and expenses incurred in connection with the preparation, execution and delivery of the Stockholder Documents and the consummation of the Initial Public Offering (including the fees and expenses of all counsel, accountants and financial and other advisors of both Groups in connection therewith, and all expenses in connection with preparation, filing and printing of the Registration Statement relating to the Initial Public Offering) shall be paid by CVS; provided that Linens shall be responsible for and pay the fees, expenses and other amounts payable to the lenders under Linens's credit facilities and all other fees and expenses incurred in connection therewith (including the fees and expenses of Linens's counsel in connection with the preparation and negotiation of all documentation relating to such credit facilities). Section 8.04. Successor and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other parties hereto. Section 8.05. Governing Law. This Agreement shall be construed in accordance with and governed by the law of the State of New York (except for Article VII, which shall be construed in accordance with and governed by the law of the State of Delaware), without regard to the conflicts of laws rules of either such State. 16 17 Section 8.06. Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received a counterpart hereof signed by the other parties hereto. Section 8.07. Entire Agreement. This Agreement and the other Stockholder Documents constitute the entire understanding of the parties with respect to the subject matter hereof and thereof and supersede all prior agreements, understandings and negotiations, both written and oral, between the parties with respect to the subject matter hereof and thereof. No representation, inducement, promise, understanding, condition or warranty not set forth herein or in the other Stockholder Documents has been made or relied upon by any party hereto. Neither this Agreement nor any provision hereof is intended to confer upon any Person other than the parties hereto any rights or remedies hereunder. Section 8.08. Tax Disaffiliation Agreement; Set-Off. (a) Except as otherwise provided herein and not inconsistent with the Tax Disaffiliation Agreement, this Agreement shall not govern any Tax, and any and all claims, losses, damages, demands, costs, expenses or liabilities relating to Taxes shall be exclusively governed by the Tax Disaffiliation Agreement. (b) If, at the time Linens is required to make any payment to CVS under this Agreement, CVS owes Linens any amount under this Agreement or the Tax Disaffiliation Agreement, then such amounts shall be offset and the excess shall be paid by the party liable for such excess. Similarly, if at the time CVS is required to make any payment to Linens under this Agreement, Linens owes CVS any amount under this Agreement or the Tax Disaffiliation Agreement, then such amounts shall be offset and the excess shall be paid by the party liable for such excess. (c) If, pursuant to a Final Determination, any amount paid by CVS, Linens or their respective Post-Distribution Affiliates pursuant to this Agreement results in any increased Tax liability or reduction of any Tax Asset of any member of the Linens Group, Linens or its Post-Distribution Affiliates, or the CVS Group, CVS or its Post-Distribution Affiliates, respectively, then CVS or Linens, as the case may be, shall indemnify the other party and hold it harmless from any interest or penalty attributable to such increased Tax liability or the reduction of such Tax asset and shall pay to the other party, in addition to amounts otherwise owed, 100 percent of the After-Tax Amount. All capitalized terms used in this Section 8.08(c) and not otherwise 17 18 defined in this Agreement are used as defined in the Tax Disaffiliation Agreement. Section 8.09. Jurisdiction. Any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated hereby may be brought in the United States District Court for the Southern District of New York or the United States District Court for the District of Delaware or any other New York State court sitting in New York County or any other court of the State of Delaware, and each of the parties hereby consents to the jurisdiction of such courts (and of the appropriate appellate courts therefrom) in any such suit, action or proceeding and irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding which is brought in any such court has been brought in an inconvenient form. Process in any such suit, action or proceeding may be served on any party anywhere in the world, whether within or without the jurisdiction of any such court. Without limiting the foregoing, each party agrees that service of process on such party as provided in Section 8.01 shall be deemed effective service of process on such party. Section 8.10. Existing Arrangements. Except as otherwise contemplated hereby, all prior agreements and arrangements, including those relating to goods, rights or services provided or licensed, between the Linens Group and the CVS Group shall be terminated effective as of the Initial Public Offering Date, if not theretofore terminated. No such agreements or arrangements shall be in effect after the Initial Public Offering Date unless embodied in the Stockholder Documents. Section 8.11. Further Assurances. In addition to the actions specifically provided for elsewhere in the Stockholder Documents, each of the parties hereto shall use its reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable laws, regulations and agreements or otherwise to consummate and make effective the transactions contemplated by the Stockholder Documents. Section 8.12. Effective Date. This Agreement shall become effective upon the closing of the Initial Public Offering. Section 8.13. Captions. The captions herein are included for convenience of reference only and shall be ignored in the construction or interpretation hereof. 18 19 IN WITNESS WHEREOF the parties hereto have caused this Stockholder Agreement to be duly executed by their respective authorized officers as of the date first above written. [CVS] CORPORATION By ____________________________ Name: Title: LINENS 'N THINGS, INC. By ____________________________ Name: Title: NASHUA HOLLIS CVS, INC. By ____________________________ Name: Title: 19 20 SCHEDULE 6.01 EMPLOYEE MATTERS Section 1. General. Except as otherwise set forth in this Schedule 6.01, (a) CVS shall retain (i) any and all liabilities relating to or arising out of any employee benefit or compensation arrangement (a "Plan") in respect of any employee or former employee of CVS and any Affiliate of CVS who is not a Transferred Employee (as hereinafter defined), and (ii) any and all liabilities relating to or arising out of any Plan in respect of all Transferred Employees that were incurred or are otherwise related to any period prior to and including the Initial Public Offering Date and (b) CVS shall have no liability relating to or arising out of any Plan in respect of Transferred Employees to the extent that any such liability is incurred or otherwise relates to any period after the Initial Public Offering Date. Section 2. Employees. With respect to each individual [listed on Schedule 6.01A or] who, as of the Initial Public Offering Date, is employed (including persons absent from active service by reason of Short Term Disability or Long Term Disability, as hereinafter defined, or absence not relating to disability, whether paid or unpaid) in the Linens Business ("Transferred Employees"), Linens shall cause the employment of each Transferred Employee to be continued on the Initial Public Offering Date, provided that nothing stated herein shall limit the right of Linens or any Subsidiary to terminate the employment of any Transferred Employee following the Initial Public Offering Date or to reduce or otherwise modify the position, responsibilities, compensation or benefits of any Transferred Employee at any time, and provided further that an individual who is employed as of the Initial Public Offering Date by Linens or any of its Subsidiaries, but on such date is absent from active service and (i) is receiving Long Term Disability Benefits (as hereinafter defined) or (ii) is absent by reason of Short Term Disability but subsequently begins to receive Long Term Disability Benefits shall not be considered a Transferred Employee for purposes of the CVS Long Term Disability Plan. The employee benefit plans and arrangements maintained by Linens shall give full service credit for purposes of eligibility and vesting (and in connection with any such severance or vacation plan or policy, for purposes of determining the level of benefit) for any service on or prior to the Initial Public Offering Date of a Transferred Employee with CVS and its Subsidiaries. For purposes of this Agreement, (i) "Short Term Disability" shall mean a condition with respect to which an employee is receiving 20 21 benefits, as of the Initial Public Offering Date, under either the CVS Short Term Disability Plan or the CVS Salary Continuation Plan, and (ii) "Long Term Disability Benefits" shall mean benefits under the CVS Long Term Disability Plan. Section 3. Qualified Plans. (a) CVS shall retain all liabilities and obligations in respect to benefits accrued by Transferred Employees under CVS's ESOP. CVS shall cause each Transferred Employee to become 100% vested in the employee's account in CVS's ESOP as of the Initial Public Offering Date. As soon as practicable after the Initial Public Offering Date, CVS shall take such action as may be necessary, if any, to permit each Transferred Employee to exercise his rights under CVS's ESOP to effect an immediate distribution of such Transferred Employee's full account balances under CVS's ESOP or to effect a tax-free rollover of the taxable portion of the account balances into an eligible retirement plan (within the meaning of Section 401(a)(31) of the Internal Revenue Code ("Code"), a "Direct Rollover") maintained by Linens (the "Linens Plan") or to an individual retirement account. CVS and Linens shall work together in order to facilitate any such distribution or rollover and to effect a Direct Rollover for those participants who elect to roll over their account balances directly into the Linens Plan; provided that nothing contained herein shall obligate the Linens Plan to accept a Direct Rollover in a form other than cash. (b) On the Initial Public Offering Date, or as soon as practicable thereafter, Linens shall establish or designate the Linens Plan in order to accommodate the Direct Rollovers described above and shall take all action necessary, if any, to qualify the Linens Plan under the applicable provisions of the Code and shall make any and all filings and submissions to the appropriate governmental authorities required to be made by it in connection with any Direct Rollover. (c) As soon as practicable after the Initial Public Offering Date, Linens shall establish or designate an individual account plan (the "Successor Individual Account Plan"), which may be the same plan as the Linens Plan, for the benefit of Transferred Employees, shall take all necessary action, if any, to qualify such plan under the applicable provisions of the Code and shall make any and all filings and submissions to the appropriate governmental agencies required to be made by it in connection with the transfer of assets described below. CVS shall cause each Transferred Employee to be 100% vested in the employee's account balance under CVS's 401(k) Profit Sharing Plan as of the Initial Public Offering Date. No later than the date of the transfer described herein, Linens shall make all applicable 401(k), profit sharing, matching contributions and 21 22 qualified non-elective contributions payable under CVS's 401(k) Profit Sharing Plan with respect to Transferred Employees for periods on or prior to the Initial Public Offering Date and shall be entitled to retain any applicable reserves or accruals relating thereto. As soon as practicable following the Initial Public Offering Date, CVS shall cause the trustee of CVS's 401(k) Profit Sharing Plan to transfer in the form of cash or, to the extent applicable, notes representing outstanding loans made to Transferred Employees under CVS's 401(k) Profit Sharing Plan (or such other form as may be agreed to by CVS and Linens) the full account balances of Transferred Employees (and beneficiaries thereof) under CVS's 401(k) Profit Sharing Plan (which account balances will have been credited with appropriate earnings attributable to the period from the Initial Public Offering Date to the date of transfer described herein), reduced by any necessary benefit or withdrawal payments to or in respect of Transferred Employees occurring during the period from the Initial Public Offering Date to the date of transfer described herein, to the appropriate trustee as designed by Linens under the trust agreement forming a part of the Successor Individual Account Plan, it being understood that CVS is under no obligation to effect a distribution, payment or loan under CVS's 401(k) Profit Sharing Plan in respect of a Transferred Employee who either requests a loan or terminates employment after the Initial Public Offering Date but prior to the date of transfer described herein if the required distribution, payment or loan, as the case may be, forms have not been received by CVS prior to the last day of the month preceding the month in which the transfer described herein occurs. CVS and Linens agree to take such actions and enter into such agreements, if any, that may be necessary to effect the transfer described herein. In consideration for the transfer of assets described herein, Linens shall, effective as of the date of transfer described herein, assume all of the obligations of CVS in respect of the account balances accumulated by Transferred Employees under CVS's 401(k) Profit Sharing Plan (exclusive of any portion of such account balances which are paid or otherwise withdrawn prior to the date of transfer described herein) with respect to the account balances transferred to the Successor Individual Account Plan. CVS hereby indemnifies Linens, the Company and the Subsidiaries against and agrees to hold them harmless from any liabilities or claims (including claims for benefits or for breach of fiduciary duties, but excluding claims for benefits to the extent of the assets transferred hereunder) relating to CVS's 401(k) Profit Sharing Plan (or the qualified status of that Plan) which arose prior to the transfer of assets described herein or which relate to the operation or administration of that Plan prior to the transfer of assets. Linens hereby indemnifies CVS against and agrees to hold it harmless from any liabilities or claims relating to the qualified status of the Successor Individual Account Plan or the 22 23 operation or administration of that Plan following the transfer of assets described herein. Section 4. Welfare Plans and Worker Compensation. (a) Linens and its Affiliates shall each establish or designate welfare benefit plans, within the meaning of Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended, and applicable workers compensation plans, for the benefit of their respective Transferred Employees (the "Replacement Welfare Plans"). The Replacement Welfare Plans shall be effective as of the Initial Public Offering Date, provided, that at the request of Linens, CVS shall continue to provide, to the extent applicable, services for (i) Transferred Employees (and eligible spouses and dependents) and (ii) former employees of the Linens Business and their qualified beneficiaries who as of the Initial Public Offering Date are covered pursuant to Title X of the Consolidated Omnibus Budget Reconciliation Act of 1985 and Section 4980B of the Code under its Plans which provide medical, dental, life insurance, accidental death and dismemberment, pharmacy, eyecare and disability benefits for such period of time from the Initial Public Offering Date to not later than May 1, 1997 as Linens shall specify in such request (the "Benefit Transition Period"). Linens shall pay the claim and claims processing cost of such services during the Benefit Transition Period (including claims runout in respect of claims incurred both before and after the Initial Public Offering Date) and shall directly fund all medical and dental claims through a bank account set up solely for such purposes. In addition, Linens shall be entitled to retain any applicable reserves or accruals relating to such benefits. Linens and its designated Affiliates shall retain or assume all of the obligations for any retiree benefits under any welfare plan provided Transferred Employees (and dependents) and retirees (and dependents) terminated while employed by Linens and any Affiliate or while employed in the Linens Business prior to the Initial Public Offering Date. Linens and its Affiliates shall assume as of the end of the Benefit Transition Period all obligations to provide coverage and benefits for Transferred Employees and former employees of the Linens Business and their qualified beneficiaries under the Title X of the Consolidated Omnibus Budget Reconciliation Act of 1985 and Section 4980B of the Code. (b) Linens shall be responsible for all workers compensation claims, whether arising before or after the Initial Public Offering Date, with respect to any employee or former employee of the Linens Business, including, but not limited to, any Transferred Employee. In addition, Linens shall be entitled to retain any applicable reserves or accruals relating thereto. Section 5. Stock Options. Except as otherwise 23 24 provided in any agreement with a Transferred Employee, as of the Initial Public Offering Date all outstanding options issued to Transferred Employees to purchase CVS Common Stock that have heretofore been granted under any employee stock option plan of CVS and are exercisable on the Initial Public Offering Date shall be exercisable for a period of 90 days from the Initial Public Offering Date. Section 6. Bonus and Profit Incentive Plans. Except as otherwise provided in any agreement with a Transferred Employee, CVS shall have no liability for any bonus or profit incentive awards and Linens shall be responsible for all such awards relating to the period beginning on the Initial Public Offering Date. Section 7. Severance. The continued employment by Linens and its Affiliates of Transferred Employees after the Initial Public Offering Date shall not be deemed a severance of employment of such Transferred Employees from CVS for purposes of any policy, Plan, program or agreement of CVS or any of its Subsidiaries that provides for the payment of severance, salary continuation or similar benefits. Section 8. Supplemental Retirement Benefits and Deferred Compensation. (a) Linens and its Affiliates shall assume as of the Initial Public Offering Date all of the obligations and liabilities of CVS and any of its Affiliates for any Transferred Employee under the Deferred Compensation Plan of CVS Corporation and Affiliated Companies and any reserve or accrual in respect of such Transferred Employees shall be retained to Linens. (b) CVS shall have no liability for any obligation relating to Transferred Employees under the Supplemental Retirement Plans I and II for Select Senior Management of CVS Corporation and any Linens reserve or accrual in respect of such Transferred Employees shall be transferred to CVS. Section 9. No Third Party Beneficiaries. Neither Transferred Employees nor any current, former or retired employee of CVS or its affiliates shall be entitled to enforce the provisions of this Schedule 6.01 against the respective parties as third party beneficiaries thereof. 24 25 APPENDIX A REGISTRATION RIGHTS ARTICLE I DEFINITIONS 1.1. Definitions. (a) Terms defined in the Stockholder Agreement (the "Agreement") dated as of _________, 1996 between Melville Corporation, to be known as CVS Corporation ("CVS"), Nashua Hollis CVS, Inc. ("Nashua Hollis") and Linens 'n Things, Inc. ("Linens") are used herein as therein defined. (b) In addition, as used in this Appendix A, the following terms will have the following meanings, applicable both to the singular and the plural forms of the terms described: "Agreement" has the meaning ascribed thereto in Section 1.1(a) hereto, as such agreement may be amended and supplemented from time to time in accordance with its terms. "Company Securities" has the meaning ascribed thereto in Section 2.2(b). "CVS Holder" means any Holder that is a Person in the CVS Group. "CVS Holder Securities" has the meaning ascribed thereto in Section 2.2(b). "Disadvantageous Condition" has the meaning ascribed thereto in Section 2.1(a). "Holder" means CVS, each Subsidiary of CVS and any Transferee. "Initial Public Offering Date" means the date of completion of the initial sale of Common Stock in the Initial Public Offering. "Lockup Period" has the meaning ascribed thereto in Section 2.1(d). "Other Holders" has the meaning ascribed thereto in Section 2.2(c). 26 "Other Securities" has the meaning ascribed thereto in Section 2.2. "Person" means any individual, partnership, limited liability company, joint venture, corporation, trust, unincorporated organization, government (and any department or agency thereof) or other entity. "Registrable Securities" means Common Stock or any other class or series of capital stock of Linens and any stock or other securities into which or for which such capital stock may hereafter be changed, converted or exchanged and any other shares or securities issued to Holders of such capital stock (or such shares or other securities into which or for which such shares are so changed, converted or exchanged) upon any reclassification, share combination, share subdivision, share dividend, share exchange, merger, consolidation or similar transaction or event. As to any particular Registrable Securities, such Registrable Securities shall cease to be Registrable Securities when (i) a registration statement with respect to the sale by the Holder thereof shall have been declared effective under the 1933 Act and such securities shall have been disposed of in accordance with such registration statement, (ii) they shall have been distributed to the public in accordance with Rule 144, (iii) they shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been delivered by Linens and subsequent disposition of them shall not require registration or qualification of them under the 1933 Act or any state securities or blue sky law then in effect or (iv) they shall have ceased to be outstanding. "Registration Expenses" means any and all expenses incident to performance of or compliance with any registration or marketing of securities pursuant to Article II, including, without limitation, (i) the fees, disbursements and expenses of Linens' counsel and accountants in connection with this Agreement and the performance of Linens' obligations hereunder; (ii) all expenses, including filing fees, in connection with the preparation, printing and filing of the registration statement, any preliminary prospectus or final prospectus, any other offering document and amendments and supplements thereto and the mailing and delivering of copies thereof to any underwriters and dealers; (iii) the cost of printing or producing any agreements among underwriters, underwriting agreements, and blue sky or legal investment memoranda, any selling agreements and any other documents in connection with the offering, sale or delivery of the securities to be 2 27 disposed of; (iv) all expenses in connection with the qualification of the securities to be disposed of for offering and sale under state securities laws, including the fees and disbursements of counsel for the underwriters or the Holders of securities in connection with such qualification and in connection with any blue sky and legal investment surveys; (v) the filing fees incident to securing any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of the securities to be disposed of; (vi) transfer agents' and registrars' fees and expenses and the fees and expenses of any other agent or trustee appointed in connection with such offering; (vii) all security engraving and security printing expenses; (viii) all fees and expenses payable in connection with the listing of the securities on any securities exchange or automated interdealer quotation system or the rating of such securities; (ix) any other fees and disbursements of underwriters customarily paid by the issuers of securities, but excluding underwriting discounts and commissions and transfer taxes, if any; (x) the costs and expenses of Linens relating to analyst or investor presentations or any "road show" undertaken in connection with the registration and/or marketing of any Registrable Securities; and (xi) other reasonable out-of-pocket expenses of Holders other than legal fees and expenses referred to in clause (iv) above. "Rule 144" means Rule 144 (or any successor rule to similar effect) promulgated under the 1933 Act. "Rule 415 Offering" means an offering on a delayed or continuous basis pursuant to Rule 415 (or any successor rule to similar effect) promulgated under the 1933 Act. "Selling Holder" has the meaning ascribed thereto in Section 2.5(e). "Transferee" has the meaning ascribed thereto in Section 2.9. "Unfettered CVS Demand Registration" has the meaning ascribed thereto in clause (x) of the proviso to Section 2.1(a)(i). 1.2. Internal References. Unless the context indicates otherwise, references to Articles, Sections and paragraphs shall refer to the corresponding articles, sections and paragraphs in this Appendix A, and references to the parties shall mean the parties to the Agreement. 3 28 ARTICLE II REGISTRATION RIGHTS 2.1. Demand Registration - Registrable Securities. (a) Upon written notice provided at any time after the Initial Public Offering Date by a CVS Holder or, subject to Section 2.11(b)(i), by a Transferee requesting that Linens effect the registration under the 1933 Act of any or all of the Registrable Securities held by such requesting Holder, which notice shall specify the intended method or methods of disposition of such Registrable Securities, Linens shall prepare and (within 90 days (or, in the case of the Unfettered CVS Demand Registration contemplated in Section 2.1(d), immediately) after such request has been given) file with the Commission a registration statement with respect to such Registrable Securities and thereafter use its best efforts to effect the registration under the 1933 Act and applicable state securities laws of such Registrable Securities for disposition in accordance with the intended method or methods of disposition stated in such request (which requested method of disposition may be a Rule 415 Offering); provided that: (i) with respect to any registration statement filed, or to be filed, pursuant to this Section 2.1, if Linens shall furnish to the Holders of Registrable Securities that have made such request a certified resolution of the Board of Directors of Linens (adopted by the affirmative vote of a majority of the directors not designated by the CVS Group) stating that in the Board of Directors' good faith judgment it would (because of the existence of, or in anticipation of, any acquisition or other material event or transaction the public disclosure of which at the time would be materially prejudicial to Linens) be significantly disadvantageous (a "Disadvantageous Condition") to Linens for such a registration statement to be maintained effective, or to be filed and become effective, and setting forth the general reasons for such judgment, Linens shall be entitled to cause such registration statement to be withdrawn and the effectiveness of such registration statement terminated, or, in the event no registration statement has yet been filed, shall be entitled not to file any such registration statement, until such Disadvantageous Condition no longer exists (notice of which Linens shall promptly deliver to such Holders). Upon receipt of any such certification of a Disadvantageous Condition, such Holders shall forthwith discontinue use of the prospectus contained in such registration 4 29 statement and, if so directed by Linens, each such Holder will deliver to Linens all copies, other than permanent file copies then in such Holder's possession, of the prospectus then covering such Registrable Securities current at the time of receipt of such notice; provided that, notwithstanding anything else contained in the Stockholder Documents, (x) Linens shall have no right to delay the filing or effectiveness of a registration statement, to withdraw a registration statement, or to terminate its effectiveness pursuant to its rights under clause (i) until one registration statement filed pursuant to a request made by CVS under Section 2.1 (the "Unfettered CVS Demand Registration") shall have become effective and all the Registrable Securities registered thereunder for sale by CVS shall have been disposed of (whereupon the Unfettered CVS Demand Registration shall be deemed completed), and (y) subject to clause (x) of this proviso, (1) neither the filing nor the effectiveness of any such registration statement may be delayed for a period in excess of 180 days due to the occurrence of any particular Disadvantageous Condition and (2) Linens may exercise its delay rights under this clause (i) on only one occasion (and then for not more than 180 days) in connection with any registration request under Section 2.1; (ii) the CVS Holders may collectively exercise their rights under this Section 2.1 on not more than two occasions (including the Unfettered CVS Demand Registration as one of such two occasions) (the "CVS Personal Demands"); (iii) Holders will have the right to transfer the right to request a registration under Section 2.1 to transferees in accordance with Section 2.9, which Transferees may collectively exercise their rights under this Section 2.1 on not more than two occasions (it being understood that such transfers in accordance with Section 2.9 will not reduce the two CVS Personal Demands); (iv) following completion of the Unfettered CVS Demand Registration, the Holders of Registrable Securities shall not have the right to require the filing of a registration statement pursuant to this Section 2.1 within six months following the registration and sale of Registrable Securities effected pursuant to a prior exercise of the registration rights provided in this Section 2.1; and (v) following completion of the Unfettered CVS Demand Registration, a request for registration of Registrable Securities pursuant to this Section 2.1 may not be made unless the Registrable Securities subject 5 30 to such request represent (x) at least $ __ million in proposed gross offering proceeds to the Selling Holders, (y) at least ___ shares of Common Stock of Linens, or (z) if less than (x) and (y), all Registrable Securities then held by the requesting Holder. (b) Notwithstanding any other provision of this Agreement to the contrary, a registration requested by a Holder of Registrable Securities pursuant to this Section 2.1 shall not be deemed to have been effected (and, therefore, not requested (and rights of a Holder shall be deemed not to have been exercised) for purposes of paragraph (a) above), (i) unless it has become effective, (ii) if after it has become effective such registration is interfered with by any stop order, injunction or other order or requirement of the Commission or other governmental agency or court for any reason other than a misrepresentation or an omission by such Holder and, as a result thereof, the Registrable Securities requested to be registered cannot be completely distributed in accordance with the plan of distribution set forth in the related registration statement or (iii) if the conditions to closing specified in the purchase agreement or underwriting agreement entered into in connection with such registration are not satisfied or waived other than by reason of some act or omission by such Holder of Registrable Securities. (c) In the event that any registration pursuant to this Section 2.1 shall involve, in whole or in part, an underwritten offering, the Holders of a majority of the Registrable Securities to be registered shall have the right to designate an underwriter or underwriters as the lead or managing underwriters of such underwritten offering who shall, in the case of any registration effected following completion of the CVS Unfettered Demand Registration, be reasonably acceptable to Linens and, in connection with each registration pursuant to this Section 2.1, such Holders may select one counsel to represent all such Holders. (d) Notwithstanding anything else contained in any Stockholder Document, (i) it is understood that CVS intends that, subject to market conditions, the Unfettered CVS Demand Registration will be effected immediately after expiration of the 180-day underwriter "lockup" period (the "Lockup Period") provided for in the underwriting agreement relating to the Initial Public Offering and (ii) to that end, Linens agrees that it shall co-operate with CVS and take all action (including preparing a registration statement) during the Lockup Period so as to be in a position to file the registration statement relating to the Unfettered CVS Demand Registration with the Commission under the 1933 Act as soon as requested by any CVS Holder immediately after expiration of the Lockup Period. The right to request the CVS Unfettered Demand Registration (x) may be exercised only by a CVS Holder and may not be transferred to any Person that is not a CVS Holder and (y) may not be exercised as such after December 31, 1997. 6 31 (e) Subject to Section 2.11, Linens shall have the right to cause the registration of additional equity securities for sale for the account of any Person that is not a Holder (including, without limitation, Linens and any existing or former directors, officers or employees of the Linens Group) in any registration of Registrable Securities requested by the Holders pursuant to paragraph (a) above; provided that if such Holders are advised in writing (with a copy to Linens) by a nationally recognized investment banking firm selected by such Holders reasonably acceptable to Linens (which shall be the lead underwriter or a managing underwriter in the case of an underwritten offering and which, in the case of any registration effected after completion of the CUS Unfettered Demand Registration, shall be reasonably acceptable to Linens) that, in such firm's good faith view, all or a part of such additional equity securities cannot be sold and the inclusion of such additional equity securities in such registration would be likely to have an adverse effect on the price, timing or distribution of the offering and sale of the Registrable Securities then contemplated by any Holder, the registration of such additional equity securities or part thereof shall not be permitted. The Holders of the Registrable Securities to be offered pursuant to paragraph (a) above may require that any such additional equity securities be included in the offering proposed by such Holders on the same conditions as the Registrable Securities that are included therein. In the event that the number of Registrable Securities requested to be included in a registration statement by the Holders thereof exceeds the number which, in the good faith view of such investment banking firm, can be sold without adversely affecting the price, timing, distribution or sale of securities in the offering, the number shall be allocated pro rata among the requesting Holders on the basis of the relative number of Registrable Securities then held by each such Holder (provided that any number in excess of a Holder's request may be reallocated among the remaining requesting Holders in a like manner). 2.2. Piggyback Registration. Subject to Section 2.11, in the event that Linens proposes to register any of its Common Stock, any other of its equity securities or securities convertible into or exchangeable for its equity securities (collectively, including Common Stock, "Other Securities") under the 1933 Act, whether or not for sale for its own account, in a manner that would permit registration of Registrable Securities for sale for cash to the public under the 1933 Act, it shall (1) in the case of each such proposed registration prior to the later of (i) January 1, 1998 and (ii) such time as CVS beneficially owns less than 5% of Linens' Common Stock, give prompt written notice to each Holder of Registrable Securities, and (2) in the case of each such proposed registration occurring after 7 32 expiration of the period referred to in clause (1) and prior to December 31, 1999, give prompt written notice to each Holder of Registrable Securities (other than any CVS Holder), in the case of each of clause (1) and (2), of its intention to do so and of the rights of such Holder under this Section 2.2 (with only the Holders so required to be notified pursuant to the foregoing clauses (1) and (2) having rights pursuant to this Section 2.2). Subject to the terms and conditions hereof, such notice shall offer each such Holder the opportunity to include in such registration statement such number of Registrable Securities as such Holder may request. Upon the written request of any such Holder made within 15 days after the receipt of Linens' notice (which request shall specify the number of Registrable Securities intended to be disposed of and the intended method of disposition thereof), Linens shall use its best efforts to effect, in connection with the registration of the Other Securities, the registration under the 1933 Act of all Registrable Securities which Linens has been so requested to register, to the extent required to permit the disposition (in accordance with such intended methods thereof) of the Registrable Securities so requested to be registered; provided, that: (a) if, at any time after giving such written notice of its intention to register any Other Securities and prior to the effective date of the registration statement filed in connection with such registration, Linens shall determine for any reason not to register the Other Securities, Linens may, at its election, give written notice of such determination to such Holders and thereupon Linens shall be relieved of its obligation to register such Registrable Securities in connection with the registration of such Other Securities, without prejudice, however, to the rights of the Holders of Registrable Securities immediately to request that such registration be effected as a registration under Section 2.1 to the extent permitted thereunder; (b) if the registration referred to in the first sentence of this Section 2.2 is to be an underwritten registration on behalf of Linens, and a nationally recognized investment banking firm selected by Linens advises Linens in writing that, in such firm's good faith view, the inclusion of all or a part of such Registrable Securities in such registration would be likely to have an adverse effect upon the price, timing or distribution of the offering and sale of the Other Securities then contemplated, Linens shall include in such registration: (i) first, all Other Securities Linens proposes to sell for its own account ("Company Securities"), (ii) second, up to the full number 8 33 of Registrable Securities held by CVS Holders that are requested to be included in such registration (Registrable Securities that are so held being sometimes referred to herein as "CVS Holder Securities") in excess of the number of Company Securities to be sold in such offering which, in the good faith view of such investment banking firm, can be sold without adversely affecting such offering and the sale of the Other Securities then contemplated (and (x) if such number is less than the full number of such CVS Holder Securities, such number shall be allocated by CVS among such CVS Holders and (y) in the event that such investment banking firm advises that less than all of such CVS Holder Securities may be included in such offering, such CVS Holders may withdraw their request for registration of their Registrable Securities under this Section 2.2 and request that 90 days subsequent to the effective date of the registration statement for the registration of such Other Securities such registration of CVS Holder Securities be effected as a registration under Section 2.1 to the extent permitted thereunder), (iii) third, up to the full number of Registrable Securities held by Holders (other than the CVS Holders) of Registrable Securities that are requested to be included in such registration in excess of the number of Company Securities and CVS Holder Securities to be sold in such offering which, in the good faith view of such investment banking firm, can be so sold without so adversely affecting such offering (and (x) if such number is less than the full number of such Registrable Securities, such number shall be allocated pro rata among such Holders on the basis of the number of Registrable Securities requested to be included therein by each such Holder and (y) in the event that such investment banking firm advises that less than all of such Registrable Securities may be included in such offering, such Holders may withdraw their request for registration of their Registrable Securities under this Section 2.2 and request that 90 days subsequent to the effective date of the registration statement for the registration of such Other Securities such registration be effected as a registration under Section 2.1 to the extent permitted thereunder), and (iv) fourth, up to the full number of the Other Securities (other than Company Securities), if any, in excess of the number of Company Securities and Registrable Securities to be sold in such offering which, in the good faith view of such investment banking firm, can be so sold without so adversely affecting such offering (and, if such number is less than the full number of such Other Securities, such number shall be allocated pro rata among the holders of such Other Securities (other than Company Securities) on the basis of the number of securities requested to be included therein by each such holder); 9 34 (c) if the registration referred to in the first sentence of this Section 2.2 is to be an underwritten secondary registration, permitted by Section 2.11, on behalf of holders (the "Other Holders") of Other Securities that are not Holders, and the lead underwriter or managing underwriter advises Linens in writing that in their good faith view, all or a part of such Other Securities cannot be sold and the inclusion of such additional securities in such registration would be likely to have an adverse effect on the price, timing or distribution of the offering and sale of the Other Securities then contemplated, Linens shall include in such registration the number of securities (including Registrable Securities) that such underwriters advise can be so sold without adversely affecting such offering, allocated pro rata among the Other Holders and the Holders of Registrable Securities on the basis of the number of securities (including Registrable Securities) requested to be included therein by each Other Holder and each Holder of Registrable Securities; provided, that if such Other Holders have requested that such registration statement be filed pursuant to demand registration rights granted to them by Linens in accordance with Section 2.11, Linens shall include in such registration (1) first, Other Securities sought to be included therein by the Other Holders pursuant to the exercise of such demand registration rights, (2) second, the number of CVS Holder Securities sought to be included in such registration in excess of the number of Other Securities sought to be included in such registration by the Other Holders which in the good faith view of such investment banking firm, can be so sold without so adversely affecting such offering (and (x) if such number is less than the full number of such CVS Holder Securities, such number shall be allocated by CVS among such CVS Holders and (y) in the event that such investment banking firm advises that less than all of such CVS Holder Securities may be included in such offering, such CVS Holders may withdraw their request for registration of their Registrable Securities under this Section 2.2 and request that 90 days subsequent to the effective date of the registration statement for the registration of such Other Securities such registration be effected as a registration under Section 2.1 to the extent permitted thereunder) and (3) third, the number of Registrable Securities sought to be included in such registration by Holders (other than the CVS Holders) of Registrable Securities in excess of the number of Other Securities and the number of CVS Holder Securities sought to be included in such registration which, in the good faith view of such investment banking firm, can be so sold without so adversely affecting such offering (and (x) if such number is less than the full number of such Registrable Securities, such number shall be allocated pro rata among such Holders 10 35 on the basis of the number of Registrable Securities requested to be included therein by each such Holder and (y) in the event that such investment banking firm advises that less than all of such Registrable Securities may be included in such offering, such Holders may withdraw their request for registration of their Registrable Securities under this Section 2.2 and request that 90 days subsequent to the effective date of the registration statement for the registration of such Other Securities such registration be effected as a registration under Section 2.l to the extent permitted thereunder); (d) Linens shall not be required to effect any registration of Registrable Securities under this Section 2.2 incidental to the registration of any of its securities in connection with mergers, acquisitions, exchange offers, subscription offers, dividend reinvestment plans or stock option or other executive or employee benefit or compensation plans; and (e) no registration of Registrable Securities effected under this Section 2.2 shall relieve Linens of its obligation to effect a registration of Registrable Securities pursuant to Section 2.1. 2.3. Expenses. Except as provided herein, Linens shall pay all Registration Expenses with respect to a particular offering (or proposed offering). Notwithstanding the foregoing, (i) each Holder and Linens shall be responsible for its own internal administrative and similar costs, which shall not constitute Registration Expenses, and (ii) each Holder shall be responsible for the legal fees and expenses of its own counsel in connection with any registration requested by a Holder pursuant to Section 2.1. 2.4. Registration and Qualification. If and whenever Linens is required to effect the registration of any Registrable Securities under the 1933 Act as provided in Sections 2.1 or 2.2, Linens shall as promptly as practicable: (a) prepare, file and use its reasonable best efforts to cause to become effective a registration statement under the 1933 Act relating to the Registrable Securities to be offered in accordance with the intended method of disposition thereof; (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and 11 36 to comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities until the earlier of (A) such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition set forth in such registration statement and (B) the expiration of 90 days (or, in the case of the Unfettered CVS Demand Registration, six months) after such registration statement becomes effective; provided, that such six-month or 90-day period shall be extended for such number of days that equals the number of days elapsing from (x) the date the written notice contemplated by paragraph (f) below is given by Linens to (y) the date on which Linens delivers to the Holders of Registrable Securities the supplement or amendment contemplated by paragraph (f) below; (c) furnish to the Holders of Registrable Securities and to any underwriter of such Registrable Securities such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and any summary prospectus), in conformity with the requirements of the 1933 Act, such documents incorporated by reference in such registration statement or prospectus, and such other documents, as the Holders of Registrable Securities or such underwriter may reasonably request, and a copy of any and all transmittal letters or other correspondence to or received from, the Commission or any other governmental agency or self-regulatory body or other body having jurisdiction (including any domestic or foreign securities exchange) relating to such offering; (d) use its best efforts to register or qualify all Registrable Securities covered by such registration statement under the securities or blue sky laws of such jurisdictions as the Holders of such Registrable Securities or any underwriter of such Registrable Securities shall request, and use its best efforts to obtain all appropriate registrations, permits and consents in connection therewith, and do any and all other acts and things which may be necessary or advisable to enable the Holders of Registrable Securities or any such underwriter to consummate the disposition in such jurisdictions of its Registrable Securities covered by such registration statement; provided, that Linens shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any such jurisdiction wherein it is not so qualified or to consent to general service of process in any such jurisdiction; 12 37 (e) (i) use its best efforts to furnish to each Holder of Registrable Securities included in such registration (each, a "Selling Holder") and to any underwriter of such Registrable Securities an opinion of counsel for Linens addressed to each Selling Holder and dated the date of the closing under the underwriting agreement (if any) (or if such offering is not underwritten, dated the effective date of the registration statement), and (ii) use its best efforts to furnish to each Selling Holder a "cold comfort" letter addressed to each Selling Holder and signed by the independent public accountants who have audited the financial statements of Linens included in such registration statement, in each such case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities and such other matters as the Selling Holders may reasonably request and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements; (f) as promptly as practicable, notify the Selling Holders in writing (i) at any time when a prospectus relating to a registration pursuant to Sections 2.1 or 2.2 is required to be delivered under the 1933 Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and (ii) of any request by the Commission or any other regulatory body or other body having jurisdiction for any amendment of or supplement to any registration statement or other document relating to such offering, and in either such case, at the request of the Selling Holders prepare and furnish to the Selling Holders a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading; (g) if reasonably requested by the lead or managing underwriters, use its best efforts to list all such Registrable Securities covered by such registration on each securities exchange and automated inter-dealer quotation 13 38 system on which a class of common equity securities of Linens is then listed; (h) send appropriate officers of Linens to attend any "road shows" and analysts presentations scheduled in connection with any such registration and use reasonable efforts to co-operate as requested by the Holders in the marketing of the Registrable Securities, with all out-of-pocket costs and expense incurred by Linens or such officers in connection with such attendance or co-operation to be paid by Linens; and (i) furnish for delivery in connection with the closing of any offering of Registrable Securities pursuant to a registration effected pursuant to Sections 2.1 or 2.2 unlegended certificates representing ownership of the Registrable Securities being sold in such denominations as shall be requested by the Selling Holders or the underwriters. 2.5. Conversion of Other Securities, Etc. In the event that any Holder offers any options, rights, warrants or other securities issued by it or any other Person that are offered with, convertible into or exercisable or exchangeable for any Registrable Securities, the Registrable Securities underlying such options, rights, warrants or other securities shall continue to be eligible for registration pursuant to Sections 2.1 and 2.2. 2.6. Underwriting; Due Diligence. (a) If requested by the underwriters for any underwritten offering of Registrable Securities pursuant to a registration requested under this Article II, Linens shall enter into an underwriting agreement with such underwriters for such offering, which agreement will contain such representations and warranties by Linens and such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, including, without limitation, indemnification and contribution provisions substantially to the effect and to the extent provided in Section 2.7, and agreements as to the provision of opinions of counsel and accountants' letters to the effect and to the extent provided in Section 2.4(e). The Selling Holders on whose behalf the Registrable Securities are to be distributed by such underwriters shall be parties to any such underwriting agreement and the representations and warranties by, and the other agreements on the part of, Linens to and for the benefit of such underwriters, shall also be made to and for the benefit of such Selling Holders. Such underwriting agreement shall also contain such representations and warranties by such Selling Holders and 14 39 such other terms and provisions as are customarily contained in underwriting agreements with respect to secondary distributions, including, without limitation, indemnification and contribution provisions substantially to the effect and to the extent provided in Section 2.7. (b) In connection with the preparation and filing of each registration statement registering Registrable Securities under the 1933 Act pursuant to this Article II, Linens shall give the Holders of such Registrable Securities and the underwriters, if any, and their respective counsel and accountants, such reasonable and customary access to its books, records and properties and such opportunities to discuss the business and affairs of Linens with its officers and the independent public accountants who have certified the financial statements of Linens as shall be necessary, in the opinion of such Holders and such underwriters or their respective counsel, to conduct a reasonable investigation within the meaning of the 1933 Act; provided, that such Holders and the underwriters and their respective counsel and accountants shall use their reasonable best efforts to coordinate any such investigation of the books, records and properties of Linens and any such discussions with Linens' officers and accountants so that all such investigations occur at the same time and all such discussions occur at the same time. 2.7. Indemnification and Contribution. (a) Linens agrees to indemnify and hold harmless each Selling Holder and each person, if any, who controls each Selling Holder within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) insofar as such losses, claims, damages or liabilities are caused by any untrue statement or alleged untrue statement of a material fact contained in any registration statement or any amendment thereof, any preliminary prospectus or prospectus (as amended or supplemented if Linens shall have furnished any amendments or supplements thereto) relating to the Registrable Securities, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to a Selling Holder furnished to Linens in writing by a Selling Holder expressly for use therein. Linens also agrees to indemnify any 15 40 underwriter of the Registrable Securities so offered and each person, if any, who controls such underwriter on substantially the same basis as that of the indemnification by Linens of the Selling Holder provided in this Section 2.7(a). (b) Each Selling Holder agrees to indemnify and hold harmless Linens, its directors, the officers who sign the Registration Statement and each person, if any who controls Linens within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) insofar as such losses, claims, damages or liabilities are caused by any untrue statement or alleged untrue statement of a material fact contained in any registration statement or any amendment thereof, any preliminary prospectus or prospectus (as amended or supplemented if Linens shall have furnished any amendments or supplements thereto) relating to the Registrable Securities, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only with reference to information relating to a Selling Holder furnished in writing by or on behalf of a Selling Holder expressly for use in a registration statement, any preliminary prospectus, prospectus or any amendments or supplements thereto. Each Selling Holder also agrees to indemnify any underwriter of the Registrable Securities so offered and each person, if any, who controls such underwriter on substantially the same basis as that of the indemnification by such Selling Holder of Linens provided in this Section 2.7(b). (c) Each party indemnified under paragraph (a) or (b) above shall, promptly after receipt of notice of a claim or action against such indemnified party in respect of which indemnity may be sought hereunder, notify the indemnifying party in writing of the claim or action; provided, that the failure to notify the indemnifying party shall not relieve it from any liability that it may have to an indemnified party on account of the indemnity agreement contained in paragraph (a) or (b) above except to the extent that the indemnifying party was actually prejudiced by such failure, and in no event shall such failure relieve the indemnifying party from any other liability that it may have to such indemnified party. If any such claim or action shall be brought against an indemnified party, and it shall have notified the indemnifying party thereof, unless in such indemnified party's reasonable judgment a conflict of 16 41 interest between such indemnified party and indemnifying parties may exist in respect of such claim, the indemnifying party shall be entitled to participate therein, and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 2.7 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation. Any indemnifying party against whom indemnity may be sought under this Section 2.7 shall not be liable to indemnify an indemnified party if such indemnified party settles such claim or action without the consent of the indemnifying party. The indemnifying party may not agree to any settlement of any such claim or action, other than solely for monetary damages for which the indemnifying party shall be responsible hereunder, the result of which any remedy or relief shall be applied to or against the indemnified party, without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld. In any action hereunder as to which the indemnifying party has assumed the defense thereof with counsel satisfactory to the indemnified party, the indemnified party shall continue to be entitled to participate in the defense thereof, with counsel of its own choice, but the indemnifying party shall not be obligated hereunder to reimburse the indemnified party for the costs thereof. (d) If the indemnification provided for in this Section 2.7 shall for any reason be unavailable (other than in accordance with its terms) to an indemnified party in respect of any loss, liability, cost, claim or damage referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, cost, claim or damage (A) as between Linens and the underwriters, (i) in such proportion as is appropriate to reflect the relative benefits received by Linens on the one hand and the underwriters on the other hand from the offering of the Registrable Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the statements or omissions that resulted in 17 42 such losses, claims, damages or liabilities, as well as any other relevant equitable considerations, and (B) as between (x) Linens and the Selling Holders, or (y) the Selling Holders and the underwriters, in such proportion as is appropriate to reflect the relative fault of the indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by Linens on the one hand and the underwriters on the other hand in connection with the offering of the Registrable Securities shall be deemed to be in the same respective proportions as the net proceeds from the offering of the Registrable Securities (before deducting expenses) (as if, for purposes of this clause (d), Linens had received the proceeds of any secondary offering) and the total underwriting discounts and commissions received by the underwriters, in each case as set forth in the table on the cover of a prospectus, bear to the aggregate public offering price of the Registrable Securities. The relative fault of Linens and the Selling Holder on the one hand and the underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by Linens, by a Selling Holder or by the underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by an indemnified party as a result of the loss, cost, claim, damage or liability, or action in respect thereof, referred to above in this paragraph (d) shall be deemed to include, for purposes of this paragraph (d), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Linens and the Selling Holders agree that it would not be just and equitable if contribution pursuant to this Section 2.7 were determined by pro rata allocation (even if the underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this paragraph. Notwithstanding any other provision of this Section 2.7, no Selling Holder shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Securities of such Selling Holder were offered to the public exceeds the amount of any damages which such Selling Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. Each Selling Holder's obligations to 18 43 contribute pursuant to this Section 2.7 are several in proportion to the proceeds of the offering received by such Selling Holder bears to the total proceeds of the offering received by all the Selling Holders and not joint. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (e) Indemnification and contribution similar to that specified in the preceding paragraphs of this Section 2.7 (with appropriate modifications) shall be given by Linens, the Selling Holders and underwriters with respect to any required registration or other qualification of securities under any state law or regulation or governmental authority. (f) The obligations of the parties under this Section 2.7 shall be in addition to any liability which any party may otherwise have to any other party. 2.8. Rule 144 and Form S-3. Commencing 90 days after the Initial Public Offering Date, Linens shall use its best efforts to ensure that the conditions to the availability of Rule 144 set forth in paragraph (c) thereof shall be satisfied. Upon the request of any Holder of Registrable Securities, Linens will deliver to such Holder a written statement as to whether it has complied with such requirements. Linens further agrees to use its reasonable efforts to cause all conditions to the availability of Form S-3 (or any successor form) under the 1933 Act for the filing of registration statements under this Agreement to be met as soon as practicable after the Initial Public Offering Date. 2.9. Transfer of Registration Rights. Any Holder may, at any time prior to January 1, 1998, transfer all or any portion of its rights under Article II to any transferee of Registrable Securities owned by such Holder (each transferee that receives such Registrable Securities, a "Transferee"). Any transfer of registration rights pursuant to this Section 2.9 shall be effective upon receipt by Linens of (i) written notice from such Holder stating the name and address of any Transferee and identifying the number of Registrable Securities with respect to which the rights under this Agreement are being transferred and the nature of the rights so transferred and (ii) a written agreement from such Transferee to be bound by the terms of this Appendix. The Holders may exercise their rights hereunder in such priority as they shall agree upon among themselves. 19 44 2.10. Holdback Agreement. If any registration pursuant to this Article II shall be in connection with an underwritten public offering of Registrable Securities, each Selling Holder agrees not to effect any public sale or distribution, including any sale under Rule 144, of any equity security of Linens (otherwise than through the registered public offering then being made), within 7 days prior to or 90 days (or such lesser period as the lead or managing underwriters may permit) after the effective date of the registration statement (or the commencement of the offering to the public of such Registrable Securities in the case of Rule 415 Offerings). Linens hereby also so agrees and agrees to cause each other holder of equity securities or securities convertible into or exchangeable or exercisable for such securities (other than in the case of equity securities issued under dividend reinvestment plans or employee stock plans) purchased from Linens otherwise than in a public offering to so agree. 2.11 Restrictions on Other Registrations and Registration Rights. (a) If during the period after Expiration of the Lockup Period and prior to any written notice having been provided by a CVS Holder to Linens pursuant to Section 2.1(a) in respect of the CVS Unfettered Demand Registration Linens desires to register any of its equity securities under the 1993 Act for sale for its own account, Linens may during such period notify CVS to such effect. Within 14 days after receipt of such notice from Linens, a CVS Holder may provide written notice to Linens exercising such CVS Holder's right to require that the CVS Unfettered Demand Registration then be effected pursuant to Section 2.1, in which case Linens shall have the right to include additional securities in the CVS Unfettered Demand Registration for Linens' own account to the extent permitted by Section 2.1(e). If no CVS Holder within such 14 day period exercises the right of a CVS Holder to require that the CVS Unfettered Demand Registration then be effected pursuant to Section 2.1, Linens may proceed to effect a registration of any of its equity securities for its own account; provided that (i) the CVS Holders shall not in such case lose their right to require that the CVS Unfettered Demand Registration be effected at any time thereafter pursuant to Section 2.1(a), (ii) if Linens does not effect such registration for its own account within 30 days after the end of such 14 day period, Linens shall not be permitted to effect such registration without first again complying with the provisions of this Section 2.11(a), and (iii) Linens shall be required to again comply with the provisions of this Section 2.11(a) should Linens desire to effect a subsequent registration of its equity securities for its own account during the period referred to in the first sentence of this Section 2.11(a). (b) Notwithstanding anything else contained in the Stockholder Documents, except as provided in Section 2.11(a), Linens shall not, without the prior written consent of CVS: (i) effect the registration under the 1933 Act of any equity security of Linens for sale for the account of Linens or any other Person (except for (i) any registration requested by a CVS Holder in accordance with the terms hereof, and (ii) any registration on Form S-8 of securities issued to Linens employees pursuant to stock option or other executive or employee benefit or compensation plans) until after completion of the Unfettered CVS Demand Registration, or (ii) grant or issue to any Person any right, or enter into any agreement with any Person entitling such Person, to request or require that Linens effect, prior to January 1, 1998, the registration under the 1933 Act of any security of Linens for the account of any Person (other than the rights granted to the Holders hereunder). ARTICLE III PRIVATE PLACEMENTS 3.1 Private Placements. (a) Linens will use its reasonable best efforts to cooperate with and assist the CVS Holders, at their request, in the marketing by the CVS Holders, at any time and from time to time prior to December 20 45 31, 1997, of any securities of Linens held by the CVS Holders in any private transaction not requiring registration under the 1933 Act, including without limitation (i) providing reasonable access to Linens' books, records, properties, offices, officers, employees, accountants, counsel, and other agents, (ii) making available senior management of Linens for participation in analyst, investor and "road show" presentations, and (iii) in preparation of a private placement memorandum or other selling or marketing materials (the "Selling Materials") relating to any such sale of Linens securities. (b) Linens shall be responsible for all expenses incurred in connection with such co-operation, assistance and marketing efforts contemplated by Section 3.1(a), including, without limitation, (1) the fees, disbursements and expenses of Linens' counsel and accountants in connection therewith, (2) all expenses in connection with the preparation and printing of all Selling Materials and amendments and supplements thereto and the mailing and delivering of copies thereof to any placement agents and other intermediaries, (3) the cost of preparing and printing or producing any agreements with placement agents or other intermediaries involved in such private placement transaction and any blue sky or legal investment memoranda, any selling agreements and any other documents in connection with the offering, sale or delivery of the securities to be disposed of, (4) all expenses in connection with the qualification of the securities to be disposed of for offering and sale under state securities laws, including the fees and disbursements of counsel for the placement agents or other intermediaries or the CVS Holders of securities in connection with such qualification and in connection with any blue sky and legal investment surveys, (5) transfer agents' and registrars' fees and expenses and the fees and expenses of any other agent or trustee appointed in connection with such transaction, (6) all security engraving and security printing expenses, (7) all fees and expenses payable in connection with the rating of such securities, (8) any other fees and disbursements of placement agents or other intermediaries customarily paid by the issuers of securities, but excluding placement or selling fees and commissions and transfer taxes, if any, (9) the costs and expenses of Linens relating to analyst or investor presentations or any "road show" undertaken in connection with the marketing of any such securities, and (10) other reasonable out-of-pocket expenses of CVS Holders in connection therewith. Notwithstanding the foregoing, (i) each CVS Holder and Linens shall be responsible for its own internal administrative and similar costs, and (ii) each CVS Holder shall be responsible for the legal fees and expenses 21 46 of its own counsel in connection with any marketing efforts requested by a CVS Holder pursuant to Section 3.1. (c) Linens agrees to indemnify and hold harmless each CVS Holder and each person, if any, who controls each CVS Holder within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) insofar as such losses, claims, damages or liabilities are caused by any untrue statement or alleged untrue statement of a material fact contained in any such Selling Materials or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to a CVS Holder furnished to Linens in writing by a CVS Holder expressly for use therein. CVS agrees to indemnify and hold harmless Linens and each person who so controls Linens to the same extent as the foregoing indemnity by Linens of the CVS Holders and persons so controlling the CVS Holders but only with reference to information relating to a CVS Holder furnished to Linens in writing by a CVS Holder expressly for use therein. The provisions and procedures set forth in Section 2.7(c) shall apply in the case of any indemnification claim made under the foregoing provisions of this Section 3.1(c). (d) To the extent that indemnification under Section 3.1(c) is unavailable for any reason or insufficient to hold any indemnified party harmless, the indemnifying party will contribute to the amount paid or payable by the indemnified party, in such proportion as is appropriate to reflect the relative fault of the indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the statements or omissions that resulted in the losses, claims, damages or liabilities (with such relative fault to be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by Linens or by a CVS Holder and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission). 22 47 (e) Nothing contained in this Article III and no performance by Linens of its obligations under this Article III shall in any way limit or reduce the rights of any Holder under Article II or any other provision of Appendix A. 23 EX-10.3 7 TAX DISAFFILIATION AGREEMENT 1 EXHIBIT 10.3 TAX DISAFFILIATION AGREEMENT between CVS CORPORATION, on behalf of itself and its Post-Deconsolidation Affiliates and LINENS 'N THINGS, INC., on behalf of itself and its Post-Deconsolidation Affiliates 2 1. Definitions ----------- 2. Federal and State Taxes--Administrative and Compliance Matters. --------------------------------------------------------------- (a) Sole Tax Sharing Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 -------------------------- (b) Designation of Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 -------------------- (c) Pre-Deconsolidation Period Returns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ---------------------------------- 3. Consolidated Federal, Consolidated State and Unitary State Taxes -- Allocation of Taxes. --------------------------------------------------------------------------------------- (a) General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ------- (b) Estimated Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ------------------ (c) Payment of Taxes at Year-End. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ---------------------------- (d) Carrybacks and Certain Other Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ------------------------------------ 4. Other Taxes ----------- 5. Certain Covenants. ----------------- (a) Linens Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 ---------------- (b) CVS Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ------------- (c) Linens and CVS Covenant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ------------------------ 6. Indemnities. ----------- (a)(I) Linens Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ---------------- (a)(II) Linens Additional Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 --------------------------- (b) CVS Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 ------------- (c) Discharge of Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ---------------------- (d) Tax Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 ------------ (e) Refunds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 ------- (f) Clerical Errors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 --------------- (g) Method of Calculation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 --------------------- 7. Communication and Cooperation. ----------------------------- (a) Consult and Cooperate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 --------------------- (b) Provide Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 -------------------
i 3 (c) Tax Attribute Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 --------------------- 8. Audits and Contest. ------------------ 9.Payments. -------- 10. Notices. ------- 11.Costs and Expenses. ------------------ 12.Effectiveness; Termination and Survival. --------------------------------------- 13.Section Headings. ---------------- 14.Entire Agreement; Amendments and Waivers. ---------------------------------------- (a) Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 ---------------- (b) Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 ------ 15.Governing Law and Interpretation. -------------------------------- 16.Dispute Resolution. ------------------ 17.Counterparts. ------------ 18. Assignments; Third Party Beneficiaries. -------------------------------------- Exhibit A --------- Exhibit B ---------
ii 4 TAX DISAFFILIATION AGREEMENT This Agreement is entered into as of the [ ] day of [ ], 1996 between CVS Corporation ("CVS"), a Delaware corporation, on behalf of itself and its Post-Deconsolidation Affiliates, and Linens 'n Things, Inc. ("Linens"), a Delaware corporation, on behalf of itself and its Post-Deconsolidation Affiliates. W I T N E S S E T H: WHEREAS CVS and Linens intend to offer shares of Linens Common Stock to the public pursuant to which Linens will cease to be a member of the CVS Consolidated Group, as defined below. WHEREAS, CVS and Linens desire to set forth their agreement on the rights and obligations of CVS, Linens and their respective Affiliates with respect to the handling and allocation of federal, state, local and foreign Taxes incurred in Taxable periods beginning prior to the Deconsolidation Date and various other Tax matters; NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the parties agree as follows: 1.Definitions (a) As used in this Agreement: "Affiliate" of any person shall mean any individual, corporation, partnership or other entity directly or indirectly owning more than 50 percent 1 5 of, owned more than 50 percent by, or under more than 50 percent common ownership with, such person. "After-Tax Amount" shall mean an additional amount necessary to reflect the hypothetical Tax consequences of the receipt or accrual of any payment, using the maximum statutory rate (or rates, in the case of an item that affects more than one Tax) applicable to the recipient of such payment for the relevant year, reflecting for example, the effect of the deductions available for interest paid or accrued and for Taxes such as state and local income Taxes. "CVS Consolidated Group" shall mean, with respect to any Taxable period, (i) with respect to Consolidated Federal Taxes, the affiliated group of corporations of which CVS or Melville Corporation ("Melville") (or a successor of either) was or is the common parent (within the meaning of Section 1504 of the Code), (ii) with respect to Consolidated State Taxes and Unitary State Taxes, the consolidated, combined or unitary group of which CVS or Melville (or a successor of either) or any of their Affiliates was or is a member, and (iii) with respect to any Other Tax payable with respect to a group which includes or included at least one member of the CVS Group and at least one member of the Linens Group, such group. "CVS Group" shall mean, with respect to any Taxable period, CVS, Melville and their Affiliates (including their predecessors and successors) 2 6 at any time prior to the Deconsolidation (including, without limitation, the Non-Chain Corporations) other than those Affiliates comprising the Linens Group. "Code" shall mean the Internal Revenue Code of 1986, as amended, or any successor thereto. "Consolidated Federal Tax" shall mean the consolidated Federal Tax liability of the CVS Consolidated Group for any period as to which a consolidated Federal Tax Return was or is filed by CVS or Melville, or any successor to either, for such group. "Consolidated State Tax" shall mean with respect to each State, any income or franchise Tax payable with respect to a group of at least two corporations, other than a Unitary State Tax. "Deconsolidation" shall mean any event pursuant to which Linens ceases to be a subsidiary corporation includible in a consolidated tax return of CVS for Federal Tax purposes, or in a consolidated, combined or unitary return with a member of the CVS Group. "Deconsolidation Date" shall mean the date on which the Deconsolidation shall be effected. "Federal Tax" shall mean any Tax imposed under Subtitle A of the Code and any related penalty imposed under Subtitle F of the Code. "Final Determination" shall mean (i) with respect to Federal Taxes, (A) a "determination" as defined in Section 1313(a) of the Code, or (B) 3 7 the date of acceptance by or on behalf of the Internal Revenue Service of Form 870-AD (or any successor form thereto), as a final resolution of Tax liability for any Taxable period, except that a Form 870-AD (or successor form thereto) that reserves the right of the taxpayer to file a claim for refund and/or the right of the Internal Revenue Service to assert a further deficiency shall not constitute a Final Determination with respect to the item or items so reserved; (ii) with respect to Taxes other than Federal Taxes, any final determination of liability in respect of a Tax provided for under applicable law; (iii) any final disposition by reason of the expiration of the applicable statute of limitations; and (iv) the payment of Tax by CVS, Linens, or any Affiliate of CVS or Linens, whichever is responsible for payment of such Tax under applicable law, with respect to any item disallowed or adjusted by a Taxing Authority, provided that the provisions of Section 8 hereof have been complied with, or, if such section is inapplicable, that the party responsible under the terms of this Agreement for such Tax is notified by the party paying such Tax that it has determined that no action should be taken to recoup such disallowed item, and the other party agrees with such determination. "Linens Group" shall mean Linens and its Affiliates immediately after the Deconsolidation Date, including any predecessors thereto, and any corporation that would have been an Affiliate of Linens immediately after the 4 8 Deconsolidation Date if it had not been previously sold, liquidated or otherwise disposed of. "Non-Chain Corporations" shall mean Computer Development, Inc., Melville Equipment Leasing Corporation, MC Retail, Inc., Melville Realty Company and their direct and indirect subsidiaries. "Other Taxes" is defined in Section 4. "Post-Deconsolidation Affiliate" shall mean with regard to CVS, any person that is or that will be an Affiliate of CVS or a successor to CVS after the Deconsolidation and, with regard to Linens, any person that is or that will be an Affiliate of Linens or a successor to Linens after the Deconsolidation. "Post-Deconsolidation Period" shall mean any taxable period (or portion thereof) beginning after the close of business on the Deconsolidation Date. "Pre-Deconsolidation Period" shall mean any Taxable period ending on or before the close of business on the Deconsolidation Date; provided that if a Taxable period ending after the Deconsolidation Date contains any days which fall prior to or on the Deconsolidation Date, any portion of such Taxable period up to or including the Deconsolidation Date shall also be included in the Pre-Deconsolidation Period. "Pre-Deconsolidation Tax Liability" shall mean (i) the Consolidated Federal Tax, and (ii) the Consolidated State Tax liability of any 5 9 group that includes at least one member of the CVS Group and at least one member of the Linens Group, (iii) the Unitary State Tax liability of any group which includes at least one member of the CVS Group and at least one member of the Linens Group, and (iv) any Other Taxes, in each case for any Pre-Deconsolidation Period. "Prime" shall mean the rate announced from time to time as "prime" by Morgan Guaranty Trust Company as its prime rate. "Referee" is defined in Section 16. "Return" shall mean any Tax return, statement, report or form (including estimated Tax returns and reports, extension requests and forms, and information returns and reports) required to be filed with any Taxing Authority. "Tax" (and the correlative meaning, "Taxes," "Taxing" and "Taxable") shall mean (A) any tax imposed under Subtitle A of the Code, any net income, gross income, gross receipts, alternative or add-on minimum, sales, use, value-added, goods and services, ad valorem, franchise, profits, license, withholding, payroll, employment, excise, transfer, recording, severance, stamp, occupation, premium, property, environmental, custom duty, or other tax, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest and any penalty, addition to tax or additional amount imposed by a Taxing Authority; (B) any liability of a member of the CVS Group or the Linens Group, as the case may be, for the payment of 6 10 any amounts of the type described in clause (A) for any Taxable period resulting from the application of Treasury Regulation Section 1.1502-6 or any similar provision applicable under state, local or foreign law; and (C) any liability of a member of the CVS Group or the Linens Group for the payment of any amounts described in clause (A) as a result of any express or implied obligation to indemnify any other party. "Tax Asset" shall mean any net operating loss, net capital loss, investment Tax credit, foreign Tax credit, target jobs Tax credit, low income housing credit, research and experimentation credit, charitable deduction or any other credit or Tax attribute, including additions to basis of property, which could reduce any Tax, including, without limitation, deductions, credits, or alternative minimum net operating loss carryforwards related to alternative minimum Taxes. "Tax Packages" shall mean one or more packages of information, including but not limited to the Corptax file and the divisional reconciliation, that are (i) reasonably necessary for the purpose of preparing Federal Tax, Consolidated State Tax, Unitary State Tax Returns or Other Tax returns of the CVS Consolidated Group with respect to a Pre-Deconsolidation Period and (ii) completed in all material respects in accordance with the standards that CVS has established for its subsidiaries with respect to the relevant Pre-Deconsolidation Period. 7 11 "Tax Proceeding" shall mean any Tax audit, dispute or proceeding (whether administrative or judicial). "Taxing Authority" shall mean any governmental authority (domestic or foreign) responsible for the imposition of any Tax. "Unitary State Tax" shall mean, with respect to each State, any income or franchise Tax payable with respect to a group of at least two corporations and based upon a group apportionment percentage. (b) Any term used in this Agreement which is not defined in this Agreement shall, to the extent the context requires, have the meaning assigned to it in the Code or the applicable Treasury regulations thereunder and, in the case of Consolidated State Taxes, Unitary State Taxes, and Other Taxes, in comparable provisions of applicable law. 2. Federal and State Taxes--Administrative and Compliance Matters. (a) Sole Tax Sharing Agreement. The parties acknowledge that there has not been a Final Determination of the Pre-Deconsolidation Tax Liability, and that members of the Linens Group are includible in the CVS Consolidated Group for the Pre-Deconsolidation Period. This Agreement shall constitute the sole Tax sharing agreement between CVS and its Post-Deconsolidation Affiliates, on one hand, and Linens and its Post-Deconsolidation Affiliates, on the other hand, and, to the extent there is any inconsistency between this Agreement and any existing Tax sharing agreements 8 12 or arrangements, written or unwritten, between CVS and its Post-Deconsolidation Affiliates, on one hand, and Linens and its Post-Deconsolidation Affiliates, on the other hand, this Agreement shall govern. (b) Designation of Agent. Linens and each member of the Linens Group, with respect to Consolidated Federal Taxes, each hereby irrevocably designate CVS or Melville (to the extent required by applicable law) or a successor of either as its agent, coordinator, and administrator, and, with respect to Consolidated State Taxes, Unitary State Taxes and any Other Taxes payable with respect to a group which includes at least one member of the CVS Group and at least one member of the Linens Group, each hereby irrevocably authorize CVS to designate a member of the CVS Group, or a successor of such member, as its agent, coordinator, and administrator, for the purpose of taking any and all actions (including the execution of waivers of applicable statutes of limitation) necessary or incidental to the filing of any Return, any amended Return, or any claim for refund (even where an item or Tax Asset giving rise to an amended Return or refund claim arises in a Post-Deconsolidation Period), credit or offset of Tax or any other proceedings, and for the purpose of making payments to, or collecting refunds from, any Taxing Authority, in each case relating to any Pre-Deconsolidation Period. CVS or the member of the CVS Group, as the case may be, as agent, covenants to Linens that it shall be responsible to see that all such administrative matters relating thereto shall be 9 13 handled promptly and appropriately. CVS shall inform and consult with Linens prior to taking any action on behalf of, or which will have any material impact on the Tax liability of the Linens Group. (c) Pre-Deconsolidation Period Returns. CVS and its Post-Deconsolidation Affiliates will prepare, with the assistance of Linens and its Post-Deconsolidation Affiliates, and file the Consolidated Federal Tax Returns and the Consolidated State and Unitary State Tax Returns for all Pre-Deconsolidation Periods. With respect to the 1996 year, Linens and its Post-Deconsolidation Affiliates shall prepare and deliver to CVS all Tax Packages within 120 days after the Deconsolidation Date.(1) 3. Consolidated Federal, Consolidated State and Unitary State Taxes -- Allocation of Taxes. (a) General. For the 1995 and 1996 Taxable years of the CVS Consolidated Group,(2) Linens shall pay, or cause to be paid, to CVS or Melville, with respect to 1995) an amount equal to (i) the Linens Group's share of the CVS Consolidated Group's Consolidated Federal Tax and Consolidated State Tax liability, determined in accordance with Exhibit A to this Agreement, and (ii) the Linens Group's share of the CVS Consolidated Group's Unitary State Tax liability, determined in accordance with Exhibit B to this Agreement. - -------------------- (1) Provide for 1997 if offering occurs in 1997 or if CVS continues to hold at least 50% of Linens at any time in 1997. (2) Provide for 1997 if offering occurs in 1997 or if CVS continues to hold at least 50% of Linens at any time in 1997. 10 14 (b) Estimated Payments. Promptly after CVS, Melville or any of their Affiliates makes an estimated Tax payment with respect to the 1996 Taxable year (other than a payment which relates solely to minimum Taxes due), whether or not such payment is made prior to the Deconsolidation, CVS shall (i) in good faith determine the amount of the Linens Group's share of such estimated Tax payment (X) in accordance with the principles of Exhibit A to this Agreement, in the case of an estimated Tax payment in respect of the Consolidated Federal Tax or any Consolidated State Tax liability of the CVS Consolidated Group, and (Y) in accordance with the principles of Exhibit B to this Agreement using 1995 apportionment factors, adjusted for significant dispositions or transfers of assets, in the case of an estimated Tax payment in respect of any Unitary State Tax liability of the CVS Consolidated Group and (ii) deliver a written statement to Linens reflecting the determination described above. Linens shall pay to CVS or CVS shall pay to Linens, as appropriate, the amount so determined in accordance with Section 9 hereof. (c) Payment of Taxes at Year-End. (i) Promptly after CVS, Melville or any of their Affiliates files an application to extend the due date of a Return for the 1995 or 1996 Taxable year, whether or not such application is filed prior to the Deconsolidation, CVS shall (a) in good faith determine the estimated amount of the Linens Group's share of the CVS Consolidated Group's 11 15 Consolidated Federal Tax or Consolidated State Tax liability for such Return in accordance with the principles of Exhibit A to this Agreement or, in the case of a Unitary State Tax Return, in accordance with the principles of Exhibit B to this Agreement using 1994 and 1995 apportionment factors for 1995 and 1996, respectively, adjusted for significant dispositions or transfers of assets, and (b) deliver a written statement to Linens reflecting the determination described above. Linens shall pay to CVS, or CVS shall pay to Linens, as appropriate, in accordance with Section 9 hereof, an amount equal to the difference, if any, between (x) the amounts so determined and (y) the aggregate amount of estimated installments paid with respect to the Linens Group's share of such Tax liability for such year made pursuant to Section 3(b), adjusted to take into account amounts previously paid or received by Linens or any Affiliate in connection with any previous extension payments made either before or after the Deconsolidation. (ii) Promptly after CVS or a member of the CVS Consolidated Group files a Consolidated Federal Tax Return, Consolidated State Tax Return or Unitary State Tax Return, as the case may be, for which payments are to be made under this Agreement, whether or not such Return is filed prior to the Deconsolidation, CVS shall deliver to Linens a written statement setting forth the difference between (x) the Linens 12 16 Group's share of the CVS Consolidated Group's Consolidated Federal Tax, Consolidated State Tax or Unitary State Tax liability for such Return, determined in accordance with the principles of Exhibit A or B to this Agreement, as the case may be, and (y) the aggregate amount of payments with respect to the Linens Group's share of such Tax liability for such year made pursuant to Section 3(b) or Section 3(c)(i). Linens shall pay to CVS, or CVS shall pay to Linens, as appropriate, in accordance with Section 9 hereof, an amount equal to such difference, if any. (iii) If the determination of the Linens Group's share of the CVS Consolidated Group's Consolidated Federal Tax, Consolidated State Tax or Unitary State Tax reflects a Tax Asset that may under applicable law be used to reduce a Federal Tax, Consolidated State Tax or Unitary State Tax liability, as the case may be, of any member of the CVS Group for any Tax period, CVS shall pay to Linens, in accordance with Section 9 hereof, the actual Tax saving produced by such Tax Asset; provided, however, that such payment shall be made within 30 days of the receipt by CVS or any CVS Affiliate of any refund, credit or other offset attributable thereto from the relevant Taxing Authority. The amount of any such tax saving for any tax period shall be the amount of the reduction in Taxes payable to a Taxing Authority (or the increase in 13 17 any Tax refund) with respect to such period as compared to the Taxes that would have been payable to a Taxing Authority (or the Tax refund that would have been received) with respect to such period in the absence of such Tax Asset; provided, however, that in the event that the use in a Pre-Deconsolidation Period of a Tax Asset attributable to any member of the Linens Group, gives rise to, or increases, any alternative minimum Tax liability, CVS shall pay to Linens, or Linens shall pay to CVS, as the case may be, an amount equal to the difference between (i) the maximum hypothetical Tax savings that could result from the use of such Tax Asset determined using the maximum applicable regular tax rate in effect for such Taxable year (or, in the case of a credit, 100 percent) and (ii) the Linens Group's share of the alternative minimum Tax liability or increase in alternative minimum Tax liability, as the case may be, determined in accordance with Exhibit A to this Agreement. (d) Carrybacks and Certain Other Matters. (i) Subject to the provisions of Exhibit A hereto, CVS agrees to pay Linens the actual benefit received by the CVS Consolidated Group in any Tax period from the use in any Pre-Deconsolidation Period of any Tax Asset arising in a Post-Deconsolidation Period. Such benefit shall be considered equal to the excess of the amount of Tax that would have been payable (or of the Tax refund that would have been 14 18 receivable) by the CVS Consolidated Group in such Tax period in the absence of such carryback over the amount of Tax actually payable (or of the Tax refund actually receivable) by the CVS Consolidated Group in such period; provided, however, that in the event that the use in a Pre-Deconsolidation Period of a Tax Asset, attributable to any member of the Linens Group, gives rise to, or increases, any alternative minimum Tax liability, CVS shall pay to Linens, or Linens shall pay to CVS, as the case may be, an amount equal to the difference between (i) the maximum hypothetical Tax savings that could result from the use of such Tax Asset determined using the maximum applicable regular tax rate in effect for such Taxable year and (ii) the Linens Group's share of the alternative minimum Tax liability or increase in alternative minimum Tax liability, as the case may be, determined in accordance with Exhibit A to this Agreement. Payment of the amount of such benefit shall be made in accordance with Section 9 hereof; provided, however, that any such payment shall be made within 30 days of the receipt by any member of the CVS Consolidated Group of any refund, credit or other offset attributable thereto from the relevant Taxing Authority. (ii) If, subsequent to the payment by CVS to Linens of any amount referred to in Section 3(d)(i) above, there shall be (A) a Final Determination which results in a disallowance or a reduction of the Tax 15 19 Asset so carried back or (B) a reduction in the amount of the benefit realized by the CVS Consolidated Group from such carryback as a result of a Final Determination or the use by the CVS Consolidated Group of a Tax Asset of the CVS Group, Linens shall repay to CVS the amount which would not have been payable to Linens pursuant to Section 3(d)(i) had the amount of the benefit been determined in light of such event. In addition, Linens shall hold CVS and each of its Post-Deconsolidation Affiliates harmless for any penalty or interest payable by any member of the CVS Consolidated Group as a result of any such event referred to in the preceding sentence. Any amounts payable under this Section 3(d)(ii) shall be paid by Linens to CVS in accordance with Section 9 hereof. To the extent Linens' repayment obligation arises due to the use by the CVS Consolidated Group of a Tax asset of a member of the CVS Group, Linens shall pay CVS interest on the amount repaid to CVS from the date such amount was paid by CVS to Linens until such repayment at Prime. (iii) The parties hereto acknowledge that, in connection with the disposition or deconsolidation of certain members of the CVS Group, CVS or Melville has entered into, and intends to enter into, agreements similar to this Agreement (the "CVS Group Agreements") relating to 16 20 Tax matters involving such members. Notwithstanding anything to the contrary in this Agreement, to the extent that (i) CVS would be required under Section 3 of this Agreement to make a payment to Linens in respect of a Tax saving or Tax benefit attributable to a Tax Asset of the Linens Group and (ii) CVS would be required under a CVS Group Agreement or Agreements to make a similar payment to a member or members of the CVS Group in respect of the same Tax saving or Tax benefit, then the portion of such Tax saving or benefit attributable to a Tax Asset of the Linens Group shall be calculated in accordance with Treasury Regulation Section 1502-21A and any successor thereto. 4. Other Taxes (a) Liability for all Taxes other than Consolidated Federal Taxes or Consolidated State or Unitary Taxes ("Other Taxes") attributable to the Linens Group shall be the sole responsibility of Linens and its Post-Deconsolidation Affiliates. Liability for all Other Taxes attributable to the CVS Group shall be the sole responsibility of CVS and its Post-Deconsolidation Affiliates. The responsibility for preparing and filing all Returns, and for making all payments to any Taxing Authority, relating solely to Other Taxes attributable to the Linens Group shall be the sole responsibility of Linens and its Post-Deconsolidation Affiliates. The responsibility for preparing and filing all other Returns, and for making all payments to any Taxing Authority, relating to 17 21 Other Taxes for any Pre-Deconsolidation Period shall be the sole responsibility of CVS and its Post-Deconsolidation Affiliates. Promptly after a payment of Other Taxes by CVS, or any of its Post-Deconsolidation Affiliates on one hand, or Linens or any of its Post-Deconsolidation Affiliates, on the other hand, the paying party shall notify the non-paying party of the amount of such Other Taxes, if any, which is attributable to the non-paying party, in accordance with Section 4(c). The non-paying party shall pay to the paying party, in accordance with Section 9 hereof, such amount. (b) Linens shall be entitled to all refunds and credits of Other Taxes attributable to the Linens Group, and CVS shall be entitled to all refunds and credits of Other Taxes attributable to the CVS Group. (c) The determination of whether Other Taxes are attributable to the CVS Group, on one hand, or the Linens Group, on the other hand, shall be made in accordance with past practices. 5. Certain Covenants. (a) Linens Covenants. Linens covenants to CVS that during the period beginning on the Deconsolidation Date and ending upon the expiration of the statute of limitations period applicable to the Taxable year in which the Deconsolidation occurs (after giving effect to any extension, mitigation or waiver thereof), Linens will not, nor will it permit any of its Post-Deconsolidation Affiliates to make or change any accounting method, amend 18 22 any Tax Return or take any Tax position on any Tax Return, change the manner in which it conducts its business, take any other action, omit to take any action or enter into any transaction that results in any increased Tax liability with respect to a Pre-Deconsolidation Period, or reduction of any Tax Asset which was created in a Pre-Deconsolidation Period, of the CVS Group or any member thereof without first obtaining the written consent of an authorized representative of CVS; provided, however, that if a change in law (including the enactment of any statute or the issuance of any proposed, temporary or final regulations, or administrative pronouncement or judicial decision) would have a material adverse effect on the aggregate Tax liability of Linens and its Post-Deconsolidation Affiliates, then, notwithstanding anything to the contrary in this Section 5(a), Linens shall be entitled to take, or to permit its Post-Deconsolidation Affiliates to take, such minimum action as is necessary to eliminate or mitigate the effect of the change in law. Linens agrees to notify CVS of any action taken under the proviso contained in the preceding sentence. (b) CVS Covenants. CVS covenants to Linens that (i) it will not change its year-end for any Tax year beginning prior to January 1, 1997 and (ii) during the period beginning on the Deconsolidation Date and ending upon the expiration of the statute of limitations period applicable to the Taxable year in which the Deconsolidation occurs (after giving effect to any extension, mitigation or waiver thereof), CVS will not, nor will it permit any of its Post- 19 23 Deconsolidation Affiliates to make or change any accounting method, amend any Tax Return or take any Tax position on any Tax Return, change the manner in which it conducts its business, take any other action, omit to take any action or enter into any transaction that results in any increased Tax liability with respect to a Pre-Deconsolidation Period, or reduction of any Tax Asset which was created in a Pre-Deconsolidation Period, of the Linens Group or any member thereof without first obtaining the written consent of an authorized representative of Linens; provided, however, that if a change in law (including the enactment of any statute or the issuance of any proposed, temporary or final regulations, or administrative pronouncement or judicial decision) would have a material adverse effect on the aggregate Tax liability of CVS and its Post-Deconsolidation Affiliates, then, notwithstanding anything to the contrary in this clause (ii), CVS shall be entitled to take, or to permit its Post-Deconsolidation Affiliates to take, such minimum action as is necessary to eliminate or mitigate the effect of the change in law. CVS agrees to notify Linens of any action taken under the proviso contained in the preceding sentence. (c) Linens and CVS Covenant. The parties hereto agree to act in good faith in complying with the terms of this Agreement. 6. Indemnities. (a)(I) Linens Indemnity. Linens and each corporation that is a Post-Deconsolidation Affiliate of Linens will jointly and severally indemnify 20 24 CVS and its Post-Deconsolidation Affiliates against and hold them harmless from (i) any Pre-Deconsolidation Tax Liability assessed pursuant to a Final Determination, to the extent attributable to an adjustment of any item of income, gain, gross receipts, loss, credit, deduction or other Tax attribute of any member of the Linens Group; and (ii) any liability or damage resulting from a breach by Linens or any of its Post-Deconsolidation Affiliates of any covenant made by Linens herein. (iii) any liability or damage under the securities laws or otherwise resulting from information furnished by Linens in connection with the Deconsolidation. (a)(II) Linens Additional Indemnity. Linens agrees to continue to be bound by the terms of the Tax Disaffiliation Agreement between Melville and Footstar, Inc. dated as of September 24, 1996 (the "Footstar Tax Disaffiliation Agreement") after the Deconsolidation. Linens will indemnify CVS and its Post-Deconsolidation Affiliates for any liability incurred by CVS or any of its Post-Deconsolidation Affiliates pursuant to Section 6(b)(iii) of the Footstar Tax Disaffiliation Agreement resulting from any action taken after the Deconsolidation by Linens or any of its Post-Deconsolidation Affiliates. 21 25 (b) CVS Indemnity. CVS and each corporation that is a Post-Deconsolidation Affiliate of CVS will jointly and severally indemnify Linens and its Post-Deconsolidation Affiliates against and hold them harmless from (i) any Pre-Deconsolidation Tax Liability, or Tax liability resulting from the Deconsolidation, other than any such liabilities described in Section 6(a); (ii) any Tax liability allocable to a member of the CVS Group which is a liability of the Linens Group under clause (B) of the definition of Tax with respect to any pre-Deconsolidation Period or any Tax year of the CVS Consolidated Group which includes (but does not end on) the Deconsolidation Date; and (iii) any liability or damage resulting from a breach by CVS or any of its Post-Deconsolidation Affiliates of any covenant made by CVS herein. (iv) any liability of damage under the securities laws or otherwise resulting from information furnished by CVS in connection with the Deconsolidation. For the purpose of avoiding ambiguity, the parties agree that CVS and its Post-Deconsolidation Affiliates shall be responsible under this Agreement for any Tax for a Pre-Deconsolidation Period attributable to (x) the corporations (domestic or foreign) comprising the CVS, Bob's, Footstar (including 22 26 Footaction, Meldisco, Melville (Europe) Purchasing Ltd. and Thom McAn), Wilsons, Kay-Bee, Marshalls, This End Up, Prints Plus, Chess King, Foxmoor and Accessory Lady retail chains, (y) the Non-Chain Corporations and (z) to any business activity conducted by CVS or any of its Affiliates (domestic or foreign) which is or was directly related to the businesses conducted by the corporations specified in clauses (x) and (y). If a Post-Deconsolidation Affiliate of CVS ceases to be an Affiliate of CVS as a result of a sale of its stock to a third party (whether or not treated as a sale of stock for Tax purposes), such Post-Deconsolidation Affiliate shall be released from its obligations under this Agreement upon such sale and neither CVS nor any of its other Post-Deconsolidation Affiliates shall have any obligation to indemnify Linens or any of its Post-Deconsolidation Affiliates under Section 6(b)(iii) for any liability or damage attributable to actions taken after such sale by such Post-Deconsolidation Affiliates. (c) Discharge of Indemnity. Linens, CVS and their respective Post-Deconsolidation Affiliates shall discharge their obligations under Section 6(a) and 6(b) hereof, respectively, by paying the relevant amount within 30 days of demand therefor. After a Final Determination of an obligation of Linens or any of its Post-Deconsolidation Affiliates under Section 6(a), CVS shall send a statement to Linens showing the amount due thereunder. After a Final Determination of an obligation of CVS or any of its Post-Deconsolidation 23 27 Affiliates under Section 6(b), Linens shall send a statement to CVS showing the amount due thereunder. Calculation mechanics relating to items described in Section 6(a)(i) are set forth in Section 3(c). Notwithstanding the foregoing, if either Linens, CVS or any of their respective Post-Deconsolidation Affiliates disputes in good faith the fact or the amount of its obligation under Section 6(a) or Section 6(b), then no payment of the amount in dispute shall be required until any such good faith dispute is resolved in accordance with Section 16 hereof; provided, however, that any amount not paid within 30 days of demand therefor shall bear interest as provided in Section 9. (d) Tax Benefits. If an indemnification obligation of CVS, Linens or any of their respective Post-Deconsolidation Affiliates under this Section 6 arises in respect of an adjustment that makes allowable to CVS or its Affiliates, or Linens or its Affiliates, respectively, any deduction, amortization, exclusion from income or other allowance (a "Tax Benefit") which would not, but for such adjustment, be allowable, then any payment by CVS, Linens or any of their respective Post-Deconsolidation Affiliates, as the case may be, pursuant to this Section 6 shall be an amount equal to (X) the amount otherwise due but for this subsection (d), minus (Y) the present value of the product of the Tax Benefit multiplied (i) by the maximum federal or state, as the case may be, corporate tax rate in effect at the time such Tax Benefit becomes allowable to CVS or its Affiliates, or Linens or its Affiliates (as the case may be) or (ii) in 24 28 the case of a credit, by 100 percent. The present value of such product shall be determined by discounting such product from the time the Tax Benefit becomes allowable at a rate equal to Prime. (e) Refunds. Any refunds of Tax received by CVS or any of its Post-Deconsolidation Affiliates relating to a Post-Deconsolidation Period, to the extent attributable to any item of income, loss, credit, deduction or other tax attribute of any member of the Linens Group shall be paid by CVS to Linens within 30 days of receipt. Any amount not paid when due shall bear interest as provided in Section 9. (f) Clerical Errors If, as a result of a correction of a clerical error made by booking any item at one member of the CVS Consolidated Group instead of another, (i) the Pre-Deconsolidation Tax Liability allocable to the Linens Group or the CVS Group, as the case may be, is increased, (ii) the Pre-Deconsolidation Tax Liability allocable to the other group is decreased by an offsetting amount, and (iii) no Tax payment is required to be made to a Taxing Authority in respect of the correction of the clerical error, then the group referred to in clause (ii) of this Section 6(f) shall be treated as having made a Tax payment in an amount equal to the increased Pre-Deconsolidation Tax Liability described in clause (i) of this Section 6(f) and shall be entitled to indemnification therefor under this Section 6 without regard to Section 6(d). 25 29 (g) Method of Calculation. (i) Except as otherwise provided, the amount of any liability of Linens and its Post-Deconsolidation Affiliates or of CVS and its Post-Deconsolidation Affiliates under this Section 6 shall be calculated pursuant to the method described in Exhibit A hereto; provided, however, that the calculation of any party's share of Unitary State Tax shall be calculated pursuant to the method described in Exhibit B hereto. (ii) For purposes of this Section 6, in the case of Taxes that are imposed on a periodic basis and are payable for a Tax period that includes (but does not end on) the Deconsolidation Date, the portion of such Tax related to the portion of such Tax period ending on the Deconsolidation Date shall (x) in the case of any Taxes other than Taxes based upon or related to income, sales, gross receipts, wages, capital expenditures or expenses, be deemed to be the amount of such Tax for the entire Tax period multiplied by a fraction the numerator of which is the number of days in the Tax period ending on the Deconsolidation Date and the denominator of which is the number of days in the entire Tax period, and (y) in the case of any Tax based upon or related to income, sales, gross receipts, wages, capital expenditures or expenses, be deemed equal to the amount which would be payable if the relevant Tax period ended on the Deconsolidation Date and applying the weighted average 1996 Tax rate for the relevant Tax applicable to the corporation subject to such Tax. 7. Communication and Cooperation. 26 30 (a) Consult and Cooperate. Linens and CVS shall consult and cooperate (and shall cause each of their Post-Deconsolidation Affiliates to cooperate) fully at such time and to the extent reasonably requested by the other party in connection with all matters subject to this Agreement. Such cooperation shall include, without limitation, (i) the retention and provision on reasonable request of any and all information including all books, records, documentation or other information pertaining to Tax matters relating to the CVS Group and the Linens Group, any necessary explanations of information, and access to personnel, until the expiration of the applicable statute of limitation (giving effect to any extension, waiver, or mitigation thereof); (ii) the execution of any document that may be necessary or helpful in connection of any required Return or in connection with any audit, proceeding, suit or action; (iii) reporting to the other party, on a quarterly basis, on the status of any Tax audit relating to a Pre-Deconsolidation Period; and (iv) the use of the parties' best efforts to obtain any documentation from a governmental authority or a third party that may be necessary or helpful in connection with the foregoing. (b) Provide Information. CVS and Linens shall keep each other fully informed with respect to any material development relating to the 27 31 matters subject to this Agreement. CVS shall provide to Linens copies of all Information Document Requests relating to a Pre-Deconsolidation Period issued by the Internal Revenue Services on Form 4564 or any successor thereto and any analogous requests issued by any other Tax Authority (collectively, "Requests"), and (to the extent practicable in light of the relevant Taxing Authority's requirements) shall use reasonable efforts to provide copies of the response to each Request more than two business days prior to filing such response; provided, however, that CVS's failure to deliver a copy of a response to a Request before such two-day period shall not relieve Linens of its obligations under this Agreement. CVS shall not be required to provide Linens with copies of any Requests or the responses thereto unless specifically related to the Linens group; provided, however, Linens shall not be entitled to review or receive the portion of any response which does not specifically relate to the Linens Group. (c) Tax Attribute Matters. CVS and Linens shall advise and consult with each other with respect to any proposed Tax adjustments relating to the CVS Consolidated Group or, with respect to Other Taxes, any group which includes at least one member of the CVS Group and at least one member of the Linens Group, which are the subject of an audit or investigation, or are the subject of any proceeding or litigation, and which may affect any Tax attribute of CVS, Linens, the CVS Group, the Linens Group or any Post- 28 32 Deconsolidation Affiliate of CVS or Linens (including, but not limited to, basis in an asset or the amount of earnings and profits). 8. Audits and Contest. (a) Notwithstanding anything in this Agreement to the contrary, CVS shall have full control over all matters relating to any Federal Tax return filed by the CVS Consolidated Group, any Consolidated State or Unitary State Tax Return, any Other Tax Return (other than one relating solely to the Linens Group), or any Tax Proceeding relating to any Tax matters of at least one member of the CVS Group. Except as provided in Section 8(b), CVS shall have absolute discretion with respect to any decisions to be made, or the nature of any action to be taken, with respect to any matter described in the preceding sentence. (b) No settlement of any Tax Proceeding relating to any matter which would cause a payment obligation under Sections 6(a) or 6(b) shall be accepted or entered into by or on behalf of the party entitled to receive a payment under either Section 6(a) or Section 6(b), whichever is applicable, unless the party ultimately responsible for such payment under either Section 6(a) or Section 6(b), whichever is applicable (the "Indemnitor"), consents thereto in writing (which consent shall not be unreasonably withheld). If such consent is unreasonably withheld, all expenses relating to the contest of such matter shall be borne by the Indemnitor, and otherwise they shall be borne 29 33 equally by the Indemnitor and the indemnified party. If the Indemnitor does not respond to the indemnified party's request for consent within 30 days, the Indemnitor will be deemed to have consented to the settlement. Notwithstanding anything to the contrary herein, the indemnified party shall have the right, without the consent of the Indemnitor, to settle any Tax Proceeding relating to any matter which would cause a payment obligation under Sections 6(a) or 6(b), provided, however, that in such event the Indemnitor shall have no liability under Section 6(a) or (b), as the case may be, with respect to such matter. (c) The indemnified party agrees to give prompt notice to the Indemnitor of the assertion of any claim, or the commencement of any suit, action or proceeding in respect of which indemnity may be sought hereunder. The failure of the indemnified party to give notice as provided in this Section 8(c) shall not relieve the Indemnitor of its obligations under this Agreement, except to the extent that the Indemnitor is materially prejudiced by such failure to give notice. (d) With respect to Returns relating to Other Taxes solely attributable to the Linens Group, Linens and its Post-Deconsolidation Affiliates shall have full control over all matters relating to any Tax Proceeding in connection therewith. Linens and its Post-Deconsolidation Affiliates shall have absolute discretion with respect to any decisions to be made, or the nature of 30 34 any action to be taken, with respect to any matter described in the preceding sentence. 9. Payments. All payments to be made hereunder shall be made in immediately available funds. Except as otherwise provided, all payments required to be made pursuant to this Agreement will be due 30 days after the receipt of notice of such payment or, where no notice is required, 30 days after the fixing of liability or the resolution of a dispute. Payments shall be deemed made when received. Any payment that is not made when due shall bear interest at the rate per annum determined, from time to time, under the provision of Section 6621(a)(2) of the Code for each day until paid; provided, however, that, if an obligation or the amount thereof is being disputed in good faith, any payment required after resolution of such dispute shall bear interest at Prime until and including the thirtieth day after such resolution. If, pursuant to a Final Determination, any amount paid by CVS, Linens or their respective Post-Deconsolidation Affiliates pursuant to this Agreement results in any increased Tax liability or reduction of any Tax Asset of any member of the Linens Group, Linens or its Post-Deconsolidation Affiliates, or the CVS Group, CVS or its Post-Deconsolidation Affiliates, respectively, then CVS or Linens, as the case may be, shall indemnify the other party and hold it harmless from any interest or penalty attributable to such increased Tax liability or the reduction of such 31 35 Tax asset and shall pay to the other party, in addition to amounts otherwise owed, 50 percent of the After-Tax Amount; provided, however, that with respect to any amount paid pursuant to Section 3(d)(ii) (other than as a result of the use by the CVS Consolidated Group of a Tax Asset of the CVS Group), Section 6(a)(ii) or (iii) or Section 6(b)(iii) or (iv), CVS or Linens, as the case may be, shall pay to the other party 100 percent of the After-Tax Amount. 10. Notices. Any notice, demand, claim, or other communication under this Agreement shall be in writing and shall be deemed to have been given upon the delivery or mailing thereof, as the case may be, if delivered personally or sent by certified mail, return receipt requested, postage prepaid, to the parties at the following addresses (or at such other address as a party may specify by notice to the other): If to CVS, to: Charles Conaway 1 CVS Drive Woonsocket, RI 02895 James E. Alward Michael Golub 67 Millbrook Street Worcester, MA 01606 If to Linens, to: James Tomaszewski William Giles 32 36 David Dick 6 Brighton Road Clifton, NJ 07015 11. Costs and Expenses. Except as expressly set forth in this Agreement, each party shall bear its own costs and expenses incurred pursuant to this Agreement. For purposes of this Agreement, "out-of-pocket" expenses shall include reasonable attorney fees, accountant fees and other related professional fees and disbursements. 12. Effectiveness; Termination and Survival. This Agreement shall become effective upon the consummation of the Deconsolidation. Notwithstanding anything in this Agreement to the contrary, this Agreement shall remain in effect and its provisions shall survive for the full period of all applicable statutes of limitation (giving effect to any extension, waiver or mitigation thereof). 13. Section Headings. The headings contained in this Agreement are inserted for convenience only and shall not constitute a part hereof or in any way affect the meaning or interpretation of this Agreement. 14. Entire Agreement; Amendments and Waivers. (a) Entire Agreement. This Agreement contains the entire understanding of the parties hereto with respect to the subject matter contained 33 37 herein. No alteration, amendment, modification, or waiver of any of the terms of this Agreement shall be valid unless made by an instrument signed by an authorized officer of CVS and Linens, or in the case of a waiver, by the party against whom the waiver is to be effective. (b) Waiver. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver hereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any right, power or privilege. 15. Governing Law and Interpretation. This Agreement has been made in and shall be construed and enforced in accordance with the laws of the Commonwealth of Massachusetts. 16. Dispute Resolution. If the parties hereto are unable to resolve any disagreement or dispute relating to this Agreement within 20 days, such disagreement or dispute shall be resolved by a nationally recognized law firm or accounting firm expert in Tax matters that is mutually acceptable to the parties hereto (a "Referee"). A Referee so chosen shall resolve any such disagreement pursuant to such procedures as it may deem advisable. Any such resolution shall be binding on the parties hereto without further recourse. Except as otherwise provided herein, the costs of any Referee shall be apportioned between CVS and Linens as determined by such Referee in such 34 38 manner as the Referee deems reasonable, taking into account the circumstances of the dispute, the conduct of the parties and the result of the dispute. 17. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 18. Assignments; Third Party Beneficiaries. Except as provided below, this Agreement shall be binding upon and shall inure only to the benefit of the parties hereto and their respective successors and assigns. This Agreement is not intended to benefit any person other than the parties hereto and such successors and assigns, and no such other person shall be a third party beneficiary hereof. If, during the period beginning on the Deconsolidation Date and ending upon the expiration of all statute of limitations periods applicable to Pre-Deconsolidation Periods, any corporation becomes an Affiliate of either CVS or Linens, as the case may be, then upon the request of either Linens or CVS, as the case may be, the other party shall provide evidence of such Affiliate's agreement to be bound by the terms of this Agreement. During the period beginning on the Deconsolidation Date and ending upon the expiration of all statute of limitations periods applicable to Pre-Deconsolidation Periods, no entity shall be entitled to acquire a controlling 35 39 interest in CVS or Linens unless such entity agrees to be bound by the terms of this Agreement. 36 40 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the day and year first written above. CVS on its own behalf and on behalf of its Post-Deconsolidation Affiliates By: -------------------------- Title: ----------------------- Linens on its own behalf and on behalf of its Post-Deconsolidation Affiliates By: -------------------------- Title: ----------------------- [Linens 'n Things, Inc.](3), Divisional Agent for the Linens Group By: -------------------------- Title: ----------------------- - -------------------- (3) Change name after new name is chosen. 37 41 Exhibit A 1. The Linens Group's share of any Pre-Deconsolidation Consolidated Federal or Consolidated State Tax liability shall be, with respect to such Federal or Consolidated State Taxes, as applicable, calculated as if Linens were the parent of a group filing its own consolidated return for all Pre-Deconsolidation Periods; provided, however, that (i) income, deductions, credits and losses shall be computed in a manner consistent with past practices, (ii) the applicable Tax rate shall be the appropriate maximum statutory rate in effect during the relevant year, (iii) in no event shall the Linens Group's share of any Consolidated Federal or Consolidated State Tax liability exceed the amount that would have constituted the Linens Group's share of such liability if such share had been calculated in accordance with the allocation principles set forth in Treas. Reg. Section 1.1552-1(a)(2) and Treas. Reg. Section 1.1502-33(d)(2)(ii) as in effect prior to Treasury Decision 8597, except to the extent consistent with past practice, and (iv) notwithstanding anything to the contrary in this Agreement, any deduction attributable to the exercise of an option to acquire CVS stock by a person who is an employee of a member of the Linens Group at the time of such exercise shall be treated as a deduction allocable to the member of the Linens Group employing such person. 2. For purposes of paragraph 1 above, "Tax liability" (1) shall exclude any liability for the payment of alternative minimum tax; and (2) shall refer to an actual out-of-pocket payment to any Taxing Authority, after taking into account the utilization of net operating losses and any other Tax Assets. 3. Any alternative minimum Tax liability (and any Tax Assets attributable to such liability) and any environmental Tax imposed under Section 59A of the Code shall be allocated among the members of the CVS Consolidated Group in accordance with the formulas referenced in Proposed Treasury Regulation Section 1.1502-5(b)(6). 4. For all Pre-Deconsolidation Periods, CVS or Melville (as appropriate) shall have the right, in its sole discretion, to elect (in an original or an amended return) to deduct currently any Taxes of foreign countries and of possessions of the United States. In the event that CVS or Melville, as the case may be, elects not to deduct currently such Taxes but instead to elect to take a foreign tax credit under the provisions of Part III of 38 42 Subchapter N of the Code, any consolidated unused foreign tax credit of the CVS Consolidated Group shall be apportioned to the members of such group pursuant to Treas. Reg. Section 1.1502-79(d). 5. Any interest imposed in connection with any Tax liability shall be allocated in the same manner as the underlying Tax liability, as provided above. 6. Any penalty imposed in connection with any Tax liability shall be the responsibility of the party whose action or inaction resulted in the imposition of such penalty; provided, however, that if such a determination cannot be made, the penalty shall be allocated in the same manner as the underlying Tax liability, as provided above. 39 43 Exhibit B 1. The Linens Group's share of any Pre-Deconsolidation Unitary State Tax Liability shall be, with respect to each State, the aggregate amount of Unitary State Tax Liability of all members of the Linens Group that are members of the relevant CVS Consolidated Group. A member's liability for its share of Pre-Deconsolidation Unitary State Tax shall be determined in accordance with paragraph 3 of this Exhibit B; provided, however, that (i) income, deductions, credits and losses shall be computed in a manner consistent with past practices, (ii) credits and any minimum taxes shall be allocated to the member responsible for the generation of such credit or taxes, and (iii) notwithstanding anything to the contrary in this Agreement, any deduction attributable to the exercise of an option to acquire CVS stock by a person who is an employee of a member of the Linens Group at the time of such exercise shall be treated as a deduction allocable to the member of the Linens Group employing such person. 2. The Linens Group's share of any Pre-Deconsolidation Unitary State Tax Assets shall be, with respect to each State, the aggregate amount of Unitary State Tax Assets of all members of the Linens Group. A member's share of such Unitary State Tax Assets shall be determined in accordance with paragraph 3 of this Exhibit B. 3. A member of the Linens Group's share of any Pre-Deconsolidation Unitary State Tax Liability or Pre-Deconsolidation Unitary State Tax Asset shall be the product of (i) such Unitary State Tax Liability or Unitary State Tax Asset, as the case may be, and (ii) the percentage of the numerator used in determining the apportionment percentage of the CVS Consolidated Group for such Unitary State which is attributable to such member of the Linens Group. 4. Any interest imposed in connection with any Tax liability shall be allocated in the same manner as the underlying Tax liability, as provided above. 5. Any penalty imposed in connection with any Tax liability shall be the responsibility of the party whose action or inaction resulted in the imposition of such penalty; provided, however, that if such a determination cannot be made, the penalty shall be allocated in the same manner as the underlying Tax liability, as provided above. 40 EX-10.6 8 EMPLOYMENT AGREEMENT-NORMAN AXELROD 1 EXHIBIT 10.6 LINENS 'N THINGS, INC. - ------------------------------------------------------------------------------- EMPLOYMENT AGREEMENT FOR NORMAN AXELROD - ------------------------------------------------------------------------------- 2 LINENS 'N THINGS, INC. - ------------------------------------------------------------------------------- EMPLOYMENT AGREEMENT FOR NORMAN AXELROD - -------------------------------------------------------------------------------
Page ---- 1. Definitions........................................................................................ 1 2. Term of Employment................................................................................. 2 3. Position, Duties and Responsibilities.............................................................. 3 4. Base Salary........................................................................................ 3 5. Annual Incentive Awards............................................................................ 3 6. Long-Term Stock Incentive Programs................................................................. 3 7. Employee Benefit Programs.......................................................................... 4 8. Disability......................................................................................... 6 9. Reimbursement of Business and Other Expenses; Perquisites.......................................... 7 10. Termination of Employment.......................................................................... 8 11 Confidentiality; Cooperation with Regard to Litigation............................................. 18 12. Non-competition.................................................................................... 19 13. Non-solicitation of Employees...................................................................... 20 14. Remedies........................................................................................... 20 15. Resolution of Disputes............................................................................. 20 16. Indemnification.................................................................................... 20 17. Excise Tax Gross-Up................................................................................ 21 18. Effect of Agreement on Other Benefits.............................................................. 23 19. Assignability; Binding Nature...................................................................... 23 20. Representation..................................................................................... 24 21. Entire Agreement................................................................................... 24 22. Amendment or Waiver................................................................................ 24 23. Severability....................................................................................... 24 24. Survivorship....................................................................................... 24 25. Beneficiaries/References........................................................................... 24
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Page ---- 26. Governing Law/Jurisdiction........................................................................ 25 27. Notices........................................................................................... 25 28. Headings.......................................................................................... 26 29. Counterparts...................................................................................... 26
4 EMPLOYMENT AGREEMENT AGREEMENT, made and entered into as of the 16th day of October, 1996 by and among Linens 'n Things, Inc., a Delaware corporation (together with its successors and assigns, the "Company"), Melville Corporation, a New York corporation (together with its successors and assigns, "Melville"), and Norman Axelrod (the "Executive"). W I T N E S S E T H: WHEREAS, the Company desires to employ the Executive pursuant to an agreement embodying the terms of such employment (this "Agreement") and the Executive desires to enter into this Agreement and to accept such employment, subject to the terms and provisions of this Agreement; WHEREAS, Melville has agreed to become a party to this Agreement for purposes of Sections 5, 6(a), 6(d), 6(e), 10(c)(vii),10(c)(viii) and 21 hereof in order to induce the Executive to enter into this Agreement; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the receipt of which is mutually acknowledged, the Company and the Executive (individually a "Party" and together the "Parties") agree as follows: 1 . Definitions. (a) "Approved Early Retirement" shall have the meaning set forth in Section 10(f) below. (b) "Base Salary" shall have the meaning set forth in Section 4 below. (c) "Board" shall have the meaning set forth in Section 3(a) below. (d) "Cause" shall have the meaning set forth in Section 10(b) below. (e) "Change in Control" shall have the meaning set forth in Section 10(c) below. (f) "Committee" shall have the meaning set forth in Section 4 below. (g) "Confidential Information" shall have the meaning set forth in Section 11(c) below. (h) "Constructive Termination Without Cause" shall have the meaning set forth in Section 10(c) below. (i) "Effective Date" shall have the meaning set forth in Section 2(a) below. (j) "IPO Date" shall have the meaning set forth in Section 3(a) below. (k) "Normal Retirement" shall have the meaning set forth in Section 10(f) below. 5 (l) "Original Term of Employment" shall have the meaning set forth in Section 2(a) below. (m) "Renewal Term" shall have the meaning set forth in Section 2(a) below. (n) "Restriction Period" shall have the meaning set forth in Section 12(b) below. (o) "Severance Period" shall have the meaning set forth in Section 10(c)(ii) below, except as provided otherwise in Section 2(b) or Section 10(e) below. (p) "Subsidiary" shall have the meaning set forth in Section 11(d) below. (q) "Term of Employment" shall have the meaning set forth in Section 2(a) below. (r) "Termination Without Cause" shall have the meaning set forth in Section 10(c) below. 2. Term of Employment. (a) The term of the Executive's employment under this Agreement shall commence immediately upon the date of this agreement (the "Effective Date") and end on the fourth anniversary of such date (the "Original Term of Employment"), unless terminated earlier in accordance herewith. The Original Term of Employment shall be automatically renewed for successive one-year terms (the "Renewal Terms") unless at least 180 days prior to the expiration of the Original Term of Employment or any Renewal Term, either Party notifies the other Party in writing that he or it is electing to terminate this Agreement at the expiration of the then current Term of Employment. "Term of Employment" shall mean the Original Term of Employment and all Renewal Terms. Notwithstanding anything to the contrary in this Agreement, the Executive may elect, upon at least 60 days' prior written notice, to accelerate the expiration of the Term of Employment to June 30, 1998 if neither a Change in Control nor the IPO Date has occurred on or prior to December 31, 1997. (b) In the event that this Agreement is not renewed because the Company has given the 180-day notice prescribed in the preceding paragraph on or before the expiration of the Original Term of Employment or any Renewal Term and, in either case, should such notice result in the expiration of the Term of Employment prior to the Executive's 60th birthday, such non-renewal shall be treated as a "Constructive Termination Without Cause" pursuant to Section 10(c). For purposes of calculating the benefits payable under Section 10(c) in such circumstances, the term "Severance Period" shall mean the period of 18 months following the termination of the Executive's employment, and any unvested Company stock options outstanding on the date of such termination shall not be canceled upon such termination but shall continue to vest as if the Executive had continued in employment with the Company during the Severance Period. (c) Notwithstanding anything in this Agreement to the contrary, at least one year prior to the expiration of the Original Term of Employment, upon the written request of the Company or the Executive, the Parties shall meet to discuss this Agreement and may agree in writing to modify any of the terms of this Agreement. - 2 - 6 3. Position, Duties and Responsibilities. (a) Generally. Executive shall serve as President and Chief Executive Officer of the Company and, following the date on which shares of common stock of the Company are first sold to the public pursuant to an initial public offering (the "IPO Date"), as Chairman of the Board of Directors of the Company. For so long as he is serving on the Board of Directors of the Company (the "Board"), Executive agrees to serve as a member of any committee of the Board if the Board shall elect Executive to such positions. In any and all such capacities, Executive shall report only to the Board. Executive shall have and perform such duties, responsibilities, and authorities as are customary for the president and chief executive officer (and after the IPO Date, chairman of the board) of corporations of similar size and businesses as the Company as they may exist from time to time and as are consistent with such positions and status. Executive shall devote substantially all of his business time and attention (except for periods of vacation or absence due to illness), and his best efforts, abilities, experience, and talent to the positions of President and Chief Executive Officer (and after the IPO Date, Chairman) and for the businesses of the Company. (b) Other Activities. Anything herein to the contrary notwithstanding, nothing in this Agreement shall preclude the Executive from (i) serving on the boards of directors of a reasonable number of other corporations or the boards of a reasonable number of trade associations and/or charitable organizations, (ii) engaging in charitable activities and community affairs, and (iii) managing his personal investments and affairs, provided that such activities do not materially interfere with the proper performance of his duties and responsibilities under this Agreement. (c) Place of Employment. Executive's principal place of employment shall be the corporate offices of the Company. (d) Rank of Executive Within Company. As President and Chief Executive Officer of the Company, Executive shall be the highest-ranking executive of the Company. 4. Base Salary. The Executive shall be paid an annualized salary, payable in accordance with the regular payroll practices of the Company, of not less than $475,000, subject to review for increase at the discretion of the Compensation Committee (the "Committee") of the Board ("Base Salary"). 5. Annual Incentive Awards. The Executive shall participate in the Company's (or until the IPO Date, Melville's or the Company's) annual incentive compensation plan with a target annual incentive award opportunity of no less than 55% of Base Salary and a maximum annual incentive award opportunity of 110% of Base Salary. Payment of annual incentive awards shall be made at the same time that other senior-level executives receive their incentive awards; provided, however, that after the IPO Date such annual incentive awards shall be paid in cash no later than 75 days after the Company's fiscal year-end unless the Executive agrees otherwise. 6. Long-Term Incentive Programs. (a) General. Commencing on the IPO Date, the Executive shall be eligible to participate in the Company's long-term incentive compensation programs (including stock options - 3 - 7 and stock grants) at a level greater than any other participant therein. Until the IPO Date, the Executive shall be eligible to participate in Melville's long-term incentive compensation programs (including stock options and stock grants) at a level comparable to other similarly situated executives. (b) Grant of Stock Option. On the IPO Date, the Executive shall be granted an option to purchase common stock of the Company in accordance with the Stock Option Grant Agreement attached hereto as Exhibit A. Notwithstanding the foregoing, (i) if a Change in Control occurs prior to the IPO Date, the Executive shall be entitled to receive, in lieu of the option grant described in Exhibit A, a cash lump-sum payment within 15 days after the Change in Control equal to 2% of the amount, if any, by which (A) the total cash consideration and the fair market value of any other consideration received by the stockholders of the Company in connection with the Change in Control exceeds (B) $325,000,000; and (ii) if neither the IPO Date nor a Change in Control has occurred on or prior to December 31, 1997, the Company shall promptly appoint an investment banking firm, which must be reasonably acceptable to the Executive (the Executive's consent not to be unreasonably withheld), to determine the fair value of all the capital stock of the Company as of December 31, 1997, and the Executive shall be entitled to receive, in lieu of the option grant described in Exhibit A, a cash lump-sum payment within 15 days after the delivery of such investment banking firm's valuation opinion, which shall be delivered no later than March 31, 1998, equal to 2% of the amount, if any, by which (A) such fair value of capital stock exceeds (B) $325,000,000. (c) Grant of Deferred Stock. On the IPO Date, the Executive shall be granted shares of deferred stock in accordance with the Deferred Stock Grant Agreement attached hereto as Exhibit B. Notwithstanding the foregoing, (i) if a Change in Control occurs prior to the IPO Date, the Executive shall be entitled to receive, in lieu of the deferred stock grant described in Exhibit B, a cash lump-sum payment within 15 days after the Change in Control equal to $1,000,000; and (ii) if neither the IPO Date nor a Change in Control has occurred on or prior to December 31, 1997, the Executive shall be entitled to receive, in lieu of the deferred stock grant described in Exhibit B, a cash lump-sum payment within 15 days after the delivery of the valuation opinion described in Section 6(b) equal to $1,000,000, but only if such valuation opinion is equal to or greater than $300,000,000. (d) Melville Option. On the earlier of a Change in Control or the IPO Date, the Executive's option to purchase 65,000 shares of Melville common stock granted to Executive on April 11, 1995 (the "1995 Melville Option") shall become immediately vested and exercisable in whole or in part at any time on or prior to December 31, 1999. If neither the IPO Date nor a Change in Control has occurred on or prior to December 31, 1996, the next installment of the Executive's 1995 Melville Option scheduled to vest on April 11, 1997, shall immediately vest. (e) Melville Restricted Stock. If neither the IPO Date nor a Change in Control has occurred on or prior to December 31, 1996, the Executive shall vest immediately in 10,000 shares of his Melville restricted stock grant for 20,067 shares dated April 11, 1995. 7. Employee Benefit Programs. (a) General Benefits. During the Term of Employment, the Executive shall be entitled to participate in such employee pension and welfare benefit plans and programs of the Company as are made available to the Company's senior-level executives or to its employees generally, as such plans or programs may be in effect from time to time, including, without - 4 - 8 limitation, health, medical, dental, long-term disability, travel accident and life insurance plans. Notwithstanding the foregoing, prior to the IPO Date the Executive shall continue to participate in the employee pension and welfare benefit plans and programs of Melville as are made available to the Company's senior-level executives or to its employees generally, as such plans or programs may be in effect from time to time, including, without limitation, health, medical, dental, long-term disability, travel accident and life insurance plans. (b) Deferral of Compensation. The Company shall implement deferral arrangements, reasonably acceptable to Executive and the Company, permitting Executive to elect to defer receipt, pursuant to written deferral election terms and forms (the "Deferral Election Forms"), of all or a specified portion of (i) his annual Base Salary and annual incentive compensation under Sections 4 and 5, (ii) long term incentive compensation under Section 6 and (iii) shares acquired upon exercise of options to purchase Company common stock that are acquired in an exercise in which Executive pays the exercise price by the surrender of previously acquired shares, to the extent of the net additional shares otherwise issuable to Executive in such exercise; provided, however, that such deferrals shall not reduce Executive's total cash compensation in any calendar year below the sum of (i) the FICA maximum taxable wage base plus (ii) the amount needed, on an after-tax basis, to enable Executive to pay the 1.45% medicare tax imposed on his wages in excess of such FICA maximum taxable wage base. In accordance with such duly executed Deferral Election Forms, the Company shall credit to a bookkeeping account (the "Deferred Compensation Account") maintained for Executive on the respective payment date or dates, amounts equal to the compensation subject to deferral, such credits to be denominated in cash if the compensation would have been paid in cash but for the deferral or in shares if the compensation would have been paid in shares but for the deferral. An amount of cash equal in value to all cash-denominated amounts credited to Executive's account and a number of shares of Company common stock equal to the number of shares credited to Executive's account pursuant to this Section 7(b) shall be transferred as soon as practicable following such crediting by the Company to, and shall be held and invested by, an independent trustee selected by the Company and reasonably acceptable to Executive (a "Trustee") pursuant to a "rabbi trust" established by the Company in connection with such deferral arrangement and as to which the Trustee shall make investments based on Executive's investment objectives (including possible investment in publicly traded stocks and bonds, mutual funds, and insurance vehicles). Thereafter, Executive's deferral accounts will be valued by reference to the value of the assets of the "rabbi trust". The Company shall pay all costs of administration or maintenance of the deferral arrangement, without deduction or reimbursement from the assets of the "rabbi trust." On the earlier of a Change in Control or the IPO Date (the "Crediting Date"), the Company shall credit to the Deferred Compensation Account (or pay to the Executive in the event of a Change in Control) an amount equal to the sum of: (i) $800,000; plus (ii) the excess of (A) $275,000 minus (B) 100% of the pre-tax gain actually realized by the Executive from the exercise of any or all of the options to purchase Melville common stock granted to Executive by Melville that have not been exercised prior to the date of this Agreement (other than the April 11, 1995 option to purchase 65,000 shares); plus (iii) the product of the number of unvested shares of restricted stock of Melville held by the Executive on the Crediting Date times the fair market value of a share of Melville Corporation common stock on the Crediting Date. The Company and the Executive agree that the options and restricted stock described in the preceding clauses (ii) and (iii) (other than the April 11, 1995 option to purchase 65,000 shares referred to in Section 6(d) above) shall be canceled on the Crediting Date, that as of the Crediting Date the Executive shall have no further rights under the Supplemental Retirement Plan for Select Senior Management of Melville - 5 - 9 Corporation, that the fair market value of Melville common stock for purposes of this paragraph shall be determined in accordance with the Melville Corporation Omnibus Stock Incentive Plan, and that the amount credited to the Executive's Deferred Compensation Account in accordance with this paragraph (and any earnings thereon) shall be paid to the Executive in a lump sum on the third anniversary of the Crediting Date unless the Executive has filed a Deferral Election Form with the Company (in accordance with Company policies) specifying a later payment date or payment method. Except as otherwise provided under Section 10, in the event of Executive's termination of employment with the Company or as otherwise determined by the Committee in the event of hardship on the part of Executive, upon such date(s) or event(s) set forth in the Deferral Election Forms (including forms filed after deferral but before settlement in which Executive may elect to further defer settlement), the Company shall promptly pay to Executive cash equal to the value of the assets then credited to Executive's deferral accounts, less applicable withholding taxes, and such distribution shall be deemed to fully settle such accounts; provided, however, that the Company may instead settle such accounts by directing the Trustee to distribute Company common stock and/or other assets of the "rabbi trust." The Company and Executive agree that compensation deferred pursuant to this Section 7(b) shall be fully vested and nonforfeitable; however, Executive acknowledges that his rights to the deferred compensation provided for in this Section 7(b) shall be no greater than those of a general unsecured creditor of the Company, and that such rights may not be pledged, collateralized, encumbered, hypothecated, or liable for or subject to any lien, obligation, or liability of Executive, or be assignable or transferable by Executive, otherwise than by will or the laws of descent and distribution, provided that Executive may designate one or more beneficiaries to receive any payment of such amounts in the event of his death. 8. Disability. (a) During the Term of Employment, as well as during the Severance Period, the Executive shall be entitled to disability coverage as described in this Section 8(a). In the event the Executive becomes disabled, as that term is defined under the Company's Long-Term Disability Plan, the Executive shall be entitled to receive pursuant to the Company's Long-Term Disability Plan or otherwise, and in place of his Base Salary, an amount equal to 60% of his Base Salary, at the annual rate in effect on the commencement date of his eligibility for the Company's long-term disability benefits ("Commencement Date") for a period beginning on the Commencement Date and ending with the earlier to occur of (A) the Executive's attainment of age 65 or (B) the Executive's commencement of retirement benefits from the Company in accordance with Section 10(f) below. If (i) the Executive ceases to be disabled during the Term of Employment (as determined in accordance with the terms of the Long-Term Disability Plan), (ii) the positions set forth in Section 3(a) are then vacant and (iii) the Company requests in writing that he resume such positions, he may elect to resume such positions by written notice to the Company within 15 days after the Company delivers its request. If he resumes such positions, he shall thereafter be entitled to his Base Salary at the annual rate in effect on the Commencement Date and, for the year he resumes his positions, a pro rata annual incentive award. If he ceases to be disabled during the Term of Employment and does not resume his positions in accordance with the preceding sentence, he shall be treated as if he voluntarily terminated his employment pursuant to Section 10(d) as of the date the Executive ceases to be disabled. If the Executive is not offered such positions after he ceases to be disabled during the Term of Employment, he shall be treated as if his employment was terminated Without Cause pursuant to Section 10(c) as of the date the Executive ceases to be disabled. - 6 - 10 (b) The Executive shall be entitled to a pro rata annual incentive award for the year in which the Commencement Date occurs based on 55% of Base Salary paid to him during such year prior to the Commencement Date, payable in a lump sum not later than 15 days after the Commencement Date. The Executive shall not be entitled to any annual incentive award with respect to the period following the Commencement Date. If the Executive recommences his positions in accordance with Section 8(a), he shall be entitled to a pro rata annual incentive award for the year he resumes such positions and shall thereafter be entitled to annual incentive awards in accordance with Section 5 hereof. (c) During the period the Executive is receiving disability benefits pursuant to Section 8(a) above, he shall continue to be treated as an employee for purposes of all employee benefits and entitlements in which he was participating on the Commencement Date, including without limitation, the benefits and entitlements referred to in Sections 6 and 7 above, except that the Executive shall not be entitled to receive any annual salary increases or any new long-term incentive plan grants following the Commencement Date. 9. Reimbursement of Business and Other Expenses: Perquisites. (a) The Executive is authorized to incur reasonable expenses in carrying out his duties and responsibilities under this Agreement, and the Company shall promptly reimburse him for all business expenses incurred in connection therewith, subject to documentation in accordance with the Company's policy. During the Term of Employment, the Company shall, commencing 1996, provide the Executive, in accordance with the terms adopted by the Company, with personal financial and tax planning. (b) The Company shall pay all reasonable legal expenses up to $17,500 incurred by the Executive in connection with the negotiation of this Agreement. 10. Termination of Employment. (a) Termination Due to Death. In the event the Executive's employment with the Company is terminated due to his death, his estate or his beneficiaries, as the case may be, shall be entitled to and their sole remedies under this Agreement shall be: (i) Base Salary through the date of death, which shall be paid in a single lump sum not later than 15 days following the Executive's death; (ii) pro rata annual incentive award for the year in which the Executive's death occurs assuming that the Executive would have received an award equal to 55% of Base Salary for such year, which shall be payable in a lump sum promptly (but in no event later than 15 days) after his death; (iii) elimination of all restrictions on any deferred stock awards outstanding at the time of his death; (iv) immediate vesting of all outstanding stock options and the right to exercise such stock options for a period of one year following death (or such longer period as may be provided in stock options granted - 7 - 11 to other similarly situated executive officers of the Company) or for the remainder of the exercise period, if less; (v) immediate vesting of all outstanding long-term incentive awards and a pro rata payment of such awards based on target performance, payable in a cash lump sum promptly (but in no event later than 15 days) after his death; (vi) the balance of any incentive awards earned as of December 31 of the prior year (but not yet paid), which shall be paid in a single lump sum not later than 15 days following the Executive's death; (vii) settlement of all deferred compensation arrangements in accordance with the Executive's duly executed Deferral Election Forms; and (viii) other or additional benefits then due or earned in accordance with applicable plans and programs of the Company. (b) Termination by the Company for Cause. (i) "Cause" shall mean: (A) the Executive's willful and material breach of Sections 11, 12 or 13 of this Agreement; (B) the Executive is convicted of a felony involving moral turpitude; or (C) the Executive engages in conduct that constitutes willful gross neglect or willful gross misconduct in carrying out his duties under this Agreement, resulting, in either case, in material harm to the financial condition or reputation of the Company. For purposes of this Agreement, an act or failure to act on Executive's part shall be considered "willful" if it was done or omitted to be done by him not in good faith, and shall not include any act or failure to act resulting from any incapacity of Executive. (ii) A termination for Cause shall not take effect unless the provisions of this paragraph (ii) are complied with. The Executive shall be given written notice by the Company of its intention to terminate him for Cause, such notice (A) to state in detail the particular act or acts or failure or failures to act that constitute the grounds on which the proposed termination for Cause is based and (B) to be given within 90 days of the Company's learning of such act or acts or failure or failures to act. The Executive shall have 20 days after the date that such written notice has been given to him in which to cure such conduct, to the extent such cure is possible. If he fails to cure such conduct, the Executive shall then be entitled to a hearing before the Committee of the Board at which the Executive is entitled to appear. - 8 - 12 Such hearing shall be held within 25 days of such notice to the Executive, provided he requests such hearing within 10 days of the written notice from the Company of the intention to terminate him for Cause. If, within five days following such hearing, the Executive is furnished written notice by the Board confirming that, in its judgment, grounds for Cause on the basis of the original notice exist, he shall thereupon be terminated for Cause. (iii) In the event the Company terminates the Executive's employment for Cause, he shall be entitled to and his sole remedies under this Agreement shall be: (A) Base Salary through the date of the termination of his employment for Cause, which shall be paid in a single lump sum not later than 15 days following the Executive's termination of employment; (B) any incentive awards earned as of December 31 of the prior year (but not yet paid), which shall be paid in a single lump sum not later than 15 days following the Executive's termination of employment; (C) settlement of all deferred compensation arrangements in accordance with the Executive's duly executed Deferral Election Forms; and (D) other or additional benefits then due or earned in accordance with applicable plans or programs of the Company. (c) Termination Without Cause or Constructive Termination Without Cause Prior to Change in Control. In the event the Executive's employment with the Company is terminated without Cause (which termination shall be effective as of the date specified by the Company in a written notice to the Executive), other than due to death, or in the event there is a Constructive Termination Without Cause (as defined below), in either case prior to a Change in Control (as defined below) the Executive shall be entitled to and his sole remedies under this Agreement shall be: (i) Base Salary through the date of termination of the Executive's employment, which shall be paid in a single lump sum not later than 15 days following the Executive's termination of employment; (ii) Base Salary, at the annualized rate in effect on the date of termination of the Executive's employment (or in the event a reduction in Base Salary is a basis for a Constructive Termination Without Cause, then the Base Salary in effect immediately prior to such reduction), for a period of 24 months (or 18 months if Section 2(b) applies) following such termination (the "Severance Period"); (iii) pro rata annual incentive award for the year in which termination occurs equal to 55% of Base Salary (determined in accordance with - 9 - 13 Section 10(c)(ii) above) for such year, payable in a lump sum promptly (but in no event later than 15 days) following termination; (iv) an amount equal to 55% of Base Salary (determined in accordance with Section 10(c)(ii) above) multiplied by 2 (or 1.5 if Section 2(b) applies), payable in equal monthly payments over the Severance Period; (v) elimination of all restrictions on any deferred stock awards outstanding at the time of termination of employment; (vi) except as provided in Section 2(b), any outstanding stock options which are unvested shall vest and the Executive shall have the right to exercise any vested stock options during the Severance Period or for the remainder of the exercise period, if less; (vii) continued vesting (as if the Executive remained employed by Melville during the Severance Period) of all outstanding options to purchase Melville common stock and the right to exercise such stock options at any time prior to 90 days following the expiration of the Severance Period or for the remainder of the exercise period, if less; (viii) immediate vesting in 50% of the Executive's Melville restricted stock grant dated April 11, 1995 (i.e., the next installment) if such termination occurs prior to April 11, 1997, and immediate vesting in 75% of such restricted stock grant (i.e., the next installment) if such termination occurs on or after April 11, 1997 and prior to April 11, 1998; (ix) immediate vesting of all outstanding long-term incentive awards and a pro rata payment of such awards based on target performance, payable in a cash lump sum promptly (but in no event later than 15 days) following the Executive's termination of employment; (x) the balance of any incentive awards earned as of December 31 of the prior year (but not yet paid), which shall be paid in a single lump sum not later than 15 days following the Executive's termination of employment; (xi) settlement of all deferred compensation arrangements in accordance with the Executive's duly executed Deferral Election Forms; (xii) continued participation in all medical, health and life insurance plans at the same benefit level at which he was participating on the date of the termination of his employment until the earlier of: (A) the end of the Severance Period; or (B) the date, or dates, he receives equivalent coverage and benefits under the plans and programs of a subsequent - 10 - 14 employer (such coverage and benefits to be determined on a coverage-by-coverage, or benefit-by-benefit, basis); provided that (1) if the Executive is precluded from continuing his participation in any employee benefit plan or program as provided in this clause (xii) of this Section 10(c), he shall receive cash payments equal on an after-tax basis to the cost to him of obtaining the benefits provided under the plan or program in which he is unable to participate for the period specified in this clause (xii) of this Section 10(c), (2) such cost shall be deemed to be the lowest reasonable cost that would be incurred by the Executive in obtaining such benefit himself on an individual basis, and (3) payment of such amounts shall be made quarterly in advance; and (xiii) other or additional benefits then due or earned in accordance with applicable plans and programs of the Company. "Termination Without Cause" shall mean the Executive's employment is terminated by the Company for any reason other than Cause (as defined in Section 10(b)) or due to death. "Constructive Termination Without Cause" shall mean a termination of the Executive's employment at his initiative as provided in this Section 10(c) following the occurrence, without the Executive's written consent, of one or more of the following events (except as a result of a prior termination): (A) a material diminution or change, adverse to Executive, in Executive's positions, titles, or offices as set forth in Section 3(a), status, rank, nature of responsibilities, or authority within the Company, or a removal of Executive from or any failure to elect or re-elect or, as the case may be, nominate Executive to any such positions or offices, including as a member of the Board; (B) an assignment of any duties to Executive which are inconsistent with his status as President and Chief Executive Officer of the Company and other positions held under Section 3(a); (C) a decrease in annual Base Salary or target annual incentive award opportunity below 55% of Base Salary; (D) any other failure by the Company to perform any material obligation under, or breach by the Company of any material provision of, this Agreement that is not cured within 30 days; (E) a relocation of the corporate offices of the Company outside a 35-mile radius of Clifton, New Jersey; or - 11 - 15 (F) any failure to secure the agreement of any successor corporation or other entity to the Company to fully assume the Company's obligations under this Agreement. A "Change in Control" shall be deemed to have occurred if: (i) any Person (other than the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company immediately prior to the occurrence with respect to which the evaluation is being made in substantially the same proportions as their ownership of the common stock of the Company) becomes the Beneficial Owner (except that a Person shall be deemed to be the Beneficial Owner of all shares that any such Person has the right to acquire pursuant to any agreement or arrangement or upon exercise of conversion rights, warrants or options or otherwise, without regard to the sixty day period referred to in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company or any Significant Subsidiary (as defined below), representing 25% or more of the combined voting power of the Company's or such subsidiary's then outstanding securities; provided, however, that such event shall not constitute a Change in Control unless or until the percentage of such securities owned beneficially, directly or indirectly, by such Person is equal to or more than all such securities owned beneficially, directly or indirectly, by Melville; (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this paragraph) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved but excluding for this purpose any such new director whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of an individual, corporation, partnership, group, associate or other entity or Person other than the Board, cease for any reason to constitute at least a majority of the Board; provided, however, that such event shall not constitute a Change in Control unless or until the percentage of voting securities of the Company owned beneficially, directly or indirectly, by Melville is less than 50% of all such outstanding securities; - 12 - 16 (iii) the consummation of a merger or consolidation of the Company or any subsidiary owning directly or indirectly all or substantially all of the consolidated assets of the Company (a "Significant Subsidiary") with any other entity, other than a merger or consolidation which would result in the voting securities of the Company or a Significant Subsidiary outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or resulting entity) more than 50% of the combined voting power of the surviving or resulting entity outstanding immediately after such merger or consolidation; (iv) the stockholders of the Company approve a plan or agreement for the sale or disposition of all or substantially all of the consolidated assets of the Company (other than such a sale or disposition immediately after which such assets will be owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the common stock of the Company immediately prior to such sale or disposition) in which case the Board shall determine the effective date of the Change in Control resulting therefrom; or (v) any other event occurs which the Board determines, in its discretion, would materially alter the structure of the Company or its ownership. For purposes of this definition: (A) The term "Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 under the Exchange Act (including any successor to such Rule). (B) The term "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto. (C) The term "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including "group" as defined in Section 13(d) thereof. (d) Voluntary Termination. In the event of a termination of employment by the Executive on his own initiative after delivery of 10 business days advance written notice, other than a termination due to death, a Constructive Termination Without Cause, an Approved Early Retirement or Normal Retirement pursuant to Section 10(f) below, or a voluntary termination following a Change in Control within the 30-day period described in Section 10(e) below, the Executive shall have the same entitlements as provided in Section 10(b)(iii) above for a termination for Cause, provided that at the Company's election, furnished in writing to the Executive within 15 days following such notice of termination, the Company shall in addition pay the Executive 155% of his Base Salary for a period of 12 months following such termination in exchange for the Executive not engaging in competition with the Company or any Subsidiary as - 13 - 17 set forth in Section 12(a) below. Notwithstanding any implication to the contrary, the Executive shall not have the right to terminate his employment with the Company during the Term of Employment except in the event of a Constructive Termination Without Cause, Approved Early Retirement, Normal Retirement, or voluntary termination following a Change in Control within the 30-day period described in Section 10(e) below, and any voluntary termination of employment during the Term of Employment in violation of this Agreement shall be considered a material breach; provided, however, if the Company elects to pay the Executive 155% of his Base Salary in accordance with this Section 10(d), the Company shall waive any and all claims it may have against the Executive for any breach of this Agreement relating to his voluntary termination of employment unless the Executive is found by a court of competent jurisdiction not to be in compliance with Section 12(a) below; provided further, however, that, notwithstanding anything contained in the foregoing to the contrary, it is not the intention of the Company to waive any claims it may have against any third parties relating to a voluntary termination by the Executive in violation of this Agreement. (e) Termination Without Cause; Constructive Termination Without Cause or Voluntary Termination Following Change in Control. In the event the Executive's employment with the Company is terminated by the Company without Cause (which termination shall be effective as of the date specified by the Company in a written notice to the Executive), other than due to death, or in the event there is a Constructive Termination Without Cause (as defined above), in either case within two years following a Change in Control (as defined above), or in the event the Executive elects within the 30-day period commencing six months following a Change in Control to terminate his employment for any reason, the Executive shall be entitled to and his sole remedies under this Agreement shall be: (i) Base Salary through the date of termination of the Executive's employment, which shall be paid in a single lump sum not later than 15 days following the Executive's termination of employment; (ii) an amount equal to 2.99 times the Executive's Base Salary, at the annualized rate in effect on the date of termination of the Executive's employment (or in the event a reduction in Base Salary is a basis for a Constructive Termination Without Cause, then the Base Salary in effect immediately prior to such reduction), payable in a cash lump sum promptly (but in no event later than 15 days) following the Executive's termination of employment; (iii) pro rata annual incentive award for the year in which termination occurs assuming that the Executive would have received an award equal to 55% of Base Salary (determined in accordance with Section 10(e)(ii) above) for such year, payable in a cash lump sum promptly (but in no event later than 15 days) following the Executive's termination of employment; (iv) an amount equal to 55% of such Base Salary (determined in accordance with Section 10(e)(ii) above) multiplied by 2.99, payable in a cash lump sum promptly (but in no event later than 15 days) following the Executive's termination of employment; - 14 - 18 (v) elimination of all restrictions on any deferred stock awards outstanding at the time of termination of employment; (vi) immediate vesting of all outstanding stock options and the right to exercise such stock options during the Severance Period or for the remainder of the exercise period, if less; (vii) immediate vesting of all outstanding long-term incentive awards and a pro rata payment of such awards based on target performance, payable in a cash lump sum promptly (but in no event later than 15 days) following the Executive's termination of employment; (viii) the balance of any incentive awards earned as of December 31 of the prior year (but not yet paid), which shall be paid in a single lump sum not later than 15 days following the Executive's termination of employment; (ix) settlement of all deferred compensation arrangements in accordance with Executive's duly executed Deferral Election Forms; (x) continued participation in all medical, health and life insurance plans at the same benefit level at which he was participating on the date of termination of his employment until the earlier of: (A) the end of the Severance Period; or (B) the date, or dates, he receives equivalent coverage and benefits under the plans and programs of a subsequent employer (such coverage and benefits to be determined on a coverage-by-coverage, or benefit-by-benefit, basis); provided that (1) if the Executive is precluded from continuing his participation in any employee benefit plan or program as provided in this clause (x) of this Section 10(e), he shall receive cash payments equal on an after-tax basis to the cost to him of obtaining the benefits provided under the plan or program in which he is unable to participate for the period specified in this clause (x) of this Section 10(e), (2) such cost shall be deemed to be the lowest reasonable cost that would be incurred by the Executive in obtaining such benefit himself on an individual basis, and (3) payment of such amounts shall be made quarterly in advance; and (xi) other or additional benefits then due or earned in accordance with applicable plans and programs of the Company. For purposes of any termination pursuant to this Section 10(e), the term "Severance Period" shall mean the period of 36 months following the termination of the Executive's employment. - 15 - 19 (f) Approved Early Retirement or Normal Retirement. Upon the Executive's Approved Early Retirement or Normal Retirement (each as defined below), the Executive shall be entitled to and his sole remedies under this Agreement shall be: (i) Base Salary through the date of termination of the Executive's employment, which shall be paid in a single lump sum not later than 15 days following the Executive's termination of employment; (ii) pro rata annual incentive award for the year in which termination occurs, based on performance valuation at the end of such year and payable in a cash lump sum promptly (but in no event later than 15 days) thereafter; (iii) continued vesting (as if the Executive remained employed by the Company) of any deferred stock awards outstanding at the time of his termination of employment; (iv) continued vesting of all outstanding stock options and the right to exercise such stock options for a period of one year following the later of the date the options are fully vested or the Executive's termination of employment (or such longer period as may be provided in stock options granted to other similarly situated executive officers of the Company) or for the remainder of the exercise period, if less; (v) continued vesting (as if the Executive remained employed by the Company) of all outstanding long-term incentive awards and payment of such awards based on valuation at the end of the performance period, payable in a cash lump sum promptly (but in no event later than 15 days) thereafter; (vi) the balance of any incentive awards earned as of December 31 of the prior year (but not yet paid), which shall be paid in a single lump sum not later than 15 days following the Executive's termination of employment; (vii) settlement of all deferred compensation arrangements in accordance with the Executive's duly executed Deferral Election Forms; (viii) continued participation in all medical, health and life insurance plans at the same benefit level at which he was participating on the date of the termination of his employment until the earlier of: (A) the Executive's attainment of age 60; or (B) the date, or dates, he receives substantially equivalent coverage and benefits under the plans and programs of a subsequent employer (such coverage and benefits to be determined on a coverage-by-coverage, or benefit-by- -16- 20 benefit, basis); provided that (1) if the Executive is precluded from continuing his participation in any employee benefit plan or program as provided in this clause (viii) of this Section 10(f), he shall receive cash payments equal on an after-tax basis to the cost to him of obtaining the benefits provided under the plan or program in which he is unable to participate for the period specified in this clause (viii) of this Section 10(f), (2) such cost shall be deemed to be the lowest cost that would be incurred by the Executive in obtaining such benefit himself on an individual basis, and (3) payment of such amounts shall be made quarterly in advance; and (ix) other or additional benefits then due or earned in accordance with applicable plans and programs of the Company. "Approved Early Retirement" shall mean the Executive's voluntary termination of employment with the Company at or after attaining age 55 but prior to attaining age 60, if such termination is approved in advance by the Committee. "Normal Retirement" shall mean the Executive's voluntary termination of employment with the Company at or after attaining age 60. (g) No Mitigation; No Offset. In the event of any termination of employment, the Executive shall be under no obligation to seek other employment; amounts due the Executive under this Agreement shall not be offset by any remuneration attributable to any subsequent employment that he may obtain. (h) Nature of Payments. Any amounts due under this Section 10 are in the nature of severance payments considered to be reasonable by the Company and are not in the nature of a penalty. (i) No Further Liability; Release. In the event of the Executive's termination of employment, payment made and performance by the Company in accordance with this Section 10 shall operate to fully discharge and release the Company and its directors, officers, employees, subsidiaries, affiliates, stockholders, successors, assigns, agents and representatives from any further obligation or liability with respect to the Executive's rights under this Agreement. Other than payment and performance under this Section 10, the Company and its directors, officers, employees, subsidiaries, affiliates, stockholders, successors, assigns, agents and representatives shall have no further obligation or liability to the Executive or any other person under this Agreement in the event of the Executive's termination of employment. The Company shall have the right to condition the last payment of any severance or other amounts pursuant to this Section 10 upon the delivery by the Executive to the Company of a release in the form satisfactory to the Company releasing any and all claims the Executive may have against the Company and its directors, officers, employees, subsidiaries, affiliates, stockholders, successors, assigns, agents and representatives arising out of this Agreement. - 17 - 21 11. Confidentiality: Cooperation with Regard to Litigation. (a) During the Term of Employment and thereafter, the Executive shall not, without the prior written consent of the Company, disclose to anyone (except in good faith in the ordinary course of business to a person who will be advised by the Executive to keep such information confidential) or make use of any Confidential Information except in the performance of his duties hereunder or when required to do so by legal process, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body (including a committee thereof) that requires him to divulge, disclose or make accessible such information. In the event that the Executive is so ordered, he shall give prompt written notice to the Company in order to allow the Company the opportunity to object to or otherwise resist such order. (b) During the Term of Employment and thereafter, Executive shall not disclose the existence or contents of this Agreement beyond what is disclosed in the proxy statement or documents filed with the government unless and to the extent such disclosure is required by law, by a governmental agency, or in a document required by law to be filed with a governmental agency or in connection with enforcement of his rights under this Agreement. In the event that disclosure is so required, the Executive shall give prompt written notice to the Company in order to allow the Company the opportunity to object to or otherwise resist such requirement. This restriction shall not apply to such disclosure by him to members of his immediate family, his tax, legal or financial advisors, any lender, or tax authorities, or to potential future employers to the extent necessary, each of whom shall be advised not to disclose such information. (c) "Confidential Information" shall mean all information concerning the business of the Company or any Subsidiary relating to any of their products, product development, trade secrets, customers, suppliers, finances, and business plans and strategies. Excluded from the definition of Confidential Information is information (i) that is or becomes part of the public domain, other than through the breach of this Agreement by the Executive or (ii) regarding the Company's business or industry properly acquired by the Executive in the course of his career as an executive in the Company's industry and independent of the Executive's employment by the Company or Melville. For this purpose, information known or available generally within the trade or industry of the Company or any Subsidiary shall be deemed to be known or available to the public. (d) "Subsidiary" shall mean any corporation controlled directly or indirectly by the Company. (e) The Executive agrees to cooperate with the Company, during the Term of Employment and thereafter (including following the Executive's termination of employment for any reason), by making himself reasonably available to testify on behalf of the Company or any Subsidiary in any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, and to assist the Company, or any Subsidiary, in any such action, suit, or proceeding, by providing information and meeting and consulting with the Board or its representatives or counsel, or representatives or counsel to the Company, or any Subsidiary as requested; provided, however that the same does not materially interfere with his then current professional activities. The Company agrees to reimburse the Executive, on an after-tax basis, for all expenses actually incurred in connection with his provision of testimony or assistance. - 18 - 22 12. Non-competition. (a) During the Restriction Period (as defined in Section 12(b) below), the Executive shall not engage in Competition with the Company or any Subsidiary. "Competition" shall mean engaging in any activity, except as provided below, for a Competitor of the Company or any Subsidiary, whether as an employee, consultant, principal, agent, officer, director, partner, shareholder (except as a less than one percent shareholder of a publicly traded company) or otherwise. A "Competitor" shall mean (i) Bed Bath & Beyond, Inc., Strouds, Inc., Home Express Inc. and Home Place Inc. (and any successor or successors thereto); (ii) any specialty retailer if 40% or more of its revenues (based on the most recent quarterly or annual financial statements available) are derived from the sale of home textiles or housewares; (iii) any corporation, other entity, or start-up corporation or other entity engaged primarily or organized for the purpose of engaging primarily in the sale of home textiles or housewares having a total capitalization (equity and/or long-term debt) in excess of $30,000,000 or revenues (based on the most recent quarterly or annual financial statements available) in excess of $25,000,000. If the Executive commences employment or becomes a consultant, principal, agent, officer, director, partner, or shareholder of any entity that is not a Competitor at the time the Executive initially becomes employed or becomes a consultant, principal, agent, officer, director, partner, or shareholder of the entity, future activities of such entity shall not result in a violation of this provision unless (x) such activities were contemplated by the Executive at the time the Executive initially became employed or becomes a consultant, principal, agent, officer, director, partner, or shareholder of the entity or (y) the Executive commences directly or indirectly overseeing or managing the activities of such Competitor which are competitive with the activities of the Company or Subsidiary. The Executive shall not be deemed indirectly overseeing or managing the activities of such Competitor which are competitive with the activities of the Company or Subsidiary so long as he does not regularly participate in discussions with regard to the conduct of the competing business. (b) For the purposes of this Section 12, "Restriction Period" shall mean the period beginning with the Effective Date and ending with: (i) in the case of a termination of the Executive's employment without Cause or a Constructive Termination Without Cause, the Restriction Period shall terminate immediately upon the Executive's termination of employment; (ii) in the case of a termination of the Executive's employment for Cause, the first anniversary of such termination; (iii) in the case of a voluntary termination of the Executive's employment pursuant to Section 10(d) above followed by the Company's election to pay the Executive (and subject to the payment of) 155% of his Base Salary, as provided in Section 10(d) above, the first anniversary of such termination; (iv) in the case of a voluntary termination of the Executive's employment pursuant to Section 10(d) above which is not followed by the Company's election to pay the Executive such 155% of Base Salary, the date of such termination; or - 19 - 23 (v) in the case of Approved Early Retirement or Normal Retirement pursuant to Section 10(f) above, the remainder of the Term of Employment. 13. Non-solicitation of Employees. During the period beginning with the Effective Date and ending one year following the termination of the Executive's employment, the Executive shall not induce employees of the Company or any Subsidiary to terminate their employment; provided, however, that the foregoing shall not be construed to prevent the Executive from engaging in generic nontargeted advertising for employees generally. During such period, the Executive shall not hire, either directly or through any employee, agent or representative, any employee of the Company or any Subsidiary or any person who was employed by the Company or any Subsidiary within 180 days of such hiring. 14. Remedies. In addition to whatever other rights and remedies the Company may have at equity or in law, if the Executive breaches any of the provisions contained in Sections 11, 12 or 13 above, the Company (a) shall have the right to immediately terminate all payments and benefits due under this Agreement and (b) shall have the right to seek injunctive relief. The Executive acknowledges that such a breach of Sections 11, 12 or 13 would cause irreparable injury and that money damages would not provide an adequate remedy for the Company; provided, however, the foregoing shall not prevent the Executive from contesting the issuance of any such injunction on the ground that no violation or threatened violation of Section 11, 12 or 13 has occurred. 15. Resolution of Disputes. Any controversy or claim arising out of or relating to this Agreement or any breach or asserted breach hereof or questioning the validity and binding effect hereof arising under or in connection with this Agreement, other than seeking injunctive relief under Section 14, shall be resolved by binding arbitration, to be held at an office closest to the Company's principal offices in accordance with the rules and procedures of the American Arbitration Association, except that disputes arising under or in connection with Sections 11, 12 and 13 above shall be submitted to the federal or state courts in the State of New Jersey. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Pending the resolution of any arbitration or court proceeding, the Company shall continue payment of all amounts and benefits due the Executive under this Agreement. All reasonable costs and expenses (including fees and disbursements of counsel) incurred by the Executive pursuant to this Section 15 shall be paid on behalf of or reimbursed to the Executive promptly by the Company; provided, however, that no reimbursement shall be made of such expenses if and to the extent the arbitrator(s) determine(s) that any of the Executive's litigation assertions or defenses were in bad faith or frivolous. 16. Indemnification. (a) Company Indemnity. The Company agrees that if the Executive is made a party, or is threatened to be made a party, to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he is or was a director, officer or employee of the Company or any Subsidiary or is or was serving at the request of the Company or any Subsidiary as a director, officer, member, employee or agent of - 20 - 24 another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether or not the basis of such Proceeding is the Executive's alleged action in an official capacity while serving as a director, officer, member, employee or agent, the Executive shall be indemnified and held harmless by the Company to the fullest extent legally permitted or authorized by the Company's certificate of incorporation or bylaws or resolutions of the Company's Board or, if greater, by the laws of the State of Delaware against all cost, expense, liability and loss (including, without limitation, attorney's fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by the Executive in connection therewith, and such indemnification shall continue as to the Executive even if he has ceased to be a director, member, officer, employee or agent of the Company or other entity and shall inure to the benefit of the Executive's heirs, executors and administrators. The Company shall advance to the Executive all reasonable costs and expenses to be incurred by him in connection with a Proceeding within 20 days after receipt by the Company of a written request for such advance. Such request shall include an undertaking by the Executive to repay the amount of such advance if it shall ultimately be determined that he is not entitled to be indemnified against such costs and expenses. The provisions of this Section 16(a) shall not be deemed exclusive of any other rights of indemnification to which the Executive may be entitled or which may be granted to him, and it shall be in addition to any rights of indemnification to which he may be entitled under any policy of insurance. (b) No Presumption Regarding Standard of Conduct. Neither the failure of the Company (including its Board, independent legal counsel or stockholders) to have made a determination prior to the commencement of any proceeding concerning payment of amounts claimed by the Executive under Section 16(a) above that indemnification of the Executive is proper because he has met the applicable standard of conduct, nor a determination by the Company (including its Board, independent legal counsel or stockholders) that the Executive has not met such applicable standard of conduct, shall create a presumption that the Executive has not met the applicable standard of conduct. (c) Liability Insurance. The Company agrees to continue and maintain a directors and officers' liability insurance policy covering the Executive to the extent the Company provides such coverage for its other executive officers. 17. Excise Tax Gross-Up. If the Executive becomes entitled to one or more payments (with a "payment" including, without limitation, the vesting of an option or other non-cash benefit or property), whether pursuant to the terms of this Agreement or any other plan, arrangement, or agreement with the Company or any affiliated company (the "Total Payments"), which are or become subject to the tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or any similar tax that may hereafter be imposed) (the "Excise Tax"), the Company shall pay to the Executive at the time specified below an additional amount (the "Gross-up Payment") (which shall include, without limitation, reimbursement for any penalties and interest that may accrue in respect of such Excise Tax) such that the net amount retained by the Executive, after reduction for any Excise Tax (including any penalties or interest thereon) on the Total Payments and any federal, state and local income or employment tax and Excise Tax on the Gross-up Payment provided for by this Section 17, but before reduction for any federal, state, or local income or employment tax on the Total Payments, shall be equal to the sum of (a) the Total Payments, and (b) an amount equal to the product of any deductions disallowed for federal, state, or local income tax purposes because of the inclusion of the Gross-up Payment in the Executive's - 21 - 25 adjusted gross income multiplied by the highest applicable marginal rate of federal, state, or local income taxation, respectively, for the calendar year in which the Gross-up Payment is to be made. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax: (i) The Total Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the written opinion of independent compensation consultants, counsel or auditors of nationally recognized standing ("Independent Advisors") selected by the Company and reasonably acceptable to the Executive, the Total Payments (in whole or in part) do not constitute parachute payments, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code in excess of the base amount within the meaning of Section 280G(b)(3) of the Code or are otherwise not subject to the Excise Tax; (ii) The amount of the Total Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Total Payments or (B) the total amount of excess parachute payments within the meaning of Section 280G(b)(1) of the Code (after applying clause (i) above); and (iii) The value of any non-cash benefits or any deferred payment or benefit shall be determined by the Independent Advisors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-up Payment, the Executive shall be deemed (A) to pay federal income taxes at the highest marginal rate of federal income taxation for the calendar year in which the Gross-up Payment is to be made; (B) to pay any applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes if paid in such year (determined without regard to limitations on deductions based upon the amount of the Executive's adjusted gross income); and (C) to have otherwise allowable deductions for federal, state, and local income tax purposes at least equal to those disallowed because of the inclusion of the Gross-up Payment in the Executive's adjusted gross income. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time the Gross-up Payment is made, the Executive shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined (but, if previously paid to the taxing authorities, not prior to the time the amount of such reduction is refunded to the Executive or otherwise realized as a benefit by the Executive) the portion of the Gross-up Payment that would not have been paid if such Excise Tax had been applied in initially calculating the Gross-up Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time the Gross-up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-up Payment), the Company shall make an additional Gross-up Payment in respect of such excess - 22 - 26 (plus any interest and penalties payable with respect to such excess) at the time that the amount of such excess is finally determined. The Gross-up Payment provided for above shall be paid on the 30th day (or such earlier date as the Excise Tax becomes due and payable to the taxing authorities) after it has been determined that the Total Payments (or any portion thereof) are subject to the Excise Tax; provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined by the Independent Advisors, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code), as soon as the amount thereof can be determined. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). If more than one Gross-up Payment is made, the amount of each Gross-up Payment shall be computed so as not to duplicate any prior Gross-up Payment. The Company shall have the right to control all proceedings with the Internal Revenue Service that may arise in connection with the determination and assessment of any Excise Tax and, at its sole option, the Company may pursue or forego any and all administrative appeals, proceedings, hearings, and conferences with any taxing authority in respect of such Excise Tax (including any interest or penalties thereon); provided, however, that the Company's control over any such proceedings shall be limited to issues with respect to which a Gross-up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest any other issue raised by the Internal Revenue Service or any other taxing authority. The Executive shall cooperate with the Company in any proceedings relating to the determination and assessment of any Excise Tax and shall not take any position or action that would materially increase the amount of any Gross-Up Payment hereunder. 18. Effect of Agreement on Other Benefits. Except as specifically provided in this Agreement, the existence of this Agreement shall not be interpreted to preclude, prohibit or restrict the Executive's participation in any other employee benefit or other plans or programs in which he currently participates. 19. Assignability: Binding Nature. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs (in the case of the Executive) and permitted assigns. No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred in connection with the sale or transfer of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes the liabilities, obligations and duties of the Company, as contained in this Agreement, either contractually or as a matter of law. The Company further agrees that, in the event of a sale or transfer of assets as described in the preceding sentence, it shall take whatever action it legally can in order to cause such assignee or transferee to expressly assume the liabilities, obligations and duties of the Company hereunder. No rights or obligations of the Executive under this Agreement may be assigned or transferred by the Executive other than his rights to compensation and benefits, which may be transferred only by will or operation of law, except as provided in Section 25 below. - 23 - 27 20. Representation. The Company represents and warrants that it is fully authorized and empowered to enter into this Agreement and that the performance of its obligations under this Agreement will not violate any agreement between it and any other person, firm or organization. 21. Entire Agreement. This Agreement contains the entire understanding and agreement between the Parties concerning the subject matter hereof and, as of the Effective Date, supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the Parties with respect thereto, including, without limitation any prior change in control agreement between the Parties or between the Executive and Melville. 22. Amendment or Waiver. No provision in this Agreement may be amended unless such amendment is agreed to in writing and signed by the Executive and an authorized officer of the Company. Except as set forth herein, no delay or omission to exercise any right, power or remedy accruing to any Party shall impair any such right, power or remedy or shall be construed to be a waiver of or an acquiescence to any breach hereof. No waiver by either Party of any breach by the other Party of any condition or provision contained in this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by the Executive or an authorized officer of the Company, as the case may be. 23. Severability. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 24. Survivorship. The respective rights and obligations of the Parties hereunder shall survive any termination of the Executive's employment to the extent necessary to the intended preservation of such rights and obligations. 25. Beneficiaries/References. The Executive shall be entitled, to the extent permitted under any applicable law, to select and change a beneficiary or beneficiaries to receive any compensation or benefit payable hereunder following the Executive's death by giving the Company written notice thereof. In the event of the Executive's death or a judicial determination of his incompetence, reference in this Agreement to the Executive shall be deemed, where appropriate, to refer to his beneficiary, estate or other legal representative. - 24 - 28 26. Governing Law/Jurisdiction. This Agreement shall be governed by and construed and interpreted in accordance with the laws of New Jersey without reference to principles of conflict of laws. Subject to Section 15, the Company and the Executive hereby consent to the jurisdiction of any or all of the following courts for purposes of resolving any dispute under this Agreement: (i) the United States District Court for New Jersey or (ii) any of the courts of the State of New Jersey. The Company and the Executive further agree that any service of process or notice requirements in any such proceeding shall be satisfied if the rules of such court relating thereto have been substantially satisfied. The Company and the Executive hereby waive, to the fullest extent permitted by applicable law, any objection which it or he may now or hereafter have to such jurisdiction and any defense of inconvenient forum. 27. Notices. Any notice given to a Party shall be in writing and shall be deemed to have been given when delivered personally or sent by certified or registered mail, postage prepaid, return receipt requested, duly addressed to the Party concerned at the address indicated below or to such changed address as such Party may subsequently give such notice of: If to the Company: Linens 'n Things, Inc. 6 Brighton Road Clifton, New Jersey 07015-5108 Attention: Secretary If to the Executive: Mr. Norman Axelrod 6 Sunflower Avenue Upper Saddle River, New Jersey 07458 - 25 - 29 28. Headings. The headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 29. Counterparts. This Agreement may be executed in two or more counterparts. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. LINENS 'N THINGS, INC. By:_______________________________ Name: Title: EXECUTIVE __________________________________ Norman Axelrod For purposes of Sections 5, 6(a), 6(d), 6(e), 10(c)(vii), 10(c)(viii) and 21 hereof: MELVILLE CORPORATION By:_______________________________ Name: Title: - 26 - 30 Exhibit A LINENS 'N THINGS, INC. STOCK OPTION GRANT AGREEMENT THIS STOCK OPTION GRANT AGREEMENT (the "Agreement") is made as of ______________,_____* between Linens 'n Things, Inc., a Delaware corporation (the "Company") and Norman Axelrod (the "Employee") pursuant to the terms and conditions of the Linens 'n Things, Inc. 1996 Incentive Compensation Plan (the "Plan"). Capitalized terms not defined in this Agreement shall have the meanings set forth in the Plan. THE PARTIES AGREE AS FOLLOWS: 1. Award of Options. Pursuant to the Plan, the Company has awarded to Employee hereunder options (the "Options") to acquire shares of Company common stock (the "Stock"), at the exercise price per share (the "Exercise Price"), all as set forth on the signature page hereof, subject to the terms and conditions set forth in this Agreement and the Plan. The Options granted hereunder are nonqualified stock options. 2. Vesting Schedule. Subject to Sections 6 and 7 hereof and Sections 6(a) and 9 of the Plan, including the authority of the Committee in its discretion to provide for accelerated vesting, the Options shall vest and become exercisable in accordance with the Vesting Schedule set forth on the signature page hereof. 3. Expiration Date. The Options subject to this Agreement shall expire on ___________** (the "Expiration Date"). 4. Payment of Exercise Price. The Exercise Price of the shares as to which Options are exercised may be paid to the Company at the time of exercise in cash or in Stock or in such other consideration as shall be permitted by the Committee at the time of exercise, in each case (a) pursuant to rules and procedures established by the Committee and (b) having a total Fair Market Value determined as of the date of exercise equal to the Exercise Price, or a combination of cash, Stock and such other consideration having a total Fair Market Value equal to such Exercise Price. 5. Non-transferability. Except to the extent otherwise determined by the Committee, the Options granted hereunder shall not be assignable or otherwise transferable other than by will or the laws of descent and distribution. Unless otherwise provided by the Committee, during the lifetime of Employee the Options shall be exercisable and elections with respect to the Options may be made only by Employee or Employee's guardian or legal representative. - -------- * To be dated as of the date on which shares of common stock of the Company are first sold to the public pursuant to an initial public offering (the "IPO Date"). ** Insert date ten years after IPO Date. 31 6. Termination of Employment. (a) Except to the extent provided in Section 7 hereof or any employment agreement between Employee and the Company, the provisions of this Section 6 shall apply to the Options upon Employee's termination of employment with the Company and all subsidiaries of the Company ("Termination") for any reason. (b) In the event of Employee's Termination for Cause, all vested and unvested Options shall be canceled on the date of such Termination. (c) In the event of Employee's Termination by reason of death, all Options shall become immediately vested and shall be exercisable in whole or in part at any time prior to the earlier of the Expiration Date and the date one year after the date of such Termination (or such longer period as may be provided in stock options granted to similarly situated executive officers of the Company). (d) In the event of Employee's Termination by reason of Approved Early Retirement or Normal Retirement, the Options shall continue to vest as if Employee had remained employed by the Company and, to the extent vested, shall be exercisable in whole or in part at any time prior to the later of one year following the date on which the Options are fully vested or one year following such Termination (or such longer period as may be provided in stock options granted to similarly situated executive officers of the Company), but in no event later than the Expiration Date. (e) In the event of a Termination without Cause (other than due to death) or Constructive Termination Without Cause, all Options shall become immediately vested and shall be exercisable in whole or in part at any time prior to the earlier of the Expiration Date and the date twenty-four months after the date of such Termination; provided, however, that in the event of a Constructive Termination Without Cause due to the Company's failure to renew any employment agreement between the Company and Employee then in effect, any unvested Options shall continue to vest as if Employee had remained employed by the Company and, to the extent vested, the Options shall be exercisable in whole or in part at any time prior to the earlier of the Expiration Date and the date eighteen months after the date of such Termination. (f) In the event of Employee's Termination for any reason other than as provided in Section 6(b), 6(c), 6(d) or 6(e), Options which are unvested shall be canceled and Options which are vested and exercisable may be exercised in whole or in part at any time prior to the earlier of the Expiration Date and the date three months after the date of such Termination. 7. Change in Control. (a) In the event of a Change in Control any Option that was not previously exercisable and vested shall become fully exercisable and vested at the time of the Change in Control except to the extent of any waiver by Employee and subject to the applicable restrictions set forth in Section 9(a) of the Plan. (b) In the event of a Termination Without Cause (other than due to death) or a Constructive Termination Without Cause, in either case within two years following a Change in Control, or a voluntary termination of employment within the 30-day period commencing six months following a Change in Control, the Options may be exercised in whole or in part at any time prior - 2 - 32 to the earlier of the Expiration Date and the date thirty-six months after the date of such Termination. In the event of any other Termination following a Change in Control, the Options may be exercised for the periods provided in the applicable subsection of Section 6. (c) Employee shall be entitled to elect during the 60-day period immediately following a Change in Control, in lieu of acquiring the shares of Stock covered by an Option, to receive, and the Company shall be obligated to pay, in cash, in respect of each share of Stock subject to an Option the excess of the Change in Control Price over the Exercise Price of such Option. 8. Definitions. For purposes of this Agreement: (a) "Approved Early Retirement" shall mean Employee's voluntary termination of employment with the Company at or after attaining age 55 but prior to attaining age 60, if such termination is approved in advance by the Committee; (b) "Cause" shall have the meaning given to such term in any employment agreement between the Company and Employee in effect at the date of Termination and, in the absence of any such agreement, shall mean (i) Employee's willful and continued failure substantially to perform his duties (other than as a result of total or partial incapacity due to physical or mental illness or by reason of Employee's prior voluntary termination of employment), (ii) Employee's dishonesty in the performance of his duties or (iii) Employee's conviction of a felony under the laws of the United States or any state thereof; (c) "Constructive Termination Without Cause" shall have the meaning given to such term in any employment agreement between the Company and Employee in effect at the date of Termination and, in the absence of any such agreement, shall mean a termination of Employee's employment at his initiative following the occurrence, without Employee's written consent, of one or more of the following events (except as a result of a prior termination): (i) a material change, adverse to Employee, in Employee's positions, titles, offices, status, rank, nature of responsibilities, or authority within the Company, or a removal of Employee from or any failure to elect or re-elect or, as the case may be, nominate Employee to any such positions or offices, including as a member of the Board; (ii) an assignment of any duties to Employee which are inconsistent with his status as President and Chief Executive Officer of the Company; (iii) a decrease in the Employee's annual base salary or target annual incentive award opportunity below 55% of base salary; (iv) any other failure by the Company to perform any material obligation under, or breach by the Company of any material provision of, any employment agreement between the Company and Employee then in effect that is not cured within 30 days; (v) a relocation of the corporate offices of the Company outside a 35-mile radius of Clifton, New Jersey; or - 3 - 33 (vi) any failure to secure the agreement of any successor corporation or other entity to the Company to fully assume the Company's obligations under any employment agreement between the Company and Employee then in effect; and (d) "Normal Retirement" shall mean Employee's voluntary termination of employment with the Company at or after attaining age 60. 9. Withholding Tax. Employee may be subject to withholding taxes as a result of the exercise or settlement of an Option or other payment in respect of an Option. Unless the Committee permits otherwise, Employee shall pay to the Company in cash promptly when the amount of such obligations become determinable, all applicable federal, state, local and foreign withholding taxes that the Committee in its discretion determines result from each such exercise, settlement or payment. Unless the Committee otherwise determines and subject to such rules and procedures as the Committee may establish, Employee may make an election to have shares of Stock withheld by the Company or to tender any such securities to the Company to pay the amount of tax that the Committee in its discretion determines to be required to be withheld by the Company upon exercise of an Option, subject to satisfying any applicable requirements for compliance with Section 16(b) of the Exchange Act. Any shares or other securities so withheld or tendered will be valued by the Committee as of the date they are withheld or tendered; provided, that Stock shall be valued at Fair Market Value on such date. Unless otherwise permitted by the Committee, the value of the shares withheld or tendered may not exceed the required federal, state, local and foreign withholding tax obligations as computed by the Company. 10. Governing Law. This Agreement shall be governed by the laws of the State of New Jersey, without regard to conflict of laws principles. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. LINENS 'N THINGS, INC. By: ____________________________ Employee hereby accepts and agrees to be bound by all the terms and conditions of this Agreement and the Plan. _______________________________ Norman Axelrod Enclosures: Plan - 4 - 34 Number of Shares of Stock Subject to Options: _________* Exercise Price: $________** Cumulative Percentage Vesting Schedule*** of Options Exercisable - ---------------- ---------------------- _____________ 25% _____________ 50% _____________ 75% _____________ 100% - -------- * Insert number of shares equal to 2% of the Company's shares of common stock outstanding immediately prior to the IPO Date. ** Insert price at which Company stock is offered to public on IPO Date. *** Insert 1st through 4th anniversaries of IPO Date. - 5 - 35 Exhibit B LINENS 'N THINGS, INC. DEFERRED STOCK GRANT AGREEMENT THIS DEFERRED STOCK GRANT AGREEMENT (the "Agreement") is made and entered into as of ___________* between Linens 'n Things, Inc., a Delaware corporation (the "Company") and Norman Axelrod (the "Employee") pursuant to the terms and conditions of the Linens 'n Things , Inc. 1996 Incentive Compensation Plan (the "Plan"). Capitalized terms not defined in this Agreement shall have the meanings set forth in the Plan. THE PARTIES AGREE AS FOLLOWS: 1. Award of Deferred Stock. Pursuant to the Plan, the Company hereby awards to Employee ________**shares of deferred stock (the "Deferred Stock") corresponding to __________**shares of Company common stock (the "Stock"), subject to the terms and conditions set forth in this Agreement and the Plan. A copy of the Plan has been delivered to the Employee. By signing below, the Employee agrees to be bound by all the provisions of the Plan. The shares of Deferred Stock constitute an unsecured promise of the Company to pay the amounts contemplated herein, and Employee as a holder of any Deferred Stock has only the rights of a general unsecured creditor of the Company. 2. Vesting Schedule. Subject to Sections 5 and 6 hereof, and Sections 6(a) and 9 of the Plan, including the authority of the Committee in its discretion to provide for accelerated vesting, the shares of Deferred Stock shall vest in four equal installments on each of the first, second, third and fourth anniversaries of July 1, 1996, but in no event prior to the IPO Date (each such date and any other date on which shares of Deferred Stock vest pursuant to this Agreement, the Plan or Committee action, a "Vesting Date"). - -------- * To be dated as of the date on which shares of common stock of the Company are first sold to the public pursuant to an initial public offering (the "IPO Date"). ** Insert number of shares equal to $1,000,000 divided by the price at which Company common stock is offered to the public on the IPO Date; provided, however, if the IPO Date occurs after December 31, 1996 at an enterprise valuation in excess of $375,000,000 (based on the shares of Company common stock outstanding immediately prior to the IPO Date and the price at which Company common stock is offered to the public), the number of shares to be inserted will be increased by the result obtained by dividing (i) the sum of (A) 2% of such enterprise value in excess of $375,000,000 plus (B) $1,000,000 multiplied by the percentage increase of such enterprise value in excess of $375,000,000, by (ii) the price at which Company common stock is offered to the public. - 1 - 36 3. Payment or Conversion of Deferred Shares. (a) On the Vesting Date, the shares of Deferred Stock which vest on such date shall be canceled and the Company shall deliver to Employee, except to the extent Employee has otherwise elected in accordance with Committee authorization pursuant to Section 7(c) of the Plan, as soon as practicable cash or shares of Stock or a combination thereof (as determined by the Committee) having a value equal to the product of (A) the Fair Market Value of a share of Stock as of such date and (B) the number of shares of Stock corresponding to such vested shares of Deferred Stock. (b) For so long as Employee holds a share of Deferred Stock, at the time any dividend is paid with respect to a share of Stock, the Company shall pay to Employee in respect of each share of Deferred Stock an amount in cash, in Stock, in other property or Awards, or in a combination thereof, in each case having a value equal to the Fair Market Value of such dividend (hereinafter "Dividend Equivalents"), subject to any deferral election by Employee in accordance with Committee authorization pursuant to Section 7(c) of the Plan and/or any determination by the Committee to subject such Dividend Equivalent payment in respect of stock dividends, dividends in kind or extraordinary dividends to the vesting provisions applicable to such share of Deferred Stock. 4. Restrictions. Except to the extent otherwise determined by the Committee, no shares of Deferred Stock shall be assignable or otherwise transferable by Employee other than by will or by the laws of descent and distribution and, unless otherwise provided by the Committee, during the life of Employee any elections with respect to a share of Deferred Stock may be made only by Employee or Employee's guardian or legal representative. 5. Termination of Employment. (a) Except to the extent provided in Section 6 hereof or any employment agreement between Employee and the Company, the provisions of this Section 5 shall apply to the unvested shares of Deferred Stock upon Employee's termination of employment with the Company and all subsidiaries of the Company ("Termination") for any reason. (b) In the event of Employee's Termination for Cause, all unvested shares of Deferred Stock shall be canceled on the date of such Termination. (c) In the event of Employee's Termination by reason of death, Termination without Cause or Constructive Termination Without Cause, all shares of Deferred Stock shall become immediately vested. (d) In the event of Employee's Termination by reason of Approved Early Retirement or Normal Retirement, all shares of Deferred Stock shall continue to vest as if Employee had remained employed by the Company. - 2 - 37 (e) In the event of Employee's Termination for any reason other than as provided in Section 5(b), 5(c), or 5(d), all unvested shares of Deferred Stock shall be canceled. 6. Change in Control. In the event of a Change in Control, all shares of Deferred Stock shall become immediately vested at the time of the Change in Control, except to the extent of any waiver by Employee and subject to the applicable restrictions set forth in Section 10(a) of the Plan. As soon as practicable following the Change in Control, the Company shall pay Employee, in cash, for each share of Deferred Stock the Change in Control Price. 7. Definitions. For purposes of this Agreement: (a) "Approved Early Retirement" shall mean Employee's voluntary termination of employment with the Company at or after attaining age 55 but prior to attaining age 60, if such termination is approved in advance by the Committee; (b) "Cause" shall have the meaning given to such term in any employment agreement between the Company and Employee in effect at the date of Termination and, in the absence of any such agreement, shall mean (i) Employee's willful and continued failure substantially to perform his duties (other than as a result of total or partial incapacity due to physical or mental illness or by reason of Employee's prior voluntary termination of employment), (ii) Employee's dishonesty in the performance of his duties or (iii) Employee's conviction of a felony under the laws of the United States or any state thereof; (c) "Constructive Termination Without Cause" shall have the meaning given to such term in any employment agreement between the Company and Employee in effect at the date of Termination and, in the absence of any such agreement, shall mean a termination of Employee's employment at his initiative following the occurrence, without Employee's written consent, of one or more of the following events (except as a result of a prior termination): (i) a material change, adverse to Employee, in Employee's positions, titles, offices, status, rank, nature of responsibilities, or authority within the Company, or a removal of Employee from or any failure to elect or re-elect or, as the case may be, nominate Employee to any such positions or offices, including as a member of the Board; (ii) an assignment of any duties to Employee which are inconsistent with his status as President and Chief Executive Officer of the Company; (iii) a decrease in the Employee's annual base salary or target annual incentive award opportunity below 55% of base salary; (iv) any other failure by the Company to perform any material obligation under, or breach by the Company of any material provision of, any employment - 3 - 38 agreement between the Company and Employee then in effect that is not cured within 30 days; (v) a relocation of the corporate offices of the Company outside a 35-mile radius of Clifton, New Jersey; or (vi) any failure to secure the agreement of any successor corporation or other entity to the Company to fully assume the Company's obligations under any employment agreement between the Company and Employee then in effect. (d) "Normal Retirement" shall mean Employee's voluntary termination of employment with the Company at or after attaining age 60. 8. Withholding Tax. Employee may be subject to withholding taxes as a result of delivery of shares of Stock or payment of cash upon payment or settlement of the Deferred Stock or payments of Dividend Equivalents. Unless the Committee permits otherwise, Employee shall pay to the Company in cash all applicable federal, state, local and foreign withholding taxes that the Company in its discretion determines result from such payments. Unless the Committee otherwise determines and subject to such rules and procedures as the Company may establish, Employee may make an election to have settlement of shares of Deferred Stock withheld by the Company upon settlement thereof or to tender shares of Stock to the Company to pay the amount of tax that the Company in its discretion determines to be required so to be withheld by the Company, subject to satisfying any applicable requirements for compliance with Section 16(b) of the Exchange Act. Any shares of Stock or other securities so withheld or tendered will be valued as of the date they are withheld or tendered; provided, that Stock shall be valued at Fair Market Value on such date. Unless otherwise permitted by the Committee, the value of shares withheld or tendered may not exceed the required federal, state, local and foreign withholding tax obligations as computed by the Company. - 4 - 39 9. Governing Law. This Agreement shall be governed by the laws of the State of New Jersey, without regard to conflict of law principles. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. LINENS 'N THINGS, INC. By:___________________________ Employee hereby accepts and agrees to be bound by all of the terms and conditions of this Agreement and the Plan. _____________________________ Norman Axelrod Enclosures: Plan - 5 - EX-10.10 9 1996 INCENTIVE COMPENSATION PLAN 1 EXHIBIT 10.10 LINENS 'N THINGS, INC. - ------------------------------------------------------------------------------- 1996 INCENTIVE COMPENSATION PLAN 2 LINENS 'N THINGS, INC. - ------------------------------------------------------------------------------- 1996 INCENTIVE COMPENSATION PLAN - -------------------------------------------------------------------------------
PAGE ---- 1. Purpose.......................................................................................... 1 2. Definitions...................................................................................... 1 3. Administration................................................................................... 3 (a) Authority of the Committee................................................................ 3 (b) Manner of Exercise of Committee Authority................................................. 4 (c) Limitation of Liability................................................................... 4 4. Stock Subject to Plan............................................................................ 4 (a) Overall Number of Shares Available for Delivery........................................... 4 (b) Application of Limitation to Grants of Awards............................................. 4 (c) Availability of Shares Not Delivered under Awards ........................................ 5 5. Eligibility; Per-Person Award Limitations........................................................ 5 6. Specific Terms of Awards......................................................................... 5 (a) General................................................................................... 5 (b) Options................................................................................... 5 (c) Stock Appreciation Rights................................................................. 6 (d) Restricted Stock.......................................................................... 6 (e) Deferred Stock............................................................................ 7 (f) Bonus Stock and Awards in Lieu of Obligations............................................. 8 (g) Dividend Equivalents...................................................................... 8 (h) Other Stock-Based Awards.................................................................. 9 7. Certain Provisions Applicable to Awards.......................................................... 9 (a) Stand-Alone, Additional, Tandem, and Substitute Awards ................................... 9 (b) Term of Awards............................................................................ 9 (c) Form and Timing of Payment under Awards; Deferrals ....................................... 9 (d) Exemptions from Section 16(b) Liability................................................... 10 8. Performance and Annual Incentive Awards.......................................................... 10 (a) Performance Conditions.................................................................... 10 (b) Performance Awards Granted to Designated Covered Employees ............................... 10 (c) Annual Incentive Awards Granted to Designated Covered Employees........................... 12 (d) Written Determinations.................................................................... 13 (e) Status of Section 8(b) and 8(c) Awards under Code Section 162(m) ......................... 13
3 LINENS 'N THINGS, INC. - ------------------------------------------------------------------------------- 1996 INCENTIVE COMPENSATION PLAN - -------------------------------------------------------------------------------
PAGE ---- 9. Change in Control................................................................................ 13 (a) Effect of "Change in Control"............................................................. 13 (b) Definition of "Change in Control"......................................................... 14 (c) Definition of "Change in Control Price" .................................................. 15 10. General Provisions............................................................................... 15 (a) Compliance with Legal and Other Requirements.............................................. 15 (b) Limits on Transferability; Beneficiaries.................................................. 16 (c) Adjustments............................................................................... 16 (d) Taxes..................................................................................... 17 (e) Changes to the Plan and Awards............................................................ 17 (f) Limitation on Rights Conferred under Plan................................................. 17 (g) Unfunded Status of Awards; Creation of Trusts............................................. 17 (h) Nonexclusivity of the Plan................................................................ 18 (i) Payments in the Event of Forfeitures; Fractional Shares .................................. 18 (j) Governing Law............................................................................. 18 (k) Plan Effective Date and Stockholder Approval.............................................. 18
4 LINENS 'N THINGS, INC. 1996 INCENTIVE COMPENSATION PLAN 1. PURPOSE. The purpose of this 1996 Incentive Compensation Plan (the "Plan") is to assist Linens 'n Things, Inc., a Delaware corporation (the "Company"), and its subsidiaries in attracting, retaining, and rewarding high-quality executives, employees, and other persons who provide services to the Company and/or its subsidiaries, enabling such persons to acquire or increase a proprietary interest in the Company in order to strengthen the mutuality of interests between such persons and the Company's stockholders, and providing such persons with annual and long-term performance incentives to expend their maximum efforts in the creation of shareholder value. The Plan is also intended to qualify certain compensation awarded under the Plan for tax deductibility under Code Section 162(m) (as hereafter defined) to the extent deemed appropriate by the Committee (or any successor committee) of the Board of Directors of the Company. 2. DEFINITIONS. For purposes of the Plan, the following terms shall be defined as set forth below, in addition to such terms defined in Section 1 hereof: (a) "Annual Incentive Award" means a conditional right granted to a Participant under Section 8(c) hereof to receive a cash payment, Stock or other Award, unless otherwise determined by the Committee, after the end of a specified fiscal year. (b) "Award" means any Option, SAR (including Limited SAR), Restricted Stock, Deferred Stock, Stock granted as a bonus or in lieu of another award, Dividend Equivalent, Other Stock-Based Award, Performance Award or Annual Incentive Award, together with any other right or interest granted to a Participant under the Plan. (c) "Beneficiary" means the person, persons, trust or trusts which have been designated by a Participant in his or her most recent written beneficiary designation filed with the Committee to receive the benefits specified under the Plan upon such Participant's death or to which Awards or other rights are transferred if and to the extent permitted under Section 10(b) hereof. If, upon a Participant's death, there is no designated Beneficiary or surviving designated Beneficiary, then the term Beneficiary means person, persons, trust or trusts entitled by will or the laws of descent and distribution to receive such benefits. (d) "Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 under the Exchange Act and any successor to such Rule. (e) "Board" means the Company's Board of Directors. (f) "Change in Control" means Change in Control as defined with related terms in Section 9 of the Plan. - 1 - 5 (g) "Change in Control Price" means the amount calculated in accordance with Section 9(c) of the Plan. (h) "Code" means the Internal Revenue Code of 1986, as amended from time to time, including regulations thereunder and successor provisions and regulations thereto. (i) "Committee" means a committee of two or more directors designated by the Board to administer the Plan; provided, however, that, unless otherwise determined by the Board, the Committee shall consist solely of two or more directors, each of whom shall be (i) a "non-employee director" within the meaning of Rule 16b-3 under the Exchange Act, unless administration of the Plan by "non-employee directors" is not then required in order for exemptions under Rule 16b-3 to apply to transactions under the Plan, and (ii) an "outside director" as defined under Code Section 162(m), unless administration of the Plan by "outside directors" is not then required in order to qualify for tax deductibility under Code Section 162(m). (j) "Covered Employee" means an Eligible Person who is a Covered Employee as specified in Section 8(e) of the Plan. (k) "Deferred Stock" means a right, granted to a Participant under Section 6(e) hereof, to receive Stock, cash or a combination thereof at the end of a specified deferral period. (l) "Dividend Equivalent" means a right, granted to a Participant under Section 6(g), to receive cash, Stock, other Awards or other property equal in value to dividends paid with respect to a specified number of shares of Stock, or other periodic payments. (m) "Effective Date" means the effective date of the Plan as defined in Section 10(k). (n) "Eligible Person" means each Executive Officer and other officers and employees of the Company or of any subsidiary, including such persons who may also be directors of the Company. An employee on leave of absence may be considered as still in the employ of the Company or a subsidiary for purposes of eligibility for participation in the Plan. (o) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, including rules thereunder and successor provisions and rules thereto. (p) "Executive Officer" means an executive officer of the Company as defined under the Exchange Act. (q) "Fair Market Value" means the fair market value of Stock, Awards or other property as determined by the Committee or under procedures established by the Committee. Unless otherwise determined by the Committee, the Fair Market Value of Stock as of any given date shall be the closing sale price per share reported on a consolidated basis for Stock listed on the principal stock exchange or market on which Stock is traded on the date as of which such value is being determined or, if there is no sale on that date, then on the last previous day on which a sale was reported. - 2 - 6 (r) "Incentive Stock Option" or "ISO" means any Option intended to be and designated as an incentive stock option within the meaning of Code Section 422 or any successor provision thereto. (s) "Initial Public Offering" means the initial offering by the Company of its Stock to the public. (t) "Limited SAR" means a right granted to a Participant under Section 6(c) hereof. (u) "Option" means a right, granted to a Participant under Section 6(b) hereof, to purchase Stock or other Awards at a specified price during specified time periods. (v) "Other Stock Based Awards" means Awards granted to a Participant under Section 6(h) hereof. (w) "Participant" means a person who has been granted an Award under the Plan which remains outstanding, including a person who is no longer an Eligible Person. (x) "Performance Award" means a right, granted to a Participant under Section 8 hereof, to receive Awards based upon performance criteria specified by the Committee. (y) "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, and shall include a "group" as defined in Section 13(d) thereof. (z) "Restricted Stock" means Stock granted to a Participant under Section 6(d) hereof, that is subject to certain restrictions and to a risk of forfeiture. (aa) "Rule 16b-3" means Rule 16b-3, as from time to time in effect and applicable to the Plan and Participants, promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act. (bb) "Stock" means the Company's Common Stock, and such other securities as may be substituted (or resubstituted) for Stock pursuant to Section 10(c) hereof. (cc) "Stock Appreciation Rights" or "SAR" means a right granted to a Participant under Section 6(c) hereof. 3. ADMINISTRATION. (a) Authority of the Committee. The Plan shall be administered by the Committee except to the extent the Board elects to administer the Plan, in which case references herein to the "Committee" shall be deemed to include references to the "Board". The Committee shall have full and final authority, in each case subject to and consistent with the provisions of the Plan, to select Eligible Persons to become Participants, grant Awards, determine the type, number and other terms and conditions of, and all other matters relating to, Awards, prescribe Award agreements (which need not be identical for each Participant) and rules and regulations for the administration of the Plan, construe and interpret the Plan and Award agreements and correct defects, supply omissions or reconcile inconsistencies therein, and - 3 - 7 to make all other decisions and determinations as the Committee may deem necessary or advisable for the administration of the Plan. (b) Manner of Exercise of Committee Authority. Any action of the Committee shall be final, conclusive and binding on all persons, including the Company, its subsidiaries, Participants, Beneficiaries, transferees under Section 10(b) hereof or other persons claiming rights from or through a Participant, and stockholders. The express grant of any specific power to the Committee, and the taking of any action by the Committee, shall not be construed as limiting any power or authority of the Committee. The Committee may delegate to officers or managers of the Company or any subsidiary, or committees thereof, the authority, subject to such terms as the Committee shall determine, (i) to perform administrative functions, (ii) with respect to Participants not subject to Section 16 of the Exchange Act, to perform such other functions as the Committee may determine, and (iii) with respect to Participants subject to Section 16, to perform such other functions of the Committee as the Committee may determine to the extent performance of such functions will not result in the loss of an exemption under Rule 16b-3 otherwise available for transactions by such persons, in each case to the extent permitted under applicable law and subject to the requirements set forth in Section 8(d). The Committee may appoint agents to assist it in administering the Plan. (c) Limitation of Liability. The Committee and each member thereof shall be entitled to, in good faith, rely or act upon any report or other information furnished to him or her by any executive officer, other officer or employee of the Company or a subsidiary, the Company's independent auditors, consultants or any other agents assisting in the administration of the Plan. Members of the Committee and any officer or employee of the Company or a subsidiary acting at the direction or on behalf of the Committee shall not be personally liable for any action or determination taken or made in good faith with respect to the Plan, and shall, to the extent permitted by law, be fully indemnified and protected by the Company with respect to any such action or determination. 4. STOCK SUBJECT TO PLAN. (a) Overall Number of Shares Available for Delivery. Subject to adjustment as provided in Section 10(c) hereof, the total number of shares of Stock reserved and available for delivery in connection with Awards under the Plan shall be (i) 2.09 million, plus (ii) 12% of the number of shares of Stock newly issued by the Company or delivered out of treasury shares during the term of the Plan but after the Initial Public Offering (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 Stock with respect to which ISO's may be granted shall be 1.5 million. Any shares of Stock delivered under the Plan may consist, in whole or in part, of authorized and unissued shares or treasury shares. (b) Application of Limitation to Grants of Awards. No Award may be granted if the number of shares of Stock to be delivered in connection with such Award or, in the case of an Award relating to shares of Stock but settleable only in cash (such as cash-only SARs), the number of shares to which such Award relates, exceeds the number of shares of Stock remaining available under the Plan minus the number of shares of Stock issuable in - 4 - 8 settlement of or relating to then-outstanding Awards. The Committee may adopt reasonable counting procedures to ensure appropriate counting, avoid double counting (as, for example, in the case of tandem or substitute awards) and make adjustments if the number of shares of Stock actually delivered differs from the number of shares previously counted in connection with an Award. (c) Availability of Shares Not Delivered under Awards. Shares of Stock subject to an Award under the Plan that is canceled, expired, forfeited, settled in cash or otherwise terminated without a delivery of shares to the Participant, including (i) the number of shares withheld in payment of any exercise or purchase price of an Award or award or taxes relating to Awards or awards, and (ii) the number of shares surrendered in payment of any exercise or purchase price of an Award or award or taxes relating to any Award or award, will again be available for Awards under the Plan, except that if any such shares could not again be available for Awards to a particular Participant under any applicable law or regulation, such shares shall be available exclusively for Awards to Participants who are not subject to such limitation. 5. ELIGIBILITY; PER-PERSON AWARD LIMITATIONS. Awards may be granted under the Plan only to Eligible Persons. In each fiscal year during any part of which the Plan is in effect, an Eligible Person may not be granted Awards relating to more than 1 million shares of Stock, subject to adjustment as provided in Section 10(c), under each of Sections 6(b), 6(c), 6(d), 6(e), 6(f), 6(g), 6(h), 8(b) and 8(c). In addition, the maximum cash amount that may be earned under the Plan as a final Annual Incentive Award or other cash annual Award in respect of any fiscal year by any one Participant shall be $3 million, and the maximum cash amount that may be earned under the Plan as a final Performance Award or other cash Award in respect of a performance period by any one Participant shall be $5 million. 6. SPECIFIC TERMS OF AWARDS. (a) General. Awards may be granted on the terms and conditions set forth in this Section 6. In addition, the Committee may impose on any Award or the exercise thereof, at the date of grant or thereafter (subject to Section 10(e)), such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall determine, including terms requiring forfeiture of Awards in the event of termination of employment by the Participant and terms permitting a Participant to make elections relating to his or her Award. The Committee shall retain full power and discretion to accelerate, waive or modify, at any time, any term or condition of an Award that is not mandatory under the Plan. Except in cases in which the Committee is authorized to require other forms of consideration under the Plan, or to the extent other forms of consideration must by paid to satisfy the requirements of the Delaware General Corporation Law, no consideration other than services may be required for the grant (but not the exercise) of any Award. (b) Options. The Committee is authorized to grant Options to Participants on the following terms and conditions: (i) Exercise Price. The exercise price per share of Stock purchasable under an Option shall be determined by the Committee, provided that such exercise price - 5 - 9 shall be not less than the Fair Market Value of a share of Stock on the date of grant of such Option except as provided under Section 7(a) hereof. (ii) Time and Method of Exercise. The Committee shall determine the time or times at which or the circumstances under which an Option may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the methods by which such exercise price may be paid or deemed to be paid, the form of such payment, including, without limitation, cash, Stock, other Awards or awards granted under other plans of the Company or any subsidiary, or other property (including notes or other contractual obligations of Participants to make payment on a deferred basis), and the methods by or forms in which Stock will be delivered or deemed to be delivered to Participants. (iii) ISOs. The terms of any ISO granted under the Plan shall comply in all respects with the provisions of Code Section 422. Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to ISOs (including any SAR in tandem therewith) shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be exercised, so as to disqualify either the Plan or any ISO under Code Section 422, unless the Participant has first requested the change that will result in such disqualification. (c) Stock Appreciation Rights. The Committee is authorized to grant SAR's to Participants on the following terms and conditions: (i) Right to Payment. A SAR shall confer on the Participant to whom it is granted a right to receive, upon exercise thereof, the excess of (A) the Fair Market Value of one share of Stock on the date of exercise (or, in the case of a "Limited SAR," the Fair Market Value determined by reference to the Change in Control Price, as defined under Section 9(c) hereof) over (B) the grant price of the SAR as determined by the Committee. (ii) Other Terms. The Committee shall determine at the date of grant or thereafter, the time or times at which and the circumstances under which a SAR may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the method of exercise, method of settlement, form of consideration payable in settlement, method by or forms in which Stock will be delivered or deemed to be delivered to Participants, whether or not a SAR shall be in tandem or in combination with any other Award, and any other terms and conditions of any SAR. Limited SARs that may only be exercised in connection with a Change in Control or other event as specified by the Committee may be granted on such terms, not inconsistent with this Section 6(c), as the Committee may determine. SARs and Limited SARs may be either freestanding or in tandem with other Awards. (d) Restricted Stock. The Committee is authorized to grant Restricted Stock to Participants on the following terms and conditions: - 6 - 10 (i) Grant and Restrictions. Restricted Stock shall be subject to such restrictions on transferability, risk of forfeiture and other restrictions, if any, as the Committee may impose, which restrictions may lapse separately or in combination at such times, under such circumstances (including based on achievement of performance goals and/or future service requirements), in such installments or otherwise, as the Committee may determine at the date of grant or thereafter. Except to the extent restricted under the terms of the Plan and any Award agreement relating to the Restricted Stock, a Participant granted Restricted Stock shall have all of the rights of a stockholder, including the right to vote the Restricted Stock and the right to receive dividends thereon (subject to any mandatory reinvestment or other requirement imposed by the Committee). During the restricted period applicable to the Restricted Stock, subject to Section 10(b) below, the Restricted Stock may not be sold, transferred, pledged, hypothecated, margined or otherwise encumbered by the Participant. (ii) Forfeiture. Except as otherwise determined by the Committee, upon termination of employment during the applicable restriction period, Restricted Stock that is at that time subject to restrictions shall be forfeited and reacquired by the Company; provided that the Committee may provide, by rule or regulation or in any Award agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Restricted Stock shall be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee may in other cases waive in whole or in part the forfeiture of Restricted Stock. (iii) Certificates for Stock. Restricted Stock granted under the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing Restricted Stock are registered in the name of the Participant, the Committee may require that such certificates bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Restricted Stock, that the Company retain physical possession of the certificates, and that the Participant deliver a stock power to the Company, endorsed in blank, relating to the Restricted Stock. (iv) Dividends and Splits. As a condition to the grant of an Award of Restricted Stock, the Committee may require that any cash dividends paid on a share of Restricted Stock be automatically reinvested in additional shares of Restricted Stock or applied to the purchase of additional Awards under the Plan. Unless otherwise determined by the Committee, Stock distributed in connection with a Stock split or Stock dividend, and other property distributed as a dividend, shall be subject to restrictions and a risk of forfeiture to the same extent as the Restricted Stock with respect to which such Stock or other property has been distributed. (e) Deferred Stock. The Committee is authorized to grant Deferred Stock to Participants, which are rights to receive Stock, cash, or a combination thereof at the end of a specified deferral period, subject to the following terms and conditions: (i) Award and Restrictions. Satisfaction of an Award of Deferred Stock shall occur upon expiration of the deferral period specified for such Deferred Stock by the Committee (or, if permitted by the Committee, as elected by the Participant). In - 7 - 11 addition, Deferred Stock shall be subject to such restrictions (which may include a risk of forfeiture) as the Committee may impose, if any, which restrictions may lapse at the expiration of the deferral period or at earlier specified times (including based on achievement of performance goals and/or future service requirements), separately or in combination, in installments or otherwise, as the Committee may determine. Deferred Stock may be satisfied by delivery of Stock, cash equal to the Fair Market Value of the specified number of shares of Stock covered by the Deferred Stock, or a combination thereof, as determined by the Committee at the date of grant or thereafter. (ii) Forfeiture. Except as otherwise determined by the Committee, upon termination of employment during the applicable deferral period or portion thereof to which forfeiture conditions apply (as provided in the Award agreement evidencing the Deferred Stock), all Deferred Stock that is at that time subject to deferral (other than a deferral at the election of the Participant) shall be forfeited; provided that the Committee may provide, by rule or regulation or in any Award agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Deferred Stock shall be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee may in other cases waive in whole or in part the forfeiture of Deferred Stock. (iii) Dividend Equivalents. Unless otherwise determined by the Committee at date of grant, Dividend Equivalents on the specified number of shares of Stock covered by an Award of Deferred Stock shall be either (A) paid with respect to such Deferred Stock at the dividend payment date in cash or in shares of unrestricted Stock having a Fair Market Value equal to the amount of such dividends, or (B) deferred with respect to such Deferred Stock and the amount or value thereof automatically deemed reinvested in additional Deferred Stock, other Awards or other investment vehicles, as the Committee shall determine or permit the Participant to elect. (f) Bonus Stock and Awards in Lieu of Obligations. The Committee is authorized to grant Stock as a bonus, or to grant Stock or other Awards in lieu of Company obligations to pay cash or deliver other property under the Plan or under other plans or compensatory arrangements, provided that, in the case of Participants subject to Section 16 of the Exchange Act, the amount of such grants remains within the discretion of the Committee to the extent necessary to ensure that acquisitions of Stock or other Awards are exempt from liability under Section 16(b) of the Exchange Act. Stock or Awards granted hereunder shall be subject to such other terms as shall be determined by the Committee. (g) Dividend Equivalents. The Committee is authorized to grant Dividend Equivalents to a Participant, entitling the Participant to receive cash, Stock, other Awards, or other property equal in value to dividends paid with respect to a specified number of shares of Stock, or other periodic payments. Dividend Equivalents may be awarded on a free-standing basis or in connection with another Award. The Committee may provide that Dividend Equivalents shall be paid or distributed when accrued or shall be deemed to have been reinvested in additional Stock, Awards, or other investment vehicles, and subject to such restrictions on transferability and risks of forfeiture, as the Committee may specify. - 8 - 12 (h) Other Stock-Based Awards. The Committee is authorized, subject to limitations under applicable law, to grant to Participants such other Awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Stock, as deemed by the Committee to be consistent with the purposes of the Plan, including, without limitation, convertible or exchangeable debt securities, other rights convertible or exchangeable into Stock, purchase rights for Stock, Awards with value and payment contingent upon performance of the Company or any other factors designated by the Committee, and Awards valued by reference to the book value of Stock or the value of securities of or the performance of specified subsidiaries. The Committee shall determine the terms and conditions of such Awards. Stock delivered pursuant to an Award in the nature of a purchase right granted under this Section 6(h) shall be purchased for such consideration, paid for at such times, by such methods, and in such forms, including, without limitation, cash, Stock, other Awards, or other property, as the Committee shall determine. Cash awards, as an element of or supplement to any other Award under the Plan, may also be granted pursuant to this Section 6(h). 7. CERTAIN PROVISIONS APPLICABLE TO AWARDS. (a) Stand-Alone, Additional, Tandem, and Substitute Awards. Awards granted under the Plan may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution or exchange for, any other Award or any award granted under another plan of the Company, any subsidiary, or any business entity to be acquired by the Company or a subsidiary, or any other right of a Participant to receive payment from the Company or any subsidiary. Such additional, tandem, and substitute or exchange Awards may be granted at any time. If an Award is granted in substitution or exchange for another Award or award, the Committee shall require the surrender of such other Award or award in consideration for the grant of the new Award. In addition, Awards may be granted in lieu of cash compensation, including in lieu of cash amounts payable under other plans of the Company or any subsidiary, in which the value of Stock subject to the Award is equivalent in value to the cash compensation (for example, Deferred Stock or Restricted Stock), or in which the exercise price, grant price or purchase price of the Award in the nature of a right that may be exercised is equal to the Fair Market Value of the underlying Stock minus the value of the cash compensation surrendered (for example, Options granted with an exercise price "discounted" by the amount of the cash compensation surrendered). (b) Term of Awards. The term of each Award shall be for such period as may be determined by the Committee; provided that in no event shall the term of any Option or SAR exceed a period of ten years (or such shorter term as may be required in respect of an ISO under Code Section 422). (c) Form and Timing of Payment under Awards; Deferrals. Subject to the terms of the Plan and any applicable Award agreement, payments to be made by the Company or a subsidiary upon the exercise of an Option or other Award or settlement of an Award may be made in such forms as the Committee shall determine, including, without limitation, cash, Stock, other Awards or other property, and may be made in a single payment or transfer, in installments, or on a deferred basis. The settlement of any Award may be accelerated, and cash paid in lieu of Stock in connection with such settlement, in the discretion of the - 9 - 13 Committee or upon occurrence of one or more specified events (in addition to a Change in Control). Installment or deferred payments may be required by the Committee (subject to Section 10(e) of the Plan, including the consent provisions thereof in the case of any deferral of an outstanding Award not provided for in the original Award agreement) or permitted at the election of the Participant on terms and conditions established by the Committee. Payments may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments or the grant or crediting of Dividend Equivalents or other amounts in respect of installment or deferred payments denominated in Stock. (d) Exemptions from Section 16(b) Liability. It is the intent of the Company that the grant of any Awards to or other transaction by a Participant who is subject to Section 16 of the Exchange Act shall be exempt under Rule 16b-3 (except for transactions acknowledged in writing to be non-exempt by such Participant). Accordingly, if any provision of this Plan or any Award agreement does not comply with the requirements of Rule 16b-3 as then applicable to any such transaction, such provision shall be construed or deemed amended to the extent necessary to conform to the applicable requirements of Rule 16b-3 so that such Participant shall avoid liability under Section 16(b). 8. PERFORMANCE AND ANNUAL INCENTIVE AWARDS. (a) Performance Conditions. The right of a Participant to exercise or receive a grant or settlement of any Award, and the timing thereof, may be subject to such performance conditions as may be specified by the Committee. The Committee may use such business criteria and other measures of performance as it may deem appropriate in establishing any performance conditions, and may exercise its discretion to reduce or increase the amounts payable under any Award subject to performance conditions, except as limited under Sections 8(b) and 8(c) hereof in the case of a Performance Award or Annual Incentive Award intended to qualify under Code Section 162(m). (b) Performance Awards Granted to Designated Covered Employees. If the Committee determines that a Performance Award to be granted to an Eligible Person who is designated by the Committee as likely to be a Covered Employee should qualify as "performance-based compensation" for purposes of Code Section 162(m), the grant, exercise and/or settlement of such Performance Award shall be contingent upon achievement of preestablished performance goals and other terms set forth in this Section 8(b). (i) Performance Goals Generally. The performance goals for such Performance Awards shall consist of one or more business criteria and a targeted level or levels of performance with respect to each of such criteria, as specified by the Committee consistent with this Section 8(b). Performance goals shall be objective and shall otherwise meet the requirements of Code Section 162(m) and regulations thereunder (including Regulation 1.162-27 and successor regulations thereto), including the requirement that the level or levels of performance targeted by the Committee result in the achievement of performance goals being "substantially uncertain." The Committee may determine that such Performance Awards shall be granted, exercised and/or settled upon achievement of any one performance goal or that two or more of the performance goals must be achieved as a condition to grant, exercise and/or - 10 - 14 settlement of such Performance Awards. Performance goals may differ for Performance Awards granted to any one Participant or to different Participants. (ii) Business Criteria. One or more of the following business criteria for the Company, on a consolidated basis, and/or for specified subsidiaries or business units of the Company (except with respect to the total stockholder return and earnings per share criteria), shall be used by the Committee in establishing performance goals for such Performance Awards: (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. One or more of the foregoing business criteria shall also be exclusively used in establishing performance goals for Annual Incentive Awards granted to a Covered Employee under Section 8(c) hereof. (iii) Performance Period; Timing for Establishing Performance Goals. Achievement of performance goals in respect of such Performance Awards shall be measured over a performance period of up to ten years, as specified by the Committee. Performance goals shall be established not later than 90 days after the beginning of any performance period applicable to such Performance Awards, or at such other date as may be required or permitted for "performance-based compensation" under Code Section 162(m). (iv) Performance Award Pool. The Committee may establish a Performance Award pool, which shall be an unfunded pool, for purposes of measuring Company performance in connection with Performance Awards. The amount of such Performance Award pool shall be based upon the achievement of a performance goal or goals based on one or more of the business criteria set forth in Section 8(b)(ii) hereof during the given performance period, as specified by the Committee in accordance with Section 8(b)(iii) hereof. The Committee may specify the amount of the Performance Award pool as a percentage of any of such business criteria, a percentage thereof in excess of a threshold amount, or as another amount which need not bear a strictly mathematical relationship to such business criteria. (v) Settlement of Performance Awards; Other Terms. Settlement of such Performance Awards shall be in cash, Stock, other Awards or other property, in the discretion of the Committee. The Committee may, in its discretion, reduce the amount of a settlement otherwise to be made in connection with such Performance Awards, but may not exercise discretion to increase any such amount payable to a Covered Employee in respect of a Performance Award subject to this Section 8(b). The Committee shall specify the circumstances in which such Performance Awards shall be paid or forfeited in the event of termination of employment by the Participant prior to the end of a performance period or settlement of Performance Awards. - 11 - 15 (c) Annual Incentive Awards Granted to Designated Covered Employees. If the Committee determines that an Annual Incentive Award to be granted to an Eligible Person who is designated by the Committee as likely to be a Covered Employee should qualify as "performance-based compensation" for purposes of Code Section 162(m), the grant, exercise and/or settlement of such Annual Incentive Award shall be contingent upon achievement of preestablished performance goals and other terms set forth in this Section 8(c). (i) Annual Incentive Award Pool. The Committee may establish an Annual Incentive Award pool, which shall be an unfunded pool, for purposes of measuring Company performance in connection with Annual Incentive Awards. The amount of such Annual Incentive Award pool shall be based upon the achievement of a performance goal or goals based on one or more of the business criteria set forth in Section 8(b)(ii) hereof during the given performance period, as specified by the Committee in accordance with Section 8(b)(iii) hereof. The Committee may specify the amount of the Annual Incentive Award pool as a percentage of any of such business criteria, a percentage thereof in excess of a threshold amount, or as another amount which need not bear a strictly mathematical relationship to such business criteria. (ii) Potential Annual Incentive Awards. Not later than the end of the 90th day of each fiscal year, or at such other date as may be required or permitted in the case of Awards intended to be "performance-based compensation" under Code Section 162(m), the Committee shall determine the Eligible Persons who will potentially receive Annual Incentive Awards, and the amounts potentially payable thereunder, for that fiscal year, either out of an Annual Incentive Award pool established by such date under Section 8(c)(i) hereof or as individual Annual Incentive Awards. In the case of individual Annual Incentive Awards intended to qualify under Code Section 162(m), the amount potentially payable shall be based upon the achievement of a performance goal or goals based on one or more of the business criteria set forth in Section 8(b)(ii) hereof in the given performance year, as specified by the Committee; in other cases, such amount shall be based on such criteria as shall be established by the Committee. In all cases, the maximum Annual Incentive Award of any Participant shall be subject to the limitation set forth in Section 5 hereof. (iii) Payout of Annual Incentive Awards. After the end of each fiscal year, the Committee shall determine the amount, if any, of (A) the Annual Incentive Award pool, and the maximum amount of potential Annual Incentive Award payable to each Participant in the Annual Incentive Award pool, or (B) the amount of potential Annual Incentive Award otherwise payable to each Participant. The Committee may, in its discretion, determine that the amount payable to any Participant as a final Annual Incentive Award shall be increased or reduced from the amount of his or her potential Annual Incentive Award, including a determination to make no final Award whatsoever, but may not exercise discretion to increase any such amount in the case of an Annual Incentive Award intended to qualify under Code Section 162(m). The Committee shall specify the circumstances in which an Annual Incentive Award shall be paid or forfeited in the event of termination of employment by the Participant prior to the end of a fiscal year or settlement of such Annual Incentive Award. - 12 - 16 (d) Written Determinations. All determinations by the Committee as to the establishment of performance goals, the amount of any Performance Award pool or potential individual Performance Awards and as to the achievement of performance goals relating to Performance Awards under Section 8(b), and the amount of any Annual Incentive Award pool or potential individual Annual Incentive Awards and the amount of final Annual Incentive Awards under Section 8(c), shall be made in writing in the case of any Award intended to qualify under Code Section 162(m). The Committee may not delegate any responsibility relating to such Performance Awards or Annual Incentive Awards. (e) Status of Section 8(b) and Section 8(c) Awards under Code Section 162(m). It is the intent of the Company that Performance Awards and Annual Incentive Awards under Sections 8(b) and 8(c) hereof granted to persons who are designated by the Committee as likely to be Covered Employees within the meaning of Code Section 162(m) and regulations thereunder (including Regulation 1.162-27 and successor regulations thereto) shall, if so designated by the Committee, constitute "performance-based compensation" within the meaning of Code Section 162(m) and regulations thereunder. Accordingly, the terms of Sections 8(b), (c), (d) and (e), including the definitions of Covered Employee and other terms used therein, shall be interpreted in a manner consistent with Code Section 162(m) and regulations thereunder. The foregoing notwithstanding, because the Committee cannot determine with certainty whether a given Participant will be a Covered Employee with respect to a fiscal year that has not yet been completed, the term Covered Employee as used herein shall mean only a person designated by the Committee, at the time of grant of Performance Awards or an Annual Incentive Award, as likely to be a Covered Employee with respect to that fiscal year. If any provision of the Plan as in effect on the date of adoption or any agreements relating to Performance Awards or Annual Incentive Awards that are designated as intended to comply with Code Section 162(m) does not comply or is inconsistent with the requirements of Code Section 162(m) or regulations thereunder, such provision shall be construed or deemed amended to the extent necessary to conform to such requirements. 9. CHANGE IN CONTROL. (a) Effect of "Change in Control." In the event of a "Change in Control," as defined in Section 9(b), the following provisions shall apply unless otherwise provided in the Award agreement: (i) Any Award carrying a right to exercise that was not previously exercisable and vested shall become fully exercisable and vested as of the time of the Change in Control and shall remain exercisable and vested for the balance of the stated term of such Award without regard to any termination of employment by the Participant, subject only to applicable restrictions set forth in Section 10(a) hereof; (ii) Any optionee who holds an Option shall be entitled to elect, during the 60-day period immediately following a Change in Control, in lieu of acquiring the shares of Stock covered by such Option, to receive, and the Company shall be obligated to pay, in cash the excess of the Change in Control Price over the exercise price of such Option, multiplied by the number of shares of Stock covered by such Option; - 13 - 17 (iii) The restrictions, deferral of settlement, and forfeiture conditions applicable to any other Award granted under the Plan shall lapse and such Awards shall be deemed fully vested as of the time of the Change in Control, except to the extent of any waiver by the Participant and subject to applicable restrictions set forth in Section 10(a) hereof; and (iv) With respect to any outstanding Award subject to achievement of performance goals and conditions under the Plan, such performance goals and other conditions will be deemed to be met if and to the extent so provided by the Committee in the Award agreement relating to such Award. (b) Definition of "Change in Control." A "Change in Control" shall be deemed to have occurred if: (i) any Person (other than the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the common stock of the Company) becomes the Beneficial Owner (except that a Person shall be deemed to be the Beneficial Owner of all shares that any such Person has the right to acquire pursuant to any agreement or arrangement or upon exercise of conversion rights, warrants or options or otherwise, without regard to the sixty day period referred to in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company or any Significant Subsidiary (as defined below), representing 25% or more of the combined voting power of the Company's or such subsidiary's then outstanding securities; provided, however, that such event shall not constitute a Change in Control unless or until the percentage of such securities owned beneficially, directly or indirectly, by such Person is equal to or more than all such securities owned beneficially, directly or indirectly, by Melville Corporation; (ii) during any period of two consecutive years (not including any period prior to the adoption of the Plan), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this paragraph) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved but excluding for this purpose any such new director whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of an individual, corporation, partnership, group, associate or other entity or Person other than the Board, cease for any reason to constitute at least a majority of the Board; provided, however, that such event shall not constitute a Change in Control unless or until the percentage of voting securities of the Company owned beneficially, directly or indirectly, by Melville Corporation is less than 50% of all such outstanding securities; - 14 - 18 (iii) the consummation of a merger or consolidation of the Company or any subsidiary owning directly or indirectly all or substantially all of the consolidated assets of the Company (a "Significant Subsidiary") with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company or a Significant Subsidiary outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or resulting entity) more than 50% of the combined voting power of the surviving or resulting entity outstanding immediately after such merger or consolidation; (iv) the stockholders of the Company or any affiliate approve a plan or agreement for the sale or disposition of all or substantially all of the consolidated assets of the Company (other than such a sale or disposition immediately after which such assets will be owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the common stock of the Company immediately prior to such sale or disposition) in which case the Board shall determine the effective date of the Change in Control resulting therefrom; or (v) any other event occurs which the Board determines, in its discretion, would materially alter the structure of the Company or its ownership. (c) Definition of "Change in Control Price." The "Change in Control Price" means an amount in cash equal to the higher of (i) the amount of cash and fair market value of property that is the highest price per share paid (including extraordinary dividends) in any transaction triggering the Change in Control under Section 9(b) hereof or any liquidation of shares following a sale of substantially all assets of the Company, or (ii) the highest Fair Market Value per share at any time during the 60-day period preceding and 60-day period following the Change in Control. 10. GENERAL PROVISIONS. (a) Compliance with Legal and Other Requirements. The Company may, to the extent deemed necessary or advisable by the Committee, postpone the issuance or delivery of Stock or payment of other benefits under any Award until completion of such registration or qualification of such Stock or other required action under any federal or state law, rule or regulation, listing or other required action with respect to any stock exchange or automated quotation system upon which the Stock or other Company securities are listed or quoted, or compliance with any other obligation of the Company, as the Committee may consider appropriate, and may require any Participant to make such representations, furnish such information and comply with or be subject to such other conditions as it may consider appropriate in connection with the issuance or delivery of Stock or payment of other benefits in compliance with applicable laws, rules, and regulations, listing requirements, or other obligations. The foregoing notwithstanding, in connection with a Change in Control, the Company shall take or cause to be taken no action, and shall undertake or permit to arise no legal or contractual obligation, that results or would result in any postponement of the issuance or delivery of Stock or payment of benefits under any Award or the imposition of any other conditions on such issuance, delivery or payment, to the extent that such postponement - 15 - 19 or other condition would represent a greater burden on a Participant than existed on the 90th day preceding the Change in Control. (b) Limits on Transferability; Beneficiaries. No Award or other right or interest of a Participant under the Plan shall be pledged, hypothecated or otherwise encumbered or subject to any lien, obligation or liability of such Participant to any party (other than the Company or a subsidiary), or assigned or transferred by such Participant otherwise than by will or the laws of descent and distribution or to a Beneficiary upon the death of a Participant, and such Awards or rights that may be exercisable shall be exercised during the lifetime of the Participant only by the Participant or his or her guardian or legal representative, except that Awards and other rights (other than ISOs and SARs in tandem therewith) may be transferred to one or more Beneficiaries or other transferees during the lifetime of the Participant, and may be exercised by such transferees in accordance with the terms of such Award, but only if and to the extent such transfers are permitted by the Committee pursuant to the express terms of an Award agreement (subject to any terms and conditions which the Committee may impose thereon). A Beneficiary, transferee, or other person claiming any rights under the Plan from or through any Participant shall be subject to all terms and conditions of the Plan and any Award agreement applicable to such Participant, except as otherwise determined by the Committee, and to any additional terms and conditions deemed necessary or appropriate by the Committee. (c) Adjustments. In the event that any dividend or other distribution (whether in the form of cash, Stock, or other property), recapitalization, forward or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, share exchange, liquidation, dissolution or other similar corporate transaction or event affects the Stock such that an adjustment is determined by the Committee to be appropriate under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and kind of shares of Stock which may be delivered in connection with Awards granted thereafter, (ii) the number and kind of shares of Stock by which annual per-person Award limitations are measured under Section 5 hereof, (iii) the number and kind of shares of Stock subject to or deliverable in respect of outstanding Awards and (iv) the exercise price, grant price or purchase price relating to any Award and/or make provision for payment of cash or other property in respect of any outstanding Award. In addition, the Committee is authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards (including Performance Awards and performance goals, and Annual Incentive Awards and any Annual Incentive Award pool or performance goals relating thereto) in recognition of unusual or nonrecurring events (including, without limitation, events described in the preceding sentence, as well as acquisitions and dispositions of businesses and assets) affecting the Company, any subsidiary or any business unit, or the financial statements of the Company or any subsidiary, or in response to changes in applicable laws, regulations, accounting principles, tax rates and regulations or business conditions or in view of the Committee's assessment of the business strategy of the Company, any subsidiary or business unit thereof, performance of comparable organizations, economic and business conditions, personal performance of a Participant, and any other circumstances deemed relevant; provided that no such adjustment shall be authorized or made if and to the extent that such authority or the making of such adjustment would cause Options, SARs, Performance Awards granted under Section 8(b) hereof or Annual Incentive Awards granted under Section 8(c) hereof to Participants designated by the Committee as Covered Employees and intended to qualify as "performance-based compensation" under Code - 16 - 20 Section 162(m) and regulations thereunder to otherwise fail to qualify as "performance-based compensation" under Code Section 162(m) and regulations thereunder. (d) Taxes. The Company and any subsidiary is authorized to withhold from any Award granted, any payment relating to an Award under the Plan, including from a distribution of Stock, or any payroll or other payment to a Participant, amounts of withholding and other taxes due or potentially payable in connection with any transaction involving an Award, and to take such other action as the Committee may deem advisable to enable the Company and Participants to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Award. This authority shall include authority to withhold or receive Stock or other property and to make cash payments in respect thereof in satisfaction of a Participant's tax obligations, either on a mandatory or elective basis in the discretion of the Committee. (e) Changes to the Plan and Awards. The Board may amend, alter, suspend, discontinue or terminate the Plan or the Committee's authority to grant Awards under the Plan without the consent of stockholders or Participants, except that any amendment or alteration to the Plan shall be subject to the approval of the Company's stockholders not later than the annual meeting next following such Board action if such stockholder approval is required by any federal or state law or regulation or the rules of any stock exchange or automated quotation system on which the Stock may then be listed or quoted, and the Board may otherwise, in its discretion, determine to submit other such changes to the Plan to stockholders for approval; provided that, without the consent of an affected Participant, no such Board action may materially and adversely affect the rights of such Participant under any previously granted and outstanding Award. The Committee may waive any conditions or rights under, or amend, alter, suspend, discontinue or terminate any Award theretofore granted and any Award agreement relating thereto, except as otherwise provided in the Plan; provided that, without the consent of an affected Participant, no such Committee action may materially and adversely affect the rights of such Participant under such Award. Notwithstanding anything in the Plan to the contrary, if any right under this Plan would cause a transaction to be ineligible for pooling of interest accounting that would, but for the right hereunder, be eligible for such accounting treatment, the Committee may modify or adjust the right so that pooling of interest accounting shall be available, including the substitution of Stock having a Fair Market Value equal to the cash otherwise payable hereunder for the right which caused the transaction to be ineligible for pooling of interest accounting. (f) Limitation on Rights Conferred under Plan. Neither the Plan nor any action taken hereunder shall be construed as (i) giving any Eligible Person or Participant the right to continue as an Eligible Person or Participant or in the employ or service of the Company or a subsidiary, (ii) interfering in any way with the right of the Company or a subsidiary to terminate any Eligible Person's or Participant's employment or service at any time, (iii) giving an Eligible Person or Participant any claim to be granted any Award under the Plan or to be treated uniformly with other Participants and employees, or (iv) conferring on a Participant any of the rights of a stockholder of the Company unless and until the Participant is duly issued or transferred shares of Stock in accordance with the terms of an Award. (g) Unfunded Status of Awards; Creation of Trusts. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant or obligation to deliver Stock pursuant to an Award, nothing contained in the Plan or any Award shall give any such Participant any rights that are greater - 17 - 21 than those of a general creditor of the Company; provided that the Committee may authorize the creation of trusts and deposit therein cash, Stock, other Awards or other property, or make other arrangements to meet the Company's obligations under the Plan. Such trusts or other arrangements shall be consistent with the "unfunded" status of the Plan unless the Committee otherwise determines with the consent of each affected Participant. The trustee of such trusts may be authorized to dispose of trust assets and reinvest the proceeds in alternative investments, subject to such terms and conditions as the Committee may specify and in accordance with applicable law. (h) Nonexclusivity of the Plan. Neither the adoption of the Plan by the Board nor its submission to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Board or a committee thereof to adopt such other incentive arrangements as it may deem desirable including incentive arrangements and awards which do not qualify under Code Section 162(m). (i) Payments in the Event of Forfeitures; Fractional Shares. Unless otherwise determined by the Committee, in the event of a forfeiture of an Award with respect to which a Participant paid cash or other consideration, the Participant shall be repaid the amount of such cash or other consideration. No fractional shares of Stock shall be issued or delivered pursuant to the Plan or any Award. The Committee shall determine whether cash, other Awards or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated. (j) Governing Law. The validity, construction and effect of the Plan, any rules and regulations under the Plan, and any Award agreement shall be determined in accordance with the Delaware General Corporation Law, without giving effect to principles of conflicts of laws, and applicable federal law. (k) Plan Effective Date and Stockholder Approval. The Plan has been adopted by the Board with the consent of the stockholders of the Company and shall become effective on the Date of the Initial Public Offering. - 18 - EX-10.11 10 1996 NON-EMPLOYEE DIRECTOR STOCK PLAN 1 Exhibit 10.11 LINENS 'N THINGS, INC. - ------------------------------------------------------------------------------- 1996 NON-EMPLOYEE DIRECTOR STOCK PLAN - ------------------------------------------------------------------------------- 2 LINENS 'N THINGS, INC. ------------------------------------------------------------------------------ 1996 NON-EMPLOYEE DIRECTOR STOCK PLAN ------------------------------------------------------------------------------ PAGE ---- 1. Purpose.......................................................... 1 2. Definitions...................................................... 1 3. Shares Available Under the Plan.................................. 2 4. Administration of the Plan....................................... 2 5. Eligibility...................................................... 2 6. Stock Options.................................................... 2 7. Grants of Stock Units............................................ 3 8. Deferral of Cash Fees in the Form of Stock Units................. 4 9. Crediting of Dividend Equivalents................................ 4 10. Adjustment Provisions............................................ 5 11. Changes to the Plan.............................................. 5 12. General Provisions............................................... 5 3 LINENS 'N THINGS, INC. 1996 NON-EMPLOYEE DIRECTOR STOCK PLAN 1. PURPOSE. The purpose of this 1996 Non-Employee Director Stock Plan (the "Plan") is to assist Linens 'n Things, Inc., a Delaware corporation (the "Company"), in attracting and retaining highly qualified persons to serve as non-employee directors and to more closely align such directors' interests with the interests of stockholders of the Company by providing a significant portion of their compensation in the form of Company stock. 2. DEFINITIONS. For purposes of the Plan, the following terms shall be defined as set forth below, in addition to such terms defined in Section 1 hereof: (a) "Board" means the Company's Board of Directors. (b) "Cause" means a director's conviction of a felony or a director's willful act of fraud, serious dishonesty, or other act materially harmful to the Company. (c) "Change in Control" shall be defined in the manner set forth in the Company's 1996 Incentive Compensation Plan, as of the effective date of the Plan. (d) "Disability" means a physical or mental incapacity of long duration which, in the reasonable determination of the Board, renders the Participant unable to perform the duties of a director of the Company. (e) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, including rules thereunder and successor provisions and rules thereto. (f) "Fair Market Value" of Stock means, as of any given date, the closing sale price per share reported on a consolidated basis for stock listed on the principal stock exchange or market on which Stock is traded on the date as of which such value is being determined or, if there is no sale on that date, then on the last previous day on which a sale was reported. (g) "Option" means the right, granted to a Participant under Section 6, to purchase Stock at a specified exercise price for a specified period of time under the Plan. (h) "Participant" means a director who has been granted or acquired Options or Stock Units which have not yet been exercised, settled or forfeited under the Plan. (i) "Initial Public Offering" means the initial offering by the Company of its Stock to the public. (j) "Retirement" means ceasing to serve as a director at or after attaining age 65. (k) "Stock" means the Company's Common Stock and such other securities as may be substituted (or resubstituted) for Stock pursuant to Section 10 hereof. (l) "Stock Unit" means the credit to a Participant's account under Sections 7, 8, or 9 hereof, which credit is denominated in shares and represents the right to receive one 4 share of Stock upon settlement of the Stock Unit account for each such credited Stock Unit, subject to such conditions as are imposed under the Plan. 3. SHARES AVAILABLE UNDER THE PLAN. Subject to adjustment as provided in Section 10 hereof, the total number of shares of Stock reserved and available for issuance under the Plan is 200,000. Such shares may be authorized but unissued shares, treasury shares or shares acquired in the market for the account of the Participant. If any Option or Stock Unit expires or terminates for any reason without having been exercised or settled, the unpurchased or undelivered shares subject to the Option or Stock Unit will again be available for delivery under the Plan. Shares surrendered in payment of the exercise price of any Option will again be available for delivery under the Plan. 4. ADMINISTRATION OF THE PLAN. The Plan will be administered by the Board. 5. ELIGIBILITY. Each director of the Company who, on any date on which Options or Stock Units are to be granted under Sections 6 or 7 hereof or on which fees are to be paid which could be deferred under Section 8 hereof, is not an executive officer or employee, either full-time or part-time, of (i) the Company, (ii) any parent of the Company, or (iii) any subsidiary of the Company, will be eligible, at such date, to be granted Options under Section 6 hereof or Stock Units under Section 7 hereof or to defer fees in the form of Stock Units under Section 8 hereof, as the case may be. No person other than those specified in this Section 5 will be eligible to participate in the Plan. 6. STOCK OPTIONS. An Option to purchase 7,000 shares of Stock will be granted to each director of the Company at the close of business on the later of the date of the Initial Public Offering or such director's initial election to the Board, if such director is then eligible to receive an Option grant under the Plan. In addition, an Option to purchase 700 shares of 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 Plan. Options granted under the Plan will be non-qualified stock options and will be subject to the following terms and conditions: (a) Exercise Price. The exercise price per share of Stock purchasable under an Option will be equal to 100% of the Fair Market Value of Stock on the date of grant of the Option; provided, however, that the exercise price per share of Stock purchasable under Options granted on the date of the Initial Public Offering shall be the initial offering price of the Stock. (b) Option Term. Each Option will expire at the earliest of (i) ten years after the date of grant, (ii) 12 months after the Participant ceases to serve as a director of the Company for any reason other than death, Disability, or Retirement or (iii) immediately upon the Participant's removal for Cause. (c) Exercisability. Each Option will become exercisable as to 25% of the Option shares 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 (i) will be fully exercisable in the event of a Change in Control, (ii) will be fully exercisable after the Participant ceases to serve as a director of the Company due to death, Disability, or Retirement, and (iii) will be exercisable after the Participant ceases to serve - 2 - 5 as a director of the Company for any reason other than death, Disability, or Retirement if and to the extent the Option was exercisable at the date of such cessation of service. (d) Method of Exercise. Each Option may be exercised, in whole or in part, at such time as it is exercisable and prior to its expiration by 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 Stock having a Fair Market Value at the time of exercise equal to the exercise price, or a combination of a cash payment and surrender of such Stock. 7. GRANTS OF STOCK UNITS. (a) Annual Grants. Each director of the Company who, at the close of business on the date of each annual meeting of the Company's stockholders commencing in 1997, is then eligible under Section 5 hereof shall be granted 700 Stock Units. (b) Vesting of Stock Units. One-half of each grant of Stock Units under Section 7(a) hereof (including any Stock Units resulting from an adjustment in accordance with Section 10 hereof) shall be forfeited by a Participant who ceases to serve as a director of the Company prior to six months and a day after the grant date for any reason other than death, Disability, or Retirement. The remaining one-half of each such grant (including any Stock Units resulting from an adjustment in accordance with Section 10 hereof) shall be forfeited by a Participant who ceases to serve as a director of the Company prior to the next annual meeting of the Company's stockholders following the grant date for any reason other than death, Disability, or Retirement. Notwithstanding anything in the Plan to the contrary, a Participant's Stock Units shall become immediately vested and nonforfeitable in the event he or she ceases to serve as a director of the Company due to death, Disability, or Retirement or in the event of a Change in Control. Settlement of Stock Units shall occur as promptly as practicable after the date they become nonforfeitable, except as provided in Section 7(d) hereof. (c) Dividend Equivalents. A Participant to whom any Stock Unit is credited under this Section 7 shall be entitled to receive dividend equivalents, in the form of additional Stock Units, in accordance with Section 9 hereof. Such additional Stock Units shall be nonforfeitable and, except as provided in Section 7(e) hereof, shall be settled as promptly as practicable after the date they become nonforfeitable. (d) Settlement and Elective Deferral. The Company will settle Stock Units credited to the Participant's Stock Unit account resulting from Stock Units granted under Section 7(a) and dividend equivalents thereon by delivering to the Participant (or his or her beneficiary), as promptly as practicable after the end of the applicable deferral period, the number of shares of Stock equal to the number of such whole Stock Units then credited to such account as to which the deferral period has expired, together with cash in lieu of any fractional share at a time that less than one whole Stock Unit remains credited to such account. The deferral period shall end at the time the Stock Unit is to be settled as set forth in Sections 7(b) and 7(c), unless the Participant shall have filed an irrevocable written election with the Secretary of the Company by such date as may be specified by the Board electing to extend the period of deferral of settlement of Stock Units granted under Section 7(a) and dividend equivalents thereon, provided that, other provisions of the Plan notwithstanding, all such deferral periods will end upon the occurrence of a Change in - 3 - 6 Control. Electively deferred Stock Units granted under Section 7(a) and dividend equivalents thereon shall be nonforfeitable. 8. DEFERRAL OF CASH FEES IN THE FORM OF STOCK UNITS. (a) Deferral of Fees Generally. Each director of the Company may, in lieu of current receipt of fees in cash, defer receipt of such fees in the form of Stock Units in accordance with this Section 8, provided that such director is then eligible under Section 5 hereof to defer fees at the date any such fee is otherwise payable. Fees that may be deferred include annual retainer fees for service on the Board, fees for attendance at meetings of the Board and committees of the Board, and other fees for services payable under then current policies of the Board. (b) Deferral Elections. Each director who elects to defer fees in the form of Stock Units for any calendar year must file an irrevocable written election with the Secretary of the Company by such date as may be specified by the Board. The election shall specify the percentage of fees to be deferred and the period or periods of deferral (subject to Section 8(e) hereof). An election by a director shall be deemed to be continuing and therefore applicable to Plan years after the year in respect of which the election is filed, unless the director revokes or changes such election by filing a new election form in accordance with this Section 8(b). (c) Crediting of Stock Units. At any date on which fees are payable to a Participant who has elected to defer fees in the form of Stock Units, the Company will credit such Participant's Stock Unit account with a number of Stock Units equal to the number of shares of Stock having an aggregate Fair Market Value at that date equal to the fees that otherwise would have been payable at such date but for the Participant's election to defer receipt of such fees in the form of Stock Units. Such Stock Units shall be nonforfeitable. (d) Dividend Equivalents. A Participant to whom any Stock Unit is credited under this Section 8 shall be entitled to receive dividend equivalents, in the form of additional Stock Units, in accordance with Section 9 hereof. Such additional Stock Units shall be nonforfeitable. (e) Settlement of Stock Units. The Company will settle Stock Units credited to the Participant's Stock Unit account under this Section 8 by delivering to the Participant (or his or her beneficiary), as promptly as practicable after the end of the applicable deferral period, the number of shares of Stock equal to the number of such whole Stock Units then credited to such account as to which the deferral period has expired, together with cash in lieu of any fractional share at a time that less than one whole Stock Unit remains credited to such account. Other provisions of the Plan notwithstanding, all deferral periods will end upon the occurrence of a Change in Control. 9. CREDITING OF DIVIDEND EQUIVALENTS. A Participant shall be entitled to receive dividend equivalents, as of the payment date for any dividend or distribution on Stock, in an amount equal to the cash or fair market value of any property other than Stock paid as a dividend or distribution on a single share of Stock at that date multiplied by the number of Stock Units (including any fractional shares) credited to his or her Stock Unit account as of the record date for such dividend or distribution. Such dividend equivalents shall be credited as a number of Stock Units determined by dividing the aggregate amount of such cash or property by the Fair Market Value of a share of - 4 - 7 Stock at the payment date of the dividend or distribution. Dividends in the form of additional shares of Stock shall not result in the crediting of dividend equivalents, but will instead result in an adjustment in the number of shares credited as Stock Units, in accordance with Section 10 hereof. 10. ADJUSTMENT PROVISIONS. In the event any recapitalization, reorganization, merger, consolidation, spinoff, combination, repurchase, exchange of shares or other securities of the Company, stock split or reverse split, stock dividend, other extraordinary dividend having a value in excess of 150% of the aggregate quarterly dividends paid during the 12-month period preceding the record date therefor, liquidation, dissolution or other similar corporate transaction or event affects the Stock such that an adjustment is determined by the Board to be appropriate in order to prevent dilution or enlargement of Participants' rights under the Plan, then the Board will, in a manner that is proportionate to the change to the Stock and is otherwise equitable, adjust (i) the number and kind of shares of Stock reserved for issuance under the Plan, (ii) the number and kind of shares of Stock to be subject to each automatic grant of Options and Stock Units under Sections 6 and 7 hereof, and (iii) the number and kind of shares of Stock to be issued and delivered in settlement of outstanding Options and Stock Units, and/or the exercise price of outstanding Options. The foregoing notwithstanding, no adjustment may be made hereunder except as shall be necessary to maintain the proportionate interest of a Participant under the Plan and to preserve, without exceeding, the value of outstanding Options and Stock Units and potential grants of Options and Stock Units. If at any date an insufficient number of shares of Stock are available under the Plan for the automatic grant of Options or Stock Units or the deferral of fees in the form of Stock Units at that date, Stock Units will first be automatically granted proportionately to Participants, to the extent shares are then available and otherwise as provided under Section 7 hereof; and then, if any shares remain available, Options will be automatically granted proportionately to Participants, to the extent shares are then available and otherwise as provided in Section 6 hereof; and then, if any shares remain available, Stock Units will be credited proportionately among Participants deferring fees in the form of Stock Units, to the extent shares are then available and otherwise as provided under Section 8 hereof. 11. CHANGES TO THE PLAN. The Board may amend, alter, suspend, discontinue, or terminate the Plan or authority to grant Options under Section 6 hereof, Stock Units under Section 7 hereof or defer fees under Section 8 hereof without the consent of stockholders or Participants, except that any such action will be subject to the approval of the Company's stockholders at the next annual meeting of stockholders having a record date after the date such action was taken if such stockholder approval is required by any federal or state law or regulation or the rules of any stock exchange or automated quotation system on which the Stock may then be listed or quoted, or if the Board determines in its discretion to seek or obtain stockholder approval; provided that, without the consent of an affected Participant, no such action may impair the rights of such Participant in respect of any previously granted or outstanding Options, Stock Units or Stock Unit account. 12. GENERAL PROVISIONS. (a) Unfunded Nature of Plan; Agreements. Stock Unit accounts are maintained solely as bookkeeping entries by the Company evidencing unfunded obligations of the Company. Accordingly, Participants will not have rights to specific property of the Company or otherwise have rights other than as unsecured creditors in respect of such Stock Unit accounts. The Board may, however, authorize the creation of trusts and deposit Stock therein, or make other arrangements, to meet the Company's obligations under the Plan; provided, however, that such actions and all other actions under this Section 12(a) shall be - 5 - 8 consistent with Section 12(d) hereof. Such trusts or other arrangements shall be consistent with the "unfunded" status of the Plan unless the Board otherwise determines with the consent of each affected Participant. The Company's obligations under the Plan will be evidenced by agreements or other documents executed by the Company and the Participant incorporating the terms and conditions set forth in the Plan, together with such other terms and conditions not inconsistent with the Plan as the Board may from time to time approve. (b) Compliance with Laws and Obligations. The Company will not be obligated to issue or deliver shares of Stock in connection with any Option or in settlement of Stock Units in a transaction subject to the registration requirements of the Securities Act of 1933, as amended, or any other federal or state securities law, any requirement under any listing agreement between the Company and any stock exchange or automated quotation system, or any other law, regulation or contractual obligation of the Company, until such laws, regulations and other obligations of the Company have been complied with to the satisfaction of the Company. Certificates representing shares of Stock issued under the Plan will be subject to such stop-transfer orders and other restrictions as may be applicable under such laws, regulations and other obligations of the Company, including any requirement that a legend or legends be placed thereon. (c) Limitations on Transferability. No Options or Stock Units or right under the Plan which constitutes a derivative security as generally defined in Rule 16a-1(c) under the Exchange Act shall be pledged, hypothecated, or otherwise encumbered or subject to any lien, obligation, or liability of a Participant to any party (other than the Company or a subsidiary), or assigned or transferred by such Participant otherwise than by will or the laws of descent and distribution or to a designated beneficiary upon the death of the Participant, except that Options, Stock Units, and rights relating thereto may be transferred to one or more beneficiaries or other transferees during the lifetime of the Participant, but only if and to the extent such transfers are permitted by the Board pursuant to the express terms of an award agreement (subject to any terms and conditions which the Board may impose thereon) then permitted under Rule 16b-3, otherwise consistent with Section 12(d) hereof, and consistent with the registration of the offer and sale of shares of Stock related thereto on Form S-8, Form S-3, or such other registration form of the Securities and Exchange Commission as may then be filed and effective with respect to the Plan. A beneficiary, transferee, or other person claiming any rights under the Plan from or through any Participant shall be subject to all terms and conditions of the Plan and any award agreement applicable to such Participant, except as otherwise determined by the Board, and to any additional terms and conditions deemed necessary or appropriate by the Board. (d) Compliance with Rule 16b-3. It is the intent of the Company that this Plan comply in all respects with applicable provisions of Rule 16b-3 under the Exchange Act. Accordingly, if any provision of this Plan or any agreement hereunder does not comply with the requirements of Rule 16b-3 as then applicable to a Participant, such provision will be construed or deemed amended to the extent necessary to conform to the applicable requirements with respect to such Participant. In addition, the Board shall have no authority to make any amendment, alteration, suspension, discontinuation or termination of the Plan and the Board shall have no authority to make any adjustment under Section 10 hereof, amend any agreement hereunder or take other action if and to the extent such authority would cause a transaction under the Plan by a Participant not to be exempt under Rule 16b-3 under the Exchange Act. - 6 - 9 (e) Designation of Beneficiary. Each Participant may designate, on forms provided by the Company, one or more beneficiaries to receive the amounts distributable pursuant to the Plan in the event of such Participant's death. The Company may rely upon the beneficiary designation last filed in accordance with the terms of the Plan. (f) Crediting of Fractional Shares. The amount of Stock Units credited to a Stock Unit shall include any fractional share, calculated to at least three decimal places. (g) No Right To Continue as a Director. Nothing contained in the Plan or any agreement hereunder will confer upon any Participant any right to continue to serve as a director of the Company. (h) No Stockholder Rights Conferred. Nothing contained in the Plan or any agreement hereunder, including the grant of Options or crediting of Stock Units to a Participant's Stock Unit account, will confer upon any Participant (or beneficiary or transferee) any rights of a stockholder of the Company unless and until an Option is duly exercised by, or shares of Stock are in fact issued and delivered in settlement of Stock Units to, such Participant or his or her nominee (or beneficiary or transferee or a nominee thereof). (i) Governing Law. The validity, construction, and effect of the Plan, any rules and regulations under the Plan, and any award agreement shall be determined in accordance with the Delaware General Corporation Law, without giving effect to principles of conflicts of laws, and applicable federal law. (j) Stockholder Approval, Effective Date, and Plan Termination. The Plan has been adopted by the Board with the consent of the stockholders of the Company and shall become effective upon the Initial Public Offering. Unless earlier terminated by action of the Board, the Plan will remain in effect until such time as no shares of Stock remain available for issuance under the Plan and the Company and Participants have no further rights or obligations under the Plan in respect of outstanding Options or Stock Units under the Plan. - 7 - EX-23.1 11 CONSENT OF PEAT MARWICK LLP 1 EXHIBIT 23.1 Linens 'n Things, Inc. 6 Brighton Road Clifton, New Jersey 07015 The Board of Directors Linens 'n Things, Inc. Re: Registration Statement No. 333-12267 We consent to the use of our reports included herein and to the reference to our firm under the headings "Selected Financial and Operating Data" and "Experts" in the Registration Statement. /s/ KPMG PEAT MARWICK LLP New York, New York October 24, 1996 -----END PRIVACY-ENHANCED MESSAGE-----