-----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, LYRnSlsgJhnhaWI+PYUjV7kQ4RC1sjkm9RIVbLkUxJNvlp+TvKDembX2GgSKppia 0dpuNP0tFms2Y47KSZAIJQ== 0000950123-96-006795.txt : 19961121 0000950123-96-006795.hdr.sgml : 19961121 ACCESSION NUMBER: 0000950123-96-006795 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19961119 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: 96669411 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 AMENDMENT #3-LINENS 'N THINGS 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 19, 1996 REGISTRATION NO. 333-12267 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------ AMENDMENT NO. 3 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. [ ] ------------------------------------ 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 NOVEMBER 19, 1996 13,000,000 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." The Common Stock has been approved for listing on the New York Stock Exchange under the 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 1,950,000 additional shares 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 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 in 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 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 these 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 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. 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 acquired in 1983 by CVS Corporation (formerly known as Melville Corporation) (CVS Corporation 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...... 13,000,000 shares Common Stock to be outstanding after the Offering(1).............. 19,267,758 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." New York Stock Exchange symbol................... "LIN" - --------------- (1) Excludes approximately 192,678 shares of deferred stock grants and 963,388 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... $ 0.20 $ (0.06) $ 0.61 $ 0.89 $ (0.01) $ 0.26 $ 0.14 Weighted average number of shares outstanding (000's)..................... 19,268 19,268 19,268 19,268 19,268 19,268 19,268 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 31,653 Shareholders' equity(10)........................................................... 209,457 237,457
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 contributions to the Company in the aggregate 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: (i) remain obligated under its guarantees of the Company's store leases where CVS has guaranteed such leases in the past (including extensions and renewals provided for in the terms of such leases at the time such guarantees were furnished); and (ii) guarantee certain new leases identified in the Stockholder Agreement (as defined below) through the initial term thereof ((i) and (ii) collectively, 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 superstore 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 Superstore 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 8 10 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 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 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 9 11 operating results and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 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. The Company has entered 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 superstore 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 32.5% of the outstanding Common Stock (22.4% 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 10 12 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 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 sale 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 for sale; 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. CVS's rights with respect to such First CVS Registration on a priority basis expire on December 31, 1997 (if not theretofore exercised) 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 19,267,758 shares of Common Stock outstanding. Of these shares, the 13,000,000 shares of Common Stock sold in the Offering (14,950,000 shares if the Underwriters' over-allotment option is exercised in full) will be freely tradeable without restriction under the Securities Act, except any such shares which may be acquired by an "affiliate" of the Company. The remaining 6,267,758 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 in certain circumstances or if permitted by CS First Boston, 6,267,758 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. See "Underwriting." 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," 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." 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. The Common Stock has been approved for listing on the New York Stock Exchange, subject to official notice of issuance. However, 11 13 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 $194,480,000 ($223,808,000 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 prohibited under its proposed Revolving Credit Facility (as defined herein). 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 prior to the Offering (the "Reorganization"). The Reorganization will include the following: (i) on October 11, 1996, CVS made contributions to the Company in the aggregate amount of $30 million which will result in, at the time of the Offering, the Company having 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 transfer of all of the outstanding common stock of Linens 'n Things Center, Inc. (a California company) to the Company, following which Linens 'n Things Center, Inc. will become a wholly-owned subsidiary of 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 common stock, par value $.01 per share, 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 Common Stock into 192,677.58 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." In connection with the Offering, the Company estimates that a one-time charge of approximately $1.5 million will be recorded in the fourth quarter of 1996 related to the termination of certain executive compensation programs. The capitalization table below should be read in conjunction with the historical Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus. See "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 18,153(2) -------- -------- Total short-term debt.................................................. 61,498 18,153 -------- -------- Long-term debt: Revolving credit facility................................................. 0 Subordinated note......................................................... 13,500 -------- -------- Total long-term debt................................................... 0 13,500 -------- -------- Total debt............................................................. 61,498 31,653 Shareholders' equity: Preferred Stock, $.01 par value, 1,000,000 shares authorized; none issued and outstanding on a pro forma basis................................... -- 0 Common Stock, par value $.01 per share; 100 shares authorized, issued and outstanding on an actual basis; 60,000,000 shares authorized, 19,267,758 shares issued and outstanding on a pro forma basis(3)....... -- 196 Contributed capital....................................................... 172,382 200,186 Retained earnings......................................................... 37,075 37,075 -------- -------- Total shareholders' equity............................................. 209,457 237,457 -------- -------- Total capitalization................................................... $270,955 $269,110 ======== ========
- --------------- (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 192,678 shares of deferred stock grants and 963,388 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......... $ 0.20 $ (0.06) $ 0.61 $ 0.89 $ (0.01) $ 0.26 $ 0.14 Weighted average number of shares outstanding (000's)............... 19,268 19,268 19,268 19,268 19,268 19,268 19,268
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(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)
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 31,653 Shareholders' equity(10)........ 41,104 65,170 74,340 85,819 76,678 209,457 237,457
- --------------- (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 contributions to the Company in the aggregate 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 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, insofar as it relates to the Company, 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 ($5.0 million) associated with the closing of six unprofitable stores and asset write-offs related to management information systems outsourcing ($0.7 million); (ii) a non-cash asset impairment charge of $1.4 million due to the early adoption of Statement of Financial Accounting Standards No. 121 16 18 ("SFAS 121") "Accounting for the Impairment of Long-Lived 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 such actions and costs associated with 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. In connection with the Offering, the Company estimates that a one-time charge of approximately $1.5 million will be recorded in the fourth quarter of 1996 related to the termination of certain executive compensation programs. 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 18 20 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 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 "linens" merchandise increased approximately 19% over the same period in the prior year, while net sales of "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 dollars 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 "linens" merchandise increased approximately 19% over the same period in the prior year, while net sales of "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 "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. 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 20 22 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. 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 21 23 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 or concurrently with closing of the Offering as follows: on October 11, 1996, CVS made contributions in the aggregate amount of $30 million to the Company, which will result in, at the time of the Offering, the Company having 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 the spread that would from time to time be applicable to 90-day LIBOR borrowings under the Revolving Credit Facility (which spread as of the closing of the Offering will be 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 reduce by 50% the outstanding principal amount of Tranche A; (ii) exceeds $400 million, then CVS would be required to reduce by 75% the outstanding principal amount of Tranche A; and (iii) exceeds $450 million, then CVS would be required to reduce by 100% the total outstanding principal amount of Tranche A. To the extent that the net proceeds realized by CVS on an after-tax basis from public or private sales by CVS of shares of Common Stock after the Offering exceeds (such excess, the "Appreciated Amount") the amount equal to the number of shares sold in such sales (the "Post-IPO Sold Shares") times $16.00 per share, the principal amount of Tranche B will be reduced by: (i) 50% of the portion of the Appreciated Amount up to $2.00 times the Post-IPO Sold Shares; and (ii) 65% of the remaining portion, if any, of the Appreciated Amount (up to a maximum aggregate reduction for Tranche B of $3.5 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 22 24 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 $32 million of total debt outstanding. See "Capitalization." The Company has received commitments from certain financial institutions for a $125 million three year senior revolving credit facility (the "Revolving Credit Facility") which facility the Company will enter into prior to the Offering. Borrowings under the Revolving Credit Facility are expected to be subject to certain conditions, including the absence of a material adverse change. The Revolving Credit Facility is anticipated to contain customary events of default as well as an event of default if any entity or related entities (other than CVS and certain of its affiliates) (i) have or acquire beneficial ownership of securities (or options therefor) having 20% or more of the voting power of the Company or (ii) possess, directly or indirectly, the power to direct or cause the direction of the management and policies of the Company, whether through the ownership of voting securities, by contract or otherwise. In addition, the Revolving Credit Facility is expected to include 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" and 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. The foregoing summary descriptions of the Revolving Credit Facility and the Subordinated Note do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all of the provisions of the Revolving Credit Facility and the Subordinated Note, which are filed as exhibits to the Registration Statement of which this Prospectus forms a part. 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. 23 25 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. In connection with the Offering, the Company estimates that a one-time charge of approximately $1.5 million will be recorded in the fourth quarter of 1996 related to the termination of certain executive compensation programs. 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 charges relating to 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. In addition, the Company may in the future explore opportunities to expand abroad. 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 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. 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 increases 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 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 5,900 people of whom approximately 2,450 were full-time employees and 3,450 were part-time employees. Less than 7% 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, CVS will: (i) remain obligated under its guarantees of the Company's store leases where CVS has guaranteed such leases in the past (including extensions and renewals provided for in the terms of such leases at the time such guarantees were furnished; and (ii) guarantee certain new leases identified in the Stockholder Agreement through the initial term thereof. Except for the foregoing, CVS will no longer enter into any guarantees of 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.......... 48 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.......... 62 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. Goldstein received his B.S. from The Wharton School of the University of Pennsylvania. Mr. Conaway is Executive Vice President, Chief Financial Officer and a Director of CVS. 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 and has held his current positions 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 two of the additional directors will expire at the 1997 annual meeting of the Company's shareholders, the terms of Mr. Goldstein and one 35 37 additional director will expire at the 1998 annual meeting of the Company's shareholders and the terms of Messrs. Axelrod and Conaway and one additional director 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 and an M.S. from New York Institute of Technology. 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) ($)(4) - ------------------------------------ ------- ----- ---------- ---------------- ------------ 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) The information shown in the table does not reflect the spinoff by CVS of Footstar, Inc. ("Footstar") in October 1996 which resulted in reducing the exercise price of the options to buy CVS common stock to 86.59% of the original exercise price shown in the table and increasing the number of securities underlying such options by 15.49%. (4) 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 $3,000) contributed under the CVS Employee Stock Ownership Plan for each of these named executives. 37 39 OPTION GRANTS IN 1995
INDIVIDUAL GRANTS(1)(2) ------------------------------------------------------------------------------------ NUMBER OF SECURITIES % OF TOTAL UNDERLYING OPTIONS OPTIONS GRANTED TO EXERCISE GRANT DATE GRANTED EMPLOYEES OR BASE PRICE PRESENT VALUE NAME # IN FISCAL YEAR ($/SH) EXPIRATION DATE $(3) - ------------------------ --------- -------------- ------------- --------------- ------------- 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 information shown in the table does not reflect the spinoff by CVS of Footstar in October 1996 which resulted in reducing the exercise price of the options to buy CVS common stock to 86.59% of the original exercise price shown in the table and increasing the number of securities underlying such options by 15.49%. (3) 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 ($36.250 in the case of Mr. Scullin); (4) the option term is 10 years; (5) the volatility of the stock is 19.27%, based on an analysis of weekly closing stock prices and dividends paid during the three-year period prior to the grant of the options; and (6) the assumed risk-free rate of interest is 7.32%, equivalent to a 10 year treasury yield at the time of grant of the options. No other discounts or any other restrictions related to vesting or the likelihood of vesting were applied. AGGREGATED OPTION EXERCISES IN 1995 AND 1995 YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING IN-THE-MONEY UNEXERCISED OPTIONS AT OPTIONS AT FY-END FY-END (#)(1) ($) 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
- --------------- (1) The information shown in the table does not reflect the spinoff by CVS of Footstar in October 1996 which resulted in reducing the exercise price of the options to buy CVS common stock to 86.59% of the original exercise price shown in the table and increasing the number of securities underlying such options by 15.49%. 38 40 EMPLOYMENT AGREEMENTS The Company has entered into an employment agreement with Mr. Axelrod and, prior to the Offering, 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 other 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 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 target bonus opportunity 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 certain welfare benefit plans 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 annual 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, in the case of Mr. Axelrod, provides that the Company generally will reimburse Mr. Axelrod for expenses incurred in seeking enforcement of his Employment Agreement, unless Mr. Axelrod'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. 39 41 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"). 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) 2,312,132 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 1,926,776 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 40 42 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 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 41 43 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 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. Prior to the Offering, it is anticipated that the Committee will make the following deferred stock grants ("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 42 44 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. Prior to or shortly following the Offering, it is also anticipated that the Committee will make the following grants of non-qualified stock options to each Named Executive Officer under the 1996 ICP: Mr. Axelrod -- 385,355 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 four-year period following the grant date. 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. 43 45 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 deferred 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 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. 44 46 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 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)..................... 19,267,758 100.0% 6,267,758 32.5% 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 210, Scarsdale, New York 10583. (4) Excludes 385,355 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 deferred stock grants. (5) Excludes 7,000 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 deferred stock grants. (6) Excludes 7,000 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 deferred 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 deferred 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 deferred 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 deferred stock grants. (10) Excludes an aggregate of 594,355 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 deferred stock grants. RELATIONSHIP WITH CVS AND RELATED PARTY TRANSACTIONS The Company was acquired by CVS in 1983. Upon completion of the Offering, CVS will own approximately 32.5% of the Common Stock of the Company (22.4% 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 The following are summary descriptions of the terms and conditions of the Transitional Services Agreement, Stockholder Agreement, Subordinated Note and Tax Disaffiliation Agreement. The descriptions do 47 49 not purport to be complete and are subject to, and are qualified in their entirety by reference to, all of the provisions of such documents, which are filed as exhibits to the Registration Statement of which this Prospectus forms a part. 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: (i) remain obligated under its guarantees of the Company's store leases where CVS has guaranteed such leases in the past (including extensions and renewals provided for in the terms of such leases at the time such guarantees were furnished); and (ii) guarantee certain new leases identified in the Stockholder Agreement through the initial term thereof. 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 with such lease guarantees. 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, under certain circumstances, 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 costs 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 the spread that would from time to time be applicable to 90-day LIBOR borrowings under the Revolving Credit Facility (which spread as of the closing of the Offering will be 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 reduce by 50% the outstanding principal amount of Tranche A; (ii) exceeds $400 million, then CVS would be required to reduce by 75% the outstanding principal amount of Tranche A; and (iii) exceeds $450 million, then CVS would be required to reduce by 100% the total outstanding principal amount of Tranche A. To the extent that the net proceeds realized by CVS on an after-tax basis from public or private sales by CVS of shares of Common Stock after the Offering exceeds (such excess, the "Appreciated 47 50 Amount") the amount equal to the number of shares sold in such sales (the "Post-IPO Sold Shares") times $16.00 per share, the principal amount of Tranche B will be reduced by: (i) 50% of the portion of the Appreciated Amount up to $2.00 times the Post-IPO Sold Shares; and (ii) 65% of the remaining portion, if any, of the Appreciated Amount (up to a maximum aggregate reduction for Tranche B of $3.5 million). The Subordinated Note will include customary Events of Default, including a cross-acceleration default to other material debt of the Company. 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." 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 up to 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 sale for its own account during the period after the Offering and before CVS has exercised its rights with respect to the 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 for sale; 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. CVS's rights with respect to such First CVS Registration on a priority basis expire on December 31, 1997 (if not theretofore exercised) 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 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 (other than CVS's two "demand" registrations). The Company will be responsible for customary registration and related expenses in connection with the exercise of such registration rights, except that CVS will pay one-half of such expenses in connection with each demand registration requested by CVS (and the excess of the Company's share of such CVS demand registration expenses over $200,000 in aggregate). 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" 48 51 agreement whereby CVS has generally 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. 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. For details as to other related party transactions, see note 9 in the notes to the Consolidated Financial Statements. 49 52 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have outstanding 19,267,758 shares of Common Stock. Of these shares, the 13,000,000 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 6,267,758 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 (192,678 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. See "Underwriting." After the expiration of such 180-day period, or earlier in certain circumstances or if permitted by CS First Boston, the 6,267,758 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. 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 up to 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 sale for its own account during the period after the Offering and before CVS has exercised its rights with respect to the 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 for sale; 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 50 53 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. CVS's rights with respect to such First CVS Registration on a priority basis expire on December 31, 1997 (if not theretofore exercised) 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 54 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 contained in Section 203 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 52 55 combination" is defined to include 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........................................ 13,000,000 =========
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 non-defaulting 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 1,950,000 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 56 $ 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, CVS, the Selling Shareholder and certain executive officers of the Company have agreed that during the period beginning from the date of the Prospectus (as defined in the Underwriting Agreement) and continuing to and including the date 180 days after the date of the Prospectus not to offer, sell, contract to sell, grant any option to purchase, establish a put equivalent position (as defined in Rule 16a-1(h) under the Securities Exchange Act of 1934, as amended), pledge or otherwise dispose of, directly or indirectly, any shares of Common Stock, or any securities that are substantially similar to the Common Stock, including but not limited to any securities that are convertible into or exercisable or exchangeable for, or that represent the right to receive, Common Stock or any substantially similar securities or, in the case of the Company and the executive officers, publicly disclose the intention to make any such offer, sale, pledge or disposal, without the prior written consent of CS First Boston, except (i) for private sales so long as the purchaser thereof enters into a corresponding lockup agreement with CS First Boston for the then unexpired portion of the 180-day period, (ii) for grants of employee stock options pursuant to the terms of a plan in effect on the date hereof, issuances of Common Stock pursuant to the exercise of such options or the exercise of any other employee stock options outstanding on the date hereof and (iii) for preparation of a registration statement or preparation for an offering so as to be in a position to file a registration statement and proceed with an offering immediately after expiration of such 180-day period. 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 650,000 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. The shares of Common Stock have been approved for listing 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 have undertaken 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 54 57 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 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 55 58 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 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 56 59 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 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. With respect to the unaudited interim financial information as of and for the thirty-nine weeks ended September 30, 1995 and September 28, 1996 included herein, the independent certified public accountants have reported that they applied limited procedures in accordance with professional standards for a review of such information. However, their separate report as of and for the thirty-nine weeks ended September 30, 1995 and September 28, 1996, included herein, states that they did not audit and they do not express an opinion on that interim financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. The accountants are not subject to the liability provisions of Section 11 of the Securities Act for their report on the unaudited interim financial information because that report is not a "report" or a "part" of the registration statement prepared or certified by the accountants within the meaning of Sections 7 and 11 of the Securities Act. 57 60 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. 58 61 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 62 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. /s/ KPMG Peat Marwick LLP New York, New York February 21, 1996, except as to paragraph 1 of note 11, which is as of June 19, 1996 and paragraph 2 of note 11, which is as of November 15, 1996. F-2 63 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 64 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...... $ 0.61 $ 0.89 $ (0.01) $ 0.26 $ 0.14 Average shares outstanding....... 19,268 19,268 19,268 19,268 19,268
See accompanying notes to consolidated financial statements. F-4 65 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 66 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 67 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 68 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 69 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. (O) PRO FORMA NET INCOME (LOSS) PER SHARE Pro forma net income (loss) per share is calculated using the weighted average shares and dilutive common equivalent shares outstanding after giving effect to the change in the Company's capital structure as indicated in note 12. (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. F-9 70 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 components of the Company's 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 ======= ========
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 71 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 72 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 73 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 74 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 75 LINENS 'N THINGS, INC. AND SUBSIDIARIES (FORMERLY BLOOMINGTON, MN., L.T., INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (11) SUBSEQUENT EVENTS--(CONTINUED) On November 15, 1996, CVS contributed all outstanding shares of common stock of LNT Center to 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 common stock, par value $.01 per share to 60 million shares of common stock, par value $.01 per share (the "Common Stock"), and (b) convert each issued and outstanding share of Common Stock into 192,677.58 shares of Common Stock. F-15 76 - ------------------------------------------------------ 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 and Related Party Transactions......................... 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 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 13,000,000 Shares Common Stock ($.01 par value) P R O S P E C T U S CS First Boston Donaldson, Lufkin & Jenrette Securities Corporation ------------------------------------------------------ 77 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 78 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 79 (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 80 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 19th day of November, 1996. LINENS 'N THINGS, INC. /s/ NORMAN AXELROD By: Norman Axelrod, President 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, November 19, 1996 - ------------------------------------- President and Director Norman Axelrod * Senior Vice President, November 19, 1996 - ------------------------------------- Chief Financial Officer James M. Tomaszewski * Vice President of Finance, November 19, 1996 - ------------------------------------- Controller William T. Giles * Director November 19, 1996 - ------------------------------------- Charles C. Conaway * Director November 19, 1996 - ------------------------------------- Stanley P. Goldstein *By: /s/ NORMAN AXELROD - ------------------------------------- Norman Axelrod Attorney-in-fact
II-4 81 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION SEQUENTIALLY NUMBERED PAGE - ------- ------------------------------------------------------------ -------------------------- 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. E-1 EX-1 2 UNDERWRITING AGREEMENT 1 L&W DRAFT 11/12/96 13,000,000 SHARES LINENS 'N THINGS, INC. COMMON STOCK UNDERWRITING AGREEMENT November __, 1996 CS FIRST BOSTON CORPORATION DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION As Representatives of the Several Underwriters, c/o CS First Boston Corporation, 55 East 52nd Street Park Avenue Plaza New York, NY 10055 Ladies and Gentlemen: 1. Introductory. Nashua Hollis CVS, Inc., a New Hampshire corporation (the "Selling Shareholder") and an indirect wholly owned subsidiary of CVS Corporation, a Delaware corporation ("CVS"), and the corporate parent of Linens 'n Things, Inc., a Delaware corporation (the "Company"), proposes to sell 13,000,000 outstanding shares of common stock, par value $0.01 per share (the "Securities") (such 13,000,000 shares of Securities being hereinafter referred to as the "Firm Securities"). The Selling Shareholder also proposes to sell to the Underwriters, at the option of the Underwriters, an aggregate of not more than 1,950,000 additional shares of the Securities, as set forth below (such 1,950,000 additional shares being hereinafter referred to as the "Optional Securities"). The Firm Securities and the Optional Securities are herein collectively called the "Offered Securities." The Company, the Selling Shareholder and CVS hereby agree with the several Underwriters named in Schedule A hereto (the "Underwriters") as follows: 2. Representations and Warranties of the Company and the Selling Shareholder. (a) The Company represents and warrants to, and agrees with, the several Underwriters that: (i) A registration statement (No. 333-12267) relating to the Offered Securities, including a form of prospectus, has been filed with the Securities and Exchange Commission (the "Commission") and either (A) has been declared effective under the Securities Act of 1933, as amended (the "Act") and is not proposed to be amended or (B) is proposed to be amended by amendment or post-effective amendment. If such registration statement (the "initial registration statement") has been declared effective, either (A) an additional registration statement (the "additional registration statement") relating to the Offered Securities may have been filed with the Commission pursuant to Rule 462(b) ("Rule 462(b)") under the Act and, if so filed, has 2 become effective upon filing pursuant to such Rule and the Offered Securities all have been duly registered under the Act pursuant to the initial registration statement and, if applicable, the additional registration statement or (B) such an additional registration statement may be proposed to be filed with the Commission pursuant to Rule 462(b) and, if so filed will become effective upon filing pursuant to such Rule and upon such filing the Offered Securities will all have been duly registered under the Act pursuant to the initial registration statement and, if applicable, such additional registration statement. If the Company does not propose to amend the initial registration statement or if an additional registration statement has been filed and the Company does not propose to amend it, and if any post-effective amendment to either such registration statement has been filed with the Commission prior to the execution and delivery of this Agreement, the most recent amendment (if any) to each such registration statement has been declared effective by the Commission or has become effective upon filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act or, in the case of the additional registration statement, Rule 462(b). For purposes of this Agreement, "Effective Time" with respect to the initial registration statement or, if filed prior to the execution and delivery of this Agreement, the additional registration statement means (A) if the Company has advised the Representatives that it does not propose to amend such registration statement, the date and time as of which such registration statement, or the most recent post-effective amendment thereto (if any) filed prior to the execution and delivery of this Agreement, was declared effective by the Commission or has become effective upon filing pursuant to Rule 462(c), or (B) if the Company has advised the Representatives that it proposes to file an amendment or post-effective amendment to such registration statement, the date and time as of which such registration statement, as amended by such amendment or post-effective amendment, as the case may be, is declared effective by the Commission. If an additional registration statement has not been filed prior to the execution and delivery of this Agreement but the Company has advised the Representatives that it proposes to file one, "Effective Time" with respect to such additional registration statement means the date and time as of which such registration statement is filed and becomes effective pursuant to Rule 462(b). "Effective Date" with respect to the initial registration statement or the additional registration statement (if any) means the date of the Effective Time thereof. The initial registration statement, as amended at its Effective Time, including all information contained in the additional registration statement (if any) and deemed to be a part of the initial registration statement as of the Effective Time of the additional registration statement pursuant to the General Instructions of the Form on which it is filed and including all information (if any) deemed to be a part of the initial registration statement as of its Effective Time pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is hereinafter referred to as the "Initial Registration Statement." The additional registration statement, as amended at its Effective Time, including the contents of the initial registration statement incorporated by reference therein and including all information (if any) deemed to be a part of the additional registration statement as of its Effective Time pursuant to Rule 430A(b), is hereinafter referred to as the "Additional Registration Statement." The Initial Registration Statement and the Additional Registration Statement are hereinafter referred to collectively as the "Registration Statements" and individually as a "Registration Statement." The form of prospectus relating to the Offered Securities, as first filed with the Commission pursuant to and in accordance with Rule 424(b) ("Rule 424(b)") under the Act or (if no such filing is required) as included in a Registration Statement, is hereinafter referred to as the "Prospectus." No document has been or will be prepared or distributed in reliance on Rule 434 under the Act. 2 3 (ii) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement: (A) on the Effective Date of the Initial Registration Statement, the Initial Registration Statement conformed in all respects to the requirements of the Act and the rules and regulations of the Commission (the "Rules and Regulations") and did not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, (B) on the Effective Date of the Additional Registration Statement (if any), each Registration Statement conformed or will conform, in all respects to the requirements of the Act and the Rules and Regulations and did not include, or will not include, any untrue statement of a material fact and did not omit, or will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (C) on the date of this Agreement, the Initial Registration Statement and, if the Effective Time of the Additional Registration Statement is prior to the execution and delivery of this Agreement, the Additional Registration Statement each conforms, and at the time of filing of the Prospectus pursuant to Rule 424(b) or (if no such filing is required) at the Effective Date of the Additional Registration Statement in which the Prospectus is included, each Registration Statement and the Prospectus will conform, in all respects to the requirements of the Act and the Rules and Regulations, and neither of such documents includes, or will include, any untrue statement of a material fact or omits, or will omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. If the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement: on the Effective Date of the Initial Registration Statement, the Initial Registration Statement and the Prospectus will conform in all respects to the requirements of the Act and the Rules and Regulations, neither of such documents will include any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and no Additional Registration Statement has been or will be filed. The two preceding sentences do not apply to statements in or omissions from a Registration Statement or the Prospectus based upon written information furnished to the Company by any Underwriter through the Representatives specifically for use therein, it being understood and agreed that the only such information is that described as such in Section 7(d). (iii) The Company has been duly incorporated and is an existing corporation in good standing under the laws of the State of Delaware, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus; and the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the current or future financial position, shareholders' equity, properties, business, results of operations, condition (financial or otherwise), affairs or prospects of the Company and its subsidiaries taken as a whole (a "Material Adverse Effect"). (iv) Each subsidiary of the Company has been duly incorporated and is an existing corporation in good standing under the laws of the jurisdiction of its incorporation, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus; and each subsidiary of the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of 3 4 property or the conduct of its business requires such qualification except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect; all of the issued and outstanding capital stock of each subsidiary of the Company has been duly authorized and validly issued and is fully paid and nonassessable; and the capital stock of each subsidiary owned by the Company, directly or through subsidiaries, is owned free from liens, encumbrances and defects. (v) The Offered Securities and all other outstanding shares of capital stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable and conform, as to legal matters, in all material respects to the description thereof contained in the Prospectus; and the stockholders of the Company have no preemptive rights with respect to the Securities. (vi) Except as disclosed in the Prospectus, there are no contracts, agreements or understandings between the Company and any person that would give rise to a valid claim against the Company or any Underwriter for a brokerage commission, finder's fee or other like payment. (vii) Except as described in the Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to a Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act. (viii) The Securities have been approved for listing subject to notice of issuance on The New York Stock Exchange. (ix) No consent, approval, authorization, or order of, or filing with, any governmental agency or body or any court is required to be obtained or made by the Company or the Selling Shareholder for the consummation of the transactions contemplated by this Agreement in connection with the sale of the Offered Securities, except such as have been obtained and made under the Act and such as may be required under state securities laws or Blue Sky laws. (x) Neither the Company nor any of its subsidiaries is in violation of its respective charter or by-laws or in default in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any other agreement, indenture or instrument material to the conduct of the business of the Company and its subsidiaries, taken as a whole, to which the Company or any of its subsidiaries is a party or by which it or any of its subsidiaries or their respective property is bound, except for breaches, violations, and defaults that could not reasonably be expected to have a Material Adverse Effect. (xi) The execution, delivery and performance of this Agreement, and the consummation of the transactions herein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any rule, regulation or order of any governmental agency or body or any court, domestic or foreign, having 4 5 jurisdiction over the Company or the Selling Shareholder or any subsidiary of the Company or the Selling Shareholder or any of their properties, or any agreement or instrument to which the Company or the Selling Shareholder or any such subsidiary is a party or by which the Company or the Selling Shareholder or any such subsidiary is bound or to which any of the properties of the Company or the Selling Shareholder or any such subsidiary is subject, or the charter or by-laws of the Company or any such subsidiary. (xii) This Agreement has been duly authorized, executed and delivered by the Company and the Selling Shareholder. (xiii) The Company and its subsidiaries hold all leased, real or personal property under valid and enforceable leases with no exceptions that would materially interfere with the use made or to be made thereof by them, except as would not have a Material Adverse Effect. (xiv) The Company and its subsidiaries possess adequate certificates, authorities or permits issued by appropriate governmental agencies or bodies necessary to conduct the business now operated by them, except as would not have a Material Adverse Effect, and have not received any notice of proceedings relating to the revocation or modification of any such certificate, authority or permit that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. (xv) The Company and each of its subsidiaries maintains reasonably adequate insurance covering their properties, operations, personnel and businesses in accordance with customary industry practice to protect the Company and each of its subsidiaries and their businesses. (xvi) The Company and its subsidiaries own, possess or can acquire on reasonable terms, adequate trademarks, trade names and other rights to inventions, know-how, patents, copyrights, confidential information and other intellectual property (collectively, "intellectual property rights") necessary to conduct the business now operated by them, or presently employed by them, and have not received any notice of infringement of or conflict with asserted rights of others with respect to any intellectual property rights that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. (xvii) Except as disclosed in the Prospectus, neither the Company nor any of its subsidiaries is in violation of any statute, any rule, regulation, decision or order of any governmental agency or body or any court, domestic or foreign, relating to the use, disposal or release of hazardous or toxic substances or relating to the protection or restoration of the environment or human exposure to hazardous or toxic substances (collectively, "environmental laws"), owns or operates any real property contaminated with any substance that is subject to any environmental laws, is liable for any off-site disposal or contamination pursuant to any environmental laws, or is subject to any claim relating to any environmental laws, which violation, contamination, liability or claim would individually or in the aggregate could reasonably be expected to have a Material Adverse Effect; and the Company is not aware of any pending investigation which might lead to such a claim. 5 6 (xviii) In the ordinary course of business, the Company and its subsidiaries conduct a periodic review of the effect of environmental laws on their business, operations and properties, in the course of which they identify and evaluate associated costs and liabilities (including, without limitation, any current or anticipated capital or operating expenditures required for clean-up, compliance with the "cluster rules," closure of properties or compliance with environmental laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties). On the basis of such review, no such associated costs and liabilities would, individually or in the aggregate, have a Material Adverse Effect. (xix) Except as disclosed in the Prospectus, there are no pending actions, suits or proceedings against or affecting the Company, any of its subsidiaries or any of their respective properties that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect, or could reasonably be expected to materially and adversely affect the ability of the Company to perform its obligations under this Agreement or to sell the Offered Securities; and no such actions, suits or proceedings are threatened or, to the Company's knowledge, contemplated. (xx) The financial statements included in each Registration Statement and the Prospectus present fairly the financial position of the Company and its consolidated subsidiaries as of the dates shown and their results of operations and cash flows for the periods shown, and such financial statements have been prepared in conformity with the generally accepted accounting principles in the United States applied on a consistent basis and the schedules included in each Registration Statement present fairly the information required to be stated therein; and the assumptions used in preparing the pro forma financial information included in each Registration Statement and the Prospectus provide a reasonable basis for presenting the significant effects directly attributable to the transactions or events described therein, the related pro forma adjustments give appropriate effect to those assumptions, and the pro forma columns therein reflect the proper application of those adjustments to the corresponding historical financial statement amounts. (xxi) Except as disclosed in the Prospectus, since the date of the latest audited financial statements included in the Prospectus there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or otherwise), business, properties or results of operations of the Company and its subsidiaries taken as a whole, and, except as disclosed in or contemplated by the Prospectus, there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (xxii) The Company and its subsidiaries maintains a system of internal auditing controls sufficient to provide reasonable assurances that (A) transactions are executed in accordance with management's general or specific authorization; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (C) access to assets is permitted only in accordance with management's general or specific authorization; and (D) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate 6 7 action is taken with respect to any differences. (xxiii) The Company and each of its subsidiaries have filed all tax returns required to be filed, which returns are complete and correct, and neither the Company nor any of its subsidiaries is in default in the payment of any taxes which were payable pursuant to said returns or any assessments with respect thereto. (xxiv) The Company is not and, after giving effect to the offering and sale of the Offered Securities and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as defined in the Investment Company Act of 1940, as amended. (xxv) Neither the Company nor any of its affiliates does business with the government of Cuba or with any person or affiliate located in Cuba within the meaning of Section 517.075, Florida Statutes and the Company agrees to comply with such Section if prior to the completion of the distribution of the Offered Securities it commences doing such business. (b) The Selling Shareholder represents and warrants to, and agrees with, the several Underwriters that: (i) The Selling Shareholder has and on each Closing Date hereinafter mentioned will have valid and unencumbered title to the Offered Securities to be delivered by the Selling Shareholder on such Closing Date and full right, power and authority to enter into this Agreement and to sell, assign, transfer and deliver the Offered Securities to be delivered by the Selling Shareholder on such Closing Date hereunder in the manner provided herein and this Agreement is a valid and binding agreement of the Selling Shareholder, enforceable in accordance with its terms (except as rights to indemnification and contribution may be limited by federal or state securities laws). (ii) The execution, delivery and performance of this Agreement and the consummation of the transactions herein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any rule, regulation or order of any governmental agency or body or any court having jurisdiction over the Selling Shareholder or any subsidiary of the Selling Shareholder or any of their properties, or any agreement or instrument to which the Selling Shareholder or any subsidiary is a party or by which the Selling Shareholder or any such subsidiary is bound or to which any of the properties of the Selling Shareholder or any such subsidiary is subject, or the charter or by-laws of the Selling Shareholder or any such subsidiary. (iii) Upon the delivery of and payment for the Offered Securities on each Closing Date hereunder the several Underwriters will acquire valid and unencumbered title to the Offered Securities to be delivered by the Selling Shareholder on such Closing Date. (iv) The descriptions in the Registration Statement and Prospectus under the heading "Principal and Selling Shareholder" does not, and will not on each Closing Date hereinafter mentioned, include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (c) CVS represents and warrants to, and agrees with, the several Underwriters that: (i) CVS has and on each Closing Date hereinafter mentioned will have full right, power and authority to enter into this Agreement and this Agreement is a valid and binding agreement of CVS, enforceable in accordance with its terms (except as rights to indemnification and contribution may be limited by federal or state securities laws). 7 8 (ii) The execution, delivery and performance of this Agreement and the consummation of the transactions herein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any rule, regulation or order of any governmental agency or body or any court having jurisdiction over CVS or any subsidiary of CVS or any of their properties, or any agreement or instrument to which CVS or any subsidiary is a party or by which CVS or any such subsidiary is bound or to which any of the properties of CVS or any such subsidiary is subject, or the charter or by-laws of CVS or any such subsidiary. 3. Purchase, Sale and Delivery of Offered Securities. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Selling Shareholder agrees to sell to each Underwriter, and each Underwriter agrees, severally and not jointly, to purchase from the Selling Shareholder, at a purchase price of $___ per share, the number of Firm Securities set forth opposite the name of such Underwriter in Schedule A hereto. The Selling Shareholder will deliver the Firm Securities to the Representatives for the accounts of the Underwriters, against payment of the purchase price therefor in federal or other funds immediately available in New York City by wire transfer to the account of the Selling Shareholder, at the office of Latham & Watkins, 885 Third Avenue, New York, New York at 10:00 a.m., New York time, on November __, 1996, or at such other time not later than seven full business days thereafter as CS First Boston Corporation ("CS First Boston") and the Company determine, such time being herein referred to as the "First Closing Date." For purposes of Rule 15c6-1 under the Securities Exchange Act of 1934, the First Closing Date (if later than the otherwise applicable settlement date) shall be the settlement date for payment of funds and delivery of securities for all the Offered Securities sold pursuant to the offering. The certificates for the Firm Securities so to be delivered will be in definitive form, in such denominations and registered in such names as CS First Boston requests and will be made available for checking and packaging at the office of CS First Boston, 55 East 52nd Street, New York, New York at least 24 hours prior to the First Closing Date. In addition, upon written notice from CS First Boston given to the Company and the Selling Shareholder from time to time not more than 30 days subsequent to the date of the Prospectus, the Underwriters may purchase all or less than all of the Optional Securities at the purchase price per Security to be paid for the Firm Securities. The Selling Shareholder agrees to sell to the Underwriters the number of shares of Optional Securities specified in such notice and the Underwriters agree, severally and not jointly, to purchase such Optional Securities. Such Optional Securities shall be purchased for the account of each Underwriter in the same proportion as the number of Firm Securities set forth opposite such Underwriter's name bears to the total number of Firm Securities (subject to adjustment by CS First Boston to eliminate fractions) and may be purchased by the Underwriters only for the purpose of covering over-allotments made in connection with the sale of the Firm Securities. No Optional Securities shall be sold or delivered unless the Firm Securities previously have been, or simultaneously are, sold and delivered. The right to purchase the Optional Securities or any portion thereof may be exercised from time to time and to the extent not previously exercised may be surrendered and terminated at any time upon notice by CS First Boston to the Company and the Selling Shareholder. Each time for the delivery of and payment for the Optional Securities, being herein referred to as an "Optional Closing Date," which may be the First Closing Date (the First Closing Date and each 8 9 Optional Closing Date, if any, being sometimes referred to as a "Closing Date"), shall be determined by CS First Boston but shall be not later than five full business days after written notice of election to purchase Optional Securities is given. The Selling Shareholder will deliver the Optional Securities being purchased on each Optional Closing Date to the Representatives for the accounts of the several Underwriters, against payment of the purchase price therefor in federal or other funds immediately available in New York City by wire transfer to the account of the Selling Shareholder, at the above office of Latham & Watkins. The certificates for the Optional Securities being purchased on each Optional Closing Date will be in definitive form, in such denominations and registered in such names as CS First Boston requests upon reasonable notice prior to such Optional Closing Date and will be made available for checking and packaging at the above office of Latham & Watkins at a reasonable time in advance of such Optional Closing Date. 4. Offering by Underwriters. It is understood that the several Underwriters propose to offer the Offered Securities for sale to the public as set forth in the Prospectus. 5. Certain Agreements of the Company and the Selling Shareholder. The Company agrees with the several Underwriters and the Selling Shareholder that: (a) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, the Company will file the Prospectus with the Commission pursuant to and in accordance with subparagraph (1) (or, if applicable and if consented to by CS First Boston, subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the second business day following the execution and delivery of this Agreement or (B) the fifteenth business day after the Effective Date of the Initial Registration Statement. The Company will advise CS First Boston promptly of any such filing pursuant to Rule 424(b). If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement and an additional registration statement is necessary to register a portion of the Offered Securities under the Act but the Effective Time thereof has not occurred as of such execution and delivery, the Company will file the additional registration statement or, if filed, will file a post-effective amendment thereto with the Commission pursuant to and in accordance with Rule 462(b) on or prior to 10:00 p.m., New York time, on the date of this Agreement or, if earlier, on or prior to the time the Prospectus is printed and distributed to any Underwriter, or will make such filing at such later date as shall have been consented to by CS First Boston, which consent shall not be unreasonably withheld. (b) The Company will advise CS First Boston promptly of any proposal to amend or supplement the initial registration statement or any additional registration statement as filed or the related prospectus or the Initial Registration Statement, the Additional Registration Statement (if any) or the Prospectus and will not effect such amendment or supplementation without CS First Boston's consent, which consent shall not be unreasonably withheld; and the Company will also advise CS First Boston promptly of the effectiveness of each Registration Statement (if its Effective Time is subsequent to the execution and delivery of this Agreement) and of any amendment or supplementation of a Registration Statement or the Prospectus and of the institution by the Commission of any stop order proceedings in respect of a Registration Statement and will use its best efforts to prevent the issuance of any such stop order and to obtain as soon as possible 9 10 its lifting, if issued. (c) If, at any time when a prospectus relating to the Offered Securities is required to be delivered under the Act in connection with sales by any Underwriter or dealer, any event occurs as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Act, the Company will promptly notify CS First Boston of such event and will promptly prepare and file with the Commission, at its own expense, an amendment or supplement which will correct such statement or omission or will effect such compliance. Neither CS First Boston's consent to, nor the Underwriters' delivery of, any such amendment or supplement shall constitute a waiver of any of the conditions set forth in Section 6. (d) As soon as practicable, but not later than the Availability Date (as defined below), the Company will make generally available to its securityholders an earnings statement covering a period of at least 12 months beginning after the Effective Date of the Initial Registration Statement (or, if later, the Effective Date of the Additional Registration Statement) which will satisfy the provisions of Section 11(a) of the Act. For the purpose of the preceding sentence, "Availability Date" means the 45th day after the end of the fourth fiscal quarter following the fiscal quarter that includes such Effective Date, except that, if such fourth fiscal quarter is the last quarter of the Company's fiscal year, "Availability Date" means the 90th day after the end of such fourth fiscal quarter. (e) The Company will furnish to the Representatives copies of each Registration Statement (three of which will be signed and will include all exhibits), each related preliminary prospectus, and, so long as delivery of a prospectus relating to the Offered Securities is required to be delivered under the Act in connection with sales by any Underwriter or dealer, the Prospectus and all amendments and supplements to such documents, in each case in such quantities as CS First Boston requests. The Prospectus shall be so furnished on or prior to 3:00 p.m., New York time, on the business day following the later of the execution and delivery of this Agreement or the Effective Time of the Initial Registration Statement. All other such documents shall be so furnished as soon as available. The Company will pay the expenses of printing and distributing to the Underwriters all such documents. (f) The Company will arrange for the qualification of the Offered Securities for sale under the laws of such jurisdictions as CS First Boston designates and will continue such qualifications in effect so long as required for the distribution. (g) During the period of five years hereafter, the Company will furnish to the Representatives and, upon request, to each of the other Underwriters, as soon as practicable after the end of each fiscal year, a copy of its annual report to stockholders for such year; and the Company will furnish to the Representatives (i) as soon as available, a copy of each report and any definitive proxy statement of the Company filed with the Commission under the Securities Exchange Act of 1934 or mailed to stockholders, and (ii) from time to time, such other information concerning the Company as CS First Boston may reasonably request. 10 11 (h) For a period of 180 days after the date of the initial public offering of the Offered Securities, the Company and CVS, together with their subsidiaries, will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any additional shares of its Securities or securities convertible into or exchangeable or exercisable for any shares of its Securities, without the prior written consent of CS First Boston, except (i) for private sales so long as the purchaser thereof enters into a corresponding lockup agreement with CS First Boston, (ii) for grants of employee stock options pursuant to the terms of a plan in effect on the date hereof, issuances of Securities pursuant to the exercise of such options or the exercise of any other employee stock options outstanding on the date hereof and (iii) for preparation of a registration statement or preparation for an offering so as to be in a position to file a registration statement and proceed with an offering immediately after expiration of such 180-day period. (i) The Company will apply the net proceeds from the initial public offering of the Securities as described in the Prospectus under the caption "Use of Proceeds." The Company agrees with the several Underwriters, the Selling Shareholder and CVS that CVS will pay all expenses incident to the performance of the obligations of the Company, the Selling Shareholder and CVS under this Agreement, and will reimburse the Underwriters (if and to the extent incurred by them) for any filing fees and other expenses (including fees and disbursements of counsel) incurred by them in connection with qualification of the Offered Securities for sale under the laws of such jurisdictions as CS First Boston designates and the printing of memoranda relating thereto, for the filing fee of the National Association of Securities Dealers, Inc. relating to the Offered Securities, for any travel expenses of the Company's or CVS's officers and employees and any other expenses of the Company, the Selling Shareholder and CVS in connection with attending or hosting meetings with prospective purchasers of the Offered Securities, for any transfer taxes on the sale by the Selling Shareholder of the Offered Securities to the Underwriters and for expenses incurred in distributing preliminary prospectuses and the Prospectus (including any amendments and supplements thereto) to the Underwriters. The Selling Shareholder agrees to deliver to CS First Boston, attention: Transactions Advisory Group, on or prior to the First Closing Date, a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). The Selling Shareholder agrees, for a period of 180 days after the date of the initial public offering of the Offered Securities, not to offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any additional shares of the Securities of the Company or securities convertible into or exchangeable or exercisable for any shares of Securities, without the prior written consent of CS First Boston; provided that the foregoing will not restrict, during such 180-day period, preparation of a registration statement or preparation for an offering so as to be in a position to file a registration statement and proceed with an offering immediately after expiration of such period. 6. Conditions of the Obligations of the Underwriters. The obligations of the several Underwriters to purchase and pay for the Firm Securities on the First Closing Date and the Optional Securities to be 11 12 purchased on each Optional Closing Date will be subject to the accuracy of the representations and warranties on the part of the Company and the Selling Shareholder herein, to the accuracy of the statements of Company officers made pursuant to the provisions hereof, to the performance by the Company and the Selling Shareholder of their obligations hereunder and to the following additional conditions precedent: (a) The Representatives shall have received a letter, dated the date of delivery thereof (which, if the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, shall be on or prior to the date of this Agreement or, if the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement, shall be prior to the filing of the amendment or post-effective amendment to the registration statement to be filed shortly prior to such Effective Time), of KPMG Peat Marwick LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating to the effect that: (i) in their opinion the financial statements, schedules and summary of earnings examined by them and included or incorporated by reference in the Registration Statements comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; (ii) they have performed the procedures specified by the American Institute of Certified Public Accountants for a review of interim financial information as described in Statement of Auditing Standards No. 71, Interim Financial Information, on the unaudited financial statements included in the Registration Statements; (iii) the assumptions used in preparing the pro forma financial information included in the Registration Statements provide a reasonable basis for presenting the significant effects directly attributable to the transactions or events described therein, the related pro forma adjustments give appropriate effect to those assumptions and the pro forma columns therein reflect the proper application of those adjustments to the corresponding historical financial statement amounts; (iv) on the basis of the review referred to in clause (ii) above, a reading of the latest available interim financial statements of the Company, inquiries of officials of the Company who have responsibility for financial and accounting matters and other specified procedures, nothing came to their attention that caused them to believe that: (A) the unaudited financial statements included in the Registration Statements do not comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations or any material modifications should be made to such unaudited financial statements for them to be in conformity with generally accepted accounting principles; (B) at the date of the latest available balance sheet read by such accountants, or at a subsequent specified date not more than five days prior to 12 13 the date of this Agreement, there was any change in the capital stock or any increase in short-term indebtedness or long-term debt of the Company and its consolidated subsidiaries or, at the date of the latest available balance sheet read by such accountants, there was any decrease in consolidated net current assets or net assets, as compared with amounts shown on the latest balance sheet included in the Prospectus; or (C) for the period from the closing date of the latest income statement included in the Prospectus to the closing date of the latest available income statement read by such accountants there were any decreases, as compared with the corresponding period of the previous year, in consolidated net sales or net operating income in the total or per share amounts of consolidated net income; except in all cases set forth in clauses (B) and (C) above for changes, increases or decreases which the Prospectus discloses have occurred or may occur or which are described in such letter; and (v) they have compared specified dollar amounts (or percentages derived from such dollar amounts) and other financial information contained in the Registration Statements (in each case to the extent that such dollar amounts, percentages and other financial information are derived from the general accounting records of the Company and its subsidiaries subject to the internal controls of the Company's accounting system or are derived directly from such records by analysis or computation) with the results obtained from inquiries, a reading of such general accounting records and other procedures specified in such letter and have found such dollar amounts, percentages and other financial information to be in agreement with such results, except as otherwise specified in such letter. For purposes of this subsection, (i) if the Effective Time of the Initial Registration Statements is subsequent to the execution and delivery of this Agreement, "Registration Statements" shall mean the initial registration statement as proposed to be amended by the amendment or post-effective amendment to be filed shortly prior to its Effective Time, (ii) if the Effective Time of the Initial Registration Statements is prior to the execution and delivery of this Agreement but the Effective Time of the Additional Registration Statement is subsequent to such execution and delivery, "Registration Statements" shall mean the Initial Registration Statement and the additional registration statement as proposed to be filed or as proposed to be amended by the post-effective amendment to be filed shortly prior to its Effective Time, and (iii) "Prospectus" shall mean the prospectus included in the Registration Statements. (b) If the Effective Time of the Initial Registration Statement is not prior to the execution and delivery of this Agreement, such Effective Time shall have occurred not later than 10:00 p.m., New York time, on the date of this Agreement or such later date as shall have been consented to by CS First Boston. If the Effective Time of the Additional Registration Statement (if any) is not prior to the execution and delivery of this Agreement, such Effective Time shall have occurred not later than 10:00 p.m., New York time, on the date of this Agreement or, if 13 14 earlier, the time the Prospectus is printed and distributed to any Underwriter, or shall have occurred at such later date as shall have been consented to by CS First Boston. If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, the Prospectus shall have been filed with the Commission in accordance with the Rules and Regulations and Section 5(a) of this Agreement. Prior to such Closing Date, no stop order suspending the effectiveness of a Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or, to the knowledge of the Selling Shareholder, the Company or the Representatives, shall be contemplated by the Commission. (c) Subsequent to the execution and delivery of this Agreement, there shall not have occurred (i) any change, or any development or event involving a prospective change, in the condition (financial or other), business, properties or results of operations of the Company or its subsidiaries which, in the judgment of CS First Boston, is material and adverse and makes it impractical or inadvisable to proceed with completion of the public offering or the sale of and payment for the Offered Securities; (ii) any suspension or limitation of trading in securities generally on the New York Stock Exchange or any setting of minimum prices for trading on such exchange, or any suspension of trading of any securities of the Company on any exchange or in the over-the-counter market; (iii) any banking moratorium declared by U.S. Federal or New York authorities; or (iv) any outbreak or escalation of major hostilities in which the United States is involved, any declaration of war by Congress or any other substantial national or international calamity or emergency if, in the judgment of CS First Boston, the effect of any such outbreak, escalation, declaration, calamity or emergency makes it impractical or inadvisable to proceed with completion of the public offering or the sale of and payment for the Offered Securities. (d) The Representatives shall have received an opinion, dated such Closing Date, of Davis Polk & Wardwell, counsel for the Company, to the effect that: (i) The Company has been duly incorporated and is an existing corporation in good standing under the laws of the jurisdiction of its incorporation, with corporate power and authority to own its properties and conduct its business as described in the Prospectus; and the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a Material Adverse Effect; (ii) The Offered Securities delivered on such Closing Date and all other outstanding shares of the Common Stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable and conform, as to legal matters in all material respects, to the description thereof contained in the Prospectus; and the stockholders of the Company have no preemptive rights with respect to the Securities; (iii) Except as disclosed in the Prospectus, there are no contracts, agreements or understandings known to such counsel between the Company and any person granting such person the right to require the Company to file a registration 14 15 statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act; (iv) No consent, approval, authorization or order of, or filing with, any governmental agency or body or any court is required to be obtained or made by the Company or the Selling Shareholder for the consummation of the transactions contemplated by this Agreement in connection with the sale of the Offered Securities, except such as have been obtained and made under the Act and such as may be required under state securities laws or Blue Sky laws; (v) Neither the Company nor any of its subsidiaries is in violation of its respective charter or by-laws and, to the best of such counsel's knowledge after due inquiry, neither the Company nor any of its subsidiaries is in default in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any other agreement, indenture or instrument material to the conduct of the business of the Company and its subsidiaries, taken as a whole, to which the Company or any of its subsidiaries is a party or by which it or any of its subsidiaries or their respective property is bound; (vi) The execution, delivery and performance of this Agreement and the consummation of the transactions herein or therein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any rule, regulation or order of any governmental agency or body or any court having jurisdiction over the Company or any subsidiary of the Company or any of their properties, except with respect to the consent of any landlord that may be required pursuant to any store lease, or any agreement or instrument to which the Company or any such subsidiary is a party or by which the Company or any such subsidiary is bound or to which any of the properties of the Company or any such subsidiary is subject, or the charter or by-laws of the Company or any such subsidiary (except as rights to indemnification and contribution may be limited by federal or state securities laws), except for violations and defaults that could not reasonably be expected to result in a Material Adverse Effect; (vii) The authorized capital stock of the Company, including the Common Stock, conforms as to legal matters to the description thereof contained in the Prospectus; (viii) The Prospectus, insofar as statements therein constitute a summary of legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings; (ix) The Initial Registration Statement and the Additional Registration Statement (if any) are effective under the Act, any required filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period 15 16 required by Rule 424(b) to the best of the knowledge of such counsel, no stop order suspending the effectiveness of a Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Act, and each Registration Statement and the Prospectus, and each amendment or supplement thereto, as of their respective effective or issue dates, complied as to form in all material respects with the requirements of the Act and the Rules and Regulations; such counsel have no reason to believe that any part of a Registration Statement or any amendment thereto, as of its effective date or as of such Closing Date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading; or that the Prospectus or any amendment or supplement thereto, as of its issue date or as of such Closing Date, contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; it being understood that such counsel need express no opinion as to the financial statements and schedules or other financial data contained in, or omitted from, the Registration Statements or the Prospectus; (x) The descriptions in the Registration Statements and Prospectus under the headings "Relationship with CVS and Related Party Transactions," "Shares Eligible for Future Sale," "Underwriting," "Certain U.S. Federal Tax Considerations for Non-U.S. Holders of Common Stock," "Risk Factors -- Control of the Company by CVS; Possible Conflicts of Interest," "Risk Factors -- Shares Eligible for Future Sale" and "Description of Capital Stock" of statutes, legal and governmental proceedings and contracts and other documents are accurate and fairly present the information required to be shown; (xi) This Agreement has been duly authorized, executed and delivered by the Company; (xii) The Company is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended; and (xiii) The Revolving Credit Facility (as defined in the Prospectus) has been duly authorized, executed and delivered by the Company and, when duly executed and delivered by the Company, will be the valid and legally binding obligation of the Company, enforceable against the Company in accordance with its terms. (e) The Representatives shall have received an opinion, dated such Closing Date, of Denise Tolles, General Attorney to the Company, to the effect that: (i) Each of the Company's subsidiaries has been duly incorporated and is an existing corporation in good standing under the laws of the jurisdiction of its incorporation, with corporate power and authority to own its properties and conduct its business as described in the Prospectus; and each of the Company's subsidiaries 16 17 is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which respective ownership or lease of property or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a Material Adverse Effect; (ii) All of the outstanding shares of capital stock of, or other ownership interests in, each of the Company's subsidiaries have been duly and validly authorized and issued and are fully paid and non-assessable, and are owned by the Company, free and clear of any security interest, claim, lien, encumbrance or adverse interest of any nature; (f) The Representatives shall have received an opinion, dated such Closing Date, of Davis Polk & Wardwell, counsel for CVS and the Selling Shareholder, to the effect that: (i) Immediately prior to the date hereof, the Selling Shareholder was the sole registered owner of the Securities and had valid and unencumbered title to the Securities and (b) the Selling Shareholder has the corporate power and authority to enter into the Underwriting Agreement and to sell, transfer and deliver the Securities to be sold by the Selling Stockholder thereunder; and (ii) Upon registration of the Securities in the names of the Underwriters in the stock records of the Company and the issuance of new certificates registered in the names of the Underwriters representing such Securities, assuming the Underwriters purchased the Securities in good faith and without notice of any adverse claim within the meaning of Section 8-302 of the Uniform Commercial Code of the State of New York, the Underwriters will have acquired all rights of the Selling Shareholder in the Securities free of any adverse claim (as defined in such Section) and the owner of the Securities, if other than the Selling Shareholder, will be precluded from asserting against the Underwriters the ineffectiveness of any unauthorized endorsement; (iii) No consent, approval, authorization or order of, or filing with, any governmental agency or body or any court is required to be obtained or made by the Selling Shareholder for the consummation of the transactions contemplated by this Agreement in connection with the sale of the Offered Securities sold by the Selling Shareholder, except such as may be required under the Act and under state securities laws; (iv) The execution, delivery and performance of this Agreement and the consummation of the transactions therein and herein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, of the charter or by-laws of CVS or the Selling Shareholder or any subsidiary of CVS or the Selling 17 18 Shareholder; and (v) This Agreement has been duly authorized, executed and delivered by each of CVS and the Selling Shareholder. (g) The Representatives shall have received from Latham & Watkins, counsel for the Underwriters, such opinion or opinions, dated such Closing Date, with respect to the incorporation of the Company, the validity of the Offered Securities delivered on such Closing Date, the Registration Statements, the Prospectus and other related matters as the Representatives may require, and the Selling Shareholder and the Company shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters. (h) The Representatives shall have received a certificate, dated such Closing Date, of the President or any Vice-President and a principal financial or accounting officer of the Company in which such officers, to the best of their knowledge after reasonable investigation, shall state that: the representations and warranties of the Company in this Agreement are true and correct; the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date; no stop order suspending the effectiveness of any Registration Statement has been issued and no proceedings for that purpose have been instituted or are contemplated by the Commission; the Additional Registration Statement (if any) satisfying the requirements of subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to Rule 462(b), including payment of the applicable filing fee in accordance with Rule 111(a) or (b) under the Act, prior to the time the Prospectus was printed and distributed to any Underwriter; and, subsequent to the date of the most recent financial statements in the Prospectus, there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or otherwise), business, properties or results of operations of the Company and its subsidiaries taken as a whole, except as set forth in or contemplated by the Prospectus or as described in such certificate. (i) The Representatives shall have received a letter, dated such Closing Date, of KPMG Peat Marwick LLP which meets the requirements of subsection (a) of this Section, except that the specified date referred to in such subsection will be a date not more than five days prior to such Closing Date for the purposes of this subsection; (j) On or prior to the Closing Date, the Revolving Credit Facility (the form and substance of which shall be reasonably acceptable to the Representatives and their counsel) shall have been entered into by the parties thereto and the Representatives shall have received counterparts, conformed as executed, thereof and of all other documents and agreements entered into in connection therewith. Each condition to the closing contemplated by the Revolving Credit Facility shall have been satisfied or, with the Representatives' specific approval, waived. There shall exist at and as of the Closing Date (after giving effect to the transactions contemplated by this Agreement) no condition that would constitute a default (or an event that with notice or 18 19 the lapse of time, or both, would constitute a default) under the Revolving Credit Facility. The Representatives shall have received true and correct copies of all documentation pertaining to the Revolving Credit Facility [and evidence satisfactory to the Representatives that the Company has borrowed thereunder]. The Revolving Credit Facility shall conform in all material respects to the description thereof in the Prospectus. (k) The Securities shall have been listed or approved for listing upon official notice of issuance on The New York Stock Exchange. The Selling Shareholder and the Company will furnish the Representatives with such conformed copies of the foregoing opinions, certificates, letters and documents as the Representatives reasonably request. CS First Boston may in its sole discretion waive on behalf of the Underwriters compliance with any conditions to the obligations of the Underwriters hereunder, whether in respect of an Optional Closing Date or otherwise. 7. Indemnification and Contribution. (a) The Company will indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, the Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in subsection (c) below; provided, however, that the foregoing indemnity agreement with respect to any untrue statement or omission in the preliminary prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased Offered Securities or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Securities to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such losses, claims, damages or liabilities. (b) CVS agrees to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act and each Underwriter and each person, if any, who controls any Underwriter within the meaning of either such section from and against any and all losses, claims, damages and liabilities (including, without 19 20 limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) 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 the Company 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; provided, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased Offered Securities or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Securities to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such losses, claims, damages or liabilities. (c) The Selling Shareholder agrees to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act and each Underwriter and each person, if any, who controls any Underwriter within the meaning of either such section 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) 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 the Company 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, but only with reference to information relating to the Selling Shareholder furnished in writing by or on behalf of the Selling Shareholder expressly for use in the Registration Statement, any preliminary prospectus, the Prospectus or any amendments or supplements thereto; provided, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased Offered Securities or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Securities to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such losses, claims, damages or liabilities. (d) Each Underwriter will severally and not jointly indemnify and hold harmless the Company and CVS against any losses, claims, damages or liabilities to which the Company or CVS may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, the Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission 20 21 or the 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 untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives specifically for use therein, and will reimburse any legal or other expenses reasonably incurred by the Company and CVS in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred, it being understood and agreed that the only such information furnished by any Underwriter consists of the following information in the Prospectus furnished on behalf of each Underwriter: the last paragraph at the bottom of the cover page concerning the terms of the offering by the Underwriters, the legend concerning over-allotments and stabilizing and passive market making on the inside front cover page and the concession and reallowance figures appearing in the fourth paragraph under the caption "Underwriting" and the information contained in the fifth paragraph under the caption "Underwriting." (e) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under subsection (a), (b), (c) or (d) above, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under subsection (a), (b), (c) or (d) above. In case any such action is brought against any indemnified party and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement includes an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action. (f) If the indemnification provided for in this Section is unavailable or insufficient to hold harmless an indemnified party under subsection (a), (b), (c) or (d) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (a), (b), (c) or (d) above (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, the Selling Shareholder and CVS, as the case may be, on the one hand and the Underwriters on the other from the offering of the 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 Company, the Selling Shareholder and CVS, as the case may be, on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities as well as any other relevant equitable considerations, and among the Company, the Selling Shareholder and CVS, in such proportion as is appropriate to reflect the relative fault of the Company, the Selling Shareholder and CVS, as the case may be, in 21 22 each case in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company, the Selling Shareholder and CVS, as the case may be, on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company (as, if, with respect to the Company, for purposes of this clause (e), the Company had received all of the proceeds of each secondary offering hereunder) bear to the total underwriting discounts and commissions received by the Underwriters. The relative fault 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 the Company, the Selling Shareholder, CVS or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (f) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim which is the subject of this subsection (f). Notwithstanding the provisions of this subsection (f), (i) no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (f) to contribute are several in proportion to their respective underwriting obligations and not joint. (g) In making a claim for indemnification under Section 7(a), 7(b), 7(c) or 7(d) or contribution under Section 7(f) against the Company, the Selling Shareholder or CVS, the indemnified parties may proceed against either (i) the Company, the Selling Shareholder and CVS (ii) the Company and the Selling Shareholder or (iii) the Company, but may not proceed (i) solely against CVS or (ii) solely against CVS and the Selling Shareholder. In the event that the indemnified parties are entitled to seek indemnity or contribution hereunder against any loss, liability, claim, damage and expense incurred with respect to a final judgment from a trial court then, as a precondition to any indemnified party obtaining indemnification or contribution from CVS (but not the Company or the Selling Shareholder), the indemnified parties shall first obtain a final judgment from a trial court that such indemnified parties are entitled to indemnity or contribution under this Agreement with respect to such loss, liability, claim, damage or expense (the "Final Judgment") from the Company and CVS and shall seek to satisfy such Final Judgment in full from the Company by making a written demand upon the Company for such satisfaction. Only in the event such Final Judgment shall remain unsatisfied in whole or in part 30 days following the date of receipt by the Company of such demand shall any indemnified party have the right to take action to satisfy such Final Judgment by making demand directly on CVS (but only if and to the extent the Company and the Selling Shareholder has not already satisfied such Final Judgment, whether by settlement, release or otherwise). The indemnified parties may exercise this right to first seek to obtain payment from the Company and the Selling Shareholder and thereafter obtain payment from CVS without regard to the pursuit by any party of its rights to the appeal of such Final Judgment. The indemnified parties shall, however, be relieved of their respective obligation to first obtain a Final Judgment, to seek to obtain payment, to wait such 30 days after failure by the Company to 22 23 immediately satisfy any such Final Judgment if (i) the Company files a petition for relief under the United States Bankruptcy Code (the "Bankruptcy Code"), (ii) an order for relief is entered against the Company in an involuntary case under the Bankruptcy Code and the continuance in effect of such order for 60 consecutive days, (iii) the Company makes an assignment for the benefit of its creditors, or (iv) any court orders or approves the appointment of a receiver or custodian for the Company or a substantial portion of its assets and the continuance in effect of such order for 60 consecutive days. (h) The obligations of the Company and CVS under this Section shall be in addition to any liability which the Company and CVS may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each director of the Company, to each officer of the Company who has signed a Registration Statement and to each person, if any, who controls the Company within the meaning of the Act. 8. Default of Underwriters. If any Underwriter or Underwriters default in their obligations to purchase Offered Securities hereunder on either the First or any Optional Closing Date and the aggregate number of shares of Offered Securities that such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed 10% of the total number of shares of Offered Securities that the Underwriters are obligated to purchase on such Closing Date, CS First Boston may make arrangements satisfactory to the Company and the Selling Shareholder for the purchase of such Offered Securities by other persons, including any of the Underwriters, but if no such arrangements are made by such Closing Date, the non-defaulting Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Offered Securities that such defaulting Underwriters agreed but failed to purchase on such Closing Date. If any Underwriter or Underwriters so default and the aggregate number of shares of Offered Securities with respect to which such default or defaults occur exceeds 10% of the total number of shares of Offered Securities that the Underwriters are obligated to purchase on such Closing Date and arrangements satisfactory to CS First Boston, the Company and the Selling Shareholder for the purchase of such Offered Securities by other persons are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter, the Company or the Selling Shareholder, except as provided in Section 9 (provided that if such default occurs with respect to Optional Securities after the First Closing Date, this Agreement will not terminate as to the Firm Securities or any Optional Securities purchased prior to such termination). As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default. 9. Survival of Certain Representations and Obligations. The respective indemnities, agreements, representations, warranties and other statements of the Selling Shareholder, of CVS, of the Company or their officers and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter, the Selling Shareholder, CVS, the Company or any of their respective representatives, officers or directors or any controlling person, and will survive delivery of and payment for the Offered Securities. If this Agreement is terminated pursuant to Section 8 or if for any reason the purchase of the Offered Securities by the Underwriters is not consummated, the Company, CVS and the Selling Shareholder shall remain responsible for the expenses to be paid or 23 24 reimbursed by them pursuant to Section 5 (except as to any defaulting underwriter) and the respective obligations of the Company, CVS, the Selling Shareholder, and the Underwriters pursuant to Section 7 shall remain in effect, and if any Offered Securities have been purchased hereunder the representations and warranties in Section 2 and all obligations under Section 5 shall also remain in effect. If the purchase of the Offered Securities by the Underwriters is not consummated for any reason other than solely because of the termination of this Agreement pursuant to Section 8 or the occurrence of any event specified in clause (ii), (iii) or (iv) of Section 6(c), the Company, CVS and the Selling Shareholder will, jointly and severally, reimburse the Underwriters for all out-of-pocket expenses (including fees and disbursements of counsel) reasonably incurred by them in connection with the offering of the Offered Securities. 10. Notices. All communications hereunder will be in writing and, if sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed to the Representatives, c/o CS First Boston Corporation, Park Avenue Plaza, New York, NY 10055, Attention: Investment Banking Department Transactions Advisory Group, with a copy to Latham & Watkins, 885 Third Avenue, New York, NY, Attention: Roger H. Kimmel, or, if sent to the Company, will be mailed, delivered or telegraphed and confirmed to it at 6 Brighton Road, Clifton, NJ 07015, Attention: Chief Financial Officer, with a copy to Davis Polk & Wardwell, 450 Lexington Avenue, New York, NY 10017, Attention: Sarah Jones Beshar, or, if sent to CVS or the Selling Shareholder, will be mailed, delivered or telegraphed and confirmed to CVS at One CVS Drive, Woonsocket, RI 02895, with a copy to Davis Polk & Wardwell, 450 Lexington Avenue, New York, NY 10017, Attention: Dennis S. Hersch; provided, however, that any notice to an Underwriter pursuant to Section 7 will be mailed, delivered or telegraphed and confirmed to such Underwriter. 11. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and the officers and directors and controlling persons referred to in Section 7, and no other person will have any right or obligation hereunder. 12. Representation. The Representatives will act for the several Underwriters in connection with the transactions contemplated by this Agreement, and any action under this Agreement taken by the Representatives, jointly or by CS First Boston will be binding upon all the Underwriters. 13. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement. 14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. The Company hereby submits to the non-exclusive jurisdiction of the Federal and state courts in the Borough of Manhattan in The City of New York in any suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. 24 25 If the foregoing is in accordance with the Representatives' understanding of our agreement, kindly sign and return to the Company one of the counterparts hereof, whereupon it will become a binding agreement among the Selling Shareholder, the Company and the several Underwriters in accordance with its terms. Very truly yours, LINENS 'N THINGS, INC. By: ______________________________ Name: Title: CVS CORPORATION By: ______________________________ Name: Title: NASHUA HOLLIS CVS, INC. By: ______________________________ Name: Title: The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. CS FIRST BOSTON CORPORATION DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION Acting on behalf of themselves and as the Representatives of the several Underwriters. By: CS FIRST BOSTON CORPORATION By:_______________________________ Name: Title: 26 SCHEDULE A Number of Firm Securities to be Underwriter Purchased - ----------- ---------------- CS First Boston Corporation Donaldson, Lufkin & Jenrette Securities Corporation TOTAL ________________ EX-5 3 OPINION 1 Exhibit 5 DAVIS POLK & WARDWELL 450 Lexington Avenue New York, New York 10017 November 19, 1996 Linens 'n Things, Inc. 6 Brighton Road Clifton, New Jersey 07015 Re: Linen 'n Things, Inc. Registration Statement on Form S-1 ----------------------------------- Ladies and Gentlemen: We have acted as counsel to Linens 'n Things, Inc., a Delaware corporation ("Linens 'n Things") in connection with the registration of 14,950,000 shares of Common Stock, par value $0.01 per share (the "Common Stock"), including 1,950,000 shares subject to an over-allotment option (collectively, the "Shares"), of Linens 'n Things under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to Linens 'n Thing's Registration Statement on Form S-1, as amended (the "Registration Statement"), filed with the Securities and Exchange Commission. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments as we have deemed necessary or advisable for the purpose of rendering this opinion, including the Certificate of Incorporation and the By-Laws, in each as amended, of Linens 'n Things. Based upon the foregoing, we are of the opinion that: (i) Linens 'n Things is validly existing as a corporation in good standing under the laws of the State of Delaware; and (ii) upon amendment of Linens 'n Things's Certificate of Incorporation, the Shares will have been duly authorized and, when issued and delivered thereof in the manner contemplated by the Registration Statement, will be validly issued, fully paid and non-assessable. If Linens 'n Things files (the "Rule 462(b) Registration Statement"), which incorporates the Registration Statement, to register additional shares of Common Stock (the "Additional Shares") pursuant to Rule 462(b) under the Securities Act, and assuming the due authorization of the Additional Shares by Linens 'n Things, for purposes of the preceding opinion, any reference therein to the "Shares" shall be deemed to include the Additional Shares. We are members of the Bar of the State of New York and the foregoing opinion is limited to the laws of the State of New York, the federal laws of the United States of America and the General Corporation Law of the State of Delaware. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement, and if filed, the Rule 462(b) Registration Statement. We also consent to the reference to our name under the caption "Legal Matters" in the Prospectus contained in the Registration Statement, and if filed, the Rule 462(b) Registration Statement. This opinion is rendered solely to you in connection with the filing of the Registration Statement. This opinion may not be relied upon by you for any other purpose or relied upon by or furnished to any other person without our prior written consent. Very truly yours, /s/ DAVIS POLK & WARDWELL EX-10.5 4 CREDIT FACILITY 1 DRAFT 11/15/96 CREDIT AGREEMENT by and among LINENS 'N THINGS, INC., THE SUBSIDIARY BORROWERS PARTY HERETO, THE LENDERS PARTY HERETO, and THE BANK OF NEW YORK, as Agent, with BNY CAPITAL MARKETS, INC., as Arranging Agent __________________________ $125,000,000 __________________________ Dated as of November __, 1996 2 DRAFT 11/15/96 CREDIT AGREEMENT, dated as of November __, 1996, by and among LINENS 'N THINGS, INC., a Delaware corporation (the "COMPANY"), each Subsidiary Borrower which is a signatory hereto or becomes a party hereto pursuant to the provisions of Section 2.10, the Lenders party hereto from time to time (each a "LENDER" and, collectively, the "LENDERS") and THE BANK OF NEW YORK ("BNY"), as agent for the Lenders (in such capacity, the "AGENT"). 1. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION 1.1. Definitions When used in any Loan Document (as defined below), each of the following terms shall have the meaning ascribed thereto unless the context otherwise specifically requires: "ABR Advances": the Revolving Credit Loans (or any portions thereof) at such time as they (or such portions) are made or are being maintained at a rate of interest based upon the Alternate Base Rate. "Accumulated Funding Deficiency": defined in Section 302 of ERISA. "Acquisition": with respect to any Person, the purchase or other acquisition by such Person, by any means whatsoever (including by devise, bequest, gift, through a dividend or otherwise), of (a) stock of, or other equity securities of, any other Person if, immediately thereafter, such other Person would be either a consolidated subsidiary of such Person or otherwise under the control of such Person, (b) any business, going concern or division or segment thereof, or (c) the Property of any other Person other than in the ordinary course of business, provided, however, that no acquisition of substantially all of the assets, or any division or segment, of such other Person shall be deemed to be in the ordinary course of business. "Affected Advance": defined in Section 3.8(b). "Affiliate": with respect to any Person at any time and from time to time, any other Person (other than a wholly-owned subsidiary of such Person) which, at such time (a) controls such Person, (b) is controlled by such Person or (c) is under common control with such Person. The term "control", as used in this definition with respect to any Person, means the power, whether direct or indirect through one or more intermediaries, to direct or cause the direction of the management and policies of such Person, whether through 3 the ownership of voting securities or other interests, by contract or otherwise. "Agent": defined in the preamble. "Aggregate Commitment Amount": at any time, the sum of the Commitment Amounts of the Lenders at such time. "Aggregate Credit Exposure": at any time, the sum of the Credit Exposures of the Lenders at such time . "Agreement": this Credit Agreement, as amended, supplemented or otherwise modified from time to time. "Alternate Base Rate": for any day, a rate per annum equal to the greater of (a) the BNY Rate in effect on such day, or (b) 0.50% plus the Federal Funds Effective Rate (rounded, if necessary, to the nearest 1/100th of 1% or, if there is no nearest 1/100 of 1%, then to the next higher 1/100 of 1%) in effect on such day. "Amended and Restated Certificate of Incorporation": the Amended and Restated Certificate of Incorporation of the Company to be filed by the Company as part of the Reorganization, substantially in the form filed as an exhibit to the Registration Statement, as the same may be amended, modified or supplemented from time to time in accordance with Section 8.9. "Applicable Margin": (i) with respect to the unpaid principal balance of ABR Advances, the applicable percentage set forth below in the column entitled "ABR Advances", (ii) with respect to the unpaid principal balance of Eurodollar Advances, the applicable percentage set forth below in the column entitled "Eurodollar Advances", (iii) with respect to the Commitment Fee, the applicable percentage set forth below in the column entitled "Commitment Fee" (iv) with respect to the Letter of Credit Participation Fee, the applicable percentage set forth below in the column entitled "Standby Letters of Credit" or "Commercial Letters of Credit"; in each case opposite the applicable Pricing Level:
Standby Commercial ABR Eurodollar Commitment Letters Letters of Pricing Level Advances Advances Fee of Credit Credit - ------------- -------- ---------- ---------- --------- ---------- Pricing Level I 0% 1.000% 0.200% 1.000% 0.5000% Pricing Level II 0% 1.250% 0.300% 1.250% 0.6250% Pricing Level III 0% 1.375% 0.375% 1.375% 0.6875% Pricing Level IV 0% 1.625% 0.500% 1.625% 0.8125%
4 DRAFT 11/15/96 Changes in the Applicable Margin resulting from a change in a Pricing Level shall become effective upon the date of the delivery by the Company to the Agent of a certificate pursuant to Section 7.7(c) evidencing a change in the Fixed Charge Coverage Ratio which would affect the applicable Pricing Level. If the Company shall fail to deliver a certificate within 50 days after the end of each of the first three fiscal quarters (or 90 days after the end of the last fiscal quarter) as required by Section 7.7(c), Pricing Level IV shall apply from and including the 51st day (the 91st day in the case of the last quarter) after the end of such fiscal quarter to the date of the delivery by the Company to the Agent of a certificate demonstrating that a different Pricing Level is applicable. "Approved Bank": any bank whose short-term commercial paper rating from (i) S&P is at least A-1 or the equivalent thereof or (ii) Moody's is at least P-1 or the equivalent thereof. "Assignment": defined in Section 12.7(c). "Assignment and Acceptance Agreement": an assignment and acceptance agreement executed by an assignor and an assignee pursuant to which, subject to the terms and conditions hereof and thereof, the assignor assigns to the assignee all or any portion of such assignor's interests under this Agreement, substantially in the form of Exhibit G. "Assignment Fee": defined in Section 12.7(c). "Authorized Signatory": as to (i) any Person which is a corporation, the chairman of the board, the president, any vice president, the chief financial officer or any other officer (acceptable to the Agent) of such Person and (ii) any Person which is not a corporation, the general partner or other managing Person thereof. "Benefited Lender": defined in Section 12.9(b). "BNY": defined in the preamble. "BNY Rate": a rate of interest per annum equal to the rate of interest publicly announced in New York City by BNY from time to time as its prime commercial lending rate, such rate to be adjusted automatically (without notice) on the effective date of any change in such publicly announced rate. "BNYCMI": BNY Capital Markets, Inc., the Arranging Agent. 5 "Borrower Addendum": an Addendum in the form of Exhibit D pursuant to which a Subsidiary of the Company may become a Subsidiary Borrower pursuant to the provisions of Section 2.10. "Borrowers": collectively, the Company and the Subsidiary Borrowers; each a "Borrower". "Borrowing Date": (i) in respect of Revolving Credit Loans, any Business Day on which the Lenders shall make Revolving Credit Loans pursuant to a Borrowing Request or pursuant to a Mandatory Borrowing, (ii) in respect of Swing Line Loans, any Business Day on which the Swing Line Lender shall make a Swing Line Loan pursuant to a Borrowing Request and (iii) in respect of Letters of Credit, any Business Day on which the Issuer shall issue a Letter of Credit pursuant to a Letter of Credit Request. "Borrowing Request": a request for Revolving Credit Loans or Swing Line Loans in the form of Exhibit B. "Cash Equivalents": (i) securities issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof) having maturities of not more than six months from the date of acquisition, (ii) Dollar denominated time deposits, certificates of deposit and bankers acceptances of (x) any Lender or (y) any Approved Bank, in each case with maturities of not more than six months from the date of acquisition, (iii) commercial paper issued by any Approved Bank or by the parent company of any Approved Bank and commercial paper issued by, or guaranteed by, any industrial or financial company with a short-term commercial paper rating of at least A-1 or the equivalent thereof by S&P or at least P-1 or the equivalent thereof by Moody's, or guaranteed by any industrial or financial company with a long term unsecured debt rating of at least A or A-2, or the equivalent of each thereof, by S&P or Moody's, as the case may be, and in each case maturing within six months after the date of acquisition, (iv) marketable direct obligations issued by any state of the United States or any political subdivision of any such state or any public instrumentality thereof maturing within six months from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either S&P or Moody's, (v) investments in money market funds substantially all the assets of which are comprised of securities of the types described in clauses (i) through (iv) above, (vi) investments in tax-exempt municipal bonds maturing within six months from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable with respect thereto from either S&P or Moody's and (vii) investments in overnight repurchase agreements with any Lender or any primary securities dealer to the extent that such Lender or securities dealer is able to segregate the securities subject to such repurchase agreements and such securities consist of the type described in clauses (i) and (iii) above. "Commitment": in respect of any Lender, such Lender's undertaking to make 6 DRAFT 11/15/96 Revolving Credit Loans, subject to the terms and conditions hereof, in an aggregate outstanding principal amount not to exceed the Commitment Amount of such Lender. "Commitment Amount": at any time and with respect to any Lender, the amount set forth adjacent to such Lender's name under the heading "Commitment Amount" in Exhibit A at such time or, in the event that such Lender is not listed on Exhibit A, the "Commitment Amount" which such Lender shall have assumed from another Lender in accordance with Section 12.7 on or prior to such time, as the same may be adjusted from time to time pursuant to Sections 2.6 and 12.7(c). "Commitment Fee": defined in Section 3.11. "Commitment Percentage": at any time and with respect to any Lender, a fraction the numerator of which is such Lender's Commitment Amount at such time, and the denominator of which is the Aggregate Commitment Amount at such time. "Commitment Period": the period commencing on the Effective Date and ending on the Commitment Termination Date, or on such earlier date as all of the Commitments shall have been terminated in accordance with the terms hereof. "Commitment Termination Date": the earlier of the third anniversary of the Effective Date and the date on which the Loans shall become due and payable, whether by acceleration, notice of intention to prepay or otherwise. "Company Guaranty": the guaranty of the Company as set forth in Section 11. "Compensatory Interest Payment": defined in Section 3.4(c). "Consolidated": the Company and the Subsidiaries on a consolidated basis in accordance with GAAP. "Contingent Obligation": as to any Person (the "secondary obligor"), any obligation of such secondary obligor (a) guaranteeing or in effect guaranteeing any return on any investment made by another Person, or (b) guaranteeing or in effect guaranteeing any Indebtedness, lease, dividend or other obligation ("primary obligation") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including any obligation of such secondary obligor, whether contingent, (i) to purchase any such primary obligation or any Property constituting direct or indirect security therefor, (ii) to advance or supply funds (A) for the purchase or payment of any such primary obligation or (B) to 7 maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase Property, securities or services primarily for the purpose of assuring the beneficiary of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, (iv) otherwise to assure or hold harmless the beneficiary of such primary obligation against loss in respect thereof, and (v) in respect of the Indebtedness of any partnership in which such secondary obligor is a general partner, except to the extent that such Indebtedness of such partnership is nonrecourse to such secondary obligor and its separate Property; provided that the term "Contingent Obligation" shall not include the indorsement of instruments for deposit or collection in the ordinary course of business or indemnity obligations under the Stockholder Agreement. "Control Person": defined in Section 3.6. "Convert", "Conversion" and "Converted": each, a reference to a conversion pursuant to Section 3.3 of one Type of Revolving Credit Loan into another Type of Revolving Credit Loan. "Credit Exposure": with respect to any Lender at any time, the sum at such time of (a) the outstanding principal balance of such Lender's Revolving Credit Loans, (b) the Swing Line Exposure of such Lender and (c) the Letter of Credit Exposure of such Lender. "Credit Parties": the Company, the Borrowers and the Guarantors; each a "Credit Party". "CVS": CVS Corporation, a Delaware corporation. "CVS Group": CVS and its subsidiaries, which shall not include the Company or any of the subsidiaries. "CVS Subordinated Debt": the indebtedness evidenced by the CVS Subordinated Note. "CVS Subordinated Note": the Subordinated Note in the principal amount of $13,500,000, substantially in the form of Exhibit H, made by the Company to CVS, as such Subordinated Note may be amended or otherwise modified from time to time in accordance with Section 8.9. "Default": any of the events specified in Section 9.1, whether any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "Disposition": with respect to any Person, any sale, assignment, transfer or other disposition by such Person by any means, of: (a) the Stock of, or other equity interests of, any other Person, (b) any business, operating entity, division or segment thereof, or 8 DRAFT 11/15/96 (c) any other Property of such Person, other than sales of inventory (other than in connection with bulk transfers); provided, however, that the term "Disposition" shall not include a sale, assignment, transfer or other disposition by a Subsidiary to any other Subsidiary, provided that the same does not materially and adversely affect the interests of the Lenders under the Loan Documents or the CVS Subordinated Note. "Dollar or "$": lawful currency of the United States of America. "Domestic Business Day": any day (other than a Saturday, Sunday or legal holiday in the State of New York) on which banks are open for business in New York City. "EBITDA": earnings from operations of the Company and its Subsidiaries on a Consolidated basis for the immediately preceding four fiscal quarter period, plus the sum of, without duplication, (i) interest expense, (ii) provision for income taxes and (iii) depreciation and amortization for such period, each to the extent deducted from such earnings for such period. EBITDA shall be adjusted to exclude nonrecurring gains and losses. "Effective Date": defined in Section 12.20. "Employee Benefit Plan": an employee benefit plan, within the meaning of Section 3(3) of ERISA, maintained, sponsored or contributed to by the Company, any Subsidiary or any ERISA Affiliate. "ERISA": the Employee Retirement Income Security Act of 1974, as amended from time to time, or any successor thereto, and the rules and regulations issued thereunder, as from time to time in effect. "ERISA Affiliate": when used with respect to an Employee Benefit Plan, ERISA, the PBGC or a provision of the Internal Revenue Code pertaining to employee benefit plans, any Person that is a member of any group of organizations within the meaning of Sections 414(b) or (c) of the Internal Revenue Code or, solely with respect to the applicable provisions of the Internal Revenue Code, Sections 414(m) or (o) of the Internal Revenue Code, of which the Company or any Subsidiary is a member. "Eurodollar Advance": a portion of the Revolving Credit Loans selected by a Borrower to bear interest during a Eurodollar Interest Period selected by such Borrower 9 at a rate per annum based upon a Eurodollar Rate determined with reference to such Interest Period, all pursuant to and in accordance with Section 2.1 or 3.3. "Eurodollar Business Day": any Domestic Business Day, other than a Domestic Business Day on which banks are not open for dealings in Dollar deposits in the interbank eurodollar market. "Eurodollar Interest Period": the period commencing on any Eurodollar Business Day selected by a Borrower in accordance with Section 2.1 or Section 3.3 and ending one, two, three or six months thereafter, as selected by such Borrower in accordance with either such Sections, subject to the following: (i) if any Interest Period would otherwise end on a day which is not a Eurodollar Business Day, such Interest Period shall be extended to the immediately succeeding Eurodollar Business Day unless the result of such extension would be to carry the end of such Interest Period into another calendar month, in which event such Interest Period shall end on the Eurodollar Business Day immediately preceding such day; and (ii) if any Interest Period shall begin on the last Eurodollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period), such Interest Period shall end on the last Eurodollar Business Day of such latter calendar month. "Eurodollar Rate": with respect to each Eurodollar Advance and as determined by the Agent, the rate of interest per annum (rounded, if necessary, to the nearest 1/100 of 1% or, if there is no nearest 1/100 of 1%, then to the next higher 1/100 of 1%) equal to a fraction, the numerator of which is the rate per annum quoted by BNY at approximately 11:00 A.M. (or as soon thereafter as practicable) two Eurodollar Business Days prior to the first day of such Interest Period to leading banks in the interbank eurodollar market as the rate at which BNY is offering Dollar deposits in an amount approximately equal to its Commitment Percentage of such Eurodollar Advance and having a period to maturity approximately equal to the Interest Period applicable to such Eurodollar Advance, and the denominator of which is an amount equal to 1.00 minus the aggregate of the then stated maximum rates during such Interest Period of all reserve requirements (including marginal, emergency, supplemental and special reserves), expressed as a decimal, established by the Board of Governors of the Federal Reserve System and any other banking authority to which BNY and other major United States money center banks are subject, in respect of eurocurrency liabilities. "Event of Default": any of the events specified in Section 9.1, provided that any requirement for the giving of notice, the lapse of time, or both, or any other condition has been satisfied. "Execution Date": the date on which this Agreement is executed and delivered by 10 DRAFT 11/15/96 and among the parties hereto. "Expiration Date": the first date, occurring after the Commitments shall have terminated or been terminated in accordance herewith, upon which there shall be no Loans or Letters of Credit outstanding. "Federal Funds Effective Rate": for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Domestic Business Day, for the next preceding Domestic Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Domestic Business Day, the average (rounded, if necessary, to the nearest 1/100 of 1% or, if there is no nearest 1/100 of 1%, then to the next higher 1/100 of 1%) of the quotations for such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by the Agent. "Fees": defined in Section 3.2. "Financial Statements": defined in Section 4.13. "Fixed Charge Coverage Ratio: at any time of determination, the ratio of (i) the sum of EBITDA and Rental Expense to (ii) the sum of Interest Expense and Rental Expense. "Free Cash Flow": at any time of determination, EBITDA for the immediately preceding fiscal year less the sum, without duplication, of Consolidated capital expenditures, Consolidated interest expense, Consolidated income taxes, permanent payments and prepayments of Consolidated Indebtedness (excluding payments and prepayments of the Loans and Indebtedness under revolving credit, line of credit or similar facilities which may be reborrowed) and the net increase (if positive) in Consolidated working capital, in each case for such immediately preceding fiscal year, all as determined in accordance with GAAP. "GAAP": generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or such other principles as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of 11 determination, consistently applied. "Governmental Authority": any foreign, federal, state, municipal or other government, or any department, commission, board, bureau, agency, public authority or instrumentality thereof, or any court or arbitrator. "Guaranties": collectively, the Company Guaranty and the Subsidiary Guaranty; individually, a "Guaranty". "Guarantor": at any time, the Company and the Subsidiaries party to the Subsidiary Guaranty at such time. "Highest Lawful Rate": the maximum rate of interest, if any, which at any time or from time to time may be contracted for, taken, charged or received on the Loans or the Notes or which may be owing to any Lender pursuant to this Agreement under the laws applicable to such Lender and this Agreement. "Indebtedness": as to any Person at a particular time, all items of such Person which constitute, without duplication, (a) indebtedness for borrowed money or the deferred purchase price of Property (other than trade payables and accrued expenses incurred in the ordinary course of business), (b) indebtedness evidenced by notes, bonds, debentures or similar instruments, (c) obligations with respect to any conditional sale or other title retention agreement, (d) indebtedness arising under acceptance facilities and the amount available to be drawn under all letters of credit (excluding for purposes of Section 7.10(b) letters of credit obtained in the ordinary course of business by the Company or any Subsidiary) issued for the account of such Person and, without duplication, all drafts drawn thereunder to the extent such Person shall not have reimbursed the issuer in respect of the issuer's payment of such drafts, (e) all liabilities secured by any Lien on any Property owned by such Person even though such Person shall not have assumed or otherwise become liable for the payment thereof (other than carriers', warehousemen's, mechanics', repairmen's or other like non-consensual Liens arising in the ordinary course of business), (f) that portion of any obligation of such Person, as lessee, which in accordance with GAAP is required to be capitalized on a balance sheet of such Person, and (g) Contingent Obligations (excluding for purposes of Sections 7.10(b) Contingent Obligations in respect of any indebtedness, obligation or liability other than those described in items (a) - (f) above); provided that, for purposes of this definition, Indebtedness shall not include Intercompany Debt and obligations in respect of interest rate caps, collars, exchanges, swaps or other, similar agreements. "Indemnified Liabilities": defined in Section 12.5. "Intercompany Debt": (i) Indebtedness of the Company to one or more of the Subsidiaries and (ii) demand Indebtedness of one or more of the Subsidiaries to the Company or any one or more of the other Subsidiaries. 12 DRAFT 11/15/96 "Interest Expense": the sum of all interest (adjusted to give effect to all interest rate swap, cap or other similar interest rate hedging arrangements, all as determined in accordance with GAAP) paid or accrued in respect of Consolidated Indebtedness for the immediately preceding four fiscal quarter period, determined in accordance with GAAP. "Interest Payment Date": (i) as to any ABR Advance, the last day of each March, June, September and December, commencing on the first of such days to occur after such ABR Advance is made or any Eurodollar Advance is converted to an ABR Advance, (ii) as to any Swing Line Loan, the day on which the outstanding principal balance of such Swing Line Loan shall become due and payable in accordance with Section 2.2(a), (iii) as to any Eurodollar Advance in respect of which a Borrower has selected an Interest Period of one, two or three months, the last day of such Interest Period, (iv) as to any Eurodollar Advance in respect of which a Borrower has selected an Interest Period greater than three months, the last day of the third month of such Interest Period and the last day of such Interest Period. "Interest Period": a Eurodollar Interest Period or a Swing Line Interest Period, as the case may be. "Internal Revenue Code": the Internal Revenue Internal Revenue Code of 1986, as amended from time to time, or any successor thereto, and the rules and regulations issued thereunder, as from time to time in effect. "Investments": defined in Section 8.12. "Issuer": BNY. "Lender": defined in the preamble; such term to also include the Swing Line Lender and the Issuer where the context hereof requires or permits such inclusion. "Letter of Credit": defined in Section 2.7, provided that each of the letters of credit listed on Schedule 1.1L shall constitute a Letter of Credit for the purposes of this Agreement. "Letter of Credit Commitment": the commitment of the Issuer to issue Letters of Credit in an aggregate face amount not in excess of $25,000,000 pursuant to Section 2.7. "Letter of Credit Exposure": at any time, (a) in respect of all Lenders, the sum, without duplication, of (i) the maximum aggregate amount which may be drawn under all 13 unexpired Letters of Credit at such time (whether the conditions for drawing thereunder have or may be satisfied), (ii) the aggregate amount, at such time, of all unpaid drafts (which have not been dishonored) drawn under all Letters of Credit, and (iii) the aggregate unpaid Reimbursement Obligations at such time, and (b) in respect of any Lender, an amount equal to such Lender's Commitment Percentage at such time multiplied by the amount determined under clause (a) of this definition. "Letter of Credit Participation": with respect to each Lender, its obligations to the Issuer under Section 2.8. "Letter of Credit Participation Fee": defined in Section 3.12. "Letter of Credit Request": a request in the form of Exhibit C. "Leverage Ratio": at any time of determination, the ratio of (i) the sum of Consolidated Indebtedness (excluding the CVS Subordinated Debt) and eight times Minimum Rentals to (ii) the sum of EBITDA plus Rental Expense. "Lien": any mortgage, pledge, hypothecation, assignment, lien, deposit arrangement, charge, encumbrance or other security arrangement or security interest of any kind, or the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement and any financing lease having substantially the same economic effect as any of the foregoing. "Loan": a Revolving Credit Loan or a Swing Line Loan, as the case may be. "Loan Documents": this Agreement, the Subsidiary Guaranty and, upon the execution and delivery thereof, any Notes executed and delivered pursuant to Section 2.11. "Loans": the Revolving Credit Loans and the Swing Line Loans. "Mandatory Borrowing": defined in Section 2.2(b). "Margin Stock": any "margin stock", as said term is defined in Regulation U of the Board of Governors of the Federal Reserve System, as the same may be amended or supplemented from time to time. "Material Adverse": with respect to any change or effect, a material adverse change in, or effect on, as the case may be, (i) the financial condition, operations, business, or Property of the Company and the Subsidiaries taken as a whole, (ii) the ability of any Credit Party to perform its obligations under any Loan Document to which it is a party, or (iii) the ability of the Agent or any Lender to enforce the Loan Documents or the CVS Subordinated Note. 14 DRAFT 11/15/96 "Minimum Rental": Consolidated minimum rentals (determined in the same manner as set forth in the notes to the Financial Statements) excluding up to $5,000,000 of Consolidated equipment rentals for (i) in the case of any determination on or prior to December 31, 1996, the twelve month period ending September 30, 1996 and (ii) in the case of any determination thereafter, the immediately preceding fiscal year. "Moody's": Moody's Investors Service, Inc., or any successor thereto. "Multiemployer Plan": a Pension Plan which is a multiemployer plan defined in Section 4001(a)(3) of ERISA. "Negotiated Rate": with respect to a Swing Line Loan, the rate per annum agreed to in writing by the Borrower requesting such Swing Line Loan and the Swing Line Lender as the interest rate which such Swing Line Loan shall bear. "Net Worth": at any date of determination, the sum of all amounts which would be included under shareholders' equity on a Consolidated balance sheet of the Company and its Subsidiaries determined in accordance with GAAP as at such date. "Obligations": defined in Section 11.1. "Offering": defined in the Registration Statement. "PBGC": the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA, or any Governmental Authority succeeding to the functions thereof. "Pension Plan": at any time, any Employee Benefit Plan (including a Multiemployer Plan) subject to Section 302 of ERISA or Section 412 of the Internal Revenue Code, the funding requirements of which are, or at any time within the six years immediately preceding the time in question, were in whole or in part, the responsibility of the Company, any Subsidiary or an ERISA Affiliate. "Person": any individual, firm, partnership, limited liability company, limited liability partnership, joint venture, corporation, association, business trust, joint stock company, unincorporated association, trust, Governmental Authority or any other entity, whether acting in an individual, fiduciary, or other capacity, and for the purpose of the definition of "ERISA Affiliate", a trade or business. "Pricing Level I": any time when the Fixed Charge Coverage Ratio is greater than 15 or equal to 2.00:1.00. "Pricing Level II": any time when (i) the Fixed Charge Coverage Ratio is greater than or equal to 1.80:1.00 and (ii) Pricing Level I does not apply. "Pricing Level III": any time when (i) the Fixed Charge Coverage Ratio is greater than or equal to 1.60:1.00 and (ii) neither Pricing Level I nor Pricing Level II applies. "Pricing Level IV": any time when (i) the Fixed Charge Coverage Ratio is less than 1.60:1.00 and (ii) none of Pricing Level I, Pricing Level II or Pricing Level III applies. "Principal Office": from time to time, the principal office of BNY, located on the date hereof in New York, New York. "Prohibited Transaction": a transaction that is prohibited under Section 4975 of the Internal Revenue Code or Section 406 of ERISA and not exempt under Section 4975 of the Internal Revenue Code or Section 408 of ERISA. "Property": in respect of any Person, all types of real, personal or mixed property and all types of tangible or intangible property owned or leased by such Person. "Registration Statement": the Registration Statement filed on Form S-1 by the Company with the Securities and Exchange Commission with respect to the offering of shares of the common stock of the Company to the public, as amended by amendment filed October 30, 1996. "Regulatory Change": (a) the introduction or phasing in of any law, rule or regulation after the date hereof, (b) the issuance or promulgation after the date hereof of any directive, guideline or request from any central bank or United States or foreign Governmental Authority (whether having the force of law), or (c) any change after the date hereof in the interpretation of any existing law, rule, regulation, directive, guideline or request by any central bank or United States or foreign Governmental Authority charged with the administration thereof, in each case applicable to the transactions contemplated by this Agreement. "Reimbursement Obligations": all obligations and liabilities of the Borrowers due and to become due hereunder in respect of Letters of Credit. "Rental Expense": the sum of all rental expense (determined in the same manner as set forth in the notes to the Financial Statements) of the Company and its Subsidiaries on a Consolidated basis for the immediately preceding four fiscal quarter period, determined in accordance with GAAP. "Reorganization": defined in the Registration Statement (and shall include the 16 DRAFT 11/15/96 Offering). "Reorganization Documents": the CVS Subordinated Note, the Stockholder Agreement, the Tax Disaffiliation Agreement, the Transition Services Agreement and the Amended and Restated Certificate of Incorporation. "Reportable Event": with respect to any Pension Plan, (a) any event set forth in Sections 4043(b) (other than a Reportable Event as to which the 30 day notice requirement is waived by the PBGC under applicable regulations), 4062(e) or 4063(a) of ERISA, or the regulations thereunder, (b) an event requiring the Company, any Subsidiary or any ERISA Affiliate to provide security to a Pension Plan under Section 401(a)(29) of the Internal Revenue Code, or (c) the failure to make any payment required by Section 412(m) of the Internal Revenue Code. "Required Lenders": at any time prior to the Commitment Termination Date or such earlier date as all of the Commitments shall have terminated or been terminated in accordance herewith, Lenders having Commitment Amounts equal to or more than 51% of the Aggregate Commitment Amount, and at all other times, Lenders having Credit Exposures equal to or more than 51% of the Aggregate Credit Exposure. "Restricted Payment": with respect to any Person, any of the following, whether direct or indirect: (a) the declaration or payment by such Person of any dividend or distribution on any class of Stock of such Person, other than a dividend payable solely in shares of that class of Stock to the holders of such class, (b) the declaration or payment by such Person of any distribution on any other type or class of equity interest or equity investment in such Person, and (c) any redemption, retirement, purchase or acquisition of, or sinking fund or other similar payment in respect of, any class of Stock of, or other type or class of equity interest or equity investment in, such Person. "Revolving Credit Loan" and "Revolving Credit Loans": defined in Section 2.1(a). "S&P": Standard & Poor's Ratings Group, a division of McGraw-Hill, Inc., or any successor thereto. "Solvent": with respect to any Person on a particular date, the condition that on such date, (i) the fair value of the Property of such Person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person, (ii) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become 17 absolute and matured, (iii) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature, and (iv) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's Property would constitute an unreasonably small amount of capital. For purposes of this definition, the amount of any contingent liability at any time shall be computed as the amount that, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability after taking into account probable payments by co-obligors. "Special Counsel": Emmet, Marvin & Martin, LLP. "Stock": any and all shares, interests, participations or other equivalents (however designated) of corporate stock. "Stockholder Agreement": the Stockholder Agreement, between the Company and CVS, substantially in the form filed as an exhibit to the Registration Statement, as the same may be amended, modified or supplemented from time to time in accordance with Section 8.9. "Subsidiary": at any time and from time to time, any corporation, association, partnership, limited liability company, joint venture or other business entity of which the Company and/or any Subsidiary of the Company, directly or indirectly at such time, either (a) in respect of a corporation, owns or controls more than 50% of the outstanding stock having ordinary voting power to elect a majority of the board of directors or similar managing body, irrespective of whether a class or classes shall or might have voting power by reason of the happening of any contingency, or (b) in respect of an association, partnership, limited liability company, joint venture or other business entity, is entitled to share in more than 50% of the profits and losses, however determined. "Subsidiary Borrowers": collectively, wholly-owned Subsidiaries of the Company which are signatories hereto on the Effective Date and each other Subsidiary of the Company which becomes a party to this Agreement by the execution of a Borrower Addendum pursuant to Section 2.10; each a "Subsidiary Borrower". "Subsidiary Guarantors": collectively, each Subsidiary of the Company in existence on the Effective Date and each other Subsidiary which becomes a party to the Subsidiary Guaranty by the execution of a Subsidiary Guaranty Addendum; each a "Subsidiary Guarantor". "Subsidiary Guaranty": the guaranty of each Subsidiary in the form of Exhibit I. "Subsidiary Guaranty Addendum": an addendum in the form of Annex B to the Subsidiary Guaranty pursuant to which a new Subsidiary shall become a party to the Subsidiary Guaranty as required by Section 8.11. "Swing Line Commitment": the commitment of the Swing Line Lender to make 18 DRAFT 11/15/96 Swing Line Loans in accordance with the terms hereof, in an aggregate outstanding principal amount not exceeding at any time (i) $25,000,000 until December 31, 1996 and (ii) $15,000,000 thereafter, as the same may be reduced pursuant to Section 2.6. "Swing Line Commitment Period": the period from the Effective Date to, but excluding, the Swing Line Termination Date. "Swing Line Exposure": at any time, in respect of any Lender, an amount equal to the aggregate principal balance of Swing Line Loans at such time multiplied by such Lender's Commitment Percentage at such time. "Swing Line Interest Period": as to any Swing Line Loan, the period commencing on the date of such Swing Line Loan and ending on the date set forth by the Borrower requesting such Swing Line Loan in the Borrowing Request with respect thereto; provided that the last day of any Swing Line Interest Period shall not be earlier than one day after the date of such Swing Line Loan or later than 7 days after the date of such Swing Line Loan and in no event later than the Swing Line Termination Date; and provided further that if any Swing Line Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day. "Swing Line Lender": BNY. "Swing Line Loan" and "Swing Line Loans": defined in Section 2.2(a). "Swing Line Maturity Date": defined in Section 2.2(a). "Swing Line Participation Amount": defined in Section 2.2(c). "Swing Line Termination Date": the date which is 10 days prior to the Commitment Termination Date. "Tangible Net Worth": at any time of determination, Net Worth less all assets of the Company and its Subsidiaries included in such Net Worth, determined on a Consolidated basis at such date, that would be classified as intangible assets in accordance with GAAP. "Tax Disaffiliation Agreement": the Tax Disaffiliation Agreement between the Company and CVS, substantially in the form filed as an exhibit to the Registration Statement, as the same may be amended, modified or supplemented from time to time in 19 accordance with Section 8.9. "Termination Event": with respect to any Pension Plan, (a) a Reportable Event, (b) the termination of a Pension Plan under Section 4041(c) of ERISA, or the filing of a notice of intent to terminate a Pension Plan under Section 4041(c) of ERISA, or the treatment of a Pension Plan amendment as a termination under Section 4041(e) of ERISA (except an amendment made after such Pension Plan satisfies the requirement for a standard termination under Section 4041(b) of ERISA), (c) the institution of proceedings by the PBGC to terminate a Pension Plan under Section 4042 of ERISA, or (d) the appointment of a trustee to administer any Pension Plan under Section 4042 of ERISA. "Transitional Services Agreement": the Transitional Services Agreement between the Company and CVS, substantially in the form filed as an exhibit to the Registration Statement, as the same may be amended, modified or supplemented from time to time in accordance with Section 8.9. "Type": with respect to any Revolving Credit Loan, the characteristic of such Loan as an ABR Advance or a Eurodollar Advance, each of which constitutes a Type of Revolving Credit Loan. "Unqualified Amount": defined in Section 3.4(c). "Upstream Dividends": defined in Section 8.7. 1.2. Principles of Construction (a) All capitalized terms defined in this Agreement shall have the meanings given such capitalized terms herein when used in the other Loan Documents or in any certificate, opinion or other document made or delivered pursuant hereto or thereto, unless otherwise expressly provided therein. (b) Unless otherwise expressly provided herein, the word "fiscal" when used herein shall refer to the relevant fiscal period of the Company. As used in the Loan Documents and in any certificate, opinion or other document made or delivered pursuant thereto, accounting terms not defined in Section 1.1, and accounting terms partly defined in Section 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP. (c) The words "hereof", "herein", "hereto" and "hereunder" and similar words when used in each Loan Document shall refer to such Loan Document as a whole and not to any particular provision of such Loan Document, and Section, schedule and exhibit references contained therein shall refer to Sections thereof or schedules or exhibits thereto unless otherwise expressly provided therein. 20 DRAFT 11/15/96 (d) All references herein to a time of day shall mean the then applicable time in New York, New York, unless otherwise expressly provided herein. (e) Section headings have been inserted in the Loan Documents for convenience only and shall not be construed to be a part thereof. Unless the context otherwise requires, words in the singular number include the plural, and words in the plural include the singular. (f) Whenever in any Loan Document or in any certificate or other document made or delivered pursuant thereto, the terms thereof require that a Person sign or execute the same or refer to the same as having been so signed or executed, such terms shall mean that the same shall be, or was, duly signed or executed by an Authorized Signatory of such Person. (g) The words "include" and "including", when used in each Loan Document, shall mean that the same shall be included "without limitation", unless otherwise specifically provided. (h) Certain provisions hereof concerning Credit Parties are incorporated by reference into other Loan Documents as if fully set forth therein. 2. AMOUNT AND TERMS OF LOANS 2.1. Revolving Credit Loans (a) Subject to the terms and conditions hereof, each Lender severally (and not jointly) agrees to make loans under this Agreement (each a "Revolving Credit Loan" and, collectively with each other Revolving Credit Loan of such Lender and/or with each Revolving Credit Loan of each other Lender, the "Revolving Credit Loans") to one or more Borrowers from time to time during the Commitment Period, during which period the Borrowers may borrow, prepay and reborrow in accordance with the provisions hereof. Immediately after making each Revolving Credit Loan and after giving effect to all Swing Line Loans repaid and all Reimbursement Obligations paid on the same date, the Aggregate Credit Exposure will not exceed the Aggregate Commitment Amount. With respect to each Lender, at the time of the making of any Revolving Credit Loan, the sum of (i) the principal amount of such Lender's Revolving Credit Loan constituting a part of the Revolving Credit Loans to be made, (ii) the aggregate principal balance of all other Revolving Credit Loans (exclusive of Revolving Credit Loans which are repaid with the 21 proceeds of, and simultaneously with the incurrence of, the Revolving Credit Loans to be made) then outstanding from such Lender and (iii) the product of (A) such Lender's Commitment Percentage and (B) the sum of (1) the aggregate principal balance of all Swing Line Loans (exclusive of Swing Line Loans which are repaid with the proceeds of, and simultaneously with the incurrence of, the respective Revolving Credit Loans) then outstanding and (2) the Letter of Credit Exposure of all Lenders, will not exceed the Commitment of such Lender at such time. During the Commitment Period, each Borrower may borrow, prepay in whole or in part and reborrow Revolving Credit Loans under the Commitments, all in accordance with the terms and conditions hereof. At the option of a Borrower, indicated in its Borrowing Request, Revolving Credit Loans may be made as ABR Advances or Eurodollar Advances. (b) The aggregate outstanding principal balance of all Revolving Credit Loans shall be due and payable on the Commitment Termination Date or on such earlier date upon which all of the Commitments shall have been voluntarily terminated by the Borrower in accordance with Section 2.6. 2.2. Swing Line Loans (a) Subject to the terms and conditions hereof, the Swing Line Lender agrees to make loans under this Agreement (each a "Swing Line Loan" and, collectively, the "Swing Line Loans") to one or more Borrowers from time to time during the Swing Line Commitment Period. Swing Line Loans (i) may be repaid and reborrowed in accordance with the provisions hereof, (ii) shall not, immediately after giving effect thereto, result in the Aggregate Credit Exposure exceeding the Aggregate Commitment Amount, and (iii) shall not, immediately after giving effect thereto, result in the aggregate outstanding principal balance of all Swing Line Loans exceeding the Swing Line Commitment. The Swing Line Lender shall not be obligated to make any Swing Line Loan at a time when any Lender shall be in default of its obligations under this Agreement unless the Swing Line Lender has entered into arrangements satisfactory to it and the Company to eliminate the Swing Line Lender's risk with respect to such defaulting Lender's participation in such Swing Line Loan. The Swing Line Lender will not make a Swing Line Loan if the Agent, or any Lender by notice to the Swing Line Lender, the Company and the applicable Borrower no later than one Business Day prior to the Borrowing Date with respect to such Swing Line Loan, shall have determined that the conditions set forth in Sections 5 and 6 have not been satisfied and such conditions remain unsatisfied as of the requested time of the making such Loan. Each Swing Line Loan shall be due and payable on the day (the "Swing Line Maturity Date") being the earliest of the last day of the Swing Line Interest Period applicable thereto, the date on which the Swing Line Commitment shall have been voluntarily terminated in accordance with Section 2.6, and the date on which the Loans shall become due and payable pursuant to the provisions hereof, whether by acceleration or otherwise. Each Swing Line Loan shall bear interest at the Negotiated Rate applicable thereto. The Swing Line Lender shall disburse the proceeds of Swing Line Loans at its office designated in Section 12.2 by crediting such proceeds to an account of the Borrower 22 DRAFT 11/15/96 thereof maintained with the Swing Line Lender or as such Borrower shall otherwise direct in its Borrowing Request therefor. (b) On any Business Day on which a Swing Line Loan shall be due and payable and shall remain unpaid, the Swing Line Lender may, in its sole discretion, give notice to the Lenders and the applicable Borrower that such outstanding Swing Line Loan shall be funded with a borrowing of Revolving Credit Loans (provided that such notice shall be deemed to have been automatically given upon the occurrence of a Default or an Event of Default under Sections 9.1(h) or (i)), in which case a borrowing of Revolving Credit Loans made as ABR Advances to such Borrower (each such borrowing, a "Mandatory Borrowing"), shall be made by all Lenders pro rata based on each such Lender's Commitment Percentage on the Business Day immediately succeeding the giving of such notice. The proceeds of each Mandatory Borrowing shall be remitted directly to the Swing Line Lender to repay such outstanding Swing Line Loan. Each Lender irrevocably agrees to make a Revolving Credit Loan pursuant to each Mandatory Borrowing in the amount and in the manner specified in the preceding sentence and on the date specified in writing by the Swing Line Lender notwithstanding: (i) the amount of such Mandatory Borrowing may not comply with the minimum amount for Loans otherwise required hereunder, (ii) whether any condition specified in Section 6 is then unsatisfied, (iii) whether a Default or an Event of Default then exists, (iv) the Borrowing Date of such Mandatory Borrowing, (v) the aggregate principal amount of all Loans then outstanding, (vi) the Aggregate Credit Exposure at such time and (vii) the amount of the Commitments at such time. (c) Upon each receipt by a Lender of notice of an Event of Default from the Agent pursuant to Section 10.5, such Lender shall purchase unconditionally, irrevocably, and severally (and not jointly) from the Swing Line Lender a participation in the outstanding Swing Line Loans (including accrued interest thereon) in an amount equal to the product of its Commitment Percentage and the outstanding balance of the Swing Line Loans (each, a "Swing Line Participation Amount"). Each Lender shall also be liable for an amount equal to the product of its Commitment Percentage and any amounts paid by a Borrower pursuant to this Section that are subsequently rescinded or avoided, or must otherwise be restored or returned. Such liabilities shall be unconditional and without regard to the occurrence of any Default or Event of Default or the compliance by any Borrower with any of its obligations under the Loan Documents. (d) In furtherance of Section 2.2(c), upon each receipt by a Lender of notice of an Event of Default from the Agent pursuant to Section 10.5, such Lender shall promptly make available to the Agent for the account of the Swing Line Lender its Swing 23 Line Participation Amount at the office of the Agent specified in Section 12.2, in lawful money of the United States and in immediately available funds. The Agent shall deliver the payments made by each Lender pursuant to the immediately preceding sentence to the Swing Line Lender promptly upon receipt thereof in like funds as received. Each Lender hereby indemnifies and agrees to hold harmless the Agent and the Swing Line Lender from and against any and all losses, liabilities (including liabilities for penalties), actions, suits, judgments, demands, costs and expenses resulting from any failure on the part of such Lender to pay, or from any delay in paying the Agent any amount such Lender is required by notice from the Agent to pay in accordance with this Section upon receipt of notice of an Event of Default from the Agent pursuant to Section 10.5 (except in respect of losses, liabilities or other obligations suffered by the Agent or the Swing Line Lender, as the case may be, resulting from the gross negligence or willful misconduct of the Agent or the Swing Line Lender, as the case may be), and such Lender shall pay interest to the Agent for the account of the Swing Line Lender from the date such amount was due until paid in full, on the unpaid portion thereof, at a rate of interest per annum, whether before or after judgment, equal to (i) from the date such amount was due until the third day therefrom, the Federal Funds Effective Rate, and (ii) thereafter, the Federal Funds Effective Rate plus 2%, payable upon demand by the Swing Line Lender. The Agent shall distribute such interest payments to the Swing Line Lender upon receipt thereof in like funds as received. (e) Whenever the Agent is reimbursed by a Borrower for the account of the Swing Line Lender for any payment in connection with Swing Line Loans made to such Borrower and such payment relates to an amount previously paid by a Lender pursuant to this Section, the Agent will promptly remit such payment to such Lender. 2.3. Notice of Borrowing-Revolving Credit Loans and Swing Line Loans Whenever a Borrower desires to borrow Loans hereunder (excluding Mandatory Loans), the Company on behalf of such Borrower agrees to notify the Agent (and with respect to a Swing Line Loan, the Swing Line Lender), which notification shall be irrevocable, no later than (a) 12:00 Noon on the proposed Borrowing Date in the case of Swing Line Loans, (b) 10:00 A.M. on the proposed Borrowing Date in the case of Revolving Credit Loans to consist of ABR Advances and (c) 9:00 A.M. at least two Eurodollar Business Days prior to the proposed Borrowing Date in the case of Revolving Credit Loans to consist of Eurodollar Advances. Each such notice shall specify (i) the aggregate amount requested to be borrowed under the Commitments or the Swing Line Commitment, (ii) the proposed Borrowing Date, (iii) whether a borrowing of Revolving Credit Loans is to be of ABR Advances or Eurodollar Advances, and the amount of each thereof (iv) the Interest Period for such Eurodollar Advances and (v) the Swing Line Interest Period for, and the amount of, each Swing Line Loan. Each such notice shall be promptly confirmed by delivery to the Agent (and, with respect to a Swing Line Loan, the Swing Line Lender) of a Borrowing Request. Each Eurodollar Advance to be made on a Borrowing Date, when aggregated with all amounts to be Converted to Eurodollar Ad- 24 DRAFT 11/15/96 vances on such date and having the same Interest Period as such Eurodollar Advance, shall equal no less than $1,000,000, or an integral multiple of $1,000,000 in excess thereof, (ii) each ABR Advance made on each Borrowing Date shall equal no less than $500,000 or an integral multiple of $100,000 in excess thereof and (iii) each Swing Line Loan made on each Borrowing Date shall equal no less than $500,000 or an integral multiple of $100,000 in excess thereof. The Agent shall promptly notify each Lender (by telephone or otherwise, such notification to be confirmed by fax or other writing) of each such Borrowing Request. Subject to its receipt of each such notice from the Agent and subject to the terms and conditions hereof, (A) each Lender shall make immediately available funds available to the Agent at the address therefor set forth in Section 12.2 not later than 1:00 P.M. on each Borrowing Date in an amount equal to such Lender's Commitment Percentage of the Revolving Credit Loans requested on such Borrowing Date and/or (B) the Swing Line Lender shall make immediately available funds available to the Borrower requesting the Swing Line Loan on such Borrowing Date in an amount equal to the Swing Line Loan requested by such Borrower. 2.4. Use of Proceeds Each Borrower agrees that the proceeds of the Loans and Letters of Credit shall be used solely for its general corporate purposes not inconsistent with the provisions hereof. Notwithstanding anything to the contrary contained in any Loan Document, each Borrower further agrees that no part of the proceeds of any Loan or Letter of Credit will be used, directly or indirectly, for a purpose which violates any law, rule or regulation of any Governmental Authority, including the provisions of Regulations G, U or X of the Board of Governors of the Federal Reserve System, as amended or any provision of this Agreement, including, without limitation, the provisions of Section 4.9. 2.5. Termination or Reduction of Commitments (a) Voluntary Termination or Reductions. At the Company's option and upon at least three Domestic Business Days' prior irrevocable notice to the Agent, the Company may (i) terminate the Commitments, the Swing Line Commitment and the Letter of Credit Commitment, at any time, or (ii) permanently reduce the Aggregate Commitment Amount, the Swing Line Commitment or the Letter of Credit Commitment, in part at any time and from time to time, provided that (1) each such partial reduction shall be in an amount equal to at least (i) in the case of the Aggregate Commitment Amount, $10,000,000 or an integral multiple of $1,000,000 in excess thereof, (ii) in the case of the Swing Line Commitment, $1,000,000, or an integral multiple of $1,000,000 in excess thereof, and (iii) in the case of the Letter of Credit Commitment, $1,000,000, or an integral multiple of 25 $1,000,000 in excess thereof, and (2) immediately after giving effect to each such reduction, (i) the Aggregate Commitment Amount shall equal or exceed the sum of the aggregate outstanding principal balance of all Loans and the Letter of Credit Exposure, (ii) the Swing Line Commitment shall equal or exceed the aggregate outstanding principal balance of all Swing Line Loans and (iii) the Letter of Credit Commitment shall equal or exceed the Letter of Credit Exposure of all Lenders. (b) Mandatory Termination. The Commitments shall automatically terminate on February 15, 1997 unless the Effective Date shall have occurred by such date. (c) In General. Each reduction of the Aggregate Commitment Amount shall be made by reducing each Lender's Commitment Amount by a sum equal to such Lender's Commitment Percentage of the amount of such reduction. 2.6. Prepayments of Loans (a) Voluntary Prepayments. Each Borrower may prepay Revolving Credit Loans and Swing Line Loans, in whole or in part, without premium or penalty, but subject to Section 3.5 at any time and from time to time, by notifying the Agent, which notification shall be irrevocable, by 9:00 A.M. at least two Eurodollar Business Days, in the case of a prepayment of Eurodollar Advances, or one Domestic Business Day, in the case of a prepayment of ABR Advances, prior to the proposed prepayment date specifying (i) the Loans to be prepaid, (ii) the amount to be prepaid, and (iii) the date of prepayment. Upon receipt of each such notice, the Agent shall promptly notify each Lender thereof. Each such notice given by a Borrower pursuant to this Section shall be irrevocable. Each partial prepayment under this Section shall be in a minimum amount of $1,000,000 ($500,000 in the case of ABR Advances and Swing Line Loans) or an integral multiple of $1,000,000 ($100,000 in the case of ABR Advances and Swing Line Loans) in excess thereof. (b) Mandatory Prepayments. (i) For 30 consecutive days during each period beginning on December 15 and ending on the following February 28, commencing on December 15, 1996, the Borrowers shall prepay and reduce to less than $35,000,000 the outstanding principal balance of the Loans. (ii) Subject to clause (iii) below with respect to Swing Line Loans, simultaneously with each reduction of the Aggregate Commitments under Section 2.5, the Borrowers shall prepay the Loans by the amount, if any, by which the Aggregate Credit Exposure exceeds the amount of the Aggregate Commitments as so reduced. (iii) Simultaneously with each reduction of the Swing Line Commitment under Section 2.5, the Borrowers shall prepay the Swing Line Loans by the 26 DRAFT 11/15/96 amount, if any, by which the outstanding principal balance of the Swing Line Loans exceeds the amount of the Swing Line Commitment as so reduced. (iv) If on any Borrowing Date or Conversion Date, the Aggregate Credit Exposure shall exceed the Aggregate Commitments, the Borrowers shall prepay the Loans in an aggregate principal amount such that immediately after giving effect to the Loans or conversion to be made on such Borrowing Date or Conversion Date the Aggregate Credit Exposure shall not exceed the Aggregate Commitments. (c) In General. Simultaneously with each prepayment hereunder, the Borrowers shall prepay all accrued interest on the amount prepaid through the date of prepayment and indemnify the Lenders in accordance with Section 3.5. 2.7. Letter of Credit Sub-facility (a) Subject to the terms and conditions hereof, the Issuer agrees, in reliance on the agreement of the other Lenders set forth in Section 2.8, to issue standby and commercial letters of credit (each a "Letter of Credit" and, collectively, the "Letters of Credit") during the Commitment Period for the account of a Borrower, provided that immediately after the issuance of each Letter of Credit (i) the Letter of Credit Exposure of all Lenders shall not exceed the Letter of Credit Commitment, and (ii) the Aggregate Credit Exposure would not exceed the Aggregate Commitment Amount. Each Letter of Credit shall have an expiration date which shall be not later than the earlier to occur of 12 months from the date of issuance thereof or 10 days prior to the Commitment Termination Date. No Letter of Credit shall be issued if the Agent, or any Lender by notice to the Agent, the Issuer and the Company no later than 3:00 P.M. one Domestic Business Day prior to the requested date of issuance of such Letter of Credit, shall have determined that the conditions set forth in Sections 5 and 6 have not been satisfied and such conditions remain unsatisfied as of the requested date of issuance of such Letter of Credit. (b) Each Letter of Credit shall be issued for the account of the applicable Borrower in support of an obligation of such Borrower in favor of a beneficiary who has requested the issuance of such Letter of Credit as a condition to a transaction entered into in connection with such Borrower's ordinary course of business. The Company on behalf of a Borrower shall give the Agent a Letter of Credit Request for the issuance of each Letter of Credit by 12:00 Noon at least two Domestic Business Days (or such other period as the Issuer and the Company may agree) prior to the requested date of issuance. Upon receipt of such Letter of Credit Request from a Borrower, the Agent shall promptly notify the Issuer and each other Lender thereof. The Issuer shall, on the proposed date of issu- 27 ance and subject to the other terms and conditions of this Agreement, issue the requested Letter of Credit. Each Letter of Credit shall be in form and substance reasonably satisfactory to the Issuer, with such provisions with respect to the conditions under which a drawing may be made thereunder and the documentation required in respect of such drawing as the Issuer shall reasonably require. Each Letter of Credit shall be used solely for the purposes described therein. (c) Each payment by the Issuer of a draft drawn under a Letter of Credit shall give rise to the obligation of the applicable Borrower to immediately reimburse the Issuer for the amount thereof. If all or any portion of any reimbursement obligation in respect of a Letter of Credit shall not be paid when due (whether at the stated maturity thereof, by acceleration or otherwise), such overdue amount shall bear interest, payable upon demand, at a rate per annum equal to the Alternate Base Rate plus the Applicable Margin applicable to ABR Advances plus 2%, from the date of such nonpayment until paid in full (whether before or after the entry of a judgment thereon). 2.8. Letter of Credit Participation (a) Each Lender hereby unconditionally and irrevocably, severally (and not jointly) takes an undivided participating interest in the obligations of the Issuer under and in connection with each Letter of Credit in an amount equal to such Lender's Commitment Percentage of the amount of such Letter of Credit. Each Lender shall be liable to the Issuer for its Commitment Percentage of the unreimbursed amount of any draft drawn and honored under each Letter of Credit. Each Lender shall also be liable for an amount equal to the product of its Commitment Percentage and any amounts paid by a Borrower pursuant to Sections 2.7 and 2.9 that are subsequently rescinded or avoided, or must otherwise be restored or returned. Such liabilities shall be unconditional and without regard to the occurrence of any Default or Event of Default or the compliance by any Borrower with any of its obligations under the Loan Documents. (b) The Issuer shall promptly notify the Agent, and the Agent shall promptly notify each Lender (which notice shall be promptly confirmed in writing), of the date and the amount of each draft paid under each Letter of Credit with respect to which full reimbursement payment shall not have been made by the applicable Borrower as provided in Section 2.8(c), and forthwith upon receipt of such notice, such Lender shall promptly make available to the Agent for the account of the Issuer its Commitment Percentage of the amount of such unreimbursed draft at the office of the Agent specified in Section 12.2 in lawful money of the United States and in immediately available funds. The Agent shall distribute the payments made by each Lender pursuant to the immediately preceding sentence to the Issuer promptly upon receipt thereof in like funds as received. Each Lender shall indemnify and hold harmless the Agent and the Issuer from and against any and all losses, liabilities (including liabilities for penalties), actions, suits, judgments, demands, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) resulting from any failure on the part of such Lender to provide, or from any 28 DRAFT 11/15/96 delay in providing, the Agent with such Lender's Commitment Percentage of the amount of any payment made by the Issuer under a Letter of Credit in accordance with this clause (b) above (except in respect of losses, liabilities or other obligations suffered by the Agent or the Issuer, as the case may be, resulting from the gross negligence or willful misconduct of the Agent or the Issuer, as the case may be). If a Lender does not make available to the Agent when due such Lender's Commitment Percentage of any unreimbursed payment made by the Issuer under a Letter of Credit, such Lender shall be required to pay interest to the Agent for the account of the Issuer on such Lender's Commitment Percentage of such payment at a rate of interest per annum equal to (i) from the date such Lender should have made such amount available until the third day therefrom, the Federal Funds Effective Rate, and (ii) thereafter, the Federal Funds Effective Rate plus 2%, in each case payable upon demand by the Issuer. The Agent shall distribute such interest payments to the Issuer upon receipt thereof in like funds as received. (c) Whenever the Agent is reimbursed by a Borrower, for the account of the Issuer, for any payment under a Letter of Credit and such payment relates to an amount previously paid by a Lender in respect of its Commitment Percentage of the amount of such payment under such Letter of Credit, the Agent (or the Issuer, if such payment by a Lender was paid by the Agent to the Issuer) will promptly pay over such payment to such Lender. 2.9. Absolute Obligation with respect to Letter of Credit Payments A Borrower's obligation to reimburse the Agent for the account of the Issuer for each payment under or in respect of each Letter of Credit shall be absolute and unconditional under any and all circumstances and irrespective of any set-off, counterclaim or defense to payment which such Borrower may have or have had against the beneficiary of such Letter of Credit, the Agent, the Issuer, the Swing Line Lender, any Lender or any other Person, including, without limitation, any defense based on the failure of any drawing to conform to the terms of such Letter of Credit, any drawing document proving to be forged, fraudulent or invalid, or the legality, validity, regularity or enforceability of such Letter of Credit, provided, however, that, with respect to any Letter of Credit, the foregoing shall not relieve the Issuer of any liability it may have to a Borrower for any actual damages sustained by such Borrower arising from a wrongful payment under such Letter of Credit made as a result of the Issuer's gross negligence or willful misconduct. 2.10. Borrower Addenda Provided that no Default or Event of Default has occurred and is continuing, 29 the Company may direct that any of its domestic wholly-owned Subsidiaries which is a Subsidiary Guarantor and which is not then a Borrower become a Borrower by submitting a Borrower Addendum to the Agent with respect to such Subsidiary duly executed by an Authorized Signatory of each of the Company and such Subsidiary together with (a) a certificate, dated the date of such Borrower Addendum of the Secretary or Assistant Secretary of such Subsidiary (i) attaching a true and complete copy of the resolutions of its Board of Directors and of all documents evidencing other necessary corporate action (in form and substance satisfactory to the Agent) taken by it to authorize such Borrower Addendum, this Agreement and the transactions contemplated hereby, (ii) attaching a true and complete copy of its certificate of incorporation, by-laws or other organizational documents, (iii) setting forth the incumbency of its officer or officers who may sign such Borrower Addendum, including therein a signature specimen of such officer or officers and (iv) attaching a certificate of good standing (or equivalent) issued by the jurisdiction of its incorporation or formation, and (b) an opinion of counsel to such Subsidiary with respect to such Borrower Addendum in all respects reasonably satisfactory to the Agent. Upon receipt of a Borrower Addendum and the supporting documentation referred to above, the Agent shall confirm such Borrower Addendum by signing a copy thereof and shall deliver a copy thereof to the Company and each Lender. Thereupon the Subsidiary which executed such Borrower Addendum shall become a "Subsidiary Borrower" hereunder. 2.11. Records; Notes (a) Lender's Records. Each Lender will note (manually or electronically) on its records with respect to each Loan made by it (i) the date and amount of such Loan, (ii) whether such Loan is a Revolving Loan or a Swing Line Loan, (iii) the identity of the Borrower thereof, (iv) the interest rate (in the case of a Eurodollar Advance or a Swing Line Loan) and Interest Period, if any, applicable to such Loan and (v) each payment and prepayment of the principal thereof. (b) Agent's Records. The Agent shall keep records regarding the Loans, the Letters of Credit and this Agreement in accordance with its customary procedures for agented credits. (c) Prima Facie Evidence. The entries made in the records maintained pursuant to subsections (a) and (b) above shall, to the extent not prohibited by applicable law, be prima facie evidence of the existence and amount of the obligations of the Company and each Borrower recorded therein; provided, however, that the failure of the Agent or any Lender, as the case may be, to make any notation on its records shall not affect the Company's or the respective Borrower's obligations in respect of the Loans, the Letters of Credit or this Agreement. (d) Notes. Upon the request of any Lender (in connection with a proposed assignment to a Federal Reserve Bank as contemplated by Section 12.7(b)) to the Agent and each Borrower, each Borrower agrees, at the expense of the Company, to ex- 30 DRAFT 11/15/96 ecute and deliver to the Agent for the account of such Lender one or more promissory notes evidencing the Loan or Loans of such Lender to such Borrower, in form and substance satisfactory to the Agent and such Lender. 3. PROCEEDS, PAYMENTS, CONVERSIONS, INTEREST, YIELD PROTECTION AND FEES 3.1. Disbursement of the Proceeds of the Loans The Agent shall disburse the proceeds of the Loans (other than the Swing Line Loans) at its office specified in Section 12.2 by crediting to the applicable Borrower's general deposit account with the Agent the funds received from each Lender. Unless the Agent shall have received prior notice from a Lender (by telephone or otherwise, such notice to be confirmed by fax or other writing) that such Lender will not make available to the Agent such Lender's Commitment Percentage of the Revolving Credit Loans, to be made by it on a Borrowing Date, the Agent may assume that such Lender has made such amount available to the Agent on such Borrowing Date in accordance with this Section, provided that such Lender received notice thereof from the Agent in accordance with the terms hereof, and the Agent may, in reliance upon such assumption, make available to the applicable Borrower on such Borrowing Date a corresponding amount. If and to the extent such Lender shall not have so made such amount available to the Agent, such Lender and the applicable Borrower severally agree to pay to the Agent, forthwith on demand, such corresponding amount (to the extent not previously paid by the other), together with interest thereon for each day from the date such amount is made available to such Borrower until the date such amount is paid to the Agent, at a rate per annum equal to, in the case of such Borrower, the applicable interest rate set forth in Section 3.4(a) and, in the case of such Lender, the Federal Funds Effective Rate from the date such payment is due until the third day after such date and, thereafter, at the Federal Funds Effective Rate plus 2%. Any such payment by an applicable Borrower shall be without prejudice to its rights against such Lender. If such Lender shall pay to the Agent such corresponding amount, such amount so paid shall constitute such Lender's Loan as part of such Loans to such Borrower for purposes of this Agreement, which Loan shall be deemed to have been made by such Lender to such Borrower on the Borrowing Date applicable to such Loans. 3.2. Payments (a) Each borrowing of Revolving Credit Loans by a Borrower from the Lenders, any Conversion of Revolving Credit Loans from one Type to another, and any 31 reduction in the Commitments shall be made pro rata according to the Commitment Percentage of each Lender. Each payment, including each prepayment, of principal and interest on the Loans and of the Commitment Fee and the Letter of Credit Participation Fee (collectively, together with all of the other fees to be paid to the Agent, the Lenders, the Issuer and the Swing Line Lender in connection with the Loan Documents, the "Fees"), and of all of the other amounts to be paid to the Agent and the Lenders in connection with the Loan Documents shall be made by the Company and the Borrowers to the Agent at its office specified in Section 12.2 in funds immediately available in New York by 3:00 P.M. on the due date for such payment. The failure of a Borrower to make any such payment by such time shall not constitute a default hereunder, provided that such payment is made on such due date, but any such payment made after 3:00 P.M. on such due date shall be deemed to have been made on the next Domestic Business Day or Eurodollar Business Day, as the case may be, for the purpose of calculating interest on amounts outstanding on the Loans. If the Company or a Borrower has not made any such payment prior to 3:00 P.M., the Company and such Borrower hereby authorize the Agent to deduct the amount of any such payment from such account(s) as the Company and such Borrower may from time to time designate in writing to the Agent, upon which the Agent shall apply the amount of such deduction to such payment. Promptly upon receipt thereof by the Agent, each payment of principal and interest on the: (i) Revolving Credit Loans shall be remitted by the Agent in like funds as received to each Lender (a) first, pro rata according to the amount of interest which is then due and payable to the Lenders, and (b) second, pro rata according to the amount of principal which is then due and payable to the Lenders and (ii) Swing Line Loans shall be remitted by the Agent in like funds as received to the Swing Line Lender. Each payment of the Fees shall be promptly transmitted by the Agent in like funds as received to each party entitled thereto pro rata to each Lender in the case of the Commitment Fee and the Letter of Credit Participation Fee according to such Lender's Commitment Amount or, if the Commitments shall have terminated or been terminated, according to the outstanding principal amount of such Lender's Revolving Credit Loans or Letter of Credit Exposure, respectively. (b) If any payment hereunder or under the Loans shall be due and payable on a day which is not a Domestic Business Day or Eurodollar Business Day, as the case may be, the due date thereof (except as otherwise provided in the definition of Eurodollar Interest Period) shall be extended to the next Domestic Business Day or Eurodollar Business Day, as the case may be, and (except with respect to payments in respect of the Commitment Fee and in respect of the Letter of Credit Participation Fee) interest shall be payable at the applicable rate specified herein during such extension. 3.3. Conversions; Other Matters (a) The Company on behalf of a Borrower may elect at any time and from time to time to Convert one or more Eurodollar Advances to an ABR Advance by giving the Agent at least one Domestic Business Day's prior irrevocable notice of such election, specifying the amount to be so Converted, provided that any such Conversion 32 DRAFT 11/15/96 shall only be made on the last day of the Interest Period applicable to each such Eurodollar Advance. In addition, a Borrower may elect from time to time to Convert an ABR Advance to any one or more new Eurodollar Advances or to Convert any one or more existing Eurodollar Advances to any one or more new Eurodollar Advances by giving the Agent at least two Eurodollar Business Days' prior irrevocable notice, in the case of a Conversion to Eurodollar Advances, of such election, specifying the amount to be so Converted and the initial Interest Period relating thereto, provided that (i) any Conversion of an ABR Advance to Eurodollar Advances shall only be made on a Eurodollar Business Day and (ii) any Conversion of Eurodollar Advances shall only be made on the last day of the Interest Period applicable thereto. The Agent shall promptly provide the Lenders with notice of each such election. ABR Advances and Eurodollar Advances may be Converted pursuant to this Section in whole or in part, provided that the amount to be Converted to each Eurodollar Advance, when aggregated with any Eurodollar Advance to be made on such date in accordance with Section 2.1 and having the same Interest Period as such first Eurodollar Advance, shall equal no less than $1,000,000 or an integral multiple of $1,000,000 in excess thereof. (b) Notwithstanding anything in this Agreement to the contrary, upon the occurrence and during the continuance of a Default or an Event of Default, no Borrower shall have the right to elect to Convert any existing ABR Advance to a new Eurodollar Advance or to Convert any existing Eurodollar Advance to a new Eurodollar Advance. In such event, such ABR Advance shall be automatically continued as an ABR Advance or such Eurodollar Advance shall be automatically Converted to an ABR Advance on the last day of the Interest Period applicable to such Eurodollar Advance. The foregoing shall not affect any other rights or remedies that the Agent or any Lender may have under this Agreement, any other Loan Document or the CVS Subordinated Note. (c) Each Conversion shall be effected by each Lender by applying the proceeds of each new ABR Advance or Eurodollar Advance, as the case may be, to the existing Advance (or portion thereof) being Converted (it being understood that such Conversion shall not constitute a borrowing for purposes of Sections 4, 5 or 6). (d) Notwithstanding any other provision of any Loan Document: (i) if a Borrower shall have failed to elect a Eurodollar Advance under Section 2.3 or this Section 3.3, as the case may be, in connection with any borrowing of new Revolving Credit Loans or expiration of an Interest Period with respect to any existing Eurodollar Advance, the amount of the Revolving Credit Loans subject to such borrowing or such existing Eurodollar Advance shall there- 33 after be an ABR Advance until such time, if any, as such Borrower shall elect a new Eurodollar Advance pursuant to this Section 3.3, (ii) a Borrower shall not be permitted to select a Eurodollar Advance the Interest Period in respect of which ends later than the Commitment Termination Date or such earlier date upon which all of the Commitments shall have been voluntarily terminated in accordance with Section 2.6, and (iii) the Borrowers shall not be permitted to have more than 12 Eurodollar Advances outstanding at any one time, it being understood and agreed that each borrowing of Eurodollar Advances pursuant to a single Borrowing Request shall constitute the making of one Eurodollar Advance for the purpose of calculating such limitation. 3.4. Interest Rates and Payment Dates (a) Prior to Maturity. Except as otherwise provided in Sections 3.4(b) and 3.4(c), the Loans shall bear interest on the unpaid principal balance thereof at the applicable interest rate or rates per annum set forth below: LOANS RATE Revolving Credit Loans Alternate Base Rate applicable made as ABR Advances thereto plus the Applicable Margin. Revolving Credit Loans Eurodollar Rate applicable made as Eurodollar thereto Advances plus the Applicable Margin. Swing Line Loans Negotiated Rate applicable thereto as provided in Section 2.2(a). (b) After Maturity, Late Payment Rate. After maturity, whether by acceleration, notice of intention to prepay or otherwise, the outstanding principal balance of the Loans shall bear interest at the Alternate Base Rate plus 2% per annum until paid (whether before or after the entry of any judgment thereon). Any payment of principal, interest, Fees or any other amount payable under the Loan Documents not paid on the date when due and payable shall bear interest at (i) in the case of principal, the applicable interest rate set forth in Section 3.4(a) plus 2% per annum and (ii) in the case of interest, Fees or any other amount payable under the Loan Documents, the Alternate Base Rate plus the Applicable Margin plus 2% per annum, in each case from the due date thereof until 34 DRAFT 11/15/96 the date such payment is made (whether before or after the entry of any judgment thereon. (c) Highest Lawful Rate. Notwithstanding anything to the contrary contained in this Agreement, at no time shall the interest rate payable to any Lender on any of its Loans, together with the Fees and all other amounts payable hereunder to such Lender to the extent the same constitute or are deemed to constitute interest, exceed the Highest Lawful Rate. If in respect of any period during the term of this Agreement, any amount paid to any Lender hereunder, to the extent the same shall (but for the provisions of this Section 3.4) constitute or be deemed to constitute interest, would exceed the maximum amount of interest permitted by the Highest Lawful Rate during such period (such amount being hereinafter referred to as an "Unqualified Amount"), then (i) such Unqualified Amount shall be applied or shall be deemed to have been applied as a prepayment of the Loans of such Lender, and (ii) if, in any subsequent period during the term of this Agreement, all amounts payable hereunder to such Lender in respect of such period which constitute or shall be deemed to constitute interest shall be less than the maximum amount of interest permitted by the Highest Lawful Rate during such period, then the applicable Borrower shall pay to such Lender in respect of such period an amount (each a "Compensatory Interest Payment") equal to the lesser of (x) a sum which, when added to all such amounts, would equal the maximum amount of interest permitted by the Highest Lawful Rate during such period, and (y) an amount equal to the aggregate sum of all Unqualified Amounts less all other Compensatory Interest Payments. (d) General. Interest shall be payable in arrears on each Interest Payment Date and, to the extent provided in Section 2.7(b), upon each prepayment of the Loans. Any change in the interest rate on the Loans resulting from an increase or a decrease in the Alternate Base Rate or any reserve requirement shall become effective as of the opening of business on the day on which such change shall become effective. The Agent shall, as soon as practicable, notify the Company on behalf of all Borrowers and the Lenders of the effective date and the amount of each change in the BNY Rate, but any failure to so notify shall not in any manner affect the obligation of the Borrowers to pay interest on the Loans in the amounts and on the dates set forth herein. Each determination by the Agent of the Alternate Base Rate, the Federal Funds Effective Rate and the Eurodollar Rate pursuant to this Agreement shall be conclusive and binding on the Borrowers absent manifest error. Each Borrower acknowledges that to the extent interest payable on the Loans is based on the Alternate Base Rate, such rate is only one of the bases for computing interest on loans made by the Lenders, and by basing interest payable on ABR Advances on the Alternate Base Rate, the Lenders have not committed to charge, and the Borrowers have not in any way bargained for, interest based on a lower or the lowest rate at which the Lenders may now or in the future make extensions of credit to other Persons. 35 All interest (other than interest calculated with reference to the BNY Rate) shall be calculated on the basis of a 360-day year for the actual number of days elapsed, and all interest calculated with reference to the BNY Rate shall be made on the basis of a 365/366-day year for the actual number of days elapsed. 3.5. Indemnification for Loss Notwithstanding anything contained herein to the contrary, if a Borrower shall fail to borrow a Eurodollar Advance or if a Borrower shall fail to Convert a Eurodollar Advance after it shall have given notice to do so in which it shall have requested a Eurodollar Advance pursuant to Section 2.3 or 3.3, as the case may be, or if the Borrower shall fail to borrow a Swing Line Loan after it shall have agreed to a Negotiated Rate with respect thereto in accordance with Section 2.2(a), or if a Eurodollar Advance or Swing Line Loan shall be terminated for any reason prior to the last day of the Interest Period applicable thereto, or if any repayment or prepayment of the principal amount of a Eurodollar Advance or Swing Line Loan is made for any reason on a date which is prior to the last day of the Interest Period applicable thereto, such Borrower agrees to indemnify each Lender (or the Swing Line Lender, as applicable) against, and to pay on demand directly to such Lender the amount (calculated by such Lender using any method chosen by such Lender which is customarily used by such Lender for such purpose) equal to any loss or expense suffered by such Lender as a result of such failure to borrow or Convert, or such termination, repayment or prepayment, including any loss, cost or expense suffered by such Lender in liquidating or employing deposits acquired to fund or maintain the funding of such Eurodollar Advance or Swing Line Loan, as the case may be, or redeploying funds prepaid or repaid, in amounts which correspond to such Eurodollar Advance or Swing Line Loan, as the case may be, and any reasonable internal processing charge customarily charged by such Lender in connection therewith. 3.6. Reimbursement for Costs, Etc. If at any time or from time to time there shall occur a Regulatory Change and the Issuer or any Lender shall have reasonably determined that such Regulatory Change (i) shall have had or will thereafter have the effect of reducing (A) the rate of return on the Issuer's or such Lender's capital or the capital of any Person directly or indirectly owning or controlling the Issuer or such Lender (each a "Control Person"), or (B) the asset value (for capital purposes) to the Issuer or such Lender or such Control Person, as applicable, of the Reimbursement Obligations, or any participation therein, or the Loans, or any participation therein, in any case to a level below that which the Issuer or such Lender or such Control Person could have achieved or would thereafter be able to achieve but for such Regulatory Change (after taking into account the Issuer's, such Lender's or such Control Person's policies regarding capital), (ii) will impose, modify or deem applicable any reserve, asset, special deposit or special assessment requirements on deposits obtained in the interbank eurodollar market in connection with the Loan Documents (excluding, with respect to any Eurodollar Advance, any such requirement which is 36 DRAFT 11/15/96 included in the determination of the rate applicable thereto), (iii) will subject the Issuer, or such Lender or such Control Person, as applicable, to any tax (documentary, stamp or otherwise) with respect to this Agreement, any Loan Document, or (iv) will change the basis of taxation of payments to the Issuer or such Lender or such Control Person, as applicable, of principal, interest or fees payable under the Loan Documents (except, in the case of clauses (iii) and (iv) above, for any tax or changes in the rate of tax on the Issuer's, or such Lender's or such Control Person's net income) then, in each such case, within ten days after demand by the Issuer or such Lender, as applicable, the Company shall pay to the Issuer, such Lender or such Control Person, as the case may be, such additional amount or amounts as shall be sufficient to compensate the Issuer, such Lender or such Control Person, as the case may be, for any such reduction, reserve or other requirement, tax, loss, cost or expense (excluding general administrative and overhead costs) attributable to the Issuer's, such Lender's or such Control Person's compliance during the term hereof with such Regulatory Change. The Issuer and each Lender may make multiple requests for compensation under this Section. 3.7. Illegality of Funding Notwithstanding any other provision hereof, if any Lender shall reasonably determine that any law, regulation, treaty or directive, or any change therein or in the interpretation or application thereof, shall make it unlawful for such Lender to make or maintain any Eurodollar Advance as contemplated by this Agreement, such Lender shall promptly notify the Company on behalf of all Borrowers and the Agent thereof, and (a) the commitment of such Lender to make such Eurodollar Advances or Convert ABR Advances to such Eurodollar Advances shall forthwith be suspended, (b) such Lender shall fund its portion of each requested Eurodollar Advance as an ABR Advance and (c) such Lender's Loans then outstanding as such Eurodollar Advances, if any, shall be Converted automatically to an ABR Advance on the last day of the then current Interest Period applicable thereto or at such earlier time as may be required. If the commitment of any Lender with respect to Eurodollar Advances is suspended pursuant to this Section and such Lender shall have obtained actual knowledge that it is once again legal for such Lender to make or maintain Eurodollar Advances, such Lender shall promptly notify the Agent and the Company on behalf of all Borrowers thereof and, upon receipt of such notice by each of the Agent and the Company, such Lender's commitment to make or maintain Eurodollar Advances shall be reinstated. If the commitment of any Lender with respect to Eurodollar Advances is suspended pursuant to this Section, such suspension shall not otherwise affect such Lender's Commitment. 3.8. Option to Fund; Substituted Interest Rate 37 (a) Each Lender has indicated that, if a Borrower requests a Swing Line Loan or a Eurodollar Advance, such Lender may wish to purchase one or more deposits in order to fund or maintain its funding of its Commitment Percentage of such Swing Line Loan or Eurodollar Advance during the Interest Period with respect thereto; it being understood that the provisions of this Agreement relating to such funding are included only for the purpose of determining the rate of interest to be paid in respect of such Swing Line Loan or Eurodollar Advance and any amounts owing under Sections 3.5 and 3.6. The Swing Line Lender and each Lender shall be entitled to fund and maintain its funding of all or any part of each Swing Line Loan and Eurodollar Advance in any manner it sees fit, but all such determinations hereunder shall be made as if such Lender had actually funded and maintained its Swing Line Loan or its Commitment Percentage of each Eurodollar Advance during the applicable Interest Period through the purchase of deposits in an amount equal to the amount of such Swing Line Loan or Eurodollar Advance, and having a maturity corresponding to such Interest Period. The Swing Line Lender, with respect to Swing Line Loans, and any Lender may fund its Commitment Percentage of each Eurodollar Advance from or for the account of any branch or office of such Lender as such Lender may choose from time to time, subject to Section 3.10. (b) In the event that (i) the Agent shall have determined in good faith (which determination shall be conclusive and binding upon the Borrower) that by reason of circumstances affecting the interbank eurodollar market either adequate and reasonable means do not exist for ascertaining the Eurodollar Rate applicable pursuant to Section 2.3 or Section 3.3, or (ii) the Required Lenders shall have notified the Agent that they have in good faith determined (which determination shall be conclusive and binding on the Borrowers) that the applicable Eurodollar Rate will not adequately and fairly reflect the cost to such Lenders of maintaining or funding loans bearing interest based on such Eurodollar Rate with respect to any portion of the Loans that a Borrower has requested be made as Eurodollar Advances or any Eurodollar Advance that will result from the requested conversion of any portion of the Loans into Eurodollar Advances (each, an "Affected Advance"), the Agent shall promptly notify the Company on behalf of the Borrowers and the Lenders (by telephone or otherwise, to be promptly confirmed in writing) of such determination on or, to the extent practicable, prior to the requested Borrowing Date or conversion date for such Affected Advances. If the Agent shall give such notice, (A) any Affected Advances shall be made as ABR Advances, (B) the Loans (or any portion thereof) that were to have been Converted to Affected Advances shall be Converted to or continued as ABR Advances, and (C) any outstanding Affected Advances shall be Converted, on the last day of the then current Interest Period with respect thereto, to ABR Advances. Until any notice under clauses (i) or (ii), as the case may be, of this Section 3.8(b) has been withdrawn by the Agent (by notice to the Company on behalf of the Borrowers) promptly upon either (x) the Agent having determined that such circumstances affecting the relevant market no longer exist and that adequate and reasonable means do exist for determining the Eurodollar Rate pursuant to Section 2.3 or Section 3.3, or (y) the Agent having been notified by such Required Lenders that circumstances no longer render the Loans (or any portion thereof) Affected Advances, no further Eurodollar Advances shall be required to 38 DRAFT 11/15/96 be made by the Lenders nor shall the Borrowers have the right to Convert all or any portion of the Loans to Eurodollar Advances. 3.9. Certificates of Payment and Reimbursement Each of the Issuer and each Lender agrees, in connection with any request by it for payment or reimbursement pursuant to Section 3.5 or 3.6, to provide the applicable Borrower with a certificate, signed by an officer of the Issuer or such Lender, as the case may be, setting forth a description in reasonable detail of any such payment or reimbursement. Each determination by the Issuer and each Lender of such payment or reimbursement shall be conclusive absent manifest error. 3.10. Taxes; Net Payments (a) All payments made by the Borrowers under the Loan Documents shall be made free and clear of, and without reduction for or on account of, any taxes required by law to be withheld from any amounts payable under the Loan Documents. In the event that a Borrower is prohibited by law from making such payments free of deductions or withholdings, then such Borrower shall pay such additional amounts to the Agent, for the benefit of the Issuer and the Lenders, as may be necessary in order that the actual amounts received by the Issuer and the Lenders in respect of interest and any other amounts payable under the Loan Documents after deduction or withholding (and after payment of any additional taxes or other charges due as a consequence of the payment of such additional amounts) shall equal the amount that would have been received if such deduction or withholding were not required. In the event that any such deduction or withholding can be reduced or nullified as a result of the application of any relevant double taxation convention, the Lenders, the Issuer and the Agent will, at the expense of the applicable Borrower, cooperate with such Borrower in making application to the relevant taxing authorities seeking to obtain such reduction or nullification, provided that the Lenders, the Issuer and the Agent shall have no obligation to (i) engage in litigation with respect thereto or (ii) disclose any tax return or other confidential information. If a Borrower shall make any payment under this Section or shall make any deduction or withholding from amounts paid under any Loan Document, such Borrower shall forthwith forward to the Agent original or certified copies of official receipts or other evidence acceptable to the Agent establishing each such payment, deduction or withholding, as the case may be, and the Agent in turn shall distribute copies thereof to the Issuer and each Lender. If any payment to the Issuer or any Lender under any Loan Document is or becomes subject to any withholding, the Issuer or such Lender, as the case may be, shall (unless otherwise required by a Governmental Authority or as a result of any law, rule, regulation, order 39 or similar directive applicable to the Issuer or such Lender, as the case may be) designate a different office or branch to which such payment is to be made from that initially selected thereby, if such designation would avoid such withholding and would not be otherwise disadvantageous to the Issuer or such Lender, as the case may be, in any respect. In the event that the Issuer or any Lender determines that it received a refund or credit for taxes paid by a Borrower under this Section, the Issuer or such Lender, as the case may be, shall promptly notify the Agent and such Borrower of such fact and shall remit to such Borrower the amount of such refund or credit applicable to the payments made by such Borrower in respect of the Issuer or such Lender, as the case may be, under this Section. (b) So long as it is lawfully able to do so, each Lender not incorporated under the laws of the United States or any State thereof shall deliver to the Company on behalf of itself and the other Borrowers such certificates, documents, or other evidence as a Borrower may reasonably require from time to time as are necessary to establish that such Lender is not subject to withholding under Section 1441, 1442 or 3406 of the Internal Revenue Code or as may be necessary to establish, under any law imposing upon such Borrower, hereafter, an obligation to withhold any portion of the payments made by such Borrower under the Loan Documents, that payments to the Agent on behalf of such Lender are not subject to withholding. Notwithstanding any provision herein to the contrary, a Borrower shall have no obligation to pay to the Issuer, the Swing Line Lender or any Lender any amount which such Borrower is liable to withhold due to the failure of the Issuer, the Swing Line Lender or such Lender, as the case may be, to file any statement of exemption required by the Internal Revenue Code. 3.11. Commitment Fee The Company agrees to pay to the Agent for the pro rata account of each Lender a fee (the "Commitment Fee"), payable quarterly in arrears during the period commencing on the Execution Date and ending on the Expiration Date on the last day of each March, June, September and December of each year, commencing on the last day of the calendar quarter in which the Execution Date shall have occurred, and on the Expiration Date, at a rate per annum equal to the Applicable Margin of the difference between (i) such Lender's Commitment and (ii) the sum of the outstanding principal balance of all Revolving Credit Loans of such Lender, such Lender's Swing Line Exposure and such Lender's Letter of Credit Exposure. Notwithstanding anything to the contrary contained in this Section, on and after the Commitment Termination Date, the Commitment Fee shall be payable upon demand. In addition, upon each reduction of the Aggregate Commitment Amount, the Company shall pay the Commitment Fee accrued on the amount of such reduction through the date of such reduction. The Commitment Fee shall be computed on the basis of a 360-day year for the actual number of days elapsed. 3.12. Letter of Credit Participation Fee The Company agrees to pay to the Agent for the pro rata account of each 40 DRAFT 11/15/96 Lender a fee (the "Letter of Credit Participation Fee") with respect to each Standby Letter of Credit and Commercial Letter of Credit, payable quarterly in arrears during the period commencing on the Effective Date and ending on the Commitment Termination Date on the last day of each March, June, September and December of each year, commencing on the last day of the calendar quarter in which the Effective Date shall have occurred, and ending on the expiration date or the date of termination of such Letter of Credit, at a rate per annum equal to the Applicable Margin of the average daily amount which may be drawn under such Letter of Credit during such period (whether or not the conditions for drawing thereunder have or may be satisfied) multiplied by such Lender's Commitment Percentage. The Letter of Credit Participation Fee shall be computed on the basis of a 360-day year for the actual number of days elapsed. 4. REPRESENTATIONS AND WARRANTIES In order to induce the Agent, the Lenders and the Issuer to enter into this Agreement, the Lenders to make the Loans and the Issuer to issue Letters of Credit, the Company (on behalf of itself and all Borrowers) hereby makes the following representations and warranties to the Agent, the Lenders and the Issuer: 4.1. Existence and Power Each of the Company and the Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation (except, in the case of the Subsidiaries, where the failure to be in such good standing could not reasonably be expected to have a Material Adverse effect), has all requisite corporate power and authority to own its Property and to carry on its business as now conducted, and is qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which it owns or leases real Property or in which the nature of its business requires it to be so qualified (except those jurisdictions where the failure to be so qualified or to be in good standing could not reasonably be expected to have a Material Adverse effect). 4.2. Authority Each Credit Party has full corporate power and authority to enter into, execute, deliver and perform the terms of the Loan Documents to which it is a party, all of which have been duly authorized by all proper and necessary corporate action and are not in contravention of any applicable law or the terms of its Certificate of Incorporation and 41 By-Laws. No consent or approval of, or other action by, shareholders of any Credit Party, any Governmental Authority, or any other Person (which has not already been obtained) is required to authorize in respect of such Credit Party, or is required in connection with the execution, delivery, and performance by such Credit Party of the Loan Documents to which it is a party, or is required as a condition to the enforceability of the Loan Documents to which it is a party against such Credit Party. 4.3. Binding Agreement The Loan Documents to which it is a party constitute the valid and legally binding obligations of each Credit Party, enforceable in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by equitable principles relating to the availability of specific performance as a remedy. 4.4. Litigation There are no actions, suits, arbitration proceedings or claims (whether purportedly on behalf of the Company or any Subsidiary or otherwise) pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary or any of its respective Properties, or maintained by the Company or any Subsidiary, at law or in equity, before any Governmental Authority which could reasonably be expected to have a Material Adverse effect. There are no proceedings pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary (a) which call into question the validity or enforceability of, or otherwise seek to invalidate any Loan Document, or (b) which might, individually or in the aggregate, materially and adversely affect any of the transactions contemplated by any Loan Document. 4.5. No Conflicting Agreements (a) Neither the Company nor any Subsidiary is in default under any agreement to which it is a party or by which it or any of its Property is bound the effect of which could reasonably be expected to have a Material Adverse effect. No notice to, or filing with, any Governmental Authority is required for the due execution, delivery and performance by any Credit Party of the Loan Documents to which it is a party. (b) No provision of any existing material mortgage, material indenture, material contract or material agreement or of any existing statute, rule, regulation, judgment, decree or order binding on the Company or any Subsidiary or affecting the Property of the Company or any Subsidiary conflicts with, or requires any consent which has not already been obtained under, or would in any way prevent the execution, delivery or performance by any Credit Party of the terms of, any Loan Document to which it is a party. The execution, delivery or performance by each Credit Party of the terms of each 42 DRAFT 11/15/96 Loan Document to which it is a party will not constitute a default under, or result in the creation or imposition of, or obligation to create, any Lien upon the Property of any Credit Party pursuant to the terms of any such mortgage, indenture, contract or agreement. 4.6. Taxes The Company and each Subsidiary has filed or caused to be filed all tax returns, and has paid, or has made adequate provision for the payment of, all taxes shown to be due and payable on said returns or in any assessments made against it, the failure of which to file or pay could reasonably be expected to have a Material Adverse effect, and no tax Liens (other than Liens permitted under Section 8.2) have been filed against such Credit Party and no claims are being asserted with respect to such taxes which are required by GAAP to be reflected in the Financial Statements and are not so reflected, except for taxes which have been assessed but which are not yet due and payable. The charges, accruals and reserves on the books of the Company and each Subsidiary with respect to all federal, state, local and other taxes are considered by the management of the Company to be adequate, and the Company knows of no unpaid assessment which (a) could reasonably be expected to have a Material Adverse effect, or (b) is or might be due and payable against it or any Subsidiary or any Property of the Company or any Subsidiary, except such thereof as are being contested in good faith and by appropriate proceedings diligently conducted, and for which adequate reserves have been set aside in accordance with GAAP or which have been assessed but are not yet due and payable. 4.7. Compliance with Applicable Laws; Filings Neither the Company nor any Subsidiary is in default with respect to any judgment, order, writ, injunction, decree or decision of any Governmental Authority which default could reasonably be expected to have a Material Adverse effect. The Company and each Subsidiary is complying with all applicable statutes, rules and regulations of all Governmental Authorities, a violation of which could reasonably be expected to have a Material Adverse effect. The Company and each Subsidiary has filed or caused to be filed with all Governmental Authorities all reports, applications, documents, instruments and information required to be filed pursuant to all applicable laws, rules, regulations and requests which, if not so filed, could reasonably be expected to have a Material Adverse effect. 4.8. Governmental Regulations Neither the Company nor any Subsidiary nor any corporation controlling 43 the Company or any Subsidiary or under common control with the Company or any Subsidiary is subject to regulation under the Investment Company Act of 1940, as amended, or is subject to any statute or regulation which regulates the incurrence of Indebtedness. 4.9. Federal Reserve Regulations; Use of Loan Proceeds No Credit Party is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, as amended. No part of the proceeds of the Loans or the Letters of Credit has been or will be used, directly or indirectly, to purchase, acquire or carry any Margin Stock or for a purpose which violates any law, rule or regulation of any Governmental Authority, including, without limitation, the provisions of Regulations G, T, U or X of the Board of Governors of the Federal Reserve System, as amended. Anything in this Agreement to the contrary notwithstanding, no Lender shall be obligated to extend credit to a Borrower in violation of any limitation or prohibition provided by any applicable law, regulation or statute, including Regulation U of the Board of Governors of the Federal Reserve System. 4.10. No Misrepresentation No representation or warranty contained in any Loan Document and no certificate or written report furnished by a Credit Party to the Agent or any Lender contains or will contain, as of its date, a misstatement of material fact, or omits or will omit to state, as of its date, a material fact required to be stated in order to make the statements therein contained not misleading in the light of the circumstances under which made. 4.11. Plans Each Employee Benefit Plan of the Company, each Subsidiary and each ERISA Affiliate is in compliance with ERISA and the Internal Revenue Code, where applicable, except where the failure to so comply would not be material. The Company, each Subsidiary and each ERISA Affiliate have complied with the material requirements of Section 515 of ERISA with respect to each Pension Plan which is a Multiemployer Plan, except where the failure to so comply would not be material. The Company and each Subsidiary and each ERISA Affiliate has, as of the date hereof, made all contributions or payments to or under each such Pension Plan required by law or the terms of such Pension Plan or any contract or agreement. No liability to the PBGC has been, or is reasonably expected by the Company, any Subsidiary or any ERISA Affiliate to be, incurred by the Company or such Subsidiary or ERISA Affiliate. Liability, as referred to in this Section 4.11, includes any joint and several liability, but excludes any liability for premiums under Section 4007 of ERISA. Each Employee Benefit Plan which is a group 44 DRAFT 11/15/96 health plan within the meaning of Section 5000(b)(1) of the Internal Revenue Code is in material compliance with the continuation of health care coverage requirements of Section 4980B of the Internal Revenue Code. 4.12. Environmental Matters Neither the Company nor any Subsidiary (a) has received written notice or otherwise learned of any claim, demand, action, event, condition, report or investigation indicating or concerning any potential or actual liability which individually or in the aggregate could reasonably be expected to have a Material Adverse effect, arising in connection with (i) any non-compliance with or violation of the requirements of any applicable federal, state or local environmental health or safety statute or regulation, or (ii) the release or threatened release of any toxic or hazardous waste, substance or constituent, or other substance into the environment, (b) to the best knowledge of the Company, has any threatened or actual liability in connection with the release or threatened release of any toxic or hazardous waste, substance or constituent, or other substance into the environment which individually or in the aggregate could reasonably be expected to have a Material Adverse effect, (c) has received notice of any federal or state investigation evaluating whether any remedial action is needed to respond to a release or threatened release of any toxic or hazardous waste, substance or constituent or other substance into the environment for which the Company or such Subsidiary is or would be liable, which liability would reasonably be expected to have a Material Adverse effect, or (d) has received notice that the Company or such Subsidiary is or may be liable to any Person under the Comprehensive Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C. Section 9601 et seq., or any analogous state law, which liability would reasonably be expected to have a Material Adverse effect. The Company and each Subsidiary is in compliance with the financial responsibility requirements of federal and state environmental laws to the extent applicable, including those contained in 40 C.F.R., parts 264 and 265, subpart H, and any analogous state law, except in those cases in which the failure so to comply would not reasonably be expected to have a Material Adverse effect. 4.13. Financial Statements The Company has heretofore delivered to the Lenders through the Agent copies of (i) the audited Consolidated Balance Sheet of the Company and its Subsidiaries as of December 31, 1995, and the related consolidated Statement of Income and Retained Earnings, and consolidated Statement of Cash Flows, for the fiscal year then ended, and (ii) the unaudited pro-forma (after giving effect to the Reorganization) Consolidated Bal- 45 ance Sheet of the Company as of the proposed Reorganization Date, and the related pro-forma (after giving effect to the Reorganization) Consolidated Statement of Income and Retained Earnings for the period from January 1, 1996 to September 30, 1996 (collectively, together with any related notes and schedules, the "Financial Statements"). The Financial Statements fairly present the Consolidated financial condition and results of the operations of the Company and the Subsidiaries, in each case as of the dates and for the periods indicated therein and, except as noted therein, have been prepared in conformity with GAAP as then in effect. Neither the Company nor any Subsidiary has any obligation or liability of any kind (whether fixed, accrued, contingent, unmatured or otherwise) which, in accordance with GAAP as then in effect, should have been disclosed in the Financial Statements and was not. Except with respect to the disclosures made in the Registration Statement, since December 31, 1995 (x) there has been no Material Adverse change, including as a result of any change in law, in the consolidated financial condition, operations, business or Property of the Company and its Subsidiaries and (y) the Company and its Subsidiaries have conducted their businesses only in the ordinary course. 4.14. Solvency Immediately after giving effect to the transactions contemplated by the Reorganization Documents and to the making of each Loan and the issuance of each Letter of Credit, the Company and each Subsidiary is and will be Solvent. 5. CONDITIONS OF LENDING-FIRST LOANS AND LETTERS OF CREDIT ON THE FIRST BORROWING DATE In addition to the requirements set forth in Section 6, the obligation of each Lender on the first Borrowing Date to make one or more Revolving Credit Loans, the Swing Line Lender to make one or more Swing Line Loans and the Issuer to issue one or more Letters of Credit are subject to the fulfillment of the following conditions precedent prior to or simultaneously with the Effective Date: 5.1. Evidence of Corporate Action The Agent shall have received a certificate, dated the Effective Date, of the Secretary or an Assistant Secretary of each Credit Party, (i) attaching a true and complete copy of the resolutions of its Board of Directors and of all documents evidencing all other necessary corporate action (in form and substance reasonably satisfactory to the Agent) taken by such Credit Party to authorize the Loan Documents to which it is a party and the transactions contemplated thereby (including the Reorganization), (ii) attaching a true and complete copy of its Certificate of Incorporation and By-Laws, (iii) setting forth the incumbency of the officer or officers of such Credit Party who may sign the Loan Documents to which it is a party and any other certificates, requests, notices or other documents now or in the future required thereunder, including therein a signature specimen of such officers, and (iv) attaching a certificate of good standing of the Secretary 46 DRAFT 11/15/96 of State of the state of incorporation of the Company, LNT, Inc., Rockford L.T., Inc. and Bloomington, MN. L.T.,Inc. 5.2. Opinion of Special Counsel The Agent shall have received from Special Counsel an opinion, dated the Effective Date, substantially in the form of Exhibit F. 5.3. Opinion of Counsel to the Credit Parties The Agent shall have received an opinion of Denise Tolles, Esq., counsel to the Credit Parties, dated the Effective Date, substantially in the form of Exhibit E. 5.4. Reorganization The Agent shall have received a certificate, in form and substance satisfactory to the Agent, from an Authorized Signatory of the Company certifying that the Reorganization has been consummated in accordance with the Reorganization Documents and attaching a true and complete copy of each Reorganization Document, each of which shall be in form and substance satisfactory to the Agent. 5.5. Subsidiary Guaranty The Agent shall have received the Subsidiary Guaranty duly executed by an Authorized Signatory of each Subsidiary Guarantor. 5.6. CVS Subordinated Note The Agent shall have received a copy of the duly executed CVS Subordinated Note. 5.7. Tangible Net Worth The Agent shall have received a certificate from an Authorized Signatory of the Company setting forth the computation, in detail satisfactory to the Agent, of the best estimate (based on all information readily available to the Company on the Effective Date) of Tangible Net Worth on the Effective Date, such estimate to be not less than $210 million. 47 6. CONDITIONS OF LENDING-ALL LOANS AND LETTERS OF CREDIT The obligation of each Lender on any Borrowing Date to make each Revolving Credit Loan, the Swing Line Lender to make each Swing Line Loan and the Issuer to issue each Letter of Credit are subject to the fulfillment of the following conditions precedent: 6.1. Compliance On each Borrowing Date, and after giving effect to the Loans to be made or the Letters of Credit to be issued on such Borrowing Date, (a) there shall exist no Default or Event of Default, and (b) the representations and warranties contained in each Loan Document shall be true and correct with the same effect as though such representations and warranties had been made on such Borrowing Date, except those which are expressly specified to be made as of an earlier date. 6.2. Requests The Agent shall have received either or both, as applicable, of a Borrowing Request or a Letter of Credit Request from the Company on behalf of the applicable Borrower. 6.3. Loan Closings All documents required by the provisions of this Agreement to have been executed or delivered to the Agent, any Lender or the Issuer on or before the applicable Borrowing Date shall have been so executed or delivered on or before such Borrowing Date. 7. AFFIRMATIVE AND FINANCIAL COVENANTS The Company covenants and agrees that on and after the Effective Date and until the later to occur of (a) the Commitment Termination Date, and (b) the payment in full of the Loans, the Reimbursement Obligations, the Fees and all other sums payable under the Loan Documents, the Company will: 7.1. Legal Existence Except as may otherwise be permitted by Sections 8.3 and 8.4, maintain, and cause each Subsidiary to maintain, its corporate existence in good standing in the jurisdiction of its incorporation or formation and in each other jurisdiction in which the failure so to do could reasonably be expected to have a Material Adverse effect, except that the corporate existence of Subsidiaries operating closing or discontinued operations may be terminated. 48 DRAFT 11/15/96 7.2. Taxes Pay and discharge when due, and cause each Subsidiary so to do, all taxes, assessments, governmental charges, license fees and levies upon or with respect to the Company and such Subsidiary, and upon the income, profits and Property thereof unless, and only to the extent, that either (i)(a) such taxes, assessments, governmental charges, license fees and levies shall be contested in good faith and by appropriate proceedings diligently conducted by the Company or such Subsidiary, and (b) such reserve or other appropriate provision as shall be required by GAAP shall have been made therefor, or (ii) the failure to pay or discharge such taxes, assessments, governmental charges, license fees and levies could not reasonably be expected to have a Material Adverse effect. 7.3. Insurance Keep, and cause each Subsidiary to keep, insurance with responsible insurance companies in such amounts and against such risks as is usually carried by businesses similar to the Company and the Subsidiaries. 7.4. Performance of Obligations Pay and discharge promptly when due, and cause each Subsidiary so to do, all lawful Indebtedness, obligations and claims for labor, materials and supplies or otherwise which, if unpaid, could reasonably be expected to (a) have a Material Adverse effect, or (b) become a Lien on the Property of the Borrower or any Subsidiary, except those Liens permitted under Section 8.2, provided that neither the Company nor such Subsidiary shall be required to pay or discharge or cause to be paid or discharged any such Indebtedness, obligation or claim so long as (i) the validity thereof shall be contested in good faith and by appropriate proceedings diligently conducted by the Company or such Subsidiary, and (ii) such reserve or other appropriate provision as shall be required by GAAP shall have been made therefor. 7.5. Condition of Property Except for ordinary wear and tear, at all times, maintain, protect and keep in good repair, working order and condition, all material Property necessary for the operation of its business (other than Property which is replaced with similar Property) as then being operated, and cause each Subsidiary so to do. 49 7.6. Observance of Legal Requirements Observe and comply in all material respects, and cause each Subsidiary so to do, with all laws, ordinances, orders, judgments, rules, regulations, certifications, franchises, permits, licenses, directions and requirements of all Governmental Authorities, which now or at any time hereafter may be applicable to it or to such Subsidiary, a violation of which could reasonably be expected to have a Material Adverse effect. 7.7. Financial Statements and Other Information Maintain, and cause each Subsidiary to maintain, a standard system of accounting in accordance with GAAP, and furnish to each Lender: (a) As soon as available and, in any event, within 90 days after the close of each fiscal year, a copy of (x) the Company's 10-K in respect of such fiscal year, and (y) (i) the Company's Consolidated Balance Sheet as of the end of such fiscal year, and (ii) the related Consolidated Statements of Earnings, Shareholders' Equity and Cash Flows, as of and through the end of such fiscal year, setting forth in each case in comparative form the corresponding figures in respect of the previous fiscal year, all in reasonable detail, and accompanied by a report of the Company's auditors, which report shall contain no qualification as to scope of audit or going concern and shall state that (A) such auditors audited such financial statements, (B) such audit was made in accordance with generally accepted auditing standards in effect at the time and provides a reasonable basis for such opinion, and (C) said financial statements have been prepared in accordance with GAAP; (b) As soon as available, and in any event within 50 days after the end of each of the first three fiscal quarters of each fiscal year, a copy of (x) the Company's 10-Q in respect of such fiscal quarter, and (y) (i) the Company's Consolidated Balance Sheet as of the end of such quarter, and (ii) the related Consolidated Statements of Earnings, Shareholders' Equity and Cash Flows for (A) such quarter, and (B) the period from the beginning of the then current fiscal year to the end of such quarter, in each case in comparable form with the prior fiscal year, all in reasonable detail and prepared in accordance with GAAP (without footnotes and subject to year-end adjustments); (c) Simultaneously with the delivery of the financial statements required by clauses (a) and (b) above, a certificate of the chief financial officer or treasurer of the Company (or such other officer as shall be acceptable to the Agent) certifying that no Default or Event of Default shall have occurred or be continuing or, if so, specifying in such certificate all such Defaults and Events of Default, and setting forth computations in reasonable detail demonstrating compliance with Sections 7.10, 8.1, 8.5, 8.12 and 8.16 as at the end of such fiscal quarter or fiscal year, as the case may be; (d) Promptly upon becoming available, copies of all regular or periodic 50 DRAFT 11/15/96 reports (including, without limitation, current reports on Form 8-K) which the Company or any Subsidiary may now or hereafter be required to file with or deliver to the Securities and Exchange Commission, or any other Governmental Authority succeeding to the functions thereof, and copies of all material news releases sent to all stockholders; (e) Prompt written notice of: (i) any citation, summons, subpoena, order to show cause or other order naming the Company or any Subsidiary a party to any proceeding before any Governmental Authority which could reasonably be expected to have a Material Adverse effect, and include with such notice a copy of such citation, summons, subpoena, order to show cause or other order, (ii) any lapse or other termination of any license, permit, franchise or other authorization issued to the Company or any Subsidiary by any Governmental Authority, (iii) any refusal by any Governmental Authority to renew or extend any license, permit, franchise or other authorization, and (iv) any dispute between the Company or any Subsidiary and any Governmental Authority, which lapse, termination, refusal or dispute, referred to in clause (ii), (iii) or (iv) above, could reasonably be expected to have a Material Adverse effect; (f) Prompt written notice of the occurrence of (i) each Default, (ii) each Event of Default, and (iii) each Material Adverse change; (g) Promptly upon receipt thereof, copies of any audit reports and management letters delivered in connection with the statements referred to in Section 7.7(a); (h) From time to time, such other information regarding the financial position or business of the Company and the Subsidiaries, as the Agent, at the request of any Lender, may reasonably request; and (i) Promptly deliver to the Agent and each Lender a copy of each proposed modification or other change to any of the Reorganization Documents prior to the effectiveness thereof. 7.8. Records Upon reasonable notice and during normal business hours, permit representatives of the Agent and each Lender to visit the offices of the Company and each Subsidiary, to examine the books and records (other than tax returns and work papers related to tax returns) thereof and auditors' reports relating thereto, to discuss the affairs of the Company and each Subsidiary with the respective officers thereof, and to meet and 51 discuss the affairs of the Company and each Subsidiary with the Company's auditors. Any meeting with the Company's auditors shall be at the expense of the Company if, at the time thereof, a Default shall have occurred and be continuing. 7.9. Authorizations Maintain and cause each Subsidiary to maintain, in full force and effect, all copyrights, patents, trademarks, trade names, franchises, licenses, permits, applications, reports, and other authorizations and rights, which, if not so maintained, would individually or in the aggregate have a Material Adverse effect. 7.10. Financial Covenants (a) Fixed Charge Coverage Ratio. Maintain at all times a Fixed Charge Coverage Ratio of not less than 1.35:1.00. (b) Leverage Ratio. Maintain at all times during each of the periods set forth below, a Leverage Ratio of not more than the applicable ratio set forth below for such period: Period Ratio ------ ----- Effective Date through December 30, 1997 4.90:1.00 December 31, 1997 and thereafter 4.75:1.00. (c) Minimum Tangible Net Worth. Maintain at all times Tangible Net Worth in an amount not less than the sum of (i) 90% of Tangible Net Worth as at the Effective Date, as set forth in the certificate delivered pursuant to Section 5.7, (ii) 50% of cumulative Consolidated net income (without giving effect to any net losses) for each fiscal year commencing with the 1997 fiscal year and (iii) 100% of the cumulative net proceeds received by the Company from any sale to the public of its capital Stock for the period commencing after the Reorganization. 8. NEGATIVE COVENANTS The Company covenants and agrees that on and after the Effective Date and until the later to occur of (a) the Commitment Termination Date, and (b) the payment in full of the Loans, the Reimbursement Obligations, the Fees and all other sums which are payable under the Loan Documents, the Company will not: 52 DRAFT 11/15/96 8.1. Indebtedness Create, incur, assume or suffer to exist any Indebtedness, or permit any Subsidiary so to do, except (i) the Loans and the Letters of Credit, (ii) capitalized lease, purchase money and real estate mortgage Indebtedness of the Company and the Subsidiary Guarantors in an aggregate outstanding principal amount not exceeding $12,500,000, (iii) the CVS Subordinated Debt, (iv) Intercompany Debt and (v) additional unsecured Indebtedness of the Company and the Subsidiary Guarantors in an aggregate outstanding principal amount not exceeding $10,000,000. 8.2. Liens Create, incur, assume or suffer to exist any Lien against or on any Property now owned or hereafter acquired by the Company or any of the Subsidiaries, or permit any Subsidiary so to do, except any one or more of the following types of Liens: (a) Liens in connection with workers' compensation, unemployment insurance or other social security obligations (which phrase shall not be construed to refer to ERISA or the minimum funding obligations under Section 412 of the Code), (b) Liens to secure the performance of bids, tenders, letters of credit (other than letters of credit securing the payment of Indebtedness), contracts (other than contracts for the payment of Indebtedness), leases, statutory obligations, surety, customs, appeal, performance and payment bonds and other obligations of like nature, in each such case arising in the ordinary course of business, (c) mechanics', workmen's, carriers', warehousemen's, materialmen's, landlords', or other like Liens arising in the ordinary course of business with respect to obligations which are not due or which are being contested in good faith and by appropriate proceedings diligently conducted, (d) Liens for taxes, assessments, fees or governmental charges the payment of which is not required by Section 7.2, (e) easements, rights of way, restrictions, leases of Property to others, easements for installations of public utilities, title imperfections and restrictions, zoning ordinances and other similar encumbrances affecting Property which in the aggregate do not materially impair its use for the operation of the business of the Company or such Subsidiary, (f) Liens on Property under capital leases and Liens on Property (excluding Liens on the Stock of any Subsidiary) acquired (whether as a result of purchase, capital lease, merger or other acquisition) and either existing on such Property when acquired, or created contemporaneously with such acquisition to secure the payment or financing of the purchase price of such Property (including the construction, development, substantial repair, alteration or improvement thereof), provided that such Liens attach only to the Property so purchased or acquired (including any such construction, development, substantial repair, alteration or improvement thereof) and provided further that the Indebtedness secured by such Liens is permitted by Section 8.1, 53 (g) statutory Liens in favor of lessors arising in connection with Property leased to the Company or any of the Subsidiaries, (h) Liens of attachments, judgments or awards against the Company or any of the Subsidiaries with respect to which an appeal or proceeding for review shall be pending or a stay of execution shall have been obtained, or which are otherwise being contested in good faith and by appropriate proceedings diligently conducted, and in respect of which adequate reserves shall have been established in accordance with GAAP on the books of the Company or such Subsidiary, and (i) Liens securing Indebtedness of a Subsidiary to the Company or another Subsidiary. 8.3. Dispositions Make any Disposition, or permit any Subsidiary so to do, except any one or more of the following: (a) Dispositions of inventory in the ordinary course of business; (b) Dispositions of individual stores consistent with past practices; (c) Dispositions in the form of a sale/lease-back transaction with respect to the distribution center located at 7500 Business Park Drive, Greensboro, North Carolina, provided that the net proceeds received from such sale/lease-back transaction are immediately applied to the prepayment of the Loans; (d) Dispositions in the form of a sale/lease-back transaction with respect to any store constructed by the Company or any Subsidiary, provided that the sale/lease-back transaction is concluded within 12 months of the commencement of operations of such store and the net proceeds from such sale/lease-back transaction are immediately applied to the prepayment of the Loans; and (e) Restricted Payments to the extent permitted pursuant to Section 8.6. 8.4. Merger or Consolidation, Etc. Consolidate with, be acquired by, or merge into or with any Person, or convey or otherwise transfer all or substantially all of its Property, or permit any Subsidiary so to do, except that: (a) any wholly-owned Subsidiary may consolidate with or merge with any other wholly-owned Subsidiary, or convey or transfer all or substantially all of its Property to any other wholly-owned Subsidiary, provided that immediately before and after giving effect thereto no Default or Event of Default shall or would exist; (b) any wholly-owned Subsidiary may consolidate with or merge with the Company, or convey or transfer all or substantially all of its Property to the Company, 54 DRAFT 11/15/96 provided that (x) immediately before and after giving effect thereto no Default or Event of Default shall or would exist and (y) the Company shall be the survivor of such consolidation or merger; and (c) any Subsidiary may consolidate with or merge with another Person, or any Subsidiary may convey or transfer all or substantially all of its Property to such other Person, in each case solely in connection with and as part of a permitted Disposition under Section 8.3 or a permitted Acquisition under Section 8.5, provided that (x) immediately before and after giving effect thereto no Default or Event of Default shall or would exist and (y) in the event that the Company is party to any such merger or consolidation, the Company shall be the survivor of such consolidation or merger; provided that in connection with each such merger, conveyance or transfer the Company and each Subsidiary party thereto shall execute and deliver to the Agent such documents and opinions as the Agent shall require in connection therewith. 8.5. Acquisitions Make any Acquisition, or permit any of the Subsidiaries so to do, except any one or more of the following: (a) Acquisitions of store leaseholds in the ordinary course of the Company's business and (b) other Acquisitions by the Company or any of the Subsidiaries, provided that (i) immediately before and after giving effect to each such other Acquisition, no Default or Event of Default shall or would exist and (ii) the aggregate amount expended on such other Acquisitions does not exceed $10,000,000 through the Expiration Date. 8.6. Restricted Payments Make any Restricted Payment, or permit any Subsidiary so to do, except any one or more of the following Restricted Payments: (a) any direct or indirect wholly-owned Subsidiary may make dividends or other distributions to the Company or to any other direct or indirect wholly-owned Subsidiary, and (b) the Company may make Restricted Payments in the form of repurchases of its Stock pursuant to and in accordance with the Company's Incentive Compensation Plan, provided that, in the case of this clause (b), immediately before and after giving effect thereto, no Default or Event of Default shall or would exist. 8.7. Limitation on Upstream Dividends by Subsidiaries 55 Permit or cause any of the Subsidiaries to enter into or agree, or otherwise be or become subject, to any agreement, contract or other arrangement (other than this Agreement) with any Person pursuant to the terms of which (a) such Subsidiary is or would be prohibited from declaring or paying any cash dividends on any class of its stock owned directly or indirectly by the Company or any of the other Subsidiaries or from making any other distribution on account of any class of any such stock (herein referred to as "Upstream Dividends"), or (b) the declaration or payment of Upstream Dividends by a Subsidiary to the Company or another Subsidiary, on an annual or cumulative basis, is or would be otherwise limited or restricted. 8.8. Limitation on Negative Pledges Enter into any agreement, other than (i) this Agreement and (ii) purchase money Lien documentation or capital leases permitted by this Agreement (in which cases, any prohibition or limitation shall only be effective against the assets financed thereby), or permit any Subsidiary so to do, which prohibits or limits the ability of the Company or such Subsidiary to create, incur, assume or suffer to exist any Lien upon any of its Property or revenues, whether now owned or hereafter acquired. 8.9. Certain Documents Amend, modify or otherwise change any term or provision of the organizational documents of any Credit Party or of the CVS Subordinated Note if such change would adversely affect the interest of the Agent or the Lenders under the Loan Documents or the CVS Subordinated Note, or amend, modify or otherwise change any term or provision of the Reorganization Documents (excluding the CVS Subordinated Note) if such change would materially adversely affect the interest of the Agent or the Lenders under the Loan Documents or the CVS Subordinated Note. 8.10. Business Change Materially change the nature of the business of the Company and the Subsidiaries as conducted on the Effective Date. 8.11. New Subsidiaries Create or acquire any Subsidiary not existing of the Effective Date, or permit any Subsidiary so to do, except (a) the Company or any Subsidiary may create a new Subsidiary in connection with the construction or acquisition of any new store, (b) the Company or any Subsidiary may acquire a new Subsidiary in connection with an Acquisition permitted by Section 8.5 and (c) the Company or any Subsidiary may create a new Subsidiary in the ordinary course of its business. Within 30 days after each time the Agent notifies the Company that the Agent has determined that one or more of the new Subsidiaries which are not Subsidiary Guarantors is material, the Company shall cause such new Subsidiaries as the Agent shall designate to execute and deliver to the Agent a Subsidiary Guaranty Addendum and such other documents and opinions as the Agent shall require in connection therewith. In addition, at any time the Company may cause any 56 DRAFT 11/15/96 Subsidiary which is not a Subsidiary Guarantor to become a Subsidiary Guarantor by executing and delivering to the Agent a Subsidiary Guaranty Addendum and such other documents and opinions as the Agent shall require in connection therewith 8.12. Investments, Acquisitions, Loans, Etc. At any time, purchase or otherwise acquire, hold or invest in the Stock or Property of, or any other interest in, any Person, or make any loan or advance to, or enter into any arrangement for the purpose of providing funds or credit to, or make any other investment, whether by way of capital contribution, deposit or otherwise, in or with any Person, or permit any Subsidiary so to do (all of which are sometimes referred to herein as "Investments"), except: (a) Investments in cash or Cash Equivalents; (b) normal business banking accounts and short-term certificates of deposit and time deposits in, or issued by, federally insured institutions in amounts not exceeding the limits of such insurance; (c) Investments in the form of purchases or other acquisitions of inventory, materials and equipment in the ordinary course of business; and (d) Investments permitted by Sections 8.4, 8.5, 8.6 and 8.11. 8.13. Sale and Leaseback Enter into any arrangement with any Person providing for the leasing by it of Property which has been or is to be sold or transferred by it to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such Property or its rental obligations, or permit any Subsidiary so to do, except to the extent permitted under Section 8.3. 8.14. Fiscal Year Change its fiscal year from that in effect on the Effective Date, or permit any Subsidiary so to do, except, with 30 days' prior notice to the Agent and the Lenders, the Company and all of the Subsidiaries may change their fiscal year. 8.15. Transactions with Affiliates 57 Become a party to any transaction with an Affiliate unless the terms and conditions relating thereto are as favorable to it as those which would be obtainable at the time in a comparable arms-length transaction with a Person other than an Affiliate, or permit any Subsidiary so to do, except as provided for in the Reorganization Documents. 8.16. Capital Expenditures During any fiscal year, make any capital expenditures, or incur any obligation so to do, or permit any Subsidiary so to do, in excess of the following amounts during the following periods:
Period Amount ------ ------ 1997 fiscal year $35,000,000 1998 fiscal year $40,000,000 1999 fiscal year $45,000,000
Each amount set forth above for the 1998 and 1999 fiscal years shall be increased, on a non-cumulative basis, by an amount equal to 40% of Free Cash Flow generated in the immediately preceding fiscal year. 8.17. CVS Subordinated Debt Make any payment or prepayment of interest on the CVS Subordinated Debt except as expressly permitted by the subordination terms of the CVS Subordinated Note, or purchase or make any payment or prepayment of principal on the CVS Subordinated Debt prior to the final stated maturity of the CVS Subordinated Debt, or purchase or make any payment of principal on the CVS Subordinated Debt on or after the final stated maturity of the CVS Subordinated Debt except as expressly permitted by the subordination terms of the CVS Subordinated Note. 9. DEFAULT 9.1. Events of Default The following shall each constitute an "Event of Default" hereunder: (a) Any payment of principal on any Loan or any reimbursement payment in respect of any Letter of Credit shall not be paid when due and payable; or (b) Any payment of interest on any Loan or of any Fee shall not be paid when due and payable and such default shall continue unremedied for a period of 5 Domestic Business Days after the same shall be due and payable; or 58 DRAFT 11/15/96 (c) The failure of a Borrower to observe any agreement contained in Section 2.4; or (d) The failure of the Company to observe or perform any covenant or agreement contained in Sections 7.1, 7.10 or in Section 8; or (e) The failure of the Company or any Borrower to observe or perform any other covenant or agreement contained in this Agreement, and such failure shall have continued unremedied for a period of 30 days after the Company or any Borrower shall have become aware of such failure; or (f) Any representation or warranty made in any Loan Document, or made in any certificate, report, opinion (other than an opinion of counsel) or other document delivered on or after the date hereof shall in any such case prove to have been incorrect or misleading (whether because of misstatement or omission) in any material respect when made; or (g) (i) Obligations in an aggregate Consolidated amount in excess of $2,500,000 of the Company and the Subsidiaries, (other than obligations hereunder) whether as principal, guarantor, surety or other obligor, for the payment of any Indebtedness or any net liability under interest rate swap, collar, exchange or cap agreements, (A) shall become or shall be declared to be due and payable prior to the expressed maturity thereof, or (B) shall not be paid when due or within any grace period for the payment thereof, or (ii) any holder of any such obligations shall have the right to declare the Indebtedness evidenced thereby due and payable prior to its stated maturity; or (h) The Company or any Subsidiary shall (i) suspend or discontinue its business (except for store closings in the ordinary course of business and except in connection with a permitted Disposition under Section 8.3 and as may otherwise be expressly permitted herein), or (ii) make an assignment for the benefit of creditors, or (iii) generally not be paying its debts as such debts become due, or (iv) admit in writing its inability to pay its debts as they become due, or (v) file a voluntary petition in bankruptcy, or (vi) become insolvent (however such insolvency shall be evidenced), or (vii) file any petition or answer seeking for itself any reorganization, arrangement, composition, readjustment of debt, liquidation or dissolution or similar relief under any present or future statute, law or regulation of any jurisdiction (including under any law applicable to insurance companies), or (viii) petition or apply to any tribunal, or any other Governmental Authority, for any receiver, custodian or any trustee for any substantial part of its 59 Property, or (ix) be the subject of any proceeding specified in clause (vii) or (viii) filed against it which remains undismissed for a period of 60 consecutive days, or (x) file any answer admitting or not contesting the material allegations of any such petition filed against it, or of any order, judgment or decree approving such petition in any such proceeding, or (xi) seek, approve, consent to, or acquiesce in any such proceeding, or in the appointment of any trustee, receiver, custodian, liquidator, or fiscal agent for it, or any substantial part of its Property, or an order is entered appointing any such trustee, receiver, custodian, liquidator or fiscal agent and such order remains unstayed and in effect for 60 consecutive days, or (xii) take any formal action for the purpose of effecting any of the foregoing (except as may otherwise be expressly permitted herein); or (i) An order for relief is entered under the United States bankruptcy laws or any other decree or order is entered by a court or other Governmental Authority having jurisdiction and continues unstayed and in effect for a period of 60 consecutive days (i) adjudging the Company or any Subsidiary bankrupt or insolvent, or (ii) approving as properly filed a petition seeking reorganization, liquidation, arrangement, adjustment or composition of, or in respect of the Company or any Subsidiary under the United States bankruptcy laws or any other applicable Federal or state law, or (iii) appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of the Company or any Subsidiary or of substantially all of the Property of any thereof, or (iv) ordering the winding up or liquidation of the affairs of the Company or any Subsidiary; or (j) Judgments or decrees in an aggregate Consolidated amount in excess of $2,500,000 against the Company and the Subsidiaries shall remain unpaid, unstayed on appeal, undischarged, unbonded or undismissed for a period of 60 days; or (k) After the Effective Date any Person (other than CVS), acting alone or with a group of Persons (within the meaning of Section 13(d) of the Securities Act of 1934, as amended) acting in concert, (i) shall have or acquire beneficial ownership of securities (or options therefor) having 20% or more of the ordinary voting power of the Company, or (ii) shall possess, directly or indirectly, the power to direct or cause the direction of the management and policies of the Company, whether through the ownership of voting securities, by contract or otherwise; or (l) (i) Any Termination Event shall occur (x) with respect to any Pension Plan (other than a Multiemployer Plan) or (y) with respect to any other retirement plan subject to Section 302 of ERISA or Section 412 of the Internal Revenue Code, which plan, during the five year period prior to such Termination Event, was the responsibility in whole or in part of the Company, any Subsidiary or any ERISA Affiliate, provided that this clause (y) shall only apply if, in connection with such Termination Event, it is reasonably likely that liability under Section 4069 of ERISA in an aggregate 60 DRAFT 11/15/96 Consolidated amount in excess of $1,000,000 will be imposed upon the Company, any Subsidiary or any ERISA Affiliate; (ii) any Accumulated Funding Deficiency, whether or not waived, in an aggregate Consolidated amount in excess of $1,000,000 shall exist with respect to any Pension Plan with respect to any Pension Plan (other than a Multiemployer Plan); (iii) any Person shall engage in any Prohibited Transaction involving any Employee Benefit Plan; (iv) the Company, any Subsidiary or any ERISA Affiliate shall fail to pay when due an amount which is payable by it to the PBGC or to a Pension Plan (including a Multiemployer Plan) under Title IV of ERISA; (v) the imposition of any tax under Section 4980(B)(a) of the Internal Revenue Code; or (vi) the assessment of a civil penalty with respect to any Employee Benefit Plan under Section 502(c) of ERISA; in each case, to the extent such event or condition would have a Material Adverse effect; or (m) A default shall occur under the Company Guaranty or the Subsidiary Guaranty or if for any reason, after the execution and delivery thereof, the Company Guaranty or the Subsidiary Guaranty is not in full force and effect. 9.2. Remedies (a) Upon the occurrence of an Event of Default or at any time thereafter during the continuance of an Event of Default, the Agent, at the written request of the Required Lenders, shall notify the Company (on behalf of all Borrowers) that the Commitments, the Swing Line Commitment and the Letter of Credit Commitment have been terminated and/or that all of the Loans and the Reimbursement Obligations and all accrued and unpaid interest on any thereof and all other amounts owing under the Loan Documents have been declared immediately due and payable, provided that upon the occurrence of an Event of Default under Section 9.1(h) or (i), the Commitments, the Swing Line Commitment and the Letter of Credit Commitment shall automatically terminate and all of the Loans and the Reimbursement Obligations and all accrued and unpaid interest on any thereof and all other amounts owing under the Loan Documents shall become immediately due and payable without declaration or notice. To the fullest extent not prohibited by law, except for the notice provided for in the preceding sentence, each Borrower expressly waives any presentment, demand, protest, notice of protest or other notice of any kind in connection with the Loan Documents and its obligations thereunder. To the fullest extent not prohibited by law, each Borrower further expressly waives and covenants not to assert any appraisement, valuation, stay, extension, redemption or similar law, now or at any time hereafter in force which might delay, prevent or otherwise impede the performance or enforcement of the Loan Documents. (b) In the event that the Commitments, the Swing Line Commitment and the Letter of Credit Commitment shall have been terminated or all of the Loans and the Reimbursement Obligations shall have been declared due and payable pursuant to the 61 provisions of this Section, (i) the Company shall forthwith deposit an amount equal to the Letter of Credit Exposure in a cash collateral account with and under the exclusive control of the Agent, and (ii) the Agent, the Issuer and the Lenders agree, among themselves, that any funds received from or on behalf of the Company under any Loan Document or the CVS Subordinated Note by the Issuer or any Lender (except funds received by the Issuer or any Lender as a result of a purchase from the Issuer or such Lender, as the case may be, pursuant to the provisions of Section 12.9) shall be remitted to the Agent, and shall be applied by the Agent in payment of the Loans, the Reimbursement Obligations and the other obligations of the Credit Parties under the Loan Documents in the following manner and order: (1) first, to reimburse the Agent, the Issuer and the Lenders, in that order, for any expenses due from the Company and the Borrowers pursuant to the provisions of Section 12.5 and the Reimbursement Agreements, (2) second, to the payment of the Fees, (3) third, to the payment of any expenses or amounts (other than the principal of and interest on the Loans and the Reimbursement Obligations) payable by the Company and the Borrowers to the Agent, the Issuer or any of the Lenders under the Loan Documents, (4) fourth, to the payment, pro rata according to the outstanding principal balance of the Loans and the Letter of Credit Exposure of each Lender, of interest due on the Loans and the Reimbursement Obligations, (5) fifth, to the payment, pro rata according to the sum of (A) the aggregate outstanding principal balance of the Loans plus (B) the aggregate outstanding balance of the Reimbursement Obligations, of the aggregate outstanding principal balance of the Loans and the aggregate outstanding balance of the Reimbursement Obligations, and (6) sixth, any remaining funds shall be paid to whosoever shall be entitled thereto or as a court of competent jurisdiction shall direct. (c) In the event that the Loans and the Reimbursement Obligations shall have been declared due and payable pursuant to the provisions of this Section 9.2, the Agent upon the written request of the Required Lenders, shall proceed to enforce the Reimbursement Obligations and the rights of the holders of the Loans by suit in equity, action at law and/or other appropriate proceedings, whether for payment or the specific performance of any covenant or agreement contained in the Loan Documents or the CVS Subordinated Note. In the event that the Agent shall fail or refuse so to proceed, the Issuer and each Lender shall be entitled to take such action as the Required Lenders shall deem appropriate to enforce its rights under the Loan Documents and the CVS Subordinated Note. 10. THE AGENT 10.1. Appointment Each Lender hereby irrevocably designates and appoints BNY as the Agent of such Lender under the Loan Documents and the CVS Subordinated Note each Lender irrevocably authorizes the Agent to take such action on its behalf under the provisions of the Loan Documents and the CVS Subordinated Note to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of the Loan Documents and the CVS Subordinated Note, together with such other powers as are reasonably 62 DRAFT 11/15/96 incidental thereto. Notwithstanding any provision to the contrary contained in the Loan Documents or the CVS Subordinated Note, the Agent shall not have any duties or responsibilities except those expressly set forth in the Loan Documents, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into the Loan Documents or the CVS Subordinated Note or otherwise exist against the Agent. 10.2. Delegation of Duties The Agent may execute any of its rights or duties under the Loan Documents or the CVS Subordinated Note by or through agents or attorneys-in-fact and shall be entitled to rely upon the advice of counsel concerning all matters pertaining thereto, and shall not be liable for any action taken or omitted to be taken in good faith upon the advice of such counsel. 10.3. Exculpatory Provisions None of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by the Agent or such Person under or in connection with the Loan Documents or the CVS Subordinated Note (except the Agent for its own gross negligence or willful misconduct), or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by any party contained in the Loan Documents or the CVS Subordinated Note or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, the Loan Documents or the CVS Subordinated Note or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of any of the Loan Documents or the CVS Subordinated Note or for any failure of any Credit Party or any other Person to perform its obligations thereunder. The Agent shall not be under any obligation to any Lender to ascertain or to inquire into the observance or performance of any of the covenants or agreements contained in, or conditions of, the Loan Documents or the CVS Subordinated Note, or to inspect the Property, books or records of the Company or any Subsidiary. The Agent shall not be under any liability or responsibility to any Credit Party or any other Person as a consequence of any failure or delay in performance, or any breach, by any Lender of any of its obligations under any of the Loan Documents or the CVS Subordinated Note. The Lenders acknowledge that the Agent shall not be under any duty to take any discretionary action permitted under the Loan Documents or the CVS Subordinated Note unless the Agent shall be requested in writing to do so by the Required Lenders. 10.4. Reliance by Agent The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, request, consent, certificate, affidavit, opinion, letter, 63 cablegram, telegram, fax, telex or teletype message, statement, order or other document or conversation reasonably believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including counsel to the Company), independent accountants and other experts selected by the Agent. The Agent may treat each Lender, or the Person designated in the last notice filed under Section 12.7, as the holder of all of the interests of such Lender in its Loans until written notice of transfer, signed by such Lender (or the Person designated in the last notice filed with the Agent) and by the Person designated in such written notice of transfer, in form and substance satisfactory to the Agent, shall have been filed with the Agent and all requirements of Section 12.7 have been satisfied. The Agent shall not be under any duty to examine or pass upon the validity, effectiveness or genuineness of the Loan Documents or any instrument, document or communication furnished pursuant thereto or in connection therewith, and the Agent shall be entitled to assume that the same are valid, effective and genuine, have been signed or sent by the proper parties and are what they purport to be. The Agent shall be fully justified in failing or refusing to take any action not expressly required under the Loan Documents unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under the Loan Documents in accordance with a request of the Required Lenders or, if required by Section 12.1, all Lenders, and such request and any action taken or failure to act pursuant thereto shall be binding upon the Credit Parties, all the Lenders and all future holders of the Loans. 10.5. Notice of Default The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default unless the Agent shall have received written notice thereof from a Lender or the Company referring to this Agreement, describing such Default or Event of Default and stating such notice is a "Notice of Default." In the event that the Agent receives such a notice, the Agent shall promptly give notice thereof to the Lenders. The Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders, provided that unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action or give such directions, or refrain from taking such action or giving such directions, with respect to such Default or Event of Default as it shall deem to be in the best interests of the Lenders. 10.6. Non-Reliance Each Lender expressly acknowledges that neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to such Lender and that no act by the Agent hereafter, including any review of the affairs of the Company or the Subsidiaries, shall be deemed to constitute any representation or warranty by the Agent to any Lender. Each Lender represents to the 64 DRAFT 11/15/96 Agent that such Lender has, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own evaluation of and investigation into the business, operations, Property, financial and other condition and creditworthiness of the Company and the Subsidiaries and has made its own decision to enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, evaluations and decisions in taking or not taking action under the Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, Property, financial and other condition and creditworthiness of the Company and the Subsidiaries. Each Lender acknowledges that a copy of this Agreement and all exhibits and schedules hereto have been made available to it and its individual counsel for review, and each Lender acknowledges that it is satisfied with the form and substance thereof. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Agent hereunder, the Agent shall have no duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, Property, financial and other condition or creditworthiness of the Company or the Subsidiaries which may come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates. 10.7. Indemnification Each Lender agrees to indemnify the Agent in its capacity as such (to the extent not promptly reimbursed by the Company and without limiting the obligation of the Company to do so), pro rata according to (i) at any time when no Loans are outstanding, its Commitment Percentage, or if no Commitments then exist, its Commitment Percentage on the last day on which Commitments did exist, and (ii) at any time when Loans are outstanding (x) if the Commitments then exist, its Commitment Percentage or (y) if the Commitments have been terminated or otherwise no longer exist, the percentage equal to the fraction (A) the numerator of which is such Lender's Credit Exposure and (B) the denominator of which is the Aggregate Credit Exposure, from and against any and all liabilities, obligations, claims, losses, damages, penalties, actions, judgments, suits, costs, expenses and disbursements of any kind whatsoever, including any amounts paid to the Lenders by or for the account of the Company pursuant to the terms of the Loan Documents or the CVS Subordinated Note that are subsequently rescinded or avoided (or must otherwise be restored or returned), which may at any time (including at any time following the payment of the Loans and the Notes) be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of the Loan Documents or the CVS Subordinated Note or any other document contemplated by 65 or referred to therein or the transactions contemplated thereby or any action taken or omitted to be taken by the Agent under or in connection therewith; provided that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements to the extent resulting solely from the gross negligence or willful misconduct of the Agent. The agreements in this Section shall survive the payment of the Loans and all other amounts payable under the Loan Documents. If the Agent is subsequently reimbursed by the Company for such amounts, the Agent shall remit to the Lenders their pro rata shares of such reimbursement to the extent they previously paid such amounts. 10.8. Agent in Its Individual Capacity BNY and each Affiliate thereof, may make loans to, accept deposits from, issue letters of credit for the account of and generally engage in any kind of business with the Borrower and the Subsidiaries as though it were not the Agent and BNYCMI did not arrange the transactions contemplated hereby. With respect to the Commitment made or renewed by BNY, BNY shall have the same rights and powers under the Loan Documents and the CVS Subordinated Note as any Lender and may exercise the same as though it were not the Agent, the Issuer and the Swing Line Lender and the term "Lender" shall include BNY. 10.9. Successor Agent If at any time the Agent deems it advisable, in its sole discretion, it may submit to each Lender a written notification of its resignation as Agent under the Loan Documents and the CVS Subordinated Note, such resignation to be effective on the earlier to occur of (a) the thirtieth day after the date of such notice, and (b) the date upon which any successor to the Agent, in accordance with the provisions of this Section, shall have accepted in writing its appointment as successor Agent. Upon any such resignation, the Required Lenders shall have the right to appoint from among the Lenders a successor Agent. If no such successor Agent shall have been so appointed by the Required Lenders and accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which successor Agent shall be a commercial bank organized and licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $500,000,000. Upon the written acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall automatically become a party to this Agreement and shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent's rights, powers, privileges and duties as Agent under the Loan Documents and the CVS Subordinated Note shall be terminated. The Credit Parties and the Lenders shall execute such documents as shall be necessary to effect such appointment. After any retiring Agent's resignation as Agent, the provisions of this Section 10 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Agent. If at any time there shall not be a duly appointed and acting Agent, upon notice duly given, the Credit Parties agree to make each payment when due under the Loan 66 DRAFT 11/15/96 Documents and the CVS Subordinated Note directly to the Lenders entitled thereto during such time. 11. GUARANTY OF THE COMPANY In order to induce the Agent, the Issuing Bank and the Lenders to enter into this Agreement, to make the Loans contemplated hereby and to issue and participate in the Letters of Credit, the Company hereby agrees as follows: 11.1. Guaranty The Company hereby absolutely, irrevocably and unconditionally guarantees to the Agent, the Issuing Bank, the Swing Line Lender and the Lenders the full and prompt payment when due, whether at stated maturity, by acceleration, by mandatory prepayment, by notice of intention to prepay or otherwise, of all obligations, now existing or hereafter arising, of the Subsidiary Borrowers, including all principal and interest (whether accruing before or after any event set forth in Sections 9.1(h) or (i) and whether or not allowed) under this Agreement to which it is a party and whether direct, indirect or contingent, incurred as primary obligor or otherwise, secured or unsecured and all costs and expenses incurred by the Agent, the Issuing Bank, the Swing Line Lender and the Lenders in enforcing any thereof, whether or not suit is instituted (as the same may be amended, increased, modified, renewed, refunded, extended, increased or refinanced from time to time, collectively, the "Obligations"). Regardless of whether the Agent, the Issuing Bank, the Swing Line Lender or the Lenders are prevented or otherwise hindered by law from collecting or otherwise enforcing any of the Obligations in accordance with their terms, whether as the result of the commencement of any bankruptcy or similar proceedings against any of the Subsidiary Borrowers or otherwise, the Agent, the Issuing Bank, the Swing Line Lender and the Lenders shall be entitled to receive hereunder from the Company upon demand therefor the sums which would have been otherwise due had such collection or enforcement not been prevented or hindered. 11.2. Absolute Obligation The obligations of the Company under this Guaranty shall be absolute, irrevocable, unconditional and continuing until the Aggregate Commitments have been terminated, the Swing Line Commitment has been terminated, the Letter of Credit Commitment has been terminated, all Letters of Credit have expired or otherwise terminated and all of the Obligations are indefeasibly paid in full in cash and shall not be subject to any counterclaim, right or set-off or any defense whatsoever. The Company acknowledges and 67 agrees that the Agent, the Issuing Bank, the Swing Line Lender and the Lenders have no responsibility or liability, and shall not be deemed to have made any representation or warranty, with respect to the validity, enforceability or collectibility of this Agreement or any document executed or delivered in connection therewith, or any preference or priority ranking with respect to the payment of the Obligations or the validity or perfection of any security interest under any of this Agreement. The Agent, the Issuing Bank, the Swing Line Lender and the Lenders shall have no obligation to enforce this Agreement or any collateral security hereunder, by any action, including, without limitation, making or perfecting any claim against any of the Subsidiary Borrowers, prior to being entitled to the benefits of this Guaranty. Nothing except the indefeasible cash payment in full of the Obligations shall release the Company from liability under this Guaranty. The Company hereby irrevocably and forever waives any right to succeed to any of the rights of the Agent, the Issuing Bank, the Swing Line Lender and the Lenders against the Subsidiary Borrowers under this Agreement, whether by way of subrogation or otherwise until all Obligations have been indefeasibly paid in full in cash. 11.3. Guaranty of Payment This Guaranty is a guaranty of payment. The liability and obligations of the Company shall be primary, direct and absolute, and the Company hereby waives any right to require that resort be had by the Agent, the Issuing Bank, the Swing Line Lender and the Lenders against any of the Subsidiary Borrowers or any other Person, or to require that resort be had by the Agent, the Issuing Bank, the Swing Line Lender and the Lenders to any direct or indirect collateral security. The Agent may, at its option, proceed against the Company in the first instance to enforce any obligation to collect any monies, the payment of which is guaranteed hereby, without first proceeding against any of the Subsidiary Borrowers or any other Person and without first resorting to any other remedies, as the Agent may deem advisable. The liability of the Company hereunder shall in no way be affected or impaired by any acceptance by the Agent, the Issuing Bank, the Swing Line Lender or the Lenders or any direct or indirect security for, or other guarantor upon, any indebtedness, liability or obligation of the Subsidiary Borrowers to the Agent, the Issuing Bank, the Swing Line Lender and the Lenders, or by any failure, delay, neglect or omission of the Agent, the Issuing Bank, the Swing Line Lender or any Lenders to realize upon or perfect any such security, indebtedness, liability or obligation, or by any direct or indirect collateral security therefor, or by the bankruptcy, reorganization or insolvency of, or by any other proceeding for the relief of debtors commenced against, any of the Subsidiary Borrowers or any other Person, or by the release, exchange, substitution or any loss or impairment of any collateral security, or the liability of any other Person in respect of the Obligations, including, without limitation, the release of any other guarantor or any collateral security provided thereby, or by the invalidity or unenforceability of this Agreement, or any of the Obligations against any of the Subsidiary Borrowers for any reason, or by any amendment or waiver of or any consent to or departure from this Agreement, or by any reason or circumstance which might constitute a defense available to or a discharge of any Subsidiary Borrower or the Company in its 68 DRAFT 11/15/96 capacity as a guarantor, including, without limitation, any defense of sovereign immunity or any similar defense available to any Subsidiary Borrower or the Company under applicable law, from any of its obligations (including, without limitation, in respect of the Obligations), or by the fact that at any time or from time to time none of the Obligations may be outstanding, or by the merger or consolidation of any Subsidiary Borrower with any other Person, or by the dissolution or liquidation of any Subsidiary Borrower, or by any law, rule, regulation or decree now or hereafter in effect which might affect any of the terms or conditions of the Obligations, or by the preference, priority ranking or collectibility of any of the Obligations, or by the existence or exercise of any right of set-off by the Agent, the Issuing Bank, the Swing Line Lender or any Lender, or by any other reason whatsoever. 11.4. Repayment in Bankruptcy If, at any time or times subsequent to the performance by the Company of its obligations hereunder or the termination of this Guaranty, the Agent, the Issuing Bank, the Swing Line Lender or any Lender shall be required to repay any amounts previously paid by or on behalf of any of the Subsidiary Borrowers in reduction of the Obligations under this Agreement by virtue of an order of any court having jurisdiction in the premises, including, without limitation, as a result of an adjudication that such amounts constituted preferential payments or fraudulent conveyances, this Guaranty shall continue to be effective, or shall be reinstated, as the case may be, all as though such payments had not been made. 11.5. Other Provisions in Guaranty (i) No failure by the Agent, the Issuing Bank, the Swing Line Lender or any of the Lenders to exercise, and no delay by the Agent in exercising, any right or remedy under this Agreement shall operate as a waiver thereof. (ii) The Company waives all errors or omissions of the Agent, the Issuing Bank, the Swing Line Lender or any of the Lenders in connection with the administration of this Agreement, the Letters of Credit and any collateral security therefor, except errors or omissions which constitute gross negligence or willful misconduct. (iii) Without limiting the foregoing, the Company waives any act or omission of the Agent, the Issuing Bank, the Swing Line Lender or any of the Lenders which may affect or change in any way the liability of the Company under this Guaranty. 69 (iv) This Guaranty shall be binding upon the Company and its successors and assigns and shall inure to the benefit of the Agent, the Issuing Bank, the Swing Line Lender and the Lenders and their respective successors and assigns, provided that the Company may not assign its obligations under this Guaranty without the consent of all of the Lenders. (v) Except as expressly provided in Section 9.1, the Company hereby waives presentment, demand for payment, notice of default, non-performance and dishonor, protest and notice of protest of or in respect of this Agreement and the incurrence of the Obligations, and notice of acceptance of this Guaranty and reliance hereupon by the Agent, the Issuing Bank, the Swing Line Lender and the Lenders. (vi) The Company agrees that this Guaranty shall automatically extend, without any further action, to this Agreement and the Obligations as the same may be amended, increased, extended, modified, supplemented or waived from time to time in accordance with the terms hereof. 12. OTHER PROVISIONS 12.1. Amendments, Waivers, Etc. With the written consent of the Required Lenders, the Agent and the Credit Parties thereto may, from time to time, enter into written amendments, supplements or modifications of the Loan Documents or the CVS Subordinated Note and, with the written consent of the Required Lenders, the Agent on behalf of the Lenders may execute and deliver to any such parties a written instrument waiving or consenting to the departure from, on such terms and conditions as the Agent may specify in such instrument, any of the requirements of the Loan Documents or the CVS Subordinated Note or any Default or Event of Default and its consequences, provided that no such amendment, supplement, modification, waiver or consent shall, without the consent of all of the Lenders (i) increase the Commitment Amount of any Lender (provided that no waiver of a Default or Event of Default shall be deemed to constitute such an increase), (ii) extend the Commitment Period, (iii) reduce the amount, or extend the time of payment, of the Fees, (iv) reduce the rate, or extend the time of payment of, interest on any Loan, any Note or any Reimbursement Obligation (other than the applicability of any post-default increase in such rate of interest), (v) reduce the amount, or extend the time of payment of any payment of any Reimbursement Obligation or principal on any Loan or any Note, (vi) decrease or forgive the principal amount of any Loan, any Note or any Reimbursement Obligation, (vii) consent to any assignment or delegation by a Credit Party of any of its rights or obligations under any Loan Document to which it is a party or the CVS Subordinated Note (except as expressly contemplated by Section 8.4), (viii) release either Guaranty or any Guarantor thereunder, (ix) change the provisions of this Section 12.1, (x) change the definition of Required Lenders, (xi) change the several nature of the obligations of the Lenders, or (xii) change the sharing provisions among Lenders. Notwithstanding the foregoing, no such amendment, 70 DRAFT 11/15/96 supplement, modification, waiver or consent shall (A) amend, modify or waive any provision of Section 10 or otherwise change any of the rights or obligations of the Agent, the Issuer or the Swing Line Lender under any Loan Document or the CVS Subordinated Note without the written consent of the Agent, the Issuer or the Swing Line Lender, as the case may be, (B) change the Letter of Credit Commitment, change the amount or the time of payment of the Letter of Credit Commissions, or change any other term or provision which relates to the Letter of Credit Commitment or the Letters of Credit without the written consent of the Issuer or (C) change the Swing Line Commitment, change the amount or the time of payment of the Swing Line Loans or interest thereon or change any other term or provision which relates to the Swing Line Commitment or the Swing Line Loans without the written consent of the Swing Line Lender. Any such amendment, supplement, modification, waiver or consent shall apply equally to each of the Lenders and shall be binding upon the parties to the applicable Loan Document, the Lenders, the Agent and all future holders of the Loans and the Reimbursement Obligations. In the case of any waiver, the Credit Parties, the Lenders and the Agent shall be restored to their former position and rights under the Loan Documents, but any Default or Event of Default waived shall not extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon. 12.2. Notices Except as otherwise expressly provided herein, all notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing and, if in writing, shall be deemed to have been duly given or made (a) when delivered by hand, (b) one Domestic Business Day after having been sent by overnight courier service at the cost of the sender, (c) five Domestic Business Days after having been deposited in the mail, first-class postage prepaid, or (d) in the case of fax notice, when sent, addressed as follows in the case of the Company for itself and on behalf of each other Credit Party, the Agent, the Issuer and the Swing Line Lender, and as set forth in Exhibit A in the case of each of the Lenders, or to such other addresses as to which the Agent may be hereafter notified by the respective parties hereto or any future holders of the Notes: The Company: Linens 'n Things, Inc. 6 Brighton Road Clifton, NJ 07015 Attention: James M. Tomaszewski, Senior Vice President/CFO Facsimile: (201) 614-2930 71 Telephone: (201) 614-2036 The Agent, the Swing Line Lender and the Issuer: in the case of each Borrowing Request, each notice of prepayment under Section 2.7 and each Letter of Credit Request: The Bank of New York One Wall Street New York, New York 10286 Attention: Carol Surles, Agency Function Administration Facsimile: (212) 635-6365,6366 or 6367 Telephone: (212) 635-4695, in all other cases: The Bank of New York Retailing Industry Division 8th Floor One Wall Street New York, New York 10286 Attention: Howard F. Bascom, Vice President Facsimile: (212) 635-1481 Telephone: (212) 635-7894, except that any notice, request or demand by a Borrower to or upon the Agent or the Lenders pursuant to Sections 2.3, 2.4, 2.6, 2.7, 2.8, 2.9 or 3.3 shall not be effective until received. Any party to a Loan Document may rely on signatures of the parties thereto which are transmitted by fax or other electronic means as fully as if originally signed, provided that any notice of Default or Event of Default and notices under Section 9.2 shall be required to be given or made in accordance with clauses (a), (b) or (c) of this Section 12.2. 12.3. No Waiver; Cumulative Remedies No failure to exercise and no delay in exercising, on the part of the Agent, any Lender or the Issuer, any right, remedy, power or privilege under any Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege under any Loan Document preclude any other or further 72 DRAFT 11/15/96 exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges under the Loan Documents are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 12.4. Survival of Representations and Warranties All representations and warranties made in the Loan Documents and in any document, certificate or statement delivered pursuant thereto or in connection therewith shall survive the execution and delivery of the Loan Documents. 12.5. Payment of Expenses and Taxes; Indemnified Liabilities The Company agrees, promptly upon presentation of a statement or invoice therefor setting forth in reasonable detail the items thereof, and whether any Loan is made or Letter of Credit is issued, (a) to pay or reimburse the Agent and BNYCMI for all their reasonable costs and expenses actually incurred in connection with the development, syndication, preparation and execution of, and any amendment, waiver, consent, supplement or modification to, the Loan Documents or the CVS Subordinated Note, any documents prepared in connection therewith and the consummation of the transactions contemplated thereby, whether such Loan Documents or any such amendment, waiver, consent, supplement or modification to the Loan Documents or the CVS Subordinated Note or any documents prepared in connection therewith are executed and whether the transactions contemplated thereby are consummated, including the reasonable fees and disbursements of Special Counsel, (b) to pay, indemnify, and hold the Agent, the Lenders and the Issuer harmless from any and all recording and filing fees and any and all liabilities and penalties with respect to, or resulting from any delay (other than penalties to the extent attributable to the negligence of the Agent, the Lenders or the Issuer, as the case may be, in failing to pay such fees or other liabilities when due) in paying, stamp, excise and other similar taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, the Loan Documents, the CVS Subordinated Note and any such other documents, and (c) to pay, reimburse, indemnify and hold the Agent, the Lenders and the Issuer and each of their respective officers, directors and employees harmless from and against any and all other liabilities, obligations, claims, losses, damages, penalties, actions, judgments, suits, costs, expenses and disbursements of any kind or nature whatsoever (including reasonable counsel fees and disbursements of counsel (including the allocated costs of internal counsel) and such local counsel as may be required) actually incurred with respect to the enforcement, performance of, and preservation of rights under, the Loan Documents and the CVS Subordinated Note (all the foregoing, collectively, the "Indemnified Liabilities") and, if 73 and to the extent that the foregoing indemnity may be unenforceable for any reason, the Company agrees to make the maximum payment permitted under applicable law; provided that the Company shall have no obligation hereunder to pay Indemnified Liabilities to any indemnified person under this Section arising from the gross negligence or willful misconduct of such indemnified person. The agreements in this Section shall survive the termination of the Commitments and the payment of the Loans and the Notes and all other amounts payable under the Loan Documents. 12.6. Lending Offices Each Lender shall have the right at any time and from time to time to transfer any Loan to a different office of such Lender, subject to Section 3.10. 12.7. Successors and Assigns (a) The Loan Documents shall be binding upon and inure to the benefit of the Credit Parties, the Lenders, the Agent, the Issuer, all future holders of the Notes and the Reimbursement Obligations and their respective successors and assigns; provided that no Credit Party shall assign, transfer or delegate any of its rights or obligations under the Loan Documents or the CVS Subordinated Note to which it is a party without the prior consent of the Agent, the Issuer and all of the Lenders. (b) Notwithstanding Section 12.7(c), but subject to Section 12.7(e), each Lender may at any time assign all or any portion of its rights under any Loan Document to any Federal Reserve Bank. (c) In addition to its rights under Section 12.7(b), each Lender shall have the right, at any time, upon written notice to the Agent of its intent to do so, to sell, assign, transfer or negotiate (each an "Assignment") all or any portion of all of its Loans, its Commitment and its Notes, if any, and its interest in the Loan Documents to any subsidiary or Affiliate of such Lender, to any other Lender or, with the prior written consent of the Company, the Swing Line Lender and the Issuer (which consents shall not be unreasonably withheld and shall not be required of the Company if, at the time of such Assignment, an Event of Default shall exist), to any other bank, insurance company, pension fund, mutual or other similar fund or other financial institution, provided that (i) each such Assignment shall be of a constant, and not varying, percentage of all of the assigning Lender's rights and obligations under Loan Documents and be in a minimum amount of $5,000,000 (which minimum amount shall not be applicable to an Assignment by a Lender to a subsidiary or Affiliate of such Lender) or the full amount of such Lender's Commitment, and (ii) the parties to each such Assignment (excluding a Credit Party if such Credit Party is a party to such assignment) shall execute and deliver to the Agent an Assignment and Acceptance Agreement, together with a fee (the "Assignment Fee"), payable to the Agent, of $3,500, provided that no Assignment Fee shall be payable with respect to an Assignment by a Lender to one or more of its Affiliates. Upon receipt of each such 74 DRAFT 11/15/96 executed Assignment and Acceptance Agreement together with the Assignment Fee therefor, the Agent shall execute the same and, in the event that either the assignee thereunder is a Lender (or a subsidiary or Affiliate thereof) or the Company shall have consented to such assignment (to the extent that such consent was not unreasonably withheld and is required as aforesaid), (i) record the same and execute two copies of such Assignment and Acceptance Agreement in the appropriate place, deliver one copy to the assignor and one copy to the assignee, and (ii) request a Borrower to execute and deliver (1) to such assignee, one or more Notes, in an aggregate principal amount equal to the Loans assigned to, and Commitment assumed by, such assignee, and (2) to such assignor, in the event that such assignor shall retain any Loans and Commitment, one or more Notes in an aggregate principal amount equal to the balance of such assignor Lender's Loans and Commitment, in each case against receipt of such assignor Lender's existing Note or Notes, as the case may be, appropriately marked to indicate their substitution. Each Borrower agrees that it shall, upon each such request of the Agent, execute and deliver such new Notes at its own cost and expense. Upon such delivery, acceptance and recording by the Agent, from and after the effective date specified in such Assignment and Acceptance Agreement, the assignee thereunder shall be a party hereto and shall for all purposes of the Loan Documents be deemed a "Lender" and, to the extent provided in such Assignment and Acceptance Agreement, the assignor Lender thereunder shall be released from its obligations under the Loan Documents. (d) In addition to the participations provided for in Section 12.9(b), each Lender may grant participations in all or any part of its Loans, its Notes and its Commitment to one or more banks, insurance companies, pension funds, mutual funds or other financial institutions, provided that (i) such Lender's obligations under the Loan Documents shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties to the Loan Documents for the performance of such obligations, (iii) the Borrowers, the Agent, the Issuer and the Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Loan Documents, (iv) no subparticipations shall be permitted, and (v) the voting rights of any holder of any participation shall be limited to decisions that in accordance with Section 12.1 require the consent of all of the Lenders. The Company acknowledges and agrees that any such participant shall for purposes of Section 3.5, 3.6, 3.10 and 11.5 be deemed to be a "Lender", provided that in no event shall the Company be liable for any amounts under said Sections in excess of the amounts for which it would be liable but for such participation. (e) No Lender shall, as between and among the Borrowers, the Agent, the Issuer, the Swing Line Lender and such Lender, be relieved of any of its obligations 75 under the Loan Documents as a result of any assignment of or granting of participations in, all or any part of its Loans, its Commitment and its Notes, except that a Lender shall be relieved of its obligations to the extent of any such assignment of all or any part of its Loans, its Commitment or its Notes pursuant to Section 12.7(c). 12.8. Counterparts Each of the Loan Documents (other than any Notes) may be executed on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same agreement. It shall not be necessary in making proof of any Loan Document to produce or account for more than one counterpart signed by the party to be charged. A set of the copies of this Agreement signed by all of the parties hereto shall be lodged with each of the Company and the Agent. Any party to a Loan Document may rely upon the signatures of any other party thereto which are transmitted by fax or other electronic means to the same extent as if originally signed. 12.9. Set-off and Sharing of Payments (a) In addition to any rights and remedies of the Lenders and the Issuer provided by law, upon the occurrence of an Event of Default under Section 9.1(a) or (b) or upon the acceleration of the payment of the Loans and Reimbursement Obligations, each Lender and the Issuer shall have the right, without prior notice to the Borrower, any such notice being expressly waived by any Credit Party, to set-off and apply against any indebtedness or other liability, whether matured or unmatured, of any Credit Party to such Lender or the Issuer arising under the Loan Documents, any amount owing from such Lender or the Issuer to such Credit Party. To the extent permitted by applicable law, the aforesaid right of set-off may be exercised by such Lender or the Issuer against a Credit Party or against any trustee in bankruptcy, custodian, debtor in possession, assignee for the benefit of creditors, receiver, or execution, judgment or attachment creditor of such Credit Party, or against anyone else claiming through or against such Credit Party or such trustee in bankruptcy, custodian, debtor in possession, assignee for the benefit of creditors, receivers, or execution, judgment or attachment creditor, notwithstanding the fact that such right of set-off shall not have been exercised by such Lender or the Issuer prior to the making, filing or issuance of, service upon such Lender or the Issuer of, or notice to such Lender or the Issuer of, any petition, assignment for the benefit of creditors, appointment or application for the appointment of a receiver, or issuance of execution, subpoena, order or warrant. Each Lender and the Issuer agree promptly to notify the applicable Credit Party and the Agent after each such set-off and application made by such Lender or the Issuer, provided that the failure to give such notice shall not affect the validity of such set-off and application. (b) If any Lender or the Issuer (each a "Benefited Lender") shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of its Loans or its Notes or the Reimbursement Obligations in 76 DRAFT 11/15/96 excess of its pro rata share (in accordance with the outstanding principal balance of all Loans or the Reimbursement Obligations ) of payments then due and payable on account of the Loans and Notes received by all the Lenders or the Reimbursement Obligations, such Lender or the Issuer, as the case may be, shall forthwith purchase, without recourse, for cash, from the other Lenders such participations in their Loans and Notes or the Reimbursement Obligations as shall be necessary to cause such purchasing Lender or the Issuer to share the excess payment with each of them according to their pro rata share (in accordance with the outstanding principal balance of all Loans or the Reimbursement Obligations), provided that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender or the Issuer, such purchase from each Lender shall be rescinded and each such Lender shall repay to the purchasing Lender or the Issuer the purchase price to the extent of such recovery, together with an amount equal to such Lender's pro rata share (according to the proportion of (i) the amount of such Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender or the Issuer) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. Each Credit Party agrees that any Lender or the Issuer so purchasing a participation from another Lender pursuant to this Section may exercise such rights to payment (including the right of set-off) with respect to such participation as fully as if such Lender or the Issuer were the direct creditor of such Credit Party in the amount of such participation. 12.10. Indemnity Each Credit Party agrees to indemnify and hold harmless each of the Agent, BNYCMI, the Issuer and each Lender from and against any loss, cost, liability, damage or expense, including the reasonable fees and disbursements of counsel (including the unallocated costs of internal counsel) and such local counsel as may be required to represent the Agent, the Issuer and each Lender actually incurred by the Agent, the Issuer or such Lender in preparing for, defending against, or providing evidence, producing documents or taking any other action in respect of, any litigation, administrative proceeding or investigation under any federal securities law or any other statute of any jurisdiction, or any regulation, or at common law or otherwise, which is alleged to arise out of or is based upon (1) any untrue statement or alleged untrue statement of any material fact by or on behalf of any Credit Party, in any document or schedule executed or filed with any Governmental Authority by or on behalf of a Credit Party which relates to the transactions contemplated by the Loan Documents, (2) any omission or alleged omission by or on behalf of a Credit Party to state any material fact required to be stated in such document or schedule, or necessary to make the statements made therein, in light of the circumstances under which made, not misleading, (3) any acts, practices or omissions or 77 alleged acts, practices or omissions of a Credit Party or its agents relating to the use of the proceeds of any Loan which is alleged to be in violation of Section 2.5, or in violation of any federal securities law or of any other statute, regulation or other law of any jurisdiction applicable thereto, or (4) any Loan Document or any other document contemplated by or referred to therein or the transactions contemplated thereby or any action taken or omitted to be taken by the Agent, the Issuer or such Lender under or in connection with any of the foregoing. Notwithstanding the above, no Credit Party shall have any liability under clause (4) of this Section to indemnify or hold harmless any Person for any loss, cost, liability, damage or expense relating to income or withholding taxes or any tax in lieu of such taxes. The indemnity set forth herein shall be in addition to any other obligations or liabilities of the Credit Parties to the Agent, the Issuer and the Lenders under the Loan Documents or at common law or otherwise, shall include the reasonable fees and disbursements of counsel (including the unallocated costs of internal counsel) and such local counsel as may be required in connection with establishing liability under this Section or collecting amounts payable under this Section and shall survive any termination of this Agreement, the expiration of the Commitments and the payment of all indebtedness under the Loan Documents, provided that no Credit Party shall have any liability under this Section to any indemnified person with respect to indemnified liabilities which are determined by a final and nonappealable judgment of a court of competent jurisdiction to have arisen primarily from the gross negligence or willful misconduct of such indemnified person. 12.11. Governing Law The Loan Documents and the rights and obligations of the parties thereto shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York, without regard to principles of conflict of laws. 12.12. Severability Every provision of the Loan Documents is intended to be severable, and if any term or provision thereof shall be invalid, illegal or unenforceable for any reason, the validity, legality and enforceability of the remaining provisions thereof shall not be affected or impaired thereby, and any invalidity, illegality or unenforceability in any jurisdiction shall not affect the validity, legality or enforceability of any such term or provision in any other jurisdiction. 12.13. Integration All exhibits to the Loan Documents shall be deemed to be a part thereof. Each Loan Document embodies the entire agreement and understanding between or among the parties thereto with respect to the subject matter thereof and supersedes all prior agreements and understandings between or among the parties thereto with respect to the subject matter thereof. 78 DRAFT 11/15/96 12.14. Treatment of Certain Information Each Lender, the Issuer and the Agent agree (on behalf of itself and each of its affiliates, directors, officers, employees and representatives) to use reasonable precautions to keep confidential, in accordance with their customary procedures for handling confidential information of the same nature and non-public information supplied by the Company pursuant to this Agreement (a) which is identified by the Company as being confidential at the time the same is delivered to such Lender, the Issuer or the Agent, or (b) which constitutes any financial statement, financial projections or forecasts, budget, compliance certificate, audit report, management letter or accountants' certification delivered hereunder, or tax return or other tax related information, provided that nothing herein shall limit the disclosure of any such information (i) to the extent required by statute, rule, regulation or judicial process, (ii) to counsel to any Lender, the Issuer or to the Agent, (iii) to bank examiners, auditors or accountants, (iv) to the Agent, the Issuer or the Lenders, (v) in connection with any litigation to which any one or more of the Lenders, the Issuer or the Agent is a party, or (vi) to any assignee or participant (or prospective assignee or participant) so long as such assignee or participant (or prospective assignee or participant) first executes and delivers a confidentiality agreement containing substantially the same restrictions as set forth in this Section. 12.15. Acknowledgments Each Credit Party acknowledges that (a) it has been advised by counsel in the negotiation, execution and delivery of the Loan Documents, (b) by virtue of the Loan Documents, none of the Agent, the Issuer, or any Lender has any fiduciary relationship to any Credit Party, and the relationship between the Agent, the Issuer, and the Lenders, on the one hand, and the Credit Parties, on the other hand, is solely that of debtor and creditor, and (c) by virtue of the Loan Documents, no joint venture exists among the Lenders or among the Credit Parties and the Lenders. 12.16. Consent to Jurisdiction Each Credit Party irrevocably submits to the non-exclusive jurisdiction of any New York State or Federal Court sitting in the City of New York over any suit, action or proceeding arising out of or relating to the Loan Documents. Each Credit Party 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 brought in such a court and any claim that any such suit, action or proceeding brought in such a court has been brought in an inconvenient forum. Each Credit Party agrees that a final 79 judgment in any such suit, action or proceeding brought in such a court, after all appropriate appeals, shall be conclusive and binding upon it. 12.17. Service of Process Each Credit Party agrees that process may be served against it in any suit, action or proceeding referred to in Section 12.16 by sending the same by first class mail, return receipt requested or by overnight courier service, with receipt acknowledged, to the address of the Company on behalf of such Credit Party set forth in Section 12.2. Each Credit Party agrees that any such service (i) shall be deemed in every respect effective service of process upon it in any such suit, action, or proceeding, and (ii) shall to the fullest extent enforceable by law, be taken and held to be valid personal service upon and personal delivery to it. 12.18. No Limitation on Service or Suit Nothing in the Loan Documents or any modification, waiver, or amendment thereto shall affect the right of the Agent, the Issuer or any Lender to serve process in any manner permitted by law or limit the right of the Agent, the Issuer or any Lender to bring proceedings against a Credit Party in the courts of any jurisdiction or jurisdictions. 12.19. WAIVER OF TRIAL BY JURY THE AGENT, THE ISSUER, THE LENDERS AND EACH CREDIT PARTY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION ARISING OUT OF, UNDER OR IN CONNECTION WITH THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. FURTHER, EACH CREDIT PARTY HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF THE AGENT, THE ISSUER, OR THE LENDERS, OR COUNSEL TO THE AGENT, THE ISSUER, OR THE LENDERS, HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE AGENT, THE ISSUER, OR THE LENDERS WOULD NOT, IN THE EVENT OF SUCH LITIGATION, SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION. EACH CREDIT PARTY ACKNOWLEDGES THAT THE AGENT, THE ISSUER, AND THE LENDERS HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, INTER ALIA, THE PROVISIONS OF THIS SECTION. 12.20. Effective Date This Agreement shall be effective at such time (the "Effective Date") as the Agent shall have received executed counterparts hereof by the parties hereto and the conditions set forth in Sections 5.1 through 5.7 have been or simultaneously will be satisfied, provided that this Agreement shall not become effective unless all of such 80 DRAFT 11/15/96 conditions are satisfied not later than February 15, 1997. 81 AS EVIDENCE of the agreement by the parties hereto to the terms and conditions herein contained, each such party has caused this Agreement to be executed on its behalf. LINENS 'N THINGS, INC. By: ________________________________ Name: ______________________________ Title:______________________________ LNT, INC. By: ________________________________ Name: ______________________________ Title:______________________________ THE BANK OF NEW YORK, in its capacity as a Lender, as Issuer, as the Swing Line Lender and in its capacity as the Agent By: ________________________________ Name: ______________________________ Title:______________________________ CORESTATES BANK, N.A. By: ________________________________ Name: ______________________________ Title:______________________________ THE FIRST NATIONAL BANK OF BOSTON 82 By: ________________________________ Name: ______________________________ Title:______________________________ FLEET NATIONAL BANK By: ________________________________ Name: ______________________________ Title:______________________________ CREDIT SUISSE By: ________________________________ Name: ______________________________ Title:______________________________ By: ________________________________ Name: ______________________________ Title:______________________________ FIRST UNION NATIONAL BANK By: ________________________________ Name: ______________________________ Title:______________________________ PNC BANK, NATIONAL ASSOCIATION By: ________________________________ Name: ______________________________ Title:______________________________ THE SAKURA BANK, LTD. 83 By: ________________________________ Name: ______________________________ Title:______________________________ 84 DRAFT 11/13/96 LINENS 'N THINGS EXHIBIT B FORM OF BORROWING REQUEST [Date] The Bank of New York, as Agent One Wall Street New York, New York 10286 Attention: ______________, Re: Credit Agreement, dated as of November __, 1996, by and among LINENS 'N THINGS, INC., a Delaware corporation (the "COMPANY"), the Subsidiary Borrowers party thereto (each a "SUBSIDIARY BORROWER" and collectively with the Company, the "BORROWERS"), the Lenders party thereto and THE BANK OF NEW YORK, as Agent (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement") Capitalized terms used herein that are not otherwise defined herein shall have the respective meanings ascribed thereto in the Credit Agreement. Pursuant to Section 2.3 of the Credit Agreement, the Company on behalf of each applicable Borrower signatory hereto hereby gives notice of intention to borrow Revolving Credit Loans in the aggregate sum of $____________ on ____________, and/or a Swing Line Loan in the sum of $____________ on ____________, which borrowing shall consist of the following: Type: (ABR, Eurodollar Interest Borrower or Swing Line) Amount Period - -------- -------------- ------ ------ 85 The Company (on behalf of itself and all Borrowers) hereby certifies that on the date hereof and on the Borrowing Date set forth above, and after giving effect to the Loans requested hereby: (a) Each Credit Party is and shall be in compliance with all of the terms, covenants and conditions of each Loan Document. (b) There exists and there shall exist no Default or Event of Default. (c) The representations and warranties contained in the Credit Agreement are and shall be true and correct, except those which are expressly specified to be made as of an earlier date. IN EVIDENCE of the foregoing, the undersigned has caused this Borrowing Request to be duly executed on its behalf. LINENS 'N THINGS, INC. By: __________________________ Name: ________________________ Title: _______________________ [___________________] By: _________________________ Name: _______________________ Title: ______________________ 86 DRAFT 11/13/96 LINENS 'N THINGS EXHIBIT D FORM OF BORROWER ADDENDUM BORROWER ADDENDUM, dated as of ________, 199_, made by ___________, a corporation organized under the laws of __________ (the "NEW BORROWER") and LINENS 'N THINGS, INC., a Delaware corporation (the "COMPANY"), to THE BANK OF NEW YORK, as agent (the "AGENT") under the Credit Agreement, dated as of November __, 1996, among the Company, the Subsidiary Borrowers party thereto, the Lenders party thereto and the Agent (as the same may from time to time be amended, supplemented or otherwise modified, the "CREDIT AGREEMENT"). I. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. II. The Company desires to designate the New Borrower as a Subsidiary Borrower pursuant to Section 2.10 of the Credit Agreement and the New Borrower desires to become a Subsidiary Borrower pursuant thereto. The New Borrower is a wholly-owned domestic Subsidiary and a Subsidiary Guarantor. Accordingly, the Company and the New Borrower agree as follows: A. The Company represents that no Default or Event of Default has occurred and is continuing. B. Pursuant to Section 2.10 of the Credit Agreement the Company hereby designates the New Borrower as a Subsidiary Borrower under the Credit Agreement and the New Borrower agrees that upon the acceptance hereof by the Agent, the New Borrower (i) shall be, and shall be deemed to be, a "Subsidiary Borrower" under, and as such term is defined in, the Credit Agreement with the same force and effect as if originally named therein as a Subsidiary Borrower and (ii) shall have made, and shall be deemed to have made, the representations and warranties as to itself contained in Section 4 of the Credit Agreement. C. There is submitted herewith by the New Borrower the certificate required by Section 2.10 of the Credit Agreement together with the required attachments thereto. D. The New Borrower hereby designates the following address as its address for notices: 87 ______________________ ______________________ Attention: ___________ ___________ Telephone: (___) ___-____ Fax: (___) ___-____. E. This Borrower Addendum shall be governed by and con- strued in accordance with the laws of the State of New York without re- gard to conflicts of laws rules. AS EVIDENCE OF THE FOREGOING, this Borrower Addendum has been executed and delivered as of the day and year first above written. [NAME OF NEW BORROWER] By: ____________________________ Name:___________________________ Title: _________________________ LINENS 'N THINGS, INC. By: ____________________________ Name:___________________________ Title: _________________________ ACCEPTED: THE BANK OF NEW YORK, as Agent By: ____________________________ Name:___________________________ Title: _________________________ 88 DRAFT 11/13/96 LINENS 'N THINGS EXHIBIT F OUTLINE OF OPINIONS OF COUNSEL TO THE CREDIT PARTIES In connection with the Credit Agreement, dated as of November __, 1996, by and among LINENS 'N THINGS, INC. (the "COMPANY"), the Subsidiary Borrowers party thereto (each a "SUBSIDIARY BORROWER" and collectively with the Company, the "BORROWERS"), the Lenders party thereto and THE BANK OF NEW YORK, as Agent (the "CREDIT AGREEMENT"), set forth below is an outline of the opinion to be delivered to the Agent and the Lenders by counsel to the Credit Parties, such opinion, including all qualifications, assumptions and exceptions, to be in all respects satisfactory to the Agent (the "Opinion"). Capitalized terms used in the Opinion and which are not defined therein shall have the meanings ascribed thereto in the Credit Agreement. Opinions 1. Existence and Power Each of the Company and the Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation (except, in the case of the Subsidiaries, where the failure to be in such good standing could not reasonably be expected to have a Material Adverse effect), has all requisite corporate power and authority to own its Property and to carry on its business as now conducted, and is qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which it owns or leases real Property or in which the nature of its business requires it to be so qualified (except those jurisdictions where the failure to be so qualified or to be in good standing could not reasonably be expected to have a Material Adverse effect). 2. Authority Each Credit Party has full corporate power and authority to enter into, execute, deliver and perform the terms of the Loan Documents to which it is a party, all of which have been duly authorized by all proper and necessary corporate action and are not in contravention of any applicable law or the terms of its Certificate of Incorporation and By-Laws. No consent or approval of, or other action by, shareholders of any Credit 89 Party, any Governmental Authority, or any other Person (which has not already been obtained) is required to authorize in respect of such Credit Party, or is required in connection with the execution, delivery and performance by such Credit Party of the Loan Documents to which it is a party, or is required as a condition to the enforceability against such Credit Party of the Loan Documents to which it is a party. 3. Binding Agreement The Loan Documents to which it is a party constitute the valid and legally binding obligations of each Credit Party, enforceable in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by equitable principles relating to the availability of specific performance as a remedy. 4. Litigation To the best of [MY/OUR] knowledge, there are no actions, suits, arbitration proceedings or claims (whether purportedly on behalf of the Company or any Subsidiary or otherwise) pending or threatened against the Company or any Subsidiary or any of its respective Properties, or maintained by the Company or any Subsidiary, at law or in equity, before any Governmental Authority which could reasonably be expected to have a Material Adverse effect. To the best of [MY/OUR] knowledge, there are no proceedings pending or threatened against the Company or any Subsidiary (a) which call into question the validity or enforceability of, or otherwise seek to invalidate any Loan Document, or (b) which might, individually or in the aggregate, materially and adversely affect any of the transactions contemplated by any Loan Document. 5. No Default To the best of [MY/OUR] knowledge, neither the Company nor any Subsidiary is in default under any agreement to which it is a party or by which it or any of its Property is bound the effect of which could reasonably be expected to have a Material Adverse effect. No notice to, or filing with, any Governmental Authority is required for the due execution, delivery and performance by any Credit Party of the Loan Documents to which it is a party. 6. No Conflicting Laws or Agreements No provision of any existing statute, rule, regulation, or, to the best of [MY/OUR] knowledge, any existing material mortgage, material indenture, material contract, material agreement, judgment, decree or order binding on the Company or any Subsidiary or affecting the Property of the Company or any Subsidiary conflicts with, or requires any consent which has not already been obtained under, or would in any way 90 DRAFT 11/13/96 prevent the execution, delivery or performance by any Credit Party of the terms of, any Loan Document to which it is a party. To the best of [MY/OUR] knowledge, the execution, delivery and performance by each Credit Party of the terms of each Loan Document to which it is a party will not constitute a default under, or result in the creation or imposition of, or obligation to create, any Lien upon the Property of any Credit Party pursuant to the terms of any such mortgage, indenture, contract or agreement. 7. Compliance with Applicable Laws; Filings To the best of [MY/OUR] knowledge, neither the Company nor any Subsidiary is in default with respect to any judgment, order, writ, injunction, decree or decision of any Governmental Authority which default could reasonably be expected to have a Material Adverse effect. To the best of [MY/OUR] knowledge, the Company and each Subsidiary is complying with all applicable statutes, rules and regulations of all Governmental Authorities, a violation of which could reasonably be expected to have a Material Adverse effect. To the best of [MY/OUR] knowledge, the Company and each Subsidiary has filed or caused to be filed with all Governmental Authorities all reports, applications, documents, instruments and information required to be filed pursuant to all applicable laws, rules, regulations and requests which, if not so filed, could reasonably be expected to have a Material Adverse effect. 8. Governmental Regulations Neither the Company nor any Subsidiary nor any corporation controlling the Company or any Subsidiary or under common control with the Company or any Subsidiary is subject to regulation under the Investment Company Act of 1940, as amended, or is subject to any statute or regulation which regulates the incurrence of Indebtedness. 9. Federal Reserve Regulations; Use of Loan Proceeds No Credit Party is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, as amended. If used in accordance with Section 2.4 of the Credit Agreement, no part of the proceeds of the Loans or the Letters of Credit has been or will be used, directly or indirectly, to purchase, acquire or carry any Margin Stock or for a purpose which violates any law, rule or regulation of any Governmental Authority, including, without limitation, the provisions of Regulations G, T, U or X of the Board of Governors of the Federal Reserve System, as amended. 91 ANNEX B TO THE SUBSIDIARY GUARANTY AND SUBORDINATION AGREEMENT DATED AS OF ___________, 1996 FORM OF SUBSIDIARY GUARANTY ADDENDUM SUBSIDIARY GUARANTY ADDENDUM, dated as of _____ __, 199_, made by _____________, a __________ corporation (the "ADDITIONAL GUARANTOR") to the Subsidiary Guaranty and Subordination Agreement, dated as of ________, 1996 (as the same may be amended, supplemented or otherwise modified from time to time, (the "AGREEMENT"), by and among each Guarantor party thereto, LINENS 'N THINGS, INC. (the "COMPANY") and THE BANK OF NEW YORK, as Agent (in such capacity, the "AGENT") under the Credit Agreement referred to below. I. Reference is made to the Credit Agreement, dated as of November __, 1996, by and among the Company, the Subsidiary Borrowers party thereto, the Lenders party thereto, and The Bank of New York, as Agent (as the same may be amended, supplemented or otherwise modified from time to time, the "Credit Agreement"). II. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Agreement and the Credit Agreement. III. The Guarantors and the Company have entered into the Agreement in order to induce the Agent and the Lenders to enter into the Credit Agreement and make the Loans, the Swing Line Lender to make the Swing Line Loans, the Issuer to issue the Letters of Credit and the Lenders to participate therein. IV. The Additional Guarantor is executing this Subsidiary Guaranty Addendum in accordance with the requirements of the Credit Agreement and the Agreement, to become a Guarantor under the Agreement in order to induce the Lenders to make additional Loans, the Swing Line Lender to make additional Swing Line Loans, the Issuer to issue additional Letters of Credit and the Lenders to participate therein and as consideration for Loans previously made and Letters of Credit previously issued. Accordingly, the Agent and the Additional Guarantor agree as follows: 1. In accordance with Section 9 of the Agreement, by signing this Subsidiary Guaranty Addendum and delivering the other instruments and documents required by the Credit Agreement, the Additional Guarantor becomes a Guarantor under the Agreement with the same force and effect as if originally named therein as a Guarantor and the Additional Guarantor hereby agrees to all the terms and provisions of the Agreement applicable to it as a Guarantor thereunder. 92 DATE 10/29/96 2. The Additional Guarantor hereby makes all of the representations and warranties made by the Guarantors in Section 4 of the Agreement, which provisions are hereby incorporated herein by reference. The Additional Guarantor and the Agent have duly executed this Subsidiary Guaranty Addendum to the Agreement as of the day and year first above written. [ADDITIONAL GUARANTOR] By: ------------------------------ Name: ---------------------------- Title: --------------------------- Accepted: THE BANK OF NEW YORK, as Agent By: ---------------------------- Name: -------------------------- Title: ------------------------- 93 SCHEDULE I A. SUBSIDIARY GUARANTORS: B. ADDRESS FOR NOTICES: _______________________ _______________________ _______________________ _______________________ 94 DRAFT 11/13/96 LINENS 'N THINGS EXHIBIT I FORM OF SUBSIDIARY GUARANTY AND SUBORDINATION AGREEMENT SUBSIDIARY GUARANTY AND SUBORDINATION AGREEMENT (as the same may be amended, supplemented or otherwise modified from time to time, this "AGREEMENT"), dated as of ________, 1996, by and among the Persons listed on Annex A attached hereto (the "CURRENT GUARANTORS"), such other Persons which from time to time may hereafter become party hereto pursuant to Section 9 hereof (the "ADDITIONAL GUARANTORS", and collectively with the Current Guarantors, the "GUARANTORS"), LINENS 'N THINGS, INC., a Delaware corporation (the "COMPANY"), and THE BANK OF NEW YORK (the "AGENT"), in its capacity as agent for the Lenders under the Credit Agreement referred to below. RECITALS I. Reference is made to the Credit Agreement, dated as of the date hereof, by and among the Company, the Subsidiary Borrowers party thereto (each a "SUBSIDIARY BORROWER" and together with the Company, the "BORROWERS"), the Lenders party thereto and the Agent (as the same may from time to time be amended, supplemented or otherwise modified, the "CREDIT AGREEMENT"). II. The Company and the Guarantors have been, and are now, engaged in the business of [RETAIL SALES]. In the past, as now, the Company, directly or indirectly, has provided financing for the Guarantors and the Guarantors have relied upon the Company to provide such financing. In addition, it is anticipated that, if the Guarantors execute and deliver this Agreement, the Company will continue, directly or indirectly, to provide such financing to the Guarantors, and that the proceeds of the Loans to be made and Letters of Credit to be issued will be used, in part, for the general working capital purposes of the Guarantors. Pursuant to the Credit Agreement, the Lenders will not make Loans and the Issuer will not issue Letters of Credit unless and until the Guarantors shall have executed and delivered this Agreement and, therefore, in light of all of the foregoing, each Guarantor expects to derive substantial benefit from the Credit Agreement and the transactions contemplated thereby and, in furtherance thereof, has agreed to execute and deliver this Agreement. Therefore, in consideration of the Recitals, the terms and conditions herein contained and other good and valuable consideration, the receipt and sufficiency of which are 95 hereby acknowledged, the Guarantors, the Company and the Agent hereby agree as follows: 1. Defined Terms (a) Capitalized terms used herein which are not otherwise defined herein shall have the respective meanings ascribed thereto in the Credit Agreement. (b) When used in this Agreement, the following capitalized terms shall have the respective meanings ascribed thereto as follows: "BORROWER OBLIGATIONS": all of the obligations and liabilities of the Borrowers under the Loan Documents, in each case whether direct, indirect or contingent, incurred as primary obligor or otherwise, secured or unsecured, now existing or hereafter arising, created, assumed, incurred or acquired, and whether before or after the occurrence of any Insolvency Event, and including, without limitation, (i) any obligation or liability in respect of any breach of any representation or warranty and in respect of any rights of redemption or rescission, and (ii) all principal and interest (including all post-petition interest), funding losses, make-whole premiums and all reasonable costs and expenses of the Agent and the Lenders in enforcing, preserving and protecting any thereof, whether or not suit is instituted and whether or not allowed as a claim in any proceeding arising in connection with an Insolvency Event (as the same may be amended, increased, modified, renewed, refinanced, refunded or extended from time to time). "CONSIDERATION": as of any date of determination and with respect to each Guarantor, an amount equal to the lesser of (i) the total "value" (within the meaning of Section 548 of the Bankruptcy Code) given, directly or indirectly, to such Guarantor during the period commencing on the date such Guarantor became a party to this Agreement and ending on such date of determination, in exchange for its execution and delivery of this Agreement, and (ii) the amount of "fair consideration" (within the meaning of Article 10 of the New York Debtor Creditor Law) given, directly or indirectly, to such Guarantor during the period commencing on the date such Guarantor became a party to this Agreement and ending on such date of determination in exchange for its execution and delivery of this Agreement. "EVENT OF DEFAULT": as defined in Section 5. "GUARANTOR OBLIGATIONS": all of the obligations and liabilities of the Guarantors hereunder, whether fixed, contingent, now existing or hereafter arising, created, assumed, incurred or acquired. "INSOLVENCY EVENT": any event set forth described in Sections 9.1(h) or 9.1(i) of the Credit Agreement. 96 DRAFT 11/13/96 "NET WORTH": as of any date and with respect to each Guarantor, the lesser of the following: (a)(i) all of such Guarantor's "property, at a fair valuation" (within the meaning of Section 101(32) of the Bankruptcy Code) on such date, minus (ii) the sum of such Guarantor's "debts" (within the meaning of Section 101(12) of the Bankruptcy Code) other than such Guarantor's liability hereunder. (b)(i) the "fair salable value of the assets" (within the meaning of Article 10 of the New York Debtor Creditor Law) of such Guarantor on such date, minus (ii) "the amount that will be required to pay such Guarantor's probable liability on its existing debts as they become absolute and matured" (as such phrase would be construed under Article 10 of the New York Debtor Creditor Law) on such date other than such Guarantor's liability hereunder. "OBLIGATIONS": collectively, the Borrower Obligations and the Guarantor Obligations. "PAYMENT": the indefeasible payment in full in cash. "SUBORDINATED DEBT": all indebtedness for borrowed money and any other obligations, contingent or otherwise, of any Borrower to any Guarantor, including, without limitation, all amounts, fees and expenses payable by such Borrower to such Guarantor in respect thereof, in each case whether now existing or hereafter arising, created, assumed, incurred or acquired. "SUBSIDIARY GUARANTY ADDENDUM": a Subsidiary Guaranty Addendum to this Agreement, duly completed, in the form of Annex B attached hereto. 2. Guaranty (a) Subject to Section 2(b) hereof, each Guarantor hereby absolutely, irrevocably and unconditionally guarantees the full and prompt payment when due (whether at stated maturity, by acceleration, by mandatory prepayment, by notice of intention to prepay or otherwise) of the Borrower Obligations. This Agreement constitutes a guaranty of payment and neither the Agent nor any Lender shall have any obligation to enforce any Loan Document or exercise any right or remedy with respect to any collateral security thereunder by any action, including, without limitation, making or perfecting any claim against any Person or any collateral security for any of the Borrower Obligations prior to being entitled to the benefits of this Agreement. The Guarantor Obligations shall be 97 absolute, irrevocable, unconditional, direct and primary and shall not be subject to any counterclaim, right of set-off or defense whatsoever. The Agent may, at its option, proceed against the Guarantors, or any one or more of them, in the first instance, to enforce the Guarantor Obligations without first proceeding against the Borrowers or any other Person, and without first resorting to any other rights or remedies, as the Agent may deem advisable. In furtherance hereof, if the Agent or any Lender is prevented by law from collecting or otherwise hindered from collecting or otherwise enforcing any Borrower Obligation in accordance with its terms, the Agent or such Lender, as the case may be, shall be entitled to receive hereunder from the Guarantors after demand therefor, the sums which would have been otherwise due had such collection or enforcement not been prevented or hindered. (b) Notwithstanding anything to the contrary contained in this Agreement, the maximum liability of each Guarantor hereunder shall not, as of any date of determination, exceed the lesser of (i) the highest amount that is valid and enforceable against such Guarantor under principles of New York State contract law, and (ii) the sum of (A) all Consideration received by such Guarantor as of such date of determination, plus (B) 95% of the Net Worth of such Guarantor on such date of determination. (c) Each Guarantor agrees that the Guarantor Obligations may at any time and from time to time exceed the maximum liability of such Guarantor hereunder without impairing this Agreement or affecting the rights and remedies of the Agent or any Lender hereunder. 3. Absolute Obligation Subject to Section 8, no Guarantor shall be released from liability hereunder unless and until the Commitment Termination Date shall have occurred and either (a) Payment in full of the Borrower Obligations shall have been made or (b) Payment in full of the Guarantor Obligations of such Guarantor shall have been made. Each Guarantor acknowledges and agrees that (i) neither the Agent nor any Lender has made any representation or warranty to such Guarantor with respect to the Borrowers, any of their Subsidiaries, any Loan Document, or any agreement, instrument or document executed or delivered in connection therewith or any other matter whatsoever, and (ii) such Guarantor shall be liable hereunder, and such liability shall not be affected or impaired, irrespective of (A) the validity or enforceability of any Loan Document, or any agreement, instrument or document executed or delivered in connection therewith, or the collectability of any of the Borrower Obligations, (B) the preference or priority ranking with respect to any of the Borrower Obligations, (C) the existence, validity, enforceability or perfection of any security interest or collateral security under any Loan Document, or the release, exchange, substitution or loss or impairment of any such security interest or collateral security, (D) any failure, delay, neglect or omission by the Agent or any Lender to realize upon or protect any direct or indirect collateral security, indebtedness, liability or obligation, any Loan Document, or any agreement, instrument or document executed or delivered in 98 DRAFT 11/13/96 connection therewith, or any of the Borrower Obligations, (E) the existence or exercise of any right of set-off by the Agent or any Lender, (F) the existence, validity or enforceability of any other guaranty with respect to any of the Borrower Obligations, the liability of any other Person in respect of any of the Borrower Obligations, or the release of any such Person or any other guarantor of any of the Borrower Obligations, (G) any act or omission of the Agent or any Lender in connection with the administration of any Loan Document, or any of the Borrower Obligations, (H) the bankruptcy, insolvency, reorganization or receivership of, or any other proceeding for the relief of debtors commenced by or against, any Person, (I) the disaffirmance or rejection, or the purported disaffirmance or purported rejection, of any of the Borrower Obligations, any Loan Document, or any agreement, instrument or document executed or delivered in connection therewith, in any bankruptcy, insolvency, reorganization or receivership, or any other proceeding for the relief of debtor, relating to any Person, (J) any law, regulation or decree now or hereafter in effect which might in any manner affect any of the terms or provisions of any Loan Document, or any agreement, instrument or document executed or delivered in connection therewith or any of the Borrower Obligations, or which might cause or permit to be invoked any alteration in the time, amount, manner or payment or performance of any of the Borrowers' obligations and liabilities (including, without limitation, the Borrower Obligations), (K) the merger or consolidation of any Borrower into or with any Person, (L) the sale by any Borrower of all or any part of its assets, (M) the fact that at any time and from time to time none of the Borrower Obligations may be outstanding or owing to the Agent or any Lender, (N) any amendment or modification of, or supplement to, any Loan Document or (O) any other reason or circumstance which might otherwise constitute a defense available to or a discharge of the Borrowers in respect of their obligations or liabilities (including, without limitation, the Borrower Obligations) or of such Guarantor in respect of any of the Guarantor Obligations (other than by the performance in full thereof). 4. Representations and Warranties Each Guarantor hereby represents and warrants to the Agent as follows: (a) Existence and Power. Such Guarantor is duly organized and validly existing in good standing under the laws of the jurisdiction of its incorporation and in each other jurisdiction in which the failure to be qualified and in good standing could reasonably be expected to have a Material Adverse Effect. (b) Authority and Execution. Such Guarantor has full legal power and authority to own its Property, conduct its business, and enter into, execute, deliver and perform the terms of this Agreement which has been duly authorized by all proper and 99 necessary corporate or other applicable action and is in full compliance with its Organizational Documents. Such Guarantor has duly executed and delivered this Agreement. (c) Binding Obligation. This Agreement constitutes the valid and binding obligation of such Guarantor, enforceable in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws related to or affecting the enforcement of creditors' rights generally. (d) Solvency. Such Guarantor (if a Current Guarantor, both immediately before and after giving effect to this Agreement, or, if an Additional Guarantor, immediately before and after giving effect to the Subsidiary Guaranty Addendum pursuant to which it becomes a party to this Agreement) and the transactions contemplated by the Loan Documents is Solvent. 5. Events of Default Each of the following shall constitute an "EVENT OF DEFAULT": (a) If any Guarantor shall fail to observe or perform any term, covenant or agreement contained in this Agreement; or (b) The occurrence and continuance of an Event of Default under and as defined in the Credit Agreement. 6. Notices Except as otherwise specifically provided herein, all notices, requests, consents, demands, waivers and other communications hereunder shall be in writing (including facsimile) and shall be electronically transmitted or mailed by registered or certified mail or delivered in person, and all statements, reports, documents, certificates and papers to be delivered hereunder shall be mailed by first class mail or delivered in person, in each case to the respective parties to this Agreement as follows: in the case of the Agent or the Company, as set forth in Section 12.2 of the Credit Agreement, in the case of each Current Guarantor, at the address set forth on Schedule I hereto, and, in the case of each Additional Guarantor, as set forth in the Subsidiary Guaranty Addendum executed and delivered by such Additional Guarantor, or to such other addresses as to which the Agent may be hereafter notified by the respective parties hereto. Any notice, request, consent, demand, waiver or communication given in accordance with the provisions of this Section shall be conclusively deemed to have been received by a party hereto and to be effective on the day on which delivered to such party at its address specified above or, if sent by registered or certified mail, on the delivery date noted on the receipt therefor, provided that a notice of change of address shall be deemed to be effective only when actually received. Any party hereto may rely on signatures of the other parties hereto which are 100 DRAFT 11/13/96 transmitted by facsimile or other electronic means as fully as if originally signed. 7. Expenses Each Guarantor agrees that it shall, upon demand, pay to the Agent any and all reasonable out-of-pocket sums, costs and expenses, which the Agent or any Lender may pay or incur defending, protecting or enforcing this Agreement (whether suit is instituted or not), including, without limitation, reasonable attorneys' fees and disbursements. All sums, costs and expenses which are due and payable pursuant to this Section shall bear interest, payable on demand, at the highest interest rate then payable on the Borrower Obligations. 8. Repayment in Bankruptcy, etc. If, at any time or times subsequent to the payment of all or any part of the Borrower Obligations or the Guarantor Obligations, the Agent or any Lender shall be required to repay any amounts previously paid by or on behalf of the Borrowers or any Guarantor in reduction thereof by virtue of an order of any court having jurisdiction in the premises, including, without limitation, as a result of an adjudication that such amounts constituted preferential payments or fraudulent conveyances, the Guarantors unconditionally agree to pay to the Agent within 10 days after demand a sum in cash equal to the amount of such repayment, together with interest on such amount from the date of such repayment by the Agent or such Lender, as the case may be, to the date of payment to the Agent at the applicable after-maturity rate set forth in the Credit Agreement. 9. Additional Guarantors Upon the execution and delivery to the Agent of a Subsidiary Guaranty Addendum by any Person, appropriately acknowledged, such Person shall be a Guarantor. 10. Subordination (a) At no time during the continuance of any Default or Event of Default shall any payment of any nature whatsoever due in respect of the Subordinated Debt payable to any Guarantor be made after the Agent shall have given notice to the Company (on behalf of all Borrowers) to such effect. (b) Upon any bankruptcy, insolvency, liquidation or reorganization of any Borrower, or upon the filing of a petition in bankruptcy or commencement of any proceeding in bankruptcy against any Borrower or upon any distribution of the assets of 101 any Borrower or upon any dissolution, winding up, liquidation or reorganization of any Borrower, whether in bankruptcy, insolvency, reorganization, arrangement or receivership proceedings, or upon any assignment for the benefit of creditors, or any other marshalling of the assets and liabilities of either Borrower, or in the event any of the Subordinated Debt shall for any reason become or be declared due and payable or otherwise: (i) the Agent shall first be entitled to receive Payment of all of the Obligations (whenever arising) before any Guarantor shall be entitled to receive any payment on account of the Subordinated Debt; (ii) any payment by, or distribution of the assets of, any Borrower of any kind or character, whether in cash, property or securities, to which any Guarantor would be entitled except for the provisions of this Agreement, in connection with the Subordinated Debt, shall be paid or delivered by the Person making such payment or distribution (whether a trustee in bankruptcy, a receiver, custodian or liquidating trustee or otherwise) directly to the Agent to the extent necessary to make Payment of all of the Obligations remaining unpaid, after giving effect to any concurrent payment or distribution (or provision therefor) in cash to the Agent; (iii) No Guarantor shall ask, demand by legal proceedings or otherwise, or take or receive from any Borrower, by set-off, counterclaim or in any other manner, any payment or distribution on account of the Subordinated Debt other than as expressly permitted hereunder; and (iv) Each Guarantor agrees to declare the Sub- ordinated Debt to be due and payable and, at least 30 days before the time required by applicable law or rule, to file proof of claim therefor, in default of which the Agent is hereby irrevocably authorized so to declare and file in order to effectuate the provisions hereof. Notwithstanding the foregoing, in the event that any payment by, or distribution of the assets of, any Borrower of any kind or character prohibited hereby, whether in cash, property or securities, shall for any reason be received by any Guarantor in respect of the Subordinated Debt, such payment or distribution shall be held in trust for the benefit of the Agent, and shall be immediately paid over to the Agent, to the extent necessary to make Payment of all of the Obligations remaining unpaid, after giving effect to any concurrent payment or distribution (or provision therefor) in cash to the Agent. (c) Without the prior written consent of the Agent, no Borrower will give, and no Guarantor will receive or accept, any collateral of any nature whatsoever for the Subordinated Debt on any Property or assets, whether now existing or hereafter acquired, of any Borrower. (d) Nothing contained in this Agreement is intended to or shall impair, as between and among the Borrowers, their creditors (other than the holders of the Obliga- 102 DRAFT 11/13/96 tions) and any Guarantor, the obligation of the Borrowers to make Payment to such Guarantor of any amount due in respect of the Subordinated Debt as and when the same shall become due and payable in accordance with the terms thereof, or affect the relative rights of the Guarantors and the creditors of the Borrowers (other than the holders of the Obligations), in each case subject to the rights of the holders of the Obligations under this Agreement. (e) Unless and until Payment of all of the Obligations has occurred and the termination of the Credit Agreement, each Guarantor agrees not to declare any part of the Subordinated Debt to be due and payable or exercise any of the rights or remedies which it may have, or bring (in its capacity as holder of the Subordinated Debt), or join with any other creditor in instituting, any proceedings against any Borrower under any bankruptcy, insolvency, reorganization, arrangement, receivership or other similar law, unless the Obligations shall have been declared immediately due and payable or, in the case of the institution of any such proceedings, the Agent shall have joined in the institution thereof or expressly consented thereto in writing. In the event that the Agent shall have so declared the Obligations immediately due and payable, each Guarantor agrees to declare the Subordinated Debt then due to be due and payable, provided, however, if the Agent shall rescind any such declaration, each Guarantor shall automatically be deemed to have rescinded its declaration. (f) No right of the Agent to enforce this Agreement shall at any time or in any way be prejudiced or impaired by any act or failure to act on the part of any Guarantor, or by any noncompliance by any Guarantor with the terms, provisions and covenants herein, and the Agent is hereby expressly authorized to extend, waive, renew, increase, decrease, modify or amend the terms of the Obligations or any collateral security therefor, and to waive any default, modify, amend, rescind or waive any provision of any document executed and delivered in connection with the Obligations and to release, sell or exchange any such collateral security and otherwise deal freely with the Borrowers, all without notice to or consent of any Guarantor and without affecting the liabilities and obligations of the parties hereto. (g) Each Borrower and each Guarantor waives notice of acceptance of this Agreement by the Agent and the Lenders, and each Guarantor waives notice of and consents to the making, amount and terms of the Obligations which may exist from time to time and any renewal, extension, increase, amendment or modification thereof and any other action which the Agent or any Lender in its sole and absolute discretion, may take or omit to take with respect thereto. This section shall constitute a continuing offer to the Agent and the Lenders, its provisions are made for the benefit of the Agent and the Lenders, and the Agent and the Lenders are made obligees hereunder and may enforce such 103 provisions. (h) No Guarantor shall sell, assign, transfer or otherwise dispose of all or any part of the Subordinated Debt without having first obtained the prior written consent of the Agent. (i) Each Borrower agrees that it will not make any payment of any of the Subordinated Debt, or take any other action, in contravention of the provisions of this Agreement. (j) Each Guarantor agrees that the provisions of this Agreement shall be applicable to the Obligations whenever the same may arise and notwithstanding the fact that no Obligations may be outstanding from time to time and may have paid down to zero at any time or from time to time, it being understood that the Credit Agreement permits the Borrowers to borrow, repay and reborrow from time to time subject to the terms and conditions thereof, all or any of which terms and conditions may be waived. (k) All rights and interests of the Agent hereunder, and all agreements and obligations of the Borrowers and the Guarantors under this Agreement, shall remain in full force and effect irrespective of (i) any lack of validity or enforceability of any of the Loan Documents; (ii) any change in the time, manner or place of payment of, or any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to departure from any of the Obligations; (iii) any exchange, release or non-perfection of the Collateral, or any release or amendment or waiver of or consent to or departure from any guaranty, for all or any of the Obligations; or (iv) any other circumstance which might otherwise constitute a defense available to, or a discharge of, any Borrower in respect of the Obligations or this Agreement. This Agreement shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Obligations is rescinded or must otherwise be returned by the Agent upon the insolvency, bankruptcy or reorganization of any Borrower or otherwise, all as though such payment had not been made. (l) Each Guarantor authorizes the Agent, without notice or demand and without affecting or impairing the obligations of any Guarantor, from time to time to (i) renew, compromise, extend, increase, accelerate or otherwise change the time for payment of, or otherwise change the terms of the Obligations, or any part thereof, including, without limitation, to increase or decrease the rate of interest thereon or the principal amount thereof; (ii) take or hold security for the payment of the Obligations and exchange, enforce, foreclose upon, waive and release any such security; (iii) apply such security and direct the order or manner of sale thereof as the Agent, in its sole discretion, may determine; (iv) release and substitute one or more endorsers, warrantors, borrowers or other obligors; and (v) exercise or refrain from exercising any rights against the Borrowers or any other Person. 104 DRAFT 11/13/96 11. Miscellaneous (a) Each Guarantor expressly waives any and all rights of subrogation, reimbursement, indemnity, exoneration, contribution or any other claim which such Guarantor may now or hereafter have against the Borrowers, or against or with respect to the Borrowers' Property, arising from the existence or performance of this Agreement until Payment of all of the Obligations has occurred and the Credit Agreement has been terminated. (b) Except as otherwise expressly provided in this Agreement, each Guarantor hereby waives presentment, demand for payment, notice of default, nonperformance and dishonor, protest and notice of protest of or in respect of this Agreement, the other Loan Documents, and the Borrower Obligations, notice of acceptance of this Agreement and reliance hereupon by the Agent and each Lender, and the incurrence of any of the Borrower Obligations, notice of any sale of collateral security or any default of any sort. (c) No Guarantor is relying upon the Agent or any Lender to provide to such Guarantor any information concerning the Borrowers or any Subsidiary, and each Guarantor has made arrangements satisfactory to such Guarantor to obtain from the Borrowers on a continuing basis such information concerning the Borrowers and their Subsidiaries as such Guarantor may desire. (d) Each Guarantor agrees that any statement of account with respect to the Borrower Obligations from the Agent or any Lender to the Borrowers which binds the Borrowers shall also be binding upon such Guarantor, and that copies of said statements of account maintained in the regular course of the Agent's or such Lender's business, as the case may be, may be used in evidence against such Guarantor in order to establish its Guarantor Obligations. (e) Each Guarantor acknowledges that it has received a copy of the Loan Documents and has approved of the same. In addition, such Guarantor acknowledges having read each Loan Document and having had the advice of counsel in connection with all matters concerning its execution and delivery of this Agreement. (f) No Guarantor may assign any right, or delegate any duty, it may have under this Agreement. (g) Subject to the limitations set forth in Section 2(b), the Guarantor 105 Obligations shall be joint and several. (h) This Agreement is the "SUBSIDIARY GUARANTY" under, and as such term is defined in, the Credit Agreement, and is subject to, and should be construed in accordance with, the provisions thereof. Each of the Agent and the Borrowers acknowledges that certain provisions of the Credit Agreement, including, without limitation, Sections 1.2 (Principles of Construction), 12.1 (Amendments, Waivers, Etc.), 12.3 (No Waiver; Cumulative Remedies), 12.4 (Survival of Representations and Warranties), 12.7 (Successors and Assigns), 12.8 (Counterparts), 12.9 (Set-off and Sharing of Payments), 12.10 (Indemnity), 12.11 (Governing Law), 12.12 (Severability), 12.13 (Integration), 12.15 (Acknowledgments), 12.16 (Consent to Jurisdiction), 12.17 (Service of Process), 12.18 (No Limitation on Service or Suit) and 12.19 (WAIVER OF TRIAL BY JURY) thereof, are made applicable to this Agreement and all such provisions are incorporated by reference herein as if fully set forth herein. 106 DRAFT 11/13/96 IN EVIDENCE of the agreement by the parties hereto to the terms and conditions herein contained, each such party has caused this Subsidiary Guaranty and Subordination Agreement to be duly executed on its behalf. Each of the Persons listed on Annex A attached hereto By: ______________________________ Name: ____________________________ Title: ___________________________ LINENS 'N THINGS, INC., on behalf of itself and all Borrowers By: ______________________________ Name: ____________________________ Title: ___________________________ THE BANK OF NEW YORK, as Agent By: ______________________________ Name: ____________________________ Title: ___________________________ 107 DRAFT 10/29/96 ANNEX A TO THE SUBSIDIARY GUARANTY AND SUBORDINATION AGREEMENT DATED AS OF ___________, 1996 LIST OF CURRENT GUARANTORS 108 DRAFT 11/13/96 LINENS 'N THINGS EXHIBIT E FORM OF OPINION OF SPECIAL COUNSEL TO THE AGENT ____________, 1996 TO THE LENDERS PARTY TO THE CREDIT AGREEMENT (AS DEFINED BELOW) Re: Credit Agreement, dated as of November __, 1996, by and among LINENS 'N THINGS, INC., a Delaware corporation (the "COMPANY"), the Subsidiary Borrowers party thereto, the Lenders party thereto and THE BANK OF NEW Agreement") We have acted as Special Counsel to the Agent in connection with the Credit Agreement. Capitalized terms used herein that are not defined herein shall have the respective meanings ascribed thereto in the Credit Agreement. We have examined originals or copies certified to our satisfaction of the documents required to be delivered pursuant to the provisions of Section 5 of the Credit Agreement. In conducting such examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, and the conformity to originals of all documents submitted to us as copies. Based upon the foregoing examination, and (1) assuming with your permission the accuracy of the opinion of Denise Tolles, counsel to the Credit Parties, and (2) relying with your permission upon the representations and warranties of the Company (on behalf of itself and all Borrowers) contained in the Credit Agreement, we are of the opinion that 109 all legal preconditions to the effectiveness of the Credit Agreement have been satisfactorily met. This opinion is rendered solely for your benefit in connection with the transactions referred to herein and may not be relied upon by any other Person. We express no opinion as to laws other than the laws of the State of New York and the federal laws of the United States of America. Very truly yours, 110 DRAFT 11/13/96 LINENS 'N THINGS EXHIBIT C FORM OF LETTER OF CREDIT REQUEST [Date] The Bank of New York, as Agent One Wall Street New York, New York 10286 Attention: ______________, Re: Credit Agreement, dated as of November __, 1996, by and among LINENS 'N THINGS, INC., a Delaware corporation (the "COMPANY"), the Subsidiary Borrowers party thereto, the Lenders party thereto and THE BANK OF NEW YORK, as Agent (as amended, supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT") Capitalized terms used herein that are not otherwise defined herein shall have the respective meanings ascribed thereto in the Credit Agreement. Pursuant to Section 2.7(b) of the Credit Agreement, the Company, on behalf of [itself/_____________], as account party (the "Account Party"), hereby requests the Issuer to issue a Letter of Credit for the account of the Account Party and for the benefit of ______________________ on ____________ in connection with ___________________________ in the maximum amount of $_______________. A drawing may be made under such Letter of Credit under the following conditions: _______________________________________________. The Company (on behalf of itself and all Borrowers) hereby certifies that on the date hereof and on the above requested date of issuance of such Letter of Credit, and after giving effect to the issuance of such Letter of Credit: (a) The Account Party is a Borrower. 111 (b) Each Credit Party is and shall be in compliance with all of the terms, covenants and conditions of each Loan Document. (c) There exists and there shall exist no Default or Event of Default. (d) The representations and warranties contained in the Credit Agreement are and shall be true and correct, except those which are expressly specified to be made as of an earlier date. IN EVIDENCE of the foregoing, the undersigned has caused this Letter of Credit Request to be duly executed on its behalf. LINENS 'N THINGS, INC. By: ________________________ Name: ______________________ Title: _____________________ [___________________] By: ________________________ Name: ______________________ Title: _____________________ 112 DRAFT 11/13/96 LINENS 'N THINGS EXHIBIT A LIST OF COMMITMENTS, APPLICABLE LENDING OFFICES AND ADDRESSES FOR NOTICES A. LIST OF COMMITMENTS
Lender Commitment Amount ------ ----------------- THE BANK OF NEW YORK $ 25,000,000 CORESTATES BANK, N.A $ 18,000,000 THE FIRST NATIONAL BANK OF BOSTON $ 18,000,000 FLEET NATIONAL BANK $ 18,000,000 CREDIT SUISSE $ 11,500,000 FIRST UNION NATIONAL BANK $ 11,500,000 PNC BANK, NATIONAL ASSOCIATION $ 11,500,000 THE SAKURA BANK, LIMITED $ 11,500,000 TOTAL $125,000,000
113 B. LIST OF APPLICABLE LENDING OFFICES AND ADDRESSES FOR NOTICES THE BANK OF NEW YORK Applicable Lending Office for each Eurodollar Advance: The Bank of New York One Wall Street, 18th Floor Agency Function Administration New York, NY 10286 Attention: Kalyani Bose Telephone: (212) 635-4693 Facsimile: (212) 635-6365 or 6366 or 6367 Applicable Lending Office for all other Advances: The Bank of New York One Wall Street, 18th Floor Agency Function Administration New York, NY 10286 Attention: Kalyani Bose Telephone: (212) 635-4693 Facsimile: (212) 635-6365 or 6366 or 6367 Address for Notices: The Bank of New York One Wall Street 8th Floor New York, NY 10286 Attention: Howard F.Bascom, Vice President Telephone: (212) 635-7894 Facsimile: (212) 635-1481 CORESTATES BANK, N.A. Applicable Lending Office for each Eurodollar Advance: Corestates Bank, N.A. 1345 Chestnut Street Philadelphia, Pennsylvania 19101 New York, NY 10286 114 DRAFT 11/13/96 Attention: Louise Clair Telephone: (215) 786-7454 Facsimile: (215) 973-2045 Applicable Lending Office for all other Advances: Corestates Bank, N.A. 1345 Chestnut Street Philadelphia, Pennsylvania 19101 New York, NY 10286 Attention: Louise Clair Telephone: (215) 786-7454 Facsimile: (215) 973-2045 Address for Notices: Corestates Bank, N.A. 1345 Chestnut Street Philadelphia, Pennsylvania 19101 New York, NY 10286 Attention: Thomas J. McDonnell Telephone: (215) 973-7667 Facsimile: (215) 973-7671 THE FIRST NATIONAL BANK OF BOSTON - --------------------------------- Applicable Lending Office for each Eurodollar Advance: The First National Bank of Boston 100 Federal Street Boston, Massachusetts 02110 Attention: Susan Santos Telephone: (617) 434-3496 Facsimile: (617) 434-0637 Applicable Lending Office for all other Advances: The First National Bank of Boston 100 Federal Street Boston, Massachusetts 02110 115 Attention: Susan Santos Telephone: (617) 434-3496 Facsimile: (617) 434-0637 Address for Notices: The First National Bank of Boston 100 Federal Street Boston, Massachusetts 02110 Attention: Terri McLaughlin Telephone: (617) 434-6991 Facsimile: (617) 434-6685 FLEET NATIONAL BANK - ------------------- Applicable Lending Office for each Eurodollar Advance: Fleet National Bank One Federal Street Boston, Massachusetts 02211 Attention: Melanie Bolster Telephone: (617) 346-0627 Facsimile: (617) 346-0580 Applicable Lending Office for all other Advances: Fleet National Bank One Federal Street Boston, Massachusetts 02211 Attention: Melanie Bolster Telephone: (617) 346-0627 Facsimile: (617) 346-0580 Address for Notices: Fleet National Bank One Federal Street Boston, Massachusetts 02211 Attention: Thomas Bullard Telephone: (617) 346-0627 Facsimile: (617) 346-0580 CREDIT SUISSE - ------------- Applicable Lending Office for each Eurodollar Advance: 116 DRAFT 11/13/96 Credit Suisse 12 East 49th Street New York, New York 10017 Attention: Gina Manginello Telephone: (212) 238-5407 Facsimile: (212) 238-5439 Applicable Lending Office for all other Advances: Credit Suisse 12 East 49th Street New York, New York 10017 Attention: Gina Manginello Telephone: (212) 238-5407 Facsimile: (212) 238-5439 Address for Notices: Credit Suisse 12 East 49th Street New York, New York 10017 Attention: Edward Barr Telephone: (212) 238-5415 Facsimile: (212) 238-5439 FIRST UNION NATIONAL BANK - ------------------------- Applicable Lending Office for each Eurodollar Advance: First Union National Bank 550 Broad Street, NJ1535 Newark, New Jersey 07102 Attention: Mary Tenore Telephone: (201) 565-3607 Facsimile: (201) 565-3978 Applicable Lending Office for all other Advances: First Union National Bank 550 Broad Street, NJ1535 Newark, New Jersey 07102 117 Attention: Mary Tenore Telephone: (201) 565-3607 Facsimile: (201) 565-3978 Address for Notices: First Union National Bank 550 Broad Street, NJ1535 Newark, New Jersey 07102 Attention: Robert Koner Telephone: (201) 565-3396 Facsimile: (201) 565-6681 PNC BANK, NATIONAL ASSOCIATION - ------------------------------ Applicable Lending Office for each Eurodollar Advance: PNC Bank, National Association Two Tower Center Boulevard East Brunswick, New Jersey 08816 Attention: Jean Styles Telephone: (908) 220-3225 Facsimile: (908) 220-3231 Applicable Lending Office for all other Advances: PNC Bank, National Association Two Tower Center Boulevard East Brunswick, New Jersey 08816 Attention: Jean Styles Telephone: (908) 220-3225 Facsimile: (908) 220-3231 Address for Notices: PNC Bank, National Association Two Tower Center Boulevard East Brunswick, New Jersey 08816 Attention: Edward Tessalone Telephone: (908) 220-3227 Facsimile: (908) 220-3231 118 DRAFT 11/13/96 THE SAKURA BANK, LIMITED - ------------------------ Applicable Lending Office for each Eurodollar Advance: The Sakura Bank, Limited 277 Park Avenue - 45th Floor New York, New York 10172 Attention: Patricia L. Walsh Telephone: (212) 756-6788 Facsimile: (212) 644-9565 Applicable Lending Office for all other Advances: The Sakura Bank, Limited 277 Park Avenue - 45th Floor New York, New York 10172 Attention: Patricia L. Walsh Telephone: (212) 756-6788 Facsimile: (212) 644-9565 Address for Notices: The Sakura Bank, Limited 277 Park Avenue - 45th Floor New York, New York 10172 Attention: Philip Schubert Telephone: (212) 756-6945 Facsimile: (212) 888-7651 119 ANNEX A TO ASSIGNMENT AND ACCEPTANCE AGREEMENT FORM OF LETTER [Assignment Effective Date] [Name and Address of Assignee] Attention: _______________, _______________ Re: Assignment and Acceptance Agreement, dated as of _______________, by and between _______________ and _______________ (as the same may be amended, supplemented or otherwise modified from time to time, the "AGREEMENT") Ladies and Gentlemen: This letter is being delivered pursuant to Section 5(a)(ii) of the Agreement. Capitalized terms used herein that are not otherwise defined herein shall have the respective meanings ascribed thereto in the Agreement. The Assignor hereby represents and warrants to the Assignee as follows: (i) the aggregate unpaid principal amount of its Revolving Credit Loans is $___________, and such Revolving Credit Loans are composed of the following ABR Advances and Eurodollar Advances: (1) ABR Advances: $_________, and (2) Eurodollar Advances: (A) $__________ for [LENGTH OF INTEREST PERIOD], the last day of which is _______________, (B) $__________ for [LENGTH OF INTEREST PERIOD], the last day of which is _______________, [(ii) THE AGGREGATE UNPAID PRINCIPAL AMOUNT OF ITS SWING LINE LOANS IS $___________, AND SUCH SWING LINE LOANS ARE COMPOSED OF THE FOLLOWING: (A) $__________ FOR [LENGTH OF SWING LINE INTEREST PERIOD], THE LAST DAY OF WHICH IS _______________, (B) $__________ FOR [LENGTH OF SWING LINE INTEREST PERIOD], THE LAST DAY OF WHICH IS _______________,] (iii) its Commitment Amount is $_______, and 120 (iv) it is the legal and beneficial owner of the Assignor Rights and Obligations free and clear of any adverse claim created by it. Very truly yours, [NAME OF ASSIGNOR] By: _______________________ Name: _____________________ Title: ____________________ cc: [Name and title of Agent contact] 121 DRAFT 11/13/96 LINENS 'N THINGS EXHIBIT G FORM OF ASSIGNMENT AND ACCEPTANCE AGREEMENT Assignment and Acceptance Agreement (as the same may be amended, supplemented or otherwise modified from time to time, this "AGREEMENT"), dated as of ____________, by and between ____________ (the "ASSIGNOR") and ____________ (the "ASSIGNEE"). RECITALS I. Reference is made to the Credit Agreement, dated as of November __, 1996, by and among LINENS 'N THINGS, INC., a Delaware corporation (the "COMPANY"), the Subsidiary Borrowers party thereto, the Lenders party thereto and THE BANK OF NEW YORK, as Agent (the "AGENT") (as amended, supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT"). II. The Assignor wishes to assign and delegate to the Assignee, and the Assignee wishes to purchase and assume from the Assignor, some or all of the Assignor's rights and obligations under the Loan Documents upon the terms, and subject to the conditions, contained herein. Therefore, in consideration of the Recitals, the terms and conditions herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Assignor and the Assignee hereby agree as follows: 1. Defined Terms (a) Each capitalized term used herein that is not defined herein shall have the meaning ascribed thereto in the Credit Agreement. (b) When used in this Agreement, each of the following capitalized terms shall have the meaning ascribed thereto unless the context hereof otherwise specifically requires: "ASSIGNED PERCENTAGE": _____%. "ASSIGNMENT EFFECTIVE DATE": as defined in Section 5. "ASSIGNOR RIGHTS AND OBLIGATIONS": as of the Assignment Effective Date, the Assigned Percentage of all of the Assignor's rights and obligations under the Loan 122 Documents, including, without limita- tion, such percentage of its Revolving Credit Loans [,SWING LINE LOANS} and its Commitment. "PURCHASE PRICE": an amount equal to the Assigned Percentage of the aggregate unpaid principal amount of the Assignor's Revolving Credit Loans [AND SWING LINE LOANS] as of the Assignment Effective Date. 2. Assignment; Payment by Assignee The Assignor hereby assigns and delegates to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, without recourse or, except as otherwise specifically provided herein, representation or warranty, the Assignor Rights and Obligations. The Assignee agrees to pay to the Assignor the Purchase Price on the Assignment Effective Date. 3. Representations and Warranties (a) Assignor. The Assignor hereby represents and warrants to the Assignee as follows: (i) the aggregate unpaid principal amount of its Revolving Credit Loans is $___________, and such Revolving Credit Loans are composed of the following ABR Advances and Eurodollar Advances: (1) ABR Advances: $__________, and (2) Eurodollar Advances: (A) $__________ for [LENGTH OF INTEREST PERIOD], the last day of which is _______________, (B) $__________ for [LENGTH OF INTEREST PERIOD], the last day of which is _______________, [(ii) THE AGGREGATE UNPAID PRINCIPAL AMOUNT OF ITS SWING LINE LOANS IS $___________, AND SUCH SWING LINE LOANS ARE COMPOSED OF THE FOLLOWING: (A) $__________ FOR [LENGTH OF SWING LINE INTEREST PERIOD], THE LAST DAY OF WHICH IS _______________, (B) $__________ FOR [LENGTH OF SWING LINE INTEREST PERIOD], THE LAST DAY OF WHICH IS _______________,] (iii) its Commitment Amount is $_______, and (iv) it is the legal and beneficial owner of the Assignor Rights and Obligations free and clear of any adverse claim created by it. (b) Assignee. The Assignee hereby represents and warrants to the Assignor that (i) it is legally authorized to enter into this Agreement, (ii) it is an "accredited investor" within the meaning of Regulation D, as amended, promulgated under the Securities Act of 1933, as amended, [AND] (iii) it has, independently and without reliance upon the Assignor or the Agent, and based on such documents and information as it has deemed appropriate, made its own evaluation of, and investigation into, the business, operations, Property, financial and other condition and creditworthiness of the Borrowers and made its own decision to enter into this Agreement [, AND (iv) IT IS A 123 DRAFT 11/13/96 LENDER OR A SUBSIDIARY OR AFFILIATE OF A LENDER]. 4. Covenants of the Assignee The Assignee hereby covenants and agrees that it will, independently and without reliance upon the Assignor or the Agent, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, evaluations and decisions in taking or not taking action under the Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, Property, financial and other condition and creditworthiness of the Borrowers. The Assignee further agrees to provide to the Agent any forms required by Section 3.10 of the Credit Agreement and any administrative questionnaire reasonably required by the Agent. 5. Effectiveness of this Agreement (a) Section 2 of this Agreement shall not become effective until such date (the "ASSIGNMENT EFFECTIVE DATE") as all of the following conditions shall have been fulfilled: (i) The Agent shall have executed a copy of this Agreement and shall have received duly executed counterparts hereof by each of the Assignor, the Assignee and, if required by the Credit Agreement, the Issuer, the Swing Line Lender and the Company; (ii) The Assignor shall have delivered to the Assignee (with a copy to the Agent) a duly completed letter in the form of Annex A hereto; (iii) The Assignee shall have confirmed in writing to the Assignor (with a copy to the Agent) that, on or before the Assignment Effective Date, it shall have transferred (in accordance with Section 6 hereof) the Purchase Price to the Assignor. At the time of such confirmation, the Assignee shall be deemed to have remade the representations and warranties contained in Section 3(b)(i), (ii) [AND] (iii) [, AND (IV)] hereof on and as of the date of such confirmation; (iv) The Agent shall have received an assignment fee, for its account, in the amount of $3,500 if required to be paid by the Credit Agreement; and (v) The Agent shall have received any forms required by Section 3.10 of the Credit Agreement and any administrative questionnaire reasonably required by the Agent. 124 (b) Upon the Assignment Effective Date, (i) the Agent shall record the assignment contemplated hereby, (ii) the Assignee shall be a Lender, and (iii) the Assignor, to the extent of the assignment provided for herein, shall be released from its obligations under the Loan Documents. (c) The Assignee hereby appoints and authorizes the Agent to take such action, on and after the Assignment Effective Date, as agent on its behalf and to exercise such powers under the Loan Documents as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto. (d) From and after the Assignment Effective Date, the Agent shall make all payments in respect of the interest assigned hereby (including payments of principal, interest, fees and other amounts) to the Assignee. The Assignor and the Assignee shall make all appropriate adjustments with respect to amounts under the Loan Documents which accrued prior to the Assignment Effective Date and which were paid thereafter, directly between themselves. 6. Payment Instructions All payments to be made to the Assignor by the Assignee hereunder shall be made by wire transfer of immediately available funds to the Assignor at: [WIRE INSTRUCTIONS]. 7. Notices All notices, requests and demands to or upon the Assignee in connection with this Agreement and the Loan Documents are to be sent or delivered to the place set forth adjacent to its name on the signature page(s) hereof. 8. Miscellaneous (a) For purposes of this Agreement, all calculations and determinations with respect to the outstanding principal amount of the Assignor's Loans, the Assignor's Commitment Amount and all other similar calculations and determinations, shall be made and shall be deemed to be made as of the commencement of business on the date of such calculation or determination, as the case may be. (b) Section headings have been inserted herein for convenience only and shall not be construed to be a part hereof. (c) This Agreement embodies the entire agreement and understanding among the parties hereto with respect to the subject matter hereof and supersedes all other prior arrangements and understandings among the parties hereto with respect to the subject matter hereof. (d) This Agreement may be executed in any number of separate 125 DRAFT 11/13/96 counterparts and all of said counterparts taken together shall be deemed to constitute one and the same agreement. It shall not be necessary in making proof of this Agreement to produce or account for more than one counterpart signed by the party to be charged. (e) Every provision of this Agreement is intended to be severable, and if any term or provision hereof shall be invalid, illegal or unenforceable for any reason, the validity, legality and enforceability of the remaining provisions hereof shall not be affected or impaired thereby, and any invalidity, illegality or unenforceability in any jurisdiction shall not affect the validity, legality or enforceability of any such term or provision in any other jurisdiction. (f) This Agreement shall be binding upon and inure to the benefit of the Assignor and the Assignee and their respective successors and permitted assigns, except that neither party may assign or transfer any of its rights or obligations hereunder (i) without the prior written consent of the other party or (ii) in contravention of the Credit Agreement. (g) This Agreement and the rights and obligations of the parties hereunder shall be governed by, and construed and interpreted in accordance with, the internal laws of the State of New York without regard to principles of conflicts of law. 126 AS EVIDENCE of the agreement by the parties hereto to the terms and conditions herein contained, each such party has caused this Agreement to be duly executed on its behalf. [NAME OF ASSIGNOR] By: ______________________ Name: ____________________ Title: ___________________ [NAME OF ASSIGNEE} Address for notices: ____________________ By: ______________________ ____________________ Name: ____________________ ____________________ Title: ___________________ Attention:__________ Telephone:_____________ Facsimile:_____________ Consented to this __ day of __________, ____ THE BANK OF NEW YORK, as Issuer and Swing Line Lender By: ___________________________ Name: _________________________ Title: ________________________ [CONSENTED TO THIS __ DAY OF __________, ____ LINENS 'N THINGS, INC. BY: ____________________________ 127 DRAFT 11/13/96 NAME: __________________________ TITLE: _________________________] Accepted this __ day of _________, ____ THE BANK OF NEW YORK, as Agent By: ___________________________ Name: _________________________ Title: ________________________ EX-10.7 5 EMPLOYMENT AGRREMENT-TOMASZEWSKI 1 Exhibit 10.7 LINENS 'N THINGS, INC. - -------------------------------------------------------------------------------- EMPLOYMENT AGREEMENT FOR JAMES TOMASZEWSKI - -------------------------------------------------------------------------------- 2 LINENS 'N THINGS, INC. - -------------------------------------------------------------------------------- EMPLOYMENT AGREEMENT FOR JAMES TOMASZEWSKI - -------------------------------------------------------------------------------- Page ---- 1. Definitions.................................................... 1 2. Term of Employment............................................. 2 3. Position, Duties and Responsibilities.......................... 2 4. Base Salary.................................................... 3 5. Annual Incentive Awards........................................ 3 6. Long-Term Stock Incentive Programs............................. 3 7. Employee Benefit Programs...................................... 3 8. Disability..................................................... 4 9. Reimbursement of Business and Other Expenses................... 5 10. Termination of Employment...................................... 5 11 Confidentiality; Cooperation with Regard to Litigation......... 15 12. Non-competition................................................ 16 13. Non-solicitation of Employees.................................. 17 14. Remedies....................................................... 17 15. Resolution of Disputes......................................... 17 16. Indemnification................................................ 17 17. Excise Tax Gross-Up............................................ 18 18. Effect of Agreement on Other Benefits.......................... 20 19. Assignability; Binding Nature.................................. 20 20. Representation................................................. 21 21. Entire Agreement............................................... 21 22. Amendment or Waiver............................................ 21 23. Severability................................................... 21 24. Survivorship................................................... 21 25. Beneficiaries/References....................................... 21 3 Page ---- 26. Governing Law/Jurisdiction..................................... 22 27. Notices........................................................ 22 28. Headings....................................................... 23 29. Counterparts................................................... 23 4 EMPLOYMENT AGREEMENT AGREEMENT, made and entered into as of the ___ day of October, 1996 by and between Linens 'n Things, Inc., a Delaware corporation (together with its successors and assigns, the "Company"), and James Tomaszewski (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; 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) "Normal Retirement" shall have the meaning set forth in Section 10(f) below. (k) "Original Term of Employment" shall have the meaning set forth in Section 2(a) below. (l) "Renewal Term" shall have the meaning set forth in Section 2(a) below. (m) "Restriction Period" shall have the meaning set forth in Section 12(b) below. 5 (n) "Severance Period" shall have the meaning set forth in Section 10(c)(ii) below, except as provided otherwise in Section 10(e) below. (o) "Subsidiary" shall have the meaning set forth in Section 11(d) below. (p) "Term of Employment" shall have the meaning set forth in Section 2(a) below. (q) "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 on the date on which shares of common stock of the Company are first sold to the public pursuant to an initial public offering (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. (b) 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. 3. Position, Duties and Responsibilities. (a) Generally. Executive shall serve as a senior executive of the Company. Executive shall have and perform such duties, responsibilities, and authorities as shall be specified by the Company from time to time and as are customary for a senior executive of a publicly held corporation of the size, type, and nature of the Company as they may exist from time to time and as are consistent with such position 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 his position and 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. - 2 - 6 4. Base Salary. The Executive shall be paid an annualized salary, ("Base Salary") payable in accordance with the regular payroll practices of the Company, of not less than $279,000, subject to review for increase at the discretion of the Compensation Committee (the "Committee") of the Company's Board of Directors (the "Board"). 5. Annual Incentive Awards. The Executive shall participate in the Company's annual incentive compensation plan with a target annual incentive award opportunity of no less than 40% of Base Salary and a maximum annual incentive award opportunity of 80% of Base Salary. Payment of annual incentive awards shall be made at the same time that other senior-level executives receive their incentive awards. 6. Long-Term Incentive Programs. The Executive shall be eligible to participate in the Company's long-term incentive compensation programs (including stock options and stock grants). 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 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 - 3 - 7 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." 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) his position or another senior executive position is then vacant and (iii) the Company requests in writing that he resume such position, he may elect to resume such position by written notice to the Company within 15 days after the Company delivers its request. If he resumes such position, 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 position, a pro rata annual incentive award. If he ceases to be disabled during the Term of Employment and does not resume his position 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 his position or another senior executive position 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. - 4 - 8 (b) The Executive shall be entitled to a pro rata annual incentive award for the year in which the Commencement Date occurs based on 40% 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 position in accordance with Section 8(a), he shall be entitled to a pro rata annual incentive award for the year he resumes such position 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. 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. 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 40% 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 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, - 5 - 9 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. 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, - 6 - 10 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 12 months (the "Severance Period"); (iii) pro rata annual incentive award for the year in which termination occurs equal to 40% of Base Salary (determined in accordance with 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) 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 - 7 - 11 sum not later than 15 days following the Executive's termination of employment; (v) settlement of all deferred compensation arrangements in accordance with the Executive's duly executed Deferral Election Forms; (vi) 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 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 (vi) 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 (vi) 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 (vii) 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) an assignment of any duties to Executive which are inconsistent with his status as a senior executive of the Company; (B) a decrease in annual Base Salary or target annual incentive award opportunity below 40% of Base Salary; (C) any other failure by the Company to perform any material obligation under, or breach by the Company of any material - 8 - 12 provision of, this Agreement that is not cured within 30 days; or (D) 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. In addition, following a Change in Control, "Constructive Termination Without Cause" shall also 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 a relocation of his principal place of employment outside a 35-mile radius of his principal place of employment as in effect immediately prior to such 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 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 Corporation; (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 - 9 - 13 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; (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. - 10 - 14 (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, or Approved Early Retirement or Normal Retirement pursuant to Section 10(f) 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 140% 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 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, or Normal Retirement, 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 140% 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), 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 two 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) an amount equal to 40% of such Base Salary (determined in accordance with Section 10(e)(ii) above) multiplied by two, payable in a cash lump sum promptly (but in no event later than 15 days) following the Executive's termination of employment; (iv) elimination of all restrictions on any deferred stock awards outstanding at the time of termination of employment; - 11 - 15 (v) 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; (vi) 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; (vii) 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; (viii) settlement of all deferred compensation arrangements in accordance with Executive's duly executed Deferral Election Forms; (ix) 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 (ix) 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 (ix) 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 (x) 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 24 months following the termination of the Executive's employment. - 12 - 16 (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- - 13 - 17 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. - 14 - 18 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 Corporation. 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. - 15 - 19 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 an entity which becomes a Competitor during the Restriction Period, which activities 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) 140% 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 140% of Base Salary, the date of such termination; or - 16 - 20 (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 costs and expenses of any arbitration or court proceeding (including fees and disbursements of counsel) shall be borne by the respective party incurring such costs and expenses, but the Company shall reimburse the Executive for such reasonable costs and expenses in the event he substantially prevails in such arbitration or court proceeding. 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 - 17 - 21 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 - 18 - 22 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 - 19 - 23 (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. - 20 - 24 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 Corporation. 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. - 21 - 25 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: James Tomaszewski 7 Heritage Court Randolph, NJ 07869 - 22 - 26 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 __________________________________ James Tomaszewski - 23 - EX-10.8 6 EMPLOYMENT AGREEMENT-SILVERSTEIN 1 Exhibit 10.8 LINENS 'N THINGS, INC. - -------------------------------------------------------------------------------- EMPLOYMENT AGREEMENT FOR STEVEN SILVERSTEIN - -------------------------------------------------------------------------------- 2 LINENS 'N THINGS, INC. - -------------------------------------------------------------------------------- EMPLOYMENT AGREEMENT FOR STEVEN SILVERSTEIN - -------------------------------------------------------------------------------- Page ---- 1. Definitions...................................................... 1 2. Term of Employment............................................... 2 3. Position, Duties and Responsibilities............................ 2 4. Base Salary...................................................... 3 5. Annual Incentive Awards.......................................... 3 6. Long-Term Stock Incentive Programs............................... 3 7. Employee Benefit Programs........................................ 3 8. Disability....................................................... 4 9. Reimbursement of Business and Other Expenses..................... 5 10. Termination of Employment........................................ 5 11 Confidentiality; Cooperation with Regard to Litigation........... 15 12. Non-competition.................................................. 16 13. Non-solicitation of Employees.................................... 17 14. Remedies......................................................... 17 15. Resolution of Disputes........................................... 17 16. Indemnification.................................................. 17 17. Excise Tax Gross-Up.............................................. 18 18. Effect of Agreement on Other Benefits............................ 20 19. Assignability; Binding Nature.................................... 20 20. Representation................................................... 21 21. Entire Agreement................................................. 21 22. Amendment or Waiver.............................................. 21 23. Severability..................................................... 21 24. Survivorship..................................................... 21 25. Beneficiaries/References......................................... 21 3 Page ---- 26. Governing Law/Jurisdiction....................................... 22 27. Notices.......................................................... 22 28. Headings......................................................... 23 29. Counterparts..................................................... 23 4 EMPLOYMENT AGREEMENT AGREEMENT, made and entered into as of the ___ day of October, 1996 by and between Linens 'n Things, Inc., a Delaware corporation (together with its successors and assigns, the "Company"), and Steven Silverstein (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; 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) "Normal Retirement" shall have the meaning set forth in Section 10(f) below. (k) "Original Term of Employment" shall have the meaning set forth in Section 2(a) below. (l) "Renewal Term" shall have the meaning set forth in Section 2(a) below. (m) "Restriction Period" shall have the meaning set forth in Section 12(b) below. 5 (n) "Severance Period" shall have the meaning set forth in Section 10(c)(ii) below, except as provided otherwise in Section 10(e) below. (o) "Subsidiary" shall have the meaning set forth in Section 11(d) below. (p) "Term of Employment" shall have the meaning set forth in Section 2(a) below. (q) "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 on the date on which shares of common stock of the Company are first sold to the public pursuant to an initial public offering (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. (b) 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. 3. Position, Duties and Responsibilities. (a) Generally. Executive shall serve as a senior executive of the Company. Executive shall have and perform such duties, responsibilities, and authorities as shall be specified by the Company from time to time and as are customary for a senior executive of a publicly held corporation of the size, type, and nature of the Company as they may exist from time to time and as are consistent with such position 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 his position and 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. - 2 - 6 4. Base Salary. The Executive shall be paid an annualized salary, ("Base Salary") payable in accordance with the regular payroll practices of the Company, of not less than $275,000, subject to review for increase at the discretion of the Compensation Committee (the "Committee") of the Company's Board of Directors (the "Board"). 5. Annual Incentive Awards. The Executive shall participate in the Company's annual incentive compensation plan with a target annual incentive award opportunity of no less than 40% of Base Salary and a maximum annual incentive award opportunity of 80% of Base Salary. Payment of annual incentive awards shall be made at the same time that other senior-level executives receive their incentive awards. 6. Long-Term Incentive Programs. The Executive shall be eligible to participate in the Company's long-term incentive compensation programs (including stock options and stock grants). 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 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 - 3 - 7 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." 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) his position or another senior executive position is then vacant and (iii) the Company requests in writing that he resume such position, he may elect to resume such position by written notice to the Company within 15 days after the Company delivers its request. If he resumes such position, 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 position, a pro rata annual incentive award. If he ceases to be disabled during the Term of Employment and does not resume his position 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 his position or another senior executive position 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. - 4 - 8 (b) The Executive shall be entitled to a pro rata annual incentive award for the year in which the Commencement Date occurs based on 40% 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 position in accordance with Section 8(a), he shall be entitled to a pro rata annual incentive award for the year he resumes such position 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. 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. 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 40% 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 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, - 5 - 9 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. 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, - 6 - 10 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 12 months (the "Severance Period"); (iii) pro rata annual incentive award for the year in which termination occurs equal to 40% of Base Salary (determined in accordance with 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) 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 - 7 - 11 sum not later than 15 days following the Executive's termination of employment; (v) settlement of all deferred compensation arrangements in accordance with the Executive's duly executed Deferral Election Forms; (vi) 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 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 (vi) 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 (vi) 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 (vii) 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) an assignment of any duties to Executive which are inconsistent with his status as a senior executive of the Company; (B) a decrease in annual Base Salary or target annual incentive award opportunity below 40% of Base Salary; (C) any other failure by the Company to perform any material obligation under, or breach by the Company of any material - 8 - 12 provision of, this Agreement that is not cured within 30 days; or (D) 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. In addition, following a Change in Control, "Constructive Termination Without Cause" shall also 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 a relocation of his principal place of employment outside a 35-mile radius of his principal place of employment as in effect immediately prior to such 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 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 Corporation; (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 - 9 - 13 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; (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. - 10 - 14 (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, or Approved Early Retirement or Normal Retirement pursuant to Section 10(f) 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 140% 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 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, or Normal Retirement, 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 140% 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), 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 two 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) an amount equal to 40% of such Base Salary (determined in accordance with Section 10(e)(ii) above) multiplied by two, payable in a cash lump sum promptly (but in no event later than 15 days) following the Executive's termination of employment; (iv) elimination of all restrictions on any deferred stock awards outstanding at the time of termination of employment; - 11 - 15 (v) 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; (vi) 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; (vii) 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; (viii) settlement of all deferred compensation arrangements in accordance with Executive's duly executed Deferral Election Forms; (ix) 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 (ix) 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 (ix) 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 (x) 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 24 months following the termination of the Executive's employment. - 12 - 16 (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- - 13 - 17 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. - 14 - 18 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 Corporation. 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. - 15 - 19 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 an entity which becomes a Competitor during the Restriction Period, which activities 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) 140% 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 140% of Base Salary, the date of such termination; or - 16 - 20 (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 costs and expenses of any arbitration or court proceeding (including fees and disbursements of counsel) shall be borne by the respective party incurring such costs and expenses, but the Company shall reimburse the Executive for such reasonable costs and expenses in the event he substantially prevails in such arbitration or court proceeding. 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 - 17 - 21 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 - 18 - 22 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 - 19 - 23 (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. - 20 - 24 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 Corporation. 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. - 21 - 25 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: Steven Silverstein 6 Rivercrest Road Riverdale, NY 10471 - 22 - 26 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 __________________________________ Steven Silverstein - 23- EX-10.9 7 EMPLOMENT AGREEMENT-SCULLIN 1 Exhibit 10.9 LINENS 'N THINGS, INC. - -------------------------------------------------------------------------------- EMPLOYMENT AGREEMENT FOR HUGH SCULLIN - -------------------------------------------------------------------------------- 2 LINENS 'N THINGS, INC. - -------------------------------------------------------------------------------- EMPLOYMENT AGREEMENT FOR HUGH SCULLIN - -------------------------------------------------------------------------------- Page ---- 1. Definitions..................................................... 1 2. Term of Employment.............................................. 2 3. Position, Duties and Responsibilities........................... 2 4. Base Salary..................................................... 3 5. Annual Incentive Awards......................................... 3 6. Long-Term Stock Incentive Programs.............................. 3 7. Employee Benefit Programs....................................... 3 8. Disability...................................................... 4 9. Reimbursement of Business and Other Expenses.................... 5 10. Termination of Employment....................................... 5 11 Confidentiality; Cooperation with Regard to Litigation.......... 15 12. Non-competition................................................. 16 13. Non-solicitation of Employees................................... 17 14. Remedies........................................................ 17 15. Resolution of Disputes.......................................... 17 16. Indemnification................................................. 17 17. Excise Tax Gross-Up............................................. 18 18. Effect of Agreement on Other Benefits........................... 20 19. Assignability; Binding Nature................................... 20 20. Representation.................................................. 21 21. Entire Agreement................................................ 21 22. Amendment or Waiver............................................. 21 23. Severability.................................................... 21 24. Survivorship.................................................... 21 25. Beneficiaries/References........................................ 21 3 Page ---- 26. Governing Law/Jurisdiction...................................... 22 27. Notices......................................................... 22 28. Headings........................................................ 23 29. Counterparts.................................................... 23 4 EMPLOYMENT AGREEMENT AGREEMENT, made and entered into as of the ___ day of October, 1996 by and between Linens 'n Things, Inc., a Delaware corporation (together with its successors and assigns, the "Company"), and Hugh Scullin (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; 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) "Normal Retirement" shall have the meaning set forth in Section 10(f) below. (k) "Original Term of Employment" shall have the meaning set forth in Section 2(a) below. (l) "Renewal Term" shall have the meaning set forth in Section 2(a) below. (m) "Restriction Period" shall have the meaning set forth in Section 12(b) below. 5 (n) "Severance Period" shall have the meaning set forth in Section 10(c)(ii) below, except as provided otherwise in Section 10(e) below. (o) "Subsidiary" shall have the meaning set forth in Section 11(d) below. (p) "Term of Employment" shall have the meaning set forth in Section 2(a) below. (q) "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 on the date on which shares of common stock of the Company are first sold to the public pursuant to an initial public offering (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. (b) 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. 3. Position, Duties and Responsibilities. (a) Generally. Executive shall serve as a senior executive of the Company. Executive shall have and perform such duties, responsibilities, and authorities as shall be specified by the Company from time to time and as are customary for a senior executive of a publicly held corporation of the size, type, and nature of the Company as they may exist from time to time and as are consistent with such position 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 his position and 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. - 2 - 6 4. Base Salary. The Executive shall be paid an annualized salary, ("Base Salary") payable in accordance with the regular payroll practices of the Company, of not less than $210,000, subject to review for increase at the discretion of the Compensation Committee (the "Committee") of the Company's Board of Directors (the "Board"). 5. Annual Incentive Awards. The Executive shall participate in the Company's annual incentive compensation plan with a target annual incentive award opportunity of no less than 40% of Base Salary and a maximum annual incentive award opportunity of 80% of Base Salary. Payment of annual incentive awards shall be made at the same time that other senior-level executives receive their incentive awards. 6. Long-Term Incentive Programs. The Executive shall be eligible to participate in the Company's long-term incentive compensation programs (including stock options and stock grants). 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 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 - 3 - 7 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." 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) his position or another senior executive position is then vacant and (iii) the Company requests in writing that he resume such position, he may elect to resume such position by written notice to the Company within 15 days after the Company delivers its request. If he resumes such position, 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 position, a pro rata annual incentive award. If he ceases to be disabled during the Term of Employment and does not resume his position 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 his position or another senior executive position 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. - 4 - 8 (b) The Executive shall be entitled to a pro rata annual incentive award for the year in which the Commencement Date occurs based on 40% 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 position in accordance with Section 8(a), he shall be entitled to a pro rata annual incentive award for the year he resumes such position 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. 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. 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 40% 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 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, - 5 - 9 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. 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, - 6 - 10 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 12 months (the "Severance Period"); (iii) pro rata annual incentive award for the year in which termination occurs equal to 40% of Base Salary (determined in accordance with 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) 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 - 7 - 11 sum not later than 15 days following the Executive's termination of employment; (v) settlement of all deferred compensation arrangements in accordance with the Executive's duly executed Deferral Election Forms; (vi) 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 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 (vi) 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 (vi) 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 (vii) 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) an assignment of any duties to Executive which are inconsistent with his status as a senior executive of the Company; (B) a decrease in annual Base Salary or target annual incentive award opportunity below 40% of Base Salary; (C) any other failure by the Company to perform any material obligation under, or breach by the Company of any material - 8 - 12 provision of, this Agreement that is not cured within 30 days; or (D) 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. In addition, following a Change in Control, "Constructive Termination Without Cause" shall also 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 a relocation of his principal place of employment outside a 35-mile radius of his principal place of employment as in effect immediately prior to such 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 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 Corporation; (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 - 9 - 13 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; (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. - 10 - 14 (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, or Approved Early Retirement or Normal Retirement pursuant to Section 10(f) 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 140% 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 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, or Normal Retirement, 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 140% 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), 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 two 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) an amount equal to 40% of such Base Salary (determined in accordance with Section 10(e)(ii) above) multiplied by two, payable in a cash lump sum promptly (but in no event later than 15 days) following the Executive's termination of employment; (iv) elimination of all restrictions on any deferred stock awards outstanding at the time of termination of employment; - 11 - 15 (v) 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; (vi) 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; (vii) 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; (viii) settlement of all deferred compensation arrangements in accordance with Executive's duly executed Deferral Election Forms; (ix) 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 (ix) 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 (ix) 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 (x) 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 24 months following the termination of the Executive's employment. - 12 - 16 (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- - 13 - 17 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. - 14- 18 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 Corporation. 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. - 15 - 19 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 an entity which becomes a Competitor during the Restriction Period, which activities 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) 140% 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 140% of Base Salary, the date of such termination; or - 16 - 20 (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 costs and expenses of any arbitration or court proceeding (including fees and disbursements of counsel) shall be borne by the respective party incurring such costs and expenses, but the Company shall reimburse the Executive for such reasonable costs and expenses in the event he substantially prevails in such arbitration or court proceeding. 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 - 17 - 21 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 - 18 - 22 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 - 19 - 23 (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. - 20 - 24 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 Corporation. 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. - 21 - 25 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: Hugh Scullin 106 Orion Way Neshanic Station, NJ 08853 - 22 - 26 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 __________________________________ Hugh Scullin - 23 - EX-15 8 UNAUDITED INTERIM FINANCIAL INFORMATION 1 EXHIBIT 15 INDEPENDENT AUDITORS' REVIEW REPORT The Board of Directors and Shareholder Linens 'n Things, Inc.: We have reviewed the consolidated balance sheets of Linens 'n Things, Inc. (formerly Bloomington, MN., L.T., Inc.) and Subsidiaries as of September 30, 1995 and September 28, 1996, the related consolidated statements of operations and cash flows for the thirty-nine weeks ended September 30, 1995 and September 28, 1996 and the consolidated statement of shareholder's equity for the thirty-nine weeks ended September 28, 1996. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical review procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP New York, New York October 18, 1996, except as to paragraph 2 of note 11, which is as of November 15, 1996 EX-23.1 9 CONSENT OF KPMG 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 audit reports dated February 21, 1996, except as to paragraph 1 of note 11, which is as of June 19, 1996 and paragraph 2 of note 11, which is as of November 15, 1996, on the consolidated financial statements of Linens 'n Things, Inc. as of December 31, 1995 and 1994, and for each of the years in the three-year period ended December 31, 1995 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 November 18, 1996 -----END PRIVACY-ENHANCED MESSAGE-----