LINENS N THINGS INC, 424B1, 1996-11-26

LINENS N THINGS INC
424B1, 1996-11-26
HOME FURNITURE, FURNISHINGS & EQUIPMENT STORES

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<PAGE> 1

Filed pursuant to
Rule 424(b)(1)
File No. 333-12267

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. 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.

<TABLE>
<S> <C> <C> <C>
Underwriting Proceeds to
Price to Discounts and Selling
Public Commissions Shareholder(1)
------------------------------------------------
Per Share................................... $15.50 $0.93 $14.57
Total(2).................................... $201,500,000 $12,090,000 $189,410,000
</TABLE>

(1) Before deduction of expenses payable by the Selling Shareholder estimated at
$1,040,000.

(2) The Selling Shareholder has granted the Underwriters an option, exercisable
for 30 days from the date of this Prospectus, to purchase a maximum of
1,950,000 additional shares to cover over-allotments of shares. If the
option is exercised in full, the total Price to Public will be $231,725,000,
Underwriting Discounts and Commissions will be $13,903,500 and Proceeds to
Selling Shareholder will be $217,821,500.

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

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 December 2, 1996, against payment in immediately
available funds.

CS First Boston Donaldson, Lufkin & Jenrette
Securities
Corporation

The date of this Prospectus is November 25, 1996.

<PAGE> 2

IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.

DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE
ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES 10B-6,
10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
<PAGE> 3

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:

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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.

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<PAGE> 5

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 173,410 shares of deferred stock grants and 982,656
shares issuable upon the exercise of stock options to be granted prior to
completion of the Offering. See "Underwriting" and "Management--1996
Incentive Compensation Plan" and "Management--1996 Non-Employee Director
Stock Plan."

5
<PAGE> 6

SUMMARY FINANCIAL AND OPERATING DATA

<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED(1)
YEAR ENDED DECEMBER 31, ------------------------------
-------------------------------------------------------- SEPTEMBER 30, SEPTEMBER 28,
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND SELECTED OPERATING DATA)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Net sales..................... $221,360 $270,889 $333,178 $440,118 $555,095 $ 377,638 $ 466,254
Gross profit.................. 89,985 108,794 133,871 174,397 209,933(2) 145,349 175,909
Selling, general &
administrative expense...... 82,666 95,904 112,135 142,155 190,826(2) 131,360 166,615
Restructuring and asset
impairment charges.......... -- 13,100(3) -- -- 10,974(2) -- --
Operating profit (loss)....... 7,319 (210)(3) 21,736 32,242 8,133(2) 13,989 9,294
Interest expense, net........... 1,610 1,301 1,398 3,170 7,059 5,137 4,464
Income (loss) before provision
for income taxes and
cumulative effect of change
in accounting principle..... 5,709 (1,511) 20,338 29,072 1,074 8,852 4,830
Net income (loss)............. 3,758 (1,201) 11,719 17,198 (212) 4,925 2,769
PRO FORMA:
Net income (loss) per share... $ 0.20 $ (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)
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 28, 1996
------------------------------
ACTUAL PRO FORMA(9)
------------- -------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Working capital.................................................................... $ 118,103 $ 114,603
Total assets....................................................................... 399,801 399,956
Total debt(10)..................................................................... 61,498 31,653
Shareholders' equity(10)........................................................... 209,457 237,457
</TABLE>

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

(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."

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<PAGE> 8

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

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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

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<PAGE> 10

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
<PAGE> 11

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
<PAGE> 12

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 $188,370,000 ($216,781,500 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
<PAGE> 13

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."

<TABLE>
<CAPTION>
SEPTEMBER 28, 1996
(UNAUDITED)
-------------------------
ACTUAL PRO FORMA(1)
-------- ------------
<S> <C> <C>
(IN THOUSANDS)
Short-term debt:
Due to CVS................................................................ $ 61,498 $ 0
Revolving credit facility................................................. 0 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
======== ========
</TABLE>

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

(1) To reflect the capitalization of the Company after giving effect to the
Reorganization.
(2) The actual amount drawn under the Revolving Credit Facility by the Company
will depend on the amount of the intercompany balance as of the closing of
the Offering. The Company does not expect that such amount will vary
materially from the Pro Forma amount.
(3) Excludes approximately 173,410 shares of deferred stock grants and 982,656
shares of Common Stock issuable upon the exercise of stock options to be
granted prior to the completion of the Offering. See "Underwriting" and
"Management--1996 Incentive Compensation Plan" and "Management--1996
Non-Employee Director Stock Plan."

13
<PAGE> 14

SELECTED FINANCIAL AND OPERATING DATA

Prior to the Offering, the Company was operated as a wholly owned, indirect
subsidiary of CVS. The table below sets forth the selected historical
consolidated financial data for the Company. The historical financial data
presented below reflect periods during which the Company did not operate as an
independent company and, accordingly, certain allocations were made in preparing
such financial data. Therefore, such data may not reflect the results of
operations or the financial condition which would have resulted if the Company
had operated as a separate, independent company during such periods and are not
necessarily indicative of the Company's future results of operations or
financial condition.

The selected financial data presented below under the captions "Income
Statement Data" and "Balance Sheet Data" have been derived from the Consolidated
Financial Statements of the Company which have been audited by KPMG Peat Marwick
LLP, whose report on the Consolidated Financial Statements as of December 31,
1994 and 1995 and for the years ended December 31, 1993, 1994 and 1995 is
included elsewhere in this Prospectus. The selected financial data as of
September 28, 1996 and for the thirty-nine weeks ended September 30, 1995 and
September 28, 1996 have been derived from unaudited consolidated financial
statements of the Company which are included elsewhere in this Prospectus and
include all adjustments consisting only of normal recurring adjustments
necessary for a fair presentation of the operating results and financial
position as of and for the unaudited periods. The information presented below
under the caption "Selected Operating Data" is unaudited. The selected financial
data should be read in conjunction with the consolidated financial statements as
of December 31, 1994 and 1995 and for the years ended December 31, 1993, 1994
and 1995, the related notes and the audit report thereto. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Consolidated Financial Statements." For information relating to factors
considered in determining the initial offering price of the Common Stock offered
hereby, see "Underwriting."

<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED(1)
YEAR ENDED DECEMBER 31, -----------------------------
------------------------------------------------------ SEPTEMBER 30, SEPTEMBER 28,
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND SELECTED OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales........................... $221,360 $270,889 $333,178 $440,118 $555,095 $ 377,638 $ 466,254
Cost of sales, including buying and
warehousing costs................. 131,375 162,095 199,307 265,721 345,162(2) 232,289 290,345
-------- -------- -------- -------- -------- -------- --------
Gross profit........................ 89,985 108,794 133,871 174,397 209,933(2) 145,349 175,909
Selling, general and administrative
expenses.......................... 82,666 95,904 112,135 142,155 190,826(2) 131,360 166,615
Restructuring and asset impairment
charge............................ -- 13,100(3) -- -- 10,974(2) -- --
-------- -------- -------- -------- -------- -------- --------
Operating profit (loss)............. 7,319 (210)(3) 21,736 32,242 8,133(2) 13,989 9,294
Interest expense, net............... 1,610 1,301 1,398 3,170 7,059 5,137 4,464
-------- -------- -------- -------- -------- -------- --------
Income (loss) before provision for
income taxes and cumulative effect
of change in accounting
principle......................... 5,709 (1,511) 20,338 29,072 1,074 8,852 4,830
Provision for (benefit from) income
taxes............................. 1,951 (310) 8,619 11,874 1,108 3,749 2,061
-------- -------- -------- -------- -------- -------- --------
Income (loss) before cumulative
effect of change in accounting
principle......................... 3,758 (1,201) 11,719 17,198 (34) 5,103 2,769
Cumulative effect of change in
accounting principle, net......... -- -- -- -- 178 178 --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)................... $ 3,758 $ (1,201) $ 11,719 $ 17,198 $ (212) $ 4,925 $ 2,769
======== ======== ======== ======== ======== ======== ========
PRO FORMA:
Net income (loss) per share......... $ 0.20 $ (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
</TABLE>

14
<PAGE> 15

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 28, 1996
-------------------------------------------------------- ------------------------------
1991 1992 1993 1994 1995 ACTUAL PRO FORMA(9)
-------- -------- -------- -------- -------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................. $ 37,354 $ 34,606 $ 35,143 $ 42,315 $ 68,332 $ 118,103 $ 114,603
Total assets.................... 111,163 157,639 196,517 273,167 343,522 399,801 399,956
Total debt(10).................. 22,760 31,180 44,620 67,452 118,652 61,498 31,653
Shareholders' equity(10)........ 41,104 65,170 74,340 85,819 76,678 209,457 237,457
</TABLE>

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

(1) The operating results for the interim periods are not necessarily
indicative of the results that may be expected for a full year. The
Company's quarters end on the Saturday nearest to the end of the last month
of such quarter, except the fourth quarter which ends on December 31.
(2) Reflects certain one-time special charges related to the CVS Strategic
Program (as defined in "Management's Discussion and Analysis of Financial
Condition and Results of Operations"). Gross profit and operating profit in
1995 excluding the effect of these charges would have been $218.1 million
and $31.5 million, respectively. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
(3) Reflects a $13.1 million realignment charge associated with the anticipated
costs of closing 66 traditional stores from 1993 to 1995. This charge
includes the write-down of fixed assets, lease settlement costs, severance
and inventory liquidation costs. Operating profit in 1992 excluding the
effect of this charge would have been $12.9 million.
(4) Store space includes the storage, receiving and office space that generally
occupies 10% to 15% of total store space. All numbers provided for the end
of the respective periods.
(5) Net sales per square foot is the result of dividing net sales for the
period by the average of gross square footage at the beginning of the year
and at the end of each interim quarterly and year period.
(6) Amounts for interim periods are calculated based on annual net sales for
the 52 weeks ending at the end of such interim period.
(7) New store net sales become comparable in the first full month following 13
full months of operations. Stores that undergo major expansion or that are
relocated are not included in the comparable store base. Comparable store
net sales include traditional stores and superstores.
(8) The decrease in comparable store net sales during 1995 and the thirty-nine
weeks of 1996 was primarily due to new competitive intrusions in existing
markets during the second half of 1995 and the first half of 1996 at
approximately 40% of the Company's superstores included in the comparable
store base which previously had limited competition from other superstores.
For the third quarter of 1996, comparable store net sales increased 2.9%.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(9) Pro forma to give effect to the Reorganization. See "Capitalization."
(10) Prior to the Offering, total debt consists of short-term intercompany
indebtedness due primarily to CVS. The amount of short term debt at
September 28, 1996 reflects a $130.0 million capital contribution from CVS
in May 1996 used to repay a portion of the Company's intercompany
indebtedness to CVS. On October 11, 1996, CVS made 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
<PAGE> 16

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
<PAGE> 17

("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
<PAGE> 18

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:

<TABLE>
<CAPTION>
THIRTY-NINE
YEAR ENDED DECEMBER THIRTY-NINE WEEKS ENDED YEAR ENDED WEEKS ENDED
31, ----------------------------- DECEMBER 31, -------------
--------------------- SEPTEMBER 30, SEPTEMBER 28, -------------- SEPTEMBER 28,
1993 1994 1995 1995 1996 1994 1995 1996
----- ----- ----- ------------- ------------- ----- ------ -------------
PERCENTAGE CHANGE FROM PRIOR
PERCENTAGE OF NET SALES PERIOD INCREASE (DECREASE)
----------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................... 100.0% 100.0% 100.0% 100.0% 100.0% 32.1% 26.1% 23.5%
Cost of sales, including buying and
warehousing costs..................... 59.8 60.4 62.2 61.5 62.3 33.3 29.9 25.0
----- ----- ----- ----- ----- ----- ------ -----
Gross profit............................ 40.2 39.6 37.8 38.5 37.7 30.3 20.4 21.0
Selling, general and administrative
expenses.............................. 33.7 32.3 34.3 34.8 35.7 26.8 34.2 26.8
Restructuring and asset impairment
charges............................... -- -- 2.0 -- -- -- -- --
----- ----- ----- ----- ----- ----- ------ -----
Operating profit........................ 6.5 7.3 1.5 3.7 2.0 48.3 (74.8) (33.6)
Interest expense, net................... 0.4 0.7 1.3 1.4 1.0 126.8 122.7 (13.1)
Income before income taxes and
cumulative effect of change in
accounting principle.................. 6.1 6.6 0.2 2.3 1.0 42.9 (96.3) (45.4)
Provision for income taxes.............. 2.6 2.7 0.2 1.0 0.4 37.8 (90.7) (45.0)
Income (loss) before cumulative effect
of change in accounting principle..... 3.5 3.9 0.0 1.3 0.6 46.8 (101.2) (45.7)
Cumulative effect of change in
accounting principle, net............. -- -- 0.0 0.0 -- -- -- --
----- ----- ----- ----- ----- ----- ------ -----
Net income (loss)....................... 3.5% 3.9% 0.0% 1.3% 0.6% 46.8% (101.2)% (45.7)%
===== ===== ===== ===== ===== ===== ====== =====
</TABLE>

THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 1996 COMPARED TO THIRTY-NINE WEEKS ENDED
SEPTEMBER 30, 1995

During the thirty-nine weeks ended September 28, 1996, the Company opened
18 superstores and closed 17 stores, as compared to opening 17 superstores and
closing 16 stores in the same period during 1995. At September 28, 1996, the
Company operated 156 stores, as compared to 146 at September 30, 1995, of which
117 were superstores, as compared to 90 superstores at September 30, 1995. Net
sales increased 23.5% to $466.3 million for the thirty-nine weeks ended
September 28, 1996, as compared to $377.6 million for the thirty-nine weeks
ended September 30, 1995, primarily as a result of new store openings.
Comparable store net

18
<PAGE> 19

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
<PAGE> 20

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
<PAGE> 21

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.

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
<PAGE> 22

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 gross proceeds received by CVS from any
public or private sale 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 Adjusted Proceeds Amount (defined as the Appreciated Amount less
transaction expenses attributable to the Appreciated Amount, determined on an
after-tax basis at the applicable effective tax rate for CVS) up to $2.00 times
the Post-IPO Sold Shares; and (ii) 65% of the remaining portion, if any, of the
Adjusted Proceeds 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

22
<PAGE> 23

under the Revolving Credit Facility or internally generated funds. The actual
amount of such repayment in connection with the elimination of the intercompany
balance will depend on the amount of the intercompany balance (which balance
will fluctuate based primarily on the amount of working capital) as of the
closing of the Offering. After the Reorganization and the Offering, the Company
will have an estimated $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 Person (as defined) (other than
CVS and its subsidiaries) acting alone or with a group of Persons (within the
meaning of Section 13(d) of the Exchange Act), acting in concert (i) shall have
or acquire beneficial ownership of securities (or options therefor) having 20%
or more of the 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. 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
<PAGE> 24

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.

The following table sets forth certain unaudited financial information for
the Company in each quarter during 1994 and 1995 and the first three quarters of
1996. The unaudited quarterly information includes all normal recurring
adjustments which management considers necessary for a fair presentation of the
information shown. See "Risk Factors--Seasonality and Quarterly Fluctuations."

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1994 QUARTER QUARTER QUARTER QUARTER YEAR
- ---------------------------------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales......................... $ 87,170 $ 89,356 $120,138 $143,454 $440,118
Gross profit...................... 33,593 35,191 47,538 58,075 174,397
Operating profit.................. 2,197 2,927 10,240 16,878 32,242
Net income........................ 959 1,242 5,394 9,603 17,198
Percentage increase in comparable
store net sales................. 5.6% 3.8% 6.7% 5.7% 5.4%
Total stores (end of period)...... 136 135 134 145 145
</TABLE>

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1995 QUARTER QUARTER QUARTER QUARTER YEAR
- ---------------------------------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales......................... $115,298 $124,290 $138,050 $177,457 $555,095
Gross profit...................... 42,787 47,896 54,666 64,584(1) 209,933
Operating profit (loss)........... 2,890 4,667 6,432 (5,856)(1) 8,133
Net income (loss)................. 682 1,644 2,599 (5,137)(1) (212)
Percentage increase (decrease) in
comparable store net sales...... 1.4% 4.7% (6.6%)(2) (3.3%)(2) (1.5%)(2)
Total stores (end of period)...... 139 142 146 155 155
</TABLE>

<TABLE>
<CAPTION>
FIRST SECOND THIRD
1996 QUARTER QUARTER QUARTER
- ---------------------------------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales......................... $138,167(2) $147,649(2) $180,438
Gross profit...................... 50,498 56,252 69,159
Operating profit (loss)........... (1,011) 1,026 9,279
Net income (loss)................. (1,786) (411) 4,966
Percentage increase (decrease) in
comparable store net sales...... 1.7%(2) (6.7%)(2) 2.9%
Total stores (end of period)...... 148 155 156
</TABLE>

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

(1) Excluding the 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
<PAGE> 25

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

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<PAGE> 26

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).

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<PAGE> 27

The following table sets forth information concerning the Company's
expansion program during the most recent five years:

<TABLE>
<CAPTION>
SQUARE FOOTAGE STORE COUNT
----------------------- -----------------------
YEAR OPENINGS CLOSINGS BEGIN YEAR END YEAR BEGIN YEAR END YEAR
- ------- -------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
1992 22 21 1,350 1,633 143 144
1993 20 21 1,633 2,078 144 143
1994 29 27 2,078 2,865 143 145
1995 28 18 2,865 3,691 145 155
1996(1) 36 18 3,691 4,836 155 173
</TABLE>

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

(1) Estimated

Linens 'n Things focuses on opening new superstores in metropolitan areas
where it believes it can become a leading retailer of home-related products. The
Company's goal is to enter two to three new markets a year through its expansion
efforts. Markets for new superstores are selected on the basis of demographic
factors, such as income, population and number of households. Linens 'n Things
focuses its site locations on prime locations within trading areas of 200,000
persons within a ten-mile radius and demographic characteristics that match the
Company's target profile. The Company's stores are located predominantly in
power strip centers and, to a lesser extent, in malls and as stand-alone stores.

The Company currently operates all of its superstores on an operating lease
basis. Based upon the Company's prior experience, the Company estimates that the
net cost of opening a superstore 35,000 to 40,000 gross square feet in size is
$2.0 to $2.4 million. This amount includes $0.9 to $1.1 million of inventory
(net of vendor payables), $0.9 to $1.1 million for leasehold improvements and
fixtures and $225,000 to $250,000 for pre-opening expenses, which are expensed
as incurred. Based on historical performance, new stores are typically
profitable within their first full year of operations. Management estimates that
the costs of its planned store closings will be approximately $3.0 million in
1996 and $4.0 to $5.0 million in 1997. The Company believes that its current
management infrastructure and management information systems, together with its
new distribution center, are capable of supporting planned expansion through
1998. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General."

INCREASE PRODUCTIVITY OF EXISTING STORE BASE. The Company is committed to
increasing its net sales per square foot, inventory turnover ratio and return on
invested capital. The Company believes the following initiatives will allow it
to achieve these goals:

Enhance Merchandise Mix and Presentation. The Company continues to explore
opportunities to increase sales of "things" merchandise without sacrificing
market share or customer image in the "linens" side of the business. The
Company's long-term goal is to increase the sales of the "things" merchandise to
approximately 50% of net sales as part of its strategic initiative to capitalize
on customer demand for one-stop shopping destinations. The Company expects this
shift to positively impact net sales per square foot and inventory turnover
since "things" merchandise tends to be more impulse driven merchandise as
compared to the "linens" portion of the business and therefore 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.

27
<PAGE> 28

management information system, which it believes will allow it to maintain low
operating costs as it pursues its superstore expansion strategy. In July 1995,
the Company began full operations of its 275,000 square foot distribution center
in Greensboro, North Carolina. Management estimates that by the end of 1996
approximately 80% of merchandise will be received at the distribution center, as
compared to approximately 20% of merchandise received at the Company's
distribution center in 1995. Management believes that the increased utilization
of the distribution center will result in lower average freight costs, more
efficient scheduling of inventory shipments to the stores, improved inventory
turnover, better in-stock positions and improved information flow. The Company
believes that the transfer of inventory receiving responsibilities from the
stores to the distribution center allows the store sales associates to redirect
their focus to the sales floor, thereby increasing the level of customer
service. The warehouse portion of the distribution center provides the Company
flexibility to manage safety stock and take advantage of opportunistic
purchases. The Company's ability to effectively manage its inventory is also
enhanced by a centralized merchandising management team and its MIS system which
allows the Company to more accurately monitor and better balance inventory
levels and improve in-stock positions in its stores.

Continue Conversion of Store Base to Superstore Format. As of September
28, 1996, the Company operated 117 superstores, representing 73% of its total
stores, and 39 traditional stores. The Company plans to close or relocate
approximately 12 of the 39 traditional stores by the end of 1997. Although the
remaining traditional stores are currently profitable, the Company's long-term
plans include closing most of the remaining traditional stores as opportunities
arise.

INDUSTRY

According to U.S. Department of Commerce data, total industry sales of
products sold in the Company's stores, which primarily includes home textiles,
housewares and decorative furnishings categories, were estimated to be over $60
billion in 1995. The market for home furnishings is fragmented and highly
competitive. Specialty superstores are the fastest growing channel of
distribution in this market. In 1995, the three largest specialty superstore
retailers of fashion home textiles (including the Company) had aggregate sales
of approximately $1.4 billion, representing less than 3% of the industry's total
unit sales.

The Company competes with many different types of retailers that sell many
or most of the items sold by the Company, including department stores, mass
merchandisers, specialty retail stores and other retailers. Linens 'n Things
generally classifies its competition within one of the following categories:

Department Stores: This category includes national and regional department
stores such as J.C. Penney Company Inc., Sears, Roebuck and Co., Dillard
Department Stores, Inc. and the department store chains operated by Federated
Department Stores, Inc. and The May Department Store Company. These retailers
offer branded merchandise as well as their own private label furnishings in a
high service environment. Department stores also offer certain designer
merchandise, such as Ralph Lauren, which is not generally distributed through
the specialty and mass merchandise distribution channels. In general, the
department stores offer a more limited selection of merchandise than the
Company. The prices offered by department stores during off-sale periods are
significantly higher than those of the Company and during on-sale periods are
comparable to or slightly higher than those of the Company.

Mass Merchandisers: This category includes companies such as Wal-Mart
Stores, Inc., the Target Stores division of Dayton Hudson Corporation and Kmart
Corporation. Fashion home furnishings represent only a small portion of the
total merchandise sales in these stores and reflect a significantly more limited
selection with fewer high quality name brands and lower quality merchandise at
lower price points than specialty stores or department stores. In addition,
these mass merchandisers typically have more limited customer services staffs
than the Company.

Specialty Stores/Retailers: This category includes large format home
furnishings retailers most similar to Linens 'n Things, including Bed Bath &
Beyond Inc., Home Place and Strouds, Inc. and smaller niche retailers such as
Crate & Barrel, Lechters, Inc. and Williams-Sonoma, Inc. The Company estimates
that large format stores range in size from approximately 30,000 to 50,000 gross
square feet and offer a home furnishings merchandise selection of approximately
20,000 to 30,000 SKUs. The Company believes that these retailers

28
<PAGE> 29

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.

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<PAGE> 30

Merchandise and sample brands offered in each major department are
highlighted below:

<TABLE>
<CAPTION>
DEPARTMENT ITEMS SOLD SAMPLE BRANDS
- --------------------- ------------------------------------ ------------------------------
<S> <C> <C>
Bath Towels, shower curtains, waste Fieldcrest, Martex, Royal
baskets, hampers, bathroom rugs and Velvet and Springmaid.
wall hardware.
Home Accessories Decorative pillows, napkins, Dakotah, Waverly and Laura
tablecloths, placemats, lamps, Ashley.
gifts, picture frames and framed
art.
Housewares Cookware, cutlery, kitchen gadgets, Braun, Krups, Calphalon,
small electric appliances (such as Henckel, Mikasa, Circulon,
blenders and coffee grinders), Faberware, Black & Decker,
dinnerware, flatware and glassware. Kitchen Aid, Copco and
International Silver.
Storage Closet-related items (such as Rubbermaid and Closetmaid.
hangers, organizers and shoe racks).
Top of the Bed Sheets, comforters, comforter Wamsutta, Laura Ashley,
covers, bedspreads, bed pillows, Revman, Croscill, Fieldcrest,
blankets and mattress pads. Springmaid, Royal Sateen and
Beautyrest.
Window Treatment Curtains, valances and window Croscill, Graber, Bali,
hardware. Waverly and Laura Ashley.
</TABLE>

As part of a strategic effort to capitalize on consumer demand for one-stop
shopping destinations, the Company has balanced its merchandise mix from being
driven primarily by the "linens" side of its business to a fuller assortment of
"linens" and "things." The Company estimates that the "things" side of its
business has increased from less than 10% of its net sales in 1991 to 35% in
1996. The Company continues to explore opportunities to increase sales of
"things" merchandise while maintaining the strength of its "linens" side of the
business. The Company's long-term goal is to increase the sales of "things"
merchandise to approximately 50% of net sales. See "--Growth Strategy--Increase
Productivity of Existing Store Base."

The Company's "racetrack" layout allows customers to easily shop between
corresponding departments and stimulates impulse sales by encouraging the
customers to shop the entire store. The Company also believes its stores allow
customers to locate products easily and reinforce the customer's perception of
an extensive merchandise selection. In addition, the Company actively works with
vendors to improve the customers' in-store experience through designing
displays, unique packaging and product information signs that optimally showcase
its product offering and by training associates in product education in order to
maximize service to the customer.

CUSTOMER SERVICE

Linens 'n Things treats every customer as a guest. The Company's philosophy
supports enhancing the guest's entire shopping experience and believes that all
elements of service differentiate them from the competition. To facilitate the
ease of shopping, the assisted self service culture is complimented by trained
department specialists, zoned floor coverage, product information displays and
videos, self demonstrations and vendor supported training seminars. This
philosophy is designed to encourage guest loyalty as well as continually develop
knowledgeable Company associates. A number of the superstores have in-store
services, such as monogramming, and the Company is currently in the process of
implementing a bridal registry service in all of its stores. The entire store
team is hired and trained to be highly visible in order to assist guests with
their selections. The ability to assist guests has been enhanced by the transfer
of inventory receiving responsibilities from the stores, allowing sales
associates to focus on the sales floor. Enhanced management

30
<PAGE> 31

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.

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<PAGE> 32

The Company manages the distribution process centrally from its corporate
headquarters. Purchase orders issued by Linens 'n Things are electronically
transmitted to the majority of its suppliers. By the end of 1996, the Company
anticipates that 80% of its total inventory will be received through the
distribution center. The balance of the Company's merchandise is directly
shipped to individual stores. The Company plans to continue efforts to ship as
much merchandise through the distribution center as possible to ensure all
benefits of the Company's logistics strategy are fully leveraged. Continued
growth will also facilitate new uses of EDI technologies between Linens 'n
Things and its suppliers to exploit the most productive and beneficial use of
its assets and resources.

As of September 28, 1996, the distribution center was utilized at
approximately 50% of capacity. Management estimates that the distribution center
can support the Company's growth through the end of 1998. As the Company
continues to open more superstores in the western United States, another
distribution center may be necessary or desirable to support the further growth
of the Company. Such a distribution center would further increase freight
savings and reduce transit time to the western stores. In order to realize
greater efficiency, the Company uses third party delivery services to ship its
merchandise from the distribution center to its stores.

MANAGEMENT INFORMATION SYSTEMS

Over the last three years, the Company has made significant investment in
technology to improve customer service, gain efficiencies and reduce operating
costs. Linens 'n Things has installed a customized IBM AS400 management
information system, which integrates all major aspects of the Company's
business, including sales, distribution, purchasing, inventory control,
merchandise planning and replenishment and financial systems. The Company
utilizes POS terminals with price look-up capabilities for both inventory and
sales transactions on a SKU basis which the Company is currently in the process
of upgrading. Information obtained daily by the system results in automatic
inventory replenishment in response to specific requirements of each superstore.
The upgraded terminals will also enable the store operator to initiate the
credit approval process and will have the capability to support the Company's
planned bridal registry service. The Company has further integrated its planning
process through a comprehensive EDI system used for substantially all purchase
orders, invoices and bills of lading and which, combined with automatic shipping
notice technology used in the distribution systems, creates additional
efficiencies by capturing data through bar codes thereby reducing clerical
errors and inventory shrinkage.

The Company believes its management information systems have fully
integrated the Company's stores, distribution and home office. The Company
continually evaluates and upgrades its management information systems on a
regular basis to enhance the quantity, quality and timeliness of information
available to management.

STORE MANAGEMENT AND OPERATIONS

Each superstore is staffed with one General Manager, two to four
Merchandise Managers and one Receiving Manager. The operations of each store are
supervised by one of 19 District Managers and one of three Zone Vice Presidents.
Each Zone Vice President reports to the Senior Vice President of Store
Operations.

The Company places a strong emphasis on its people, their development and
opportunity for advancement, particularly at the store level. The Company's
commitment to maintaining a high internal promotion rate is best exemplified
through the practice of opening each new store with a seasoned management crew,
who participate in training at an existing store immediately prior to the new
opening. As a result, the vast majority of General Managers opening a new store
have significant experience at the Company. Additionally, the structured
management training program requires each new associate to learn all facets of
the business within the framework of a fully operational store. This program
includes, among other things, product knowledge, merchandise presentation,
business and sales perspective, employee relations and manpower planning,
complimented at the associate level through daily product knowledge seminars and
structured register training materials and proficiencies. The Company believes
that its policy of promoting from within

32
<PAGE> 33

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
<PAGE> 34

disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.

TRADE NAMES AND SERVICE MARKS

The Company uses the "Linens 'n Things" name as a trade name and as a
service mark in connection with retail services. The Company has registered the
"Linens 'n Things" logo as a service mark with the United States Patent and
Trademark Office. Management believes that the name Linens 'n Things is an
important element of the Company's business.

34
<PAGE> 35

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth information regarding the executive officers
and directors of the Company.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ ---- ----------------------------------------------------
<S> <C> <C>
Norman Axelrod................ 44 Chief Executive Officer, President and Director
James M. Tomaszewski.......... 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
</TABLE>

Mr. Axelrod has been Chief Executive Officer and President of the Company
since 1988. Prior to joining Linens 'n Things, Mr. Axelrod held various
management positions at Bloomingdale's between 1976 to 1988 including: Buyer,
Divisional Merchandise Manager, Vice President/Merchandise Manager and Senior
Vice President/General Merchandise Manager. Mr. Axelrod earned his B.S. from
Lehigh University and his M.B.A. from New York University.

Mr. Tomaszewski has served as Senior Vice President, Chief Financial
Officer since joining Linens 'n Things in 1994. Mr. Tomaszewski began his career
with J.L. Hudsons Department Store in Detroit in 1970. In 1982, he was promoted
to Vice President Controller of Diamonds Department Store in Tempe, Arizona. In
1985, he joined Filene's Department Store as Vice President, Controller, and
later that year he was promoted to Senior Vice President & Chief Financial
Officer for Filene's Basement. In 1987, Mr. Tomaszewski joined Lechmere's in
Boston as Senior Vice President and Chief Financial Officer. In 1992, he was
promoted to Executive Vice President Retail Operations at Lechmere's and elected
to Lechmere's Board of Directors. Mr. Tomaszewski has a B.S. in Finance and
Economics and an M.B.A. in Finance from Wayne State University.

Mr. Silverstein joined Linens 'n Things in 1992 as Vice President, General
Merchandise Manager. Prior to joining Linens 'n Things, Mr. Silverstein was
Merchandise Vice President of Home Textiles at Bloomingdales from 1985 to 1992.
Mr. Silverstein has been Senior Vice President, General Merchandise Manager
since 1993. He received his B.A. from Cornell University and his M.B.A. from
Wharton Business School.

Mr. Scullin joined Linens 'n Things in 1989 as Vice President, Store
Operations. Mr. Scullin has been Senior Vice President, Store Operations since
1994. From 1978 to 1987, Mr. Scullin held various management positions with The
Gap, Inc., including Zone Vice President at both The Gap and Banana Republic
from 1984 to 1987. From 1987 to 1989, Mr. Scullin was Vice President of Stores
with Alcott and Andrews. Mr. Scullin graduated from St. Joseph's University with
a B.S. in Marketing Management.

Mr. Goldstein is Chairman and Chief Executive Officer of CVS. Mr. Goldstein
has served in various capacities at CVS since 1969. He served as President of
CVS from January 1987 to January 1994 and as Executive Vice President of CVS
from 1984 to December 1986. Prior to that, he served as President of CVS
Corporation which was a division of Melville Corporation. Mr. Goldstein also
serves on the board of NYNEX. Mr. 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
<PAGE> 36

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.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ----------------------------------------------------
<S> <C> <C>
William T. Giles.............. 37 Vice President, Finance, Controller
Matthew J. Meaney............. 50 Vice President, Management Information Systems
Brian D. Silva................ 40 Vice President, Human Resources
Dominick J. Trapasso.......... 43 Vice President, Logistics
</TABLE>

Mr. Giles joined Linens 'n Things in 1991 as Assistant Controller and was
promoted to Vice President of Finance and Controller in 1994. From 1981 to 1990
, Mr. Giles was with Price Waterhouse. From 1990 to 1991, Mr. Giles held the
position of Director of Financial Reporting with Melville Corporation. Mr. Giles
is a certified public accountant and member of the American Institute of
Certified Public Accountants. He graduated from Alfred University with a B.A. in
Accounting and Management.

Mr. Meaney joined Linens 'n Things in 1991 as Vice President of Management
Information Services. From 1985 to 1991, Mr. Meaney was Vice President of
Management Information Services for Laura Ashley, Inc. Mr. Meaney received a
B.S. in Economics from St. Peter's College and an M.B.A. in Finance from Seton
Hall University.

Mr. Silva has been Vice President, Human Resources, since joining Linens 'n
Things in 1995. Mr. Silva was Assistant Vice President, Human Resources at the
Guardian, an insurance and financial services company, from 1986 to 1995. He
holds an M.A. in Organizational Development from Columbia University and an M.A.
in Human Resources Management from New York Institute of Technology. Mr. Silva
received his B.A. from St. John's University 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
<PAGE> 37

EXECUTIVE COMPENSATION

The following tables set forth the compensation paid or accrued by the
Company during 1995 to its executive officers.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM COMPENSATION
------------------------------
AWARDS
------------------------------
ANNUAL RESTRICTED ALL
COMPENSATION STOCK SECURITIES OTHER
---------------- AWARD(S) UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION SALARY BONUS ($)(1) OPTIONS(#)(2)(3) ($)(4)
- ------------------------------------ ------- ----- ---------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Norman Axelrod...................... 455,000 0 750,004 65,000 6,918
Chief Executive Officer and
President
Steven B. Silverstein............... 265,000 0 200,031 20,000 7,069
Senior Vice President,
General Merchandise Manager
James M. Tomaszewski................ 264,000 0 100,016 15,000 5,373
Senior Vice President,
Chief Financial Officer
Hugh J. Scullin..................... 210,000 0 0 6,000 8,519
Senior Vice President, Store
Operations
</TABLE>

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

(1) All restricted stock disclosed in the table is CVS restricted stock which is
subject to a four year vesting period from date of grant which was April
11, 1995. On December 31, 1995 Messrs. Axelrod, Silverstein and Tomaszewski
had the right to receive 25,011, 7,538 and 2,676 shares, having a market
value on December 31, 1995 (based on the value of CVS common stock on that
date of $30.875) of $772,214, $232,735 and $82,621, respectively. As of the
date of the Offering, all shares of restricted stock will be vested, except
that with respect to Mr. Axelrod, all shares which have not vested as of
the closing of the Offering will be cancelled, and certain shares awarded
to Messrs. Tomaszewski and Silverstein will be converted to CVS share units
payable on the third anniversary of the Offering.

(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 (i) 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%; and (ii) increasing the number
of shares of restricted stock 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
<PAGE> 38

OPTION GRANTS IN 1995

<TABLE>
<CAPTION>
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)
- ------------------------ --------- -------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Norman Axelrod.......... 65,000 2.1% $37.375 4/10/2005 $ 595,197
Steven B. Silverstein... 20,000 .6% $37.375 4/10/2005 $ 183,137
James M. Tomaszewski.... 15,000 .5% $37.375 4/10/2005 $ 137,353
Hugh J. Scullin......... 6,000 .2% $36.250 3/29/2005 $ 51,960
</TABLE>

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

(1) These options are multi-year grants to buy CVS stock that become
exercisable in one-third increments over a three-year period, except for
Mr. Scullin who received a traditional grant which is fully exercisable one
year after the grant date. An additional one-third of the options granted
to Messrs. Silverstein and Tomaszewski will become vested and remain
exercisable for the 90-day period following the Offering. Mr. Axelrod's
options are fully exercisable following the Offering until December 31,
1999. All of the options were awarded at fair market value on the date of
grant.

(2) The 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

<TABLE>
<CAPTION>
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
- --------------------------- --------------- -------------- ---------------------- --------------------
<S> <C> <C> <C> <C>
Norman Axelrod............. 0 0 42,000/65,000 0/0
Steven B. Silverstein...... 0 0 8,500/20,000 0/0
James M. Tomaszewski....... 0 0 7,500/15,000 0/0
Hugh J. Scullin............ 0 0 13,500/6,000 0/0
</TABLE>

- ---------------
(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
<PAGE> 39

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
<PAGE> 40

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 1,974,944 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
<PAGE> 41

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
<PAGE> 42

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 -- 64,516 shares, Mr. Tomaszewski -- 18,750 shares, Mr.
Silverstein -- 18,750 shares

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<PAGE> 43

and Mr. Scullin -- 11,250 shares. It is expected that such Founders Stock Awards
will vest in 25% increments on each July 1, commencing on July 1, 1997.

Effective upon 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.

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<PAGE> 44

OPTION GRANT. An option to purchase 7,000 shares of Common Stock (an
"Option") will be automatically granted to each non-employee director upon the
later of the Offering or initial election to the Board. In addition, an Option
to purchase 700 shares of Common Stock will be granted to each director of the
Company who, at the close of business on the date of each annual meeting of the
Company's stockholders commencing with the calendar year following his or her
initial election to the Board, is then eligible to receive an Option grant under
the 1996 Director Plan. Options granted under the 1996 Director Plan will be
non-qualified stock options and will have the following principal terms and
conditions: (i) the exercise price per share of Common Stock purchasable under
an Option will be equal to 100% of the fair market value of Common Stock on the
date of grant of the Option; (ii) each Option will expire at the earliest of (a)
ten years after the date of grant, (b) 12 months after the non-employee director
ceases to serve as a director of the 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.

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<PAGE> 45

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.

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<PAGE> 46

PRINCIPAL AND SELLING SHAREHOLDER

The following table and the notes thereto set forth information as of
immediately prior to and immediately after completion of the Offering relating
to beneficial ownership (as defined in Rule 13d-3 of the Securities and Exchange
Act of 1934) of the Company's Common Stock by each director, the executive
officers and directors as a group and the Selling Shareholder:

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
OF COMMON STOCK PRIOR OF COMMON STOCK
TO OFFERING(1) AFTER OFFERING(2)
--------------------- --------------------
NUMBER OF NUMBER OF
SHAREHOLDERS SHARES PERCENT SHARES PERCENT
- ----------------------------------------------- ---------- ------- --------- -------
<S> <C> <C> <C> <C>
Nashua Hollis CVS, Inc.(3)..................... 19,267,758 100.0% 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).................................... -- -- -- --
</TABLE>

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

(1) Common Stock will be the only class of equity securities outstanding
immediately prior to completion of the Offering.

(2) Assuming the Underwriters' over-allotment option is not exercised.

(3) Nashua Hollis CVS, Inc. is a wholly owned, indirect, subsidiary of CVS. Its
address is 670 White Plains Road, Suite 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 64,516 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 114,666 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.

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 not purport to be complete and
are subject to, and are qualified in their entirety by reference to, all of the

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<PAGE> 47

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 gross proceeds received by CVS from any public or private sale 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 Adjusted Proceeds

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<PAGE> 48

Amount (defined as the Appreciated Amount less transaction expenses attributable
to the Appreciated Amount, determined on an after-tax basis at the applicable
effective tax rate for CVS) up to $2.00 times the Post-IPO Sold Shares; and (ii)
65% of the remaining portion, if any, of the Adjusted Proceeds 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"

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<PAGE> 49

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.

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<PAGE> 50

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

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<PAGE> 51

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.

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<PAGE> 52

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

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<PAGE> 53

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 25, 1996 (the "Underwriting Agreement"), the
Underwriters named below (the "Underwriters"), for whom CS First Boston and
Donaldson, Lufkin & Jenrette Securities Corporation are acting as
representatives (the "Representatives"), have severally but not jointly agreed
to purchase from the Selling Shareholder the following respective numbers of
shares of Common Stock:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
------------------------------------------------------- ----------
<S> <C>
CS First Boston Corporation............................ 4,400,000
Donaldson, Lufkin & Jenrette Securities Corporation.... 4,400,000
Alex. Brown & Sons Incorporated........................ 200,000
Dean Witter Reynolds Inc............................... 200,000
Deutsche Morgan Grenfell Inc........................... 200,000
A.G. Edwards & Sons, Inc............................... 200,000
Invemed Associates, Inc................................ 200,000
Lazard Freres & Co. LLC................................ 200,000
Lehman Brothers Inc.................................... 200,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated..... 200,000
Montgomery Securities.................................. 200,000
PaineWebber Incorporated............................... 200,000
Prudential Securities Incorporated..................... 200,000
Robertson, Stephens & Company LLC...................... 200,000
Salomon Brothers Inc................................... 200,000
Smith Barney Inc....................................... 200,000
Arnhold and S. Bleichroeder, Inc....................... 100,000
Sanford C. Bernstein & Co., Inc........................ 100,000
William Blair & Company, L.L.C......................... 100,000
Brean Murray & Co., Inc................................ 100,000
The Chicago Corporation................................ 100,000
Dain Bosworth Incorporated............................. 100,000
Fahnestock & Co. Inc................................... 100,000
Furman Selz LLC........................................ 100,000
Janney Montgomery Scott Inc............................ 100,000
Piper Jaffray Inc...................................... 100,000
Raymond James & Associates, Inc........................ 100,000
The Robinson-Humphrey Company, Inc..................... 100,000
Tucker Anthony Incorporated............................ 100,000
Wessels, Arnold & Henderson, L.L.C..................... 100,000
----------
Total........................................ 13,000,000
=========
</TABLE>

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<PAGE> 54

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 $0.55 per share, and the Underwriters and such
dealers may allow a discount of $0.10 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.

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<PAGE> 55

Prior to the Offering, there has been no public market for the Common
Stock. The initial price to the public for the shares of Common Stock has been
negotiated among the Company, CVS and the Representatives. Such initial price is
based on, among other things in addition to prevailing market conditions, the
Company's financial and operating history and condition, its prospects and the
prospects for its industry in general, the management of the Company and the
market prices for securities of companies in businesses similar to that of the
Company.

Certain of the Underwriters and their affiliates have provided from time to
time, and expect to provide in the future, various investment banking and
commercial banking services for CVS, for which such Underwriters have received
and will receive customary fees and commissions.

NOTICE TO CANADIAN RESIDENTS

RESALE RESTRICTIONS

The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company prepare and
file a prospectus with the securities regulatory authorities in each province
where trades of Common Stock are effected. Accordingly, any resale of the Common
Stock in Canada must be made in accordance with applicable securities laws which
will vary depending on the relevant jurisdiction, and which may require resales
to be made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the Common Stock.

REPRESENTATIONS OF PURCHASERS

Each purchaser of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company, the Selling Shareholder
and the dealer from whom such purchase confirmation is received that (i) such
purchaser is entitled under applicable provincial securities laws to purchase
such 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.

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<PAGE> 56

CERTAIN U.S. FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK

The following is a general discussion of certain U.S. federal income and
estate tax consequences of the ownership and disposition of Common Stock by a
beneficial owner thereof that is a "Non-U.S. Holder." A "Non-U.S. Holder" is a
person or entity that, for U.S. federal income tax purposes, is a non-resident
alien individual, a foreign corporation, a foreign partnership, or a
non-resident fiduciary of a foreign estate or trust.

This discussion is based on the Internal Revenue Code of 1986, as amended
(the "Code"), and administrative interpretations as of the date hereof, all of
which are subject to change, including changes with retroactive effect. This
discussion does not address all aspects of U.S. federal income and estate
taxation that may be relevant to Non-U.S. Holders in light of their particular
circumstances and does not address any tax consequences arising under the laws
of any state, local or foreign jurisdiction. Prospective holders should consult
their tax advisors with respect to the particular tax consequences to them of
owning and disposing of Common Stock, including the consequences under the laws
of any state, local or foreign jurisdiction.

Proposed United States Treasury Regulations were issued in April 1996 (the
"Proposed Regulations") which, if adopted, would affect the United States
taxation of dividends paid to a Non-U.S. Holder on Common Stock. The Proposed
Regulations are generally proposed to be effective with respect to dividends
paid after December 31, 1997, subject to certain transition rules. The
discussion below is not intended to be a complete discussion of the provisions
of the Proposed Regulations, and prospective investors are urged to consult
their tax advisors with respect to the effect the Proposed Regulations would
have if adopted.

DIVIDENDS

Subject to the discussion below, dividends, if any, paid to a Non-U.S.
Holder of Common Stock generally will be subject to withholding tax at a rate of
30% of the gross amount of the dividend or such lower rate as may be specified
by an applicable income tax treaty. For purposes of determining whether tax is
to be withheld at a 30% rate or at a reduced rate as specified by an income tax
treaty, in accordance with existing United States Treasury Regulations, the
Company ordinarily will presume that dividends paid to an address in a 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.

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<PAGE> 57

GAIN ON DISPOSITION OF COMMON STOCK

A Non-U.S. Holder generally will not be subject to U.S. federal income tax
(and no tax will generally be withheld) with respect to gain realized on a sale
or other disposition of Common Stock unless (i) the gain is effectively
connected with a trade or business of such holder in the United States, (ii) in
the case of certain Non-U.S. Holders who are non-resident alien individuals and
hold the Common Stock as a capital asset, such individuals are present in the
United States for 183 or more days in the taxable year of the disposition, (iii)
the Non-U.S. Holder is subject to tax pursuant to the provisions of the Code
regarding the taxation of U.S. expatriates, or (iv) the Company is or has been a
"U.S. real property holding corporation" for federal income tax purposes and the
Non-U.S. Holder owned directly or pursuant to certain attribution rules more
than 5% of the Company's Common Stock (assuming the Common Stock is regularly
traded on an established securities market) at any time within the shorter of
the five-year period preceding such disposition or such holder's holding period.
The Company is not, and does not anticipate becoming, a U.S. real property
holding corporation.

INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING ON DISPOSITION OF
COMMON STOCK

Under current United States federal income tax law, information reporting
and backup withholding imposed at a rate of 31% will apply to the proceeds of a
disposition of Common Stock paid to or through a U.S. office of a broker unless
the disposing holder certifies as to its non-U.S. status or otherwise
establishes an exemption. Generally, U.S. information reporting and backup
withholding will not apply to a payment of disposition proceeds if the payment
is made outside the United States through a non-U.S. office of a non-U.S.
broker. However, U.S. information reporting requirements (but not backup
withholding) will apply to a payment of disposition proceeds outside the United
States if the payment is made through an office outside the United States of a
broker that is (i) a U.S. person, (ii) a foreign person which derives 50% or
more of its gross income for certain periods from the conduct of a trade or
business in the United States or (iii) a "controlled foreign corporation" for
U.S. federal income tax purposes, unless the broker maintains documentary
evidence 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.

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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.

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
<PAGE> 59

LINENS 'N THINGS, INC. AND SUBSIDIARIES
(FORMERLY BLOOMINGTON, MN., L.T., INC.)

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Independent Auditors' Report........................................................... F-2
Consolidated Balance Sheets as of December 31, 1994, December 31, 1995, September 30,
1995 and September 28, 1996.......................................................... F-3
Consolidated Statements of Operations for the fiscal years 1993, 1994 and 1995 and for
the thirty-nine weeks ended September 30, 1995 and September 28, 1996................ F-4
Consolidated Statements of Shareholder's Equity for the fiscal years 1993, 1994 and
1995 and for the thirty-nine weeks ended September 28, 1996.......................... F-5
Consolidated Statements of Cash Flows for the fiscal years 1993, 1994 and 1995 and for
the thirty-nine weeks ended September 30, 1995 and September 28, 1996................ F-6
Notes to Consolidated Financial Statements............................................. F-7
</TABLE>

F-1
<PAGE> 60

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
<PAGE> 61

LINENS 'N THINGS, INC. AND SUBSIDIARIES
(FORMERLY BLOOMINGTON, MN., L.T., INC.)

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30, SEPTEMBER 28,
1994 1995 1995 1996
-------- -------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash................................... $ 4,106 $ 4,222 $ 1,835 $ 2,899
Accounts receivable (note 3)........... 12,022 13,955 8,420 13,991
Inventories............................ 130,560 176,893 176,756 206,764
Prepaid expenses and other current
assets (note 4)..................... 5,753 11,076 8,292 10,119
-------- -------- -------- --------
Total current assets................ 152,441 206,146 195,303 233,773
-------- -------- -------- --------
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
======== ======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE> 62

LINENS 'N THINGS, INC. AND SUBSIDIARIES
(FORMERLY BLOOMINGTON, MN., L.T., INC.)

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
THIRTY-NINE
WEEKS ENDED
YEAR ENDED DECEMBER 31, ------------------------------
-------------------------------- SEPTEMBER 30, SEPTEMBER 28,
1993 1994 1995 1995 1996
-------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(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
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 63

LINENS 'N THINGS, INC. AND SUBSIDIARIES
(FORMERLY BLOOMINGTON, MN., L.T., INC.)

CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS EXCEPT NUMBER OF SHARES)

<TABLE>
<CAPTION>
COMMON STOCK
------------------ CONTRIBUTED RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ -------- ----------- ------- --------
<S> <C> <C> <C> <C> <C>
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
===== ======== ======== ======= ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 64

LINENS 'N THINGS, INC. AND SUBSIDIARIES
(FORMERLY BLOOMINGTON, MN., L.T., INC.)

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
THIRTY-NINE
WEEKS ENDED
YEAR ENDED DECEMBER 31, -----------------------------
------------------------------ SEPTEMBER 30, SEPTEMBER 28,
1993 1994 1995 1995 1996
-------- -------- -------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
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
======== ======== ======== ========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 65

LINENS 'N THINGS, INC. AND SUBSIDIARIES
(FORMERLY BLOOMINGTON, MN., L.T., INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) BASIS OF PRESENTATION (SEE NOTE 11)

The consolidated financial statements include those of Linens 'n Things,
Inc. (formerly Bloomington, MN., L.T., Inc.) and Subsidiaries (collectively, the
"Company"), a wholly owned, indirect subsidiary of CVS Corporation ("CVS" or the
"Parent"), formerly Melville Corporation. All intercompany balances and
transactions have been eliminated.

The Parent allocates certain costs to its subsidiaries, including the
Company. A summary of the amounts allocated to the Company for the years ended
December 31, are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
----------------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>

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.

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
<PAGE> 66

LINENS 'N THINGS, INC. AND SUBSIDIARIES
(FORMERLY BLOOMINGTON, MN., L.T., INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(E) CASH

The Company's cash management program utilizes zero balance accounts.
Accordingly, all book overdraft balances have been reclassified to current
liabilities.

(F) INVENTORIES

Inventories consist of finished goods merchandise purchased from domestic
and foreign vendors and are carried at the lower of cost or market. Inventories
are determined on the retail inventory method valued on a first-in, first-out
(FIFO) basis.

(G) PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation and amortization of
property and equipment is computed on a straight-line basis, generally over the
estimated useful lives of the assets or, when applicable, the life of the lease,
whichever is shorter. Capitalized software costs are amortized on a
straight-line basis over their estimated useful lives, beginning in the year
placed in service. Fully depreciated property and equipment is removed from the
cost and related accumulated depreciation accounts.

Maintenance and repairs are charged directly to expense as incurred. Major
renewals or replacements are capitalized after making the necessary adjustment
to the asset and accumulated depreciation accounts of the items renewed or
replaced.

(H) IMPAIRMENT OF LONG-LIVED ASSETS

When changes in circumstance warrant measurement, impairment losses for
store fixed assets are calculated by comparing the present value of projected
individual store cash flows over the lease term to the asset carrying values.

(I) DEFERRED CHARGES

Deferred charges, principally beneficial leasehold costs, are amortized on
a straight-line basis, generally over the remaining life of the leasehold
acquired.

(J) GOODWILL

The excess of acquisition costs over the fair value of net assets acquired
is amortized on a straight-line basis not to exceed 40 years. Impairment is
assessed based on the profitability of the related business relative to planned
levels.

(K) STORE OPENING AND CLOSING COSTS

New store opening costs are charged to expense as incurred. In the event a
store is closed before its lease has expired, the total lease obligation, less
sublease rental income, is provided for in the year of closing.

(L) ADVERTISING COSTS

The Company charges production costs of advertising to expense the first
time the advertising takes place. Advertising costs for the years ended December
31, 1993, 1994 and 1995 were $10.7 million, $12.2 million and $16.9 million,
respectively.

F-8
<PAGE> 67

LINENS 'N THINGS, INC. AND SUBSIDIARIES
(FORMERLY BLOOMINGTON, MN., L.T., INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(M) INCOME TAXES

The Parent and its subsidiaries, including the Company, file a consolidated
Federal income tax return and, where applicable, group state and local returns.
The provision for Federal income taxes recorded by the Company represents the
amount calculated on a separate return basis in accordance with a tax sharing
agreement with the Parent. State income taxes represent actual amounts paid or
payable by the Company.

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

(N) INTERIM FINANCIAL STATEMENTS

The accompanying consolidated balance sheets as of September 30, 1995 and
September 28, 1996 and the related consolidated statements of operations and
cash flows for the thirty-nine weeks ended September 30, 1995 and September 28,
1996 and consolidated statement of shareholder's equity for the thirty-nine
weeks ended September 28, 1996 are unaudited. The unaudited consolidated
financial statements have been prepared on the same basis as the audited
consolidated financial statements and, in the opinion of management, include all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation for the period presented.

The results of operations for the thirty-nine weeks ended September 30,
1995 and September 28, 1996 are not necessarily indicative of results to be
achieved for the full fiscal years.

(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
<PAGE> 68

LINENS 'N THINGS, INC. AND SUBSIDIARIES
(FORMERLY BLOOMINGTON, MN., L.T., INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(2) STRATEGIC PROGRAM AND ASSET IMPAIRMENT CHARGES--(CONTINUED)
The components of the Company's restructuring and asset impairment charges
as of December 31, 1995 and the amounts remaining were as follows (in
thousands):

<TABLE>
<CAPTION>
RECORDED REMAINING
-------- ---------
<S> <C> <C>
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
======= ========
</TABLE>

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):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
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
======= =======
</TABLE>

(4) PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consisted of the following (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Deferred income taxes.................................................. $ 4,928 $ 8,323
Other.................................................................. 825 2,753
------- -------
Total.................................................................. $ 5,753 $11,076
======= =======
</TABLE>

F-10
<PAGE> 69

LINENS 'N THINGS, INC. AND SUBSIDIARIES
(FORMERLY BLOOMINGTON, MN., L.T., INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(5) PROPERTY AND EQUIPMENT

Property and equipment consisted of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1994 1995
------- --------
<S> <C> <C>
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
======= ========
</TABLE>

(6) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following
(in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
------- --------
<S> <C> <C>
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
======= =======
</TABLE>

(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):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>

F-11
<PAGE> 70

LINENS 'N THINGS, INC. AND SUBSIDIARIES
(FORMERLY BLOOMINGTON, MN., L.T., INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(7) LEASES--(CONTINUED)
At December 31, 1995, the future minimum rental payments required under
operating leases and the future minimum sublease rentals excluding lease
obligations for closed stores were as follows (in thousands):

<TABLE>
<CAPTION>
OPERATING
YEAR LEASES
-------------------------------------------------------- --------
<S> <C>
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
========
</TABLE>

(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):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
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
======== =======
</TABLE>

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
<PAGE> 71

LINENS 'N THINGS, INC. AND SUBSIDIARIES
(FORMERLY BLOOMINGTON, MN., L.T., INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(8) INCOME TAXES--(CONTINUED)
The provision for income taxes comprised the following (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>

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:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
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%
===== ===== ======
</TABLE>

(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
<PAGE> 72

LINENS 'N THINGS, INC. AND SUBSIDIARIES
(FORMERLY BLOOMINGTON, MN., L.T., INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(9) RELATED PARTY TRANSACTIONS--(CONTINUED)
EMPLOYEE STOCK OWNERSHIP PLAN

The Company's employees participate in the Parent's Employee Stock
Ownership Plan ("ESOP"). The ESOP is a defined contribution plan for all
employees meeting certain eligibility requirements. During 1989, the ESOP trust
(the "Trust") borrowed $357.5 million at an interest rate of 8.6% through a
20-year loan guaranteed by the Parent. The Trust used the proceeds of the loan
to purchase a new issue of convertible preference stock from the Parent.

The Parent charges compensation expense to the Company based upon total
payments due to the ESOP. The charge allocated to the Company is based on the
Company's proportionate share of qualifying compensation expense and does not
reflect the manner in which the Parent funds these costs or the related tax
benefits realized by the Parent. As a result of the Company's allocation from
the Parent, compensation expense of approximately $.7 million, $.7 million and
$1.0 million was recognized for the years ended December 31, 1993, 1994 and
1995, respectively.

ADMINISTRATIVE COSTS

The Parent allocates real estate service costs and various other
administrative expenses to the Company. Allocations are based on the Company's
ratable share of expense incurred by the Parent on behalf of the Company for the
combined programs. The total costs allocated to the Company for the years ended
December 31, 1993, 1994 and 1995 were approximately $2.7 million, $3.3 million
and $3.0 million, respectively.

In addition, Melville Realty Company, Inc., a subsidiary of the Parent,
guarantees the leases of certain stores operated by the Company and charges a
fee for that service which amounted to approximately $0.2 million, $0.3 million
and $0.3 million for the years ended December 31, 1993, 1994 and 1995,
respectively.

BORROWINGS

The weighted average interest rate on borrowings from the Parent and other
divisions for the years ended December 31, 1993, 1994 and 1995, respectively,
was 3.4%, 4.9% and 6.5%. The related interest expense recognized by the Company
on such borrowings was $1.4 million, $3.2 million and $7.1 million,
respectively.

(10) COMMITMENTS AND CONTINGENCIES

The Company had outstanding letters of credit amounting to approximately
$2.7 million at December 31, 1995 which were used to guarantee certain foreign
purchase contracts. The Company is not obligated under any formal or informal
compensating balance requirements.

The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.

(11) SUBSEQUENT EVENTS

During the thirty-nine weeks ended September 28, 1996, CVS acquired 100
shares of common stock of Linens 'n Things Center, Inc. ("LNT Center"), a newly
formed California corporation, for $130,010,000. On June 19, 1996, CVS
contributed all outstanding shares of common stock of Bloomington, MN., L.T.,
Inc. to LNT Center.

F-14
<PAGE> 73

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
<PAGE> 74

[IMAGE MATERIAL APPEARS HERE
LISTING BRAND NAMES SOLD AT
LINENS 'N THINGS STORES]

<PAGE> 75

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

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

<TABLE>
<CAPTION>
PAGE
------
<S> <C>
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........... 55
Certain U.S. Federal Tax Considerations
for Non-U.S. Holders of Common
Stock................................ 56
Legal Matters.......................... 57
Experts................................ 58
Available Information.................. 58
Index to Consolidated Financial
Statements........................... F-1
</TABLE>

UNTIL DECEMBER 20, 1996, 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
------------------------------------------------------