LINENS 'N THINGS, INC.
6 Brighton Road
Clifton, New Jersey 07015
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 6, 1997
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To Linens 'n Things Shareholders:
The Annual Meeting of Shareholders of Linens 'n Things, Inc., a Delaware
corporation, will be held at the Company's headquarters at 6 Brighton Road,
Clifton, New Jersey, on Tuesday, May 6, 1997, at 10:00 a.m., for the following
purposes:
1. To elect one director for a three year term.
2. To consider and act upon a proposal to approve the adoption of the
1996 Incentive Compensation Plan for the purpose of compliance
with Section 162(m) of the Internal Revenue Code.
3. To act upon such other business as may properly come before the
Annual Meeting or any postponement or adjournment thereof.
Shareholders of record at the close of business on March 18, 1997 are
entitled to notice of and to vote at the Annual Meeting or at any postponement
or adjournment thereof.
By order of the Board of Directors,
/s/ Brian D. Silva
BRIAN D. SILVA
Secretary
March 24, 1997
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YOUR VOTE IS IMPORTANT. TO ASSURE YOUR REPRESENTATION AT THE MEETING, PLEASE
COMPLETE THE ENCLOSED PROXY AND RETURN IT PROMPTLY, WHETHER OR NOT YOU PLAN TO
ATTEND THE MEETING.
- --------------------------------------------------------------------------------
<PAGE>
LINENS 'N THINGS, INC.
6 Brighton Road
Clifton, New Jersey 07015
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ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 6, 1997
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PROXY STATEMENT
This Proxy Statement is being furnished to the shareholders of Linens 'n
Things, Inc., a Delaware corporation (the "Company"), in connection with the
solicitation of proxies by the Board of Directors of the Company for use at the
Annual Meeting of Shareholders of the Company to be held on Tuesday, May 6,
1997, at 10:00 a.m., at 6 Brighton Road, Clifton, New Jersey and at any and all
postponements or adjournments thereof (the "Annual Meeting"). At the Annual
Meeting, shareholders of the Company are being asked to consider and vote on (1)
the election of one director for a three year term and (2) the approval of the
adoption of the 1996 Incentive Compensation Plan for the purpose of compliance
with Section 162(m) of the Internal Revenue Code. This is the first solicitation
by the Company of proxies for an annual meeting of shareholders. The Company was
a wholly-owned subsidiary of CVS Corporation ("CVS"), formerly Melville
Corporation, until November 26, 1996, when CVS completed an initial public
offering (the "IPO") of 13,000,000 shares of the Company's common stock, par
value $0.01 per share (the "Common Stock"). As a result of the IPO, the Company
became a separate, publicly held corporation. This Proxy Statement, Notice of
Meeting and accompanying proxy are first being mailed to shareholders on or
about April 1, 1997.
GENERAL
The holders of shares of the Company's Common Stock of record at the close
of business on March 18, 1997 are entitled to vote such shares at the Annual
Meeting. On March 18, 1997, there were outstanding 19,267,758 shares of Common
Stock. The presence in person or by proxy of the holders of a majority of the
shares outstanding on the record date is necessary to constitute a quorum for
the transaction of business. Each shareholder is entitled to one vote, in person
or by proxy, for each share of Common Stock held as of the record date on each
matter to be voted on at the Annual Meeting. Directors are elected by the
affirmative vote of a plurality of the votes cast at the Annual Meeting and
entitled to vote. The proposal to approve the 1996 Incentive Compensation Plan,
as described in this Proxy Statement, requires the affirmative vote of the
majority of shares present in person or represented by proxy at the Annual
Meeting and entitled to vote. Abstentions and broker non-votes will be included
in determining the number of shares present or represented at the Annual Meeting
for purposes of determining whether a quorum exists. In determining whether a
particular proposal submitted to shareholders has received the requisite votes
for approval, abstentions would be counted and would have the same effect as a
vote against the proposal, and broker non-votes would not be counted and would
have no effect on the outcome of that vote. However, neither abstentions nor
broker non-votes are counted as votes cast in connection with determining the
plurality required to elect directors and will have no effect on the outcome of
that vote. Shares of Common Stock represented by a proxy received in time for
the Annual Meeting and properly executed will be voted as specified in the
proxy, unless the proxy has previously been revoked. Unless contrary
instructions are given in the proxy, it will be voted for the person designated
in the proxy as the Board of Directors' nominee for director, for approval of
the adoption of the 1996 Incentive Compensation Plan and, with respect to any
other matters properly submitted to shareholders at the Annual Meeting, as
recommended by the Board of Directors or, if no such recommendation is given, in
its discretion.
<PAGE>
A proxy may be revoked by filing with the Secretary of the Company, prior
to the exercise of such proxy, either a written revocation of that proxy or a
new proxy bearing a later date. A proxy may also be revoked by filing a written
notice of revocation with the Secretary of the Company at the Annual Meeting
prior to the voting of the proxy. Attendance at the Annual Meeting will not in
itself constitute revocation of a proxy.
This proxy solicitation is being made on behalf of the Company and the
expense of preparing, printing and mailing this Proxy Statement and proxy is
being paid by the Company. In addition to use of the mails, proxies may be
solicited personally or by telephone, telefax or telex by regular employees of
the Company without additional compensation. The Company will reimburse banks,
brokers and other custodians, nominees and fiduciaries for their costs in
sending proxy materials to the beneficial owners of Common Stock.
2
<PAGE>
ITEM 1
ELECTION OF ONE DIRECTOR
General. The Board of Directors currently consists of four members and is
divided into three classes approximately equal in size. Directors are generally
elected for three-year terms on a staggered term basis, so that the term of
office of one class will expire each year and the terms of office of the other
classes will extend for additional periods of one and two years, respectively.
This year's nominee has been nominated to serve for a three-year term expiring
in the year 2000. The Company has inquired of such nominee and determined that
he will serve if elected.
The Amended and Restated Certificate of Incorporation of the Company and
the Stockholder Agreement among the Company, CVS Corporation ("CVS") and Nashua
Hollis CVS, Inc., a wholly-owned indirect subsidiary of CVS ("Nashua Hollis"),
dated November 25, 1996, provides that CVS has 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) no members of the Board of Directors of the Company at such
time as CVS in aggregate owns less than 5% of the total outstanding voting
stock. Pursuant to the terms of the Stockholder Agreement, CVS, which in the
aggregate currently owns approximately 32.5% of the total outstanding Common
Stock of the Company, designated Messrs. Goldstein and Conaway to the Company's
Board of Directors. For more information about other provisions of the
Stockholder Agreement see "Certain Transactions With Related Parties."
The nominee to the Board of Directors at this Annual Meeting is a current
director of the Company. Set forth below is a brief description of the
background of the nominee for election to the Board of Directors at this Annual
Meeting. Also set forth below are the existing directors whose terms of office
extend beyond this Annual Meeting. The Board of Directors recommends that
shareholders vote "FOR" the Company's nominee for director.
Nominee for Election at the Annual Meeting
PHILIP E. BEEKMAN Director since January 1997
Mr. Beekman, age 65, is currently President of Owl Hollow Enterprises,
Inc., a consulting and investment company. From 1986 to 1994, Mr. Beekman was
Chairman of the Board and Chief Executive Officer of Hook SupeRx, Inc., a retail
drug store chain. Prior to that he was President and Chief Operating Officer of
Seagram Company Limited. Mr. Beekman is also a director of Fisher Scientific
International, Inc., Mafco Consolidated Group Inc., General Chemical Group, Inc.
and BT Office Products International.
Directors Whose Terms Do Not Expire this Year
NORMAN AXELROD Director since September 1996
Mr. Axelrod, age 44, has been Chief Executive Officer and President of
Linens 'n Things since 1988. Mr. Axelrod was additionally appointed Chairman of
the Board of Directors of the Company effective as of January 1997. Mr.
Axelrod's term as a director of the Company expires in 1999. 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.
CHARLES C. CONAWAY Director since September 1996
Mr. Conaway, age 36, is Executive Vice President and Chief Financial
Officer of CVS. Mr. Conaway's term as director of the Company expires in 1999.
Prior to joining CVS, he held the position of Executive Vice President and Chief
3
<PAGE>
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.
STANLEY P. GOLDSTEIN Director since October 1996
Mr. Goldstein, age 62, is Chairman and Chief Executive Officer of CVS. Mr.
Goldstein's term as a director of the Company expires in 1998. Mr. Goldstein
co-founded Consumer Value Stores, a retail drug store chain, in 1963. CVS was
acquired by Melville Corporation in 1969, at which time Mr. Goldstein became
President of the CVS Division of Melville Corporation. In 1984 he was appointed
Executive Vice President of Melville Corporation, in January 1986, President of
Melville Corporation and in January 1987, Chairman and Chief Executive Officer
of Melville Corporation. Mr. Goldstein is on the board of directors of CVS,
NYNEX Corporation and Footstar, Inc. and on the board of overseers of The
Wharton School, University of Pennsylvania.
Director Compensation - Attendance; Committees. Directors who are not
receiving compensation as officers or employees of the Company or any of its
affiliates are paid an annual retainer of $10,000 and a $750 fee for attendance
at each meeting of the Board or any committee of the Board. Non-employee
directors are also eligible to participate in the 1996 Non-Employee Director
Stock Plan. Under the 1996 Non-Employee Director Stock Plan, each non-employee
director is entitled to receive an option to purchase 7,000 shares of the
Company's Common Stock on the date of the November 1996 IPO or, if later, the
date of such director's first election to the Board of Directors. In addition,
each non-employee director is entitled to receive an option to purchase 700
shares of the Company's Common Stock on the date of each Annual Meeting
following the IPO.
The 1996 Non-Employee Director Stock Plan also provides for automatic
grants of 700 stock units ("Stock Units") to each non-employee director on the
date of the IPO and thereafter on the date of each annual meeting following the
IPO. 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 and the other half on the date of the next
Annual Meeting, provided that on such date 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.
The Board of Directors held one meeting in 1996 following the IPO, and
otherwise addressed necessary business by unanimous written consent. The
Compensation Committee which was formed on November 22, 1996, acted by unanimous
written consent in 1996. The Board of Directors has established an Audit
Committee and a Compensation Committee. There is no standing nominating
committee. Messrs. Goldstein and Conaway are the current members of the
Compensation Committee and Mr. Beekman is currently the sole member of the Audit
Committee.
The Board is expected to increase to up to seven members during fiscal 1997
and the Company is currently considering various potential candidates.
Audit Committee. The Audit Committee is intended to function as a
communication point among non-Audit Committee directors, the independent
auditors and Company management as their respective duties relate to financial
accounting, reporting and internal controls. The Audit Committee is also
intended to assist the Board of Directors in fulfilling its responsibility with
respect to accounting policies, internal controls, financial and operating
controls, standards of corporate conduct and performance, and reporting
practices of the Company and the sufficiency of auditing. Mr. Beekman is
Chairman of the Audit Committee.
Compensation Committee. The principal responsibilities of the Compensation
Committee will include determination and administration of compensation for the
senior officers of the Company and other key members of the Company's
management, including salary and incentive based plans and ongoing review, in
consultation with the Company's executive management and the Board of Directors,
of the policies relating to compensation of the Company's senior officers and
other key members of the Company's management. Mr. Goldstein is Chairman of the
Compensation Committee.
4
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information on compensation earned in fiscal
years 1996 and 1995 by the Company's Chairman, Chief Executive Officer and
President and the three other most highly compensated key policy making officers
of the Company.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
------------------------------
Annual Compensation Awards
---------------------- ------------------------------
Number of
Restricted Securities All Other
Name and Principal Fiscal Stock Underlying Options/ Compensation
Position Year Salary ($) Bonus ($) Award(s) ($) SARs # ($)
----------------- ----- -------- -------- ----------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Norman Axelrod, Chairman, 1996 475,000 65,313 999,353(1) 385,355 3,167(5)
Chief Executive 1995 455,000 0 750,004(2) 75,069(3)(4) 6,918(6)
Officer and President
James M. Tomaszewski, Senior 1996 279,000 27,900 290,438(1) 75,000 1,357(5)
Vice President, Chief 1995 264,000 0 100,016(2) 17,324(3)(4) 5,373(6)
Financial Officer
Steven B. Silverstein, Senior 1996 275,000 27,500 290,438(1) 75,000 3,167(5)
Vice President, General 1995 265,000 0 200,031(2) 23,098(3)(4) 7,069(6)
Merchandise Manager
Hugh J. Scullin, 1996 210,000 21,000 174,263(1) 45,000 3,167(5)
Senior Vice President, 1995 210,000 0 0 6,929(3)(4) 8,519(6)
Store Operations
</TABLE>
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(1) Valuation of the restricted stock awards in the above table is based on the
initial public offering price of $15.50, net of consideration paid of $0.01
per share. The number and value of the restricted stock holdings at the end
of fiscal 1996 for each of the named executives is: Mr. Axelrod, 64,516
shares, $1,265,481; Mr. Tomaszewski 18,750 shares, $367,781; Mr.
Silverstein 18,750 shares, $367,781; and Mr. Scullin 11,250 shares,
$220,669. The foregoing values are calculated by multiplying the total
number of restricted shares by the closing price of the Company's Common
Stock on the last day of fiscal 1996, $19.625, net of consideration paid of
$0.01 per share. Shares of restricted stock vest 25% on July 1, 1997, July
1, 1998, July 1, 1999 and July 1, 2000. Holders of restricted stock are
entitled to receive dividends, if any, on the restricted stock.
(2) Represents CVS restricted stock which was subject to a four year vesting
period from the date of grant, April 11, 1995. As of the IPO date Messrs.
Tomaszewski and Silverstein elected to surrender 3,091 and 6,182 CVS
restricted shares, with a value of $129,822 and $259,644, respectively,
(based on the value of CVS common stock on the IPO date of $42.00) for an
equivalent number of vested CVS share units payable on November 25, 1999.
With respect to Mr. Axelrod, all remaining shares of CVS restricted stock
became immediately vested in connection with the IPO and along with certain
stock options and accumulated pension benefits, were terminated and a
deferred compensation account was established for him in lieu thereof. See
"Employment Agreements and Change of Control Agreements."
(3) These options were 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 was fully exercisable one year after
the grant date. An additional one-third of the options granted to Messrs.
Tomaszewski and Silverstein became fully vested and were exercisable for
approximately a 90-day period following the IPO at which time the exercise
period expired. In the case of Mr. Scullin, his options were fully
exercisable for approximately a 90-day period following the IPO. In the
case of Mr. Axelrod, his options are fully exercisable until December 31,
1999. See footnote (1) to table entitled "Aggregated Options/SAR Exercises
in Last Fiscal Year and Fiscal Year-End Option/SAR Values" for description
of option exercises in 1996. Except in the case of Mr. Axelrod, all CVS
options have been cancelled following the expiration of such 90 day period
after the IPO.
(4) The information shown in the table reflects the spinoff by CVS of Footstar,
Inc. 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 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%.
(5) Represents $3,167, $1,357, $3,167, and $3,167 contributed under the CVS
401(k) profit sharing plan from January through November of 1996 for
Messrs. Axelrod, Tomaszewski, Silverstein and Scullin, respectively.
(6) Includes $3,918, $2,373, $4,069 and $5,519 contributed under the CVS 401(k)
profit sharing plan for Messrs. Axelrod, Tomaszewski, Silverstein and
Scullin, respectively, and shares of CVS common stock with a value of
$3,000 contributed under the CVS employee stock ownership plan for each of
the named executives.
5
<PAGE>
Option Grants in Last Fiscal Year. The table below sets forth certain
information concerning stock options granted during 1996 by the Company to the
Chief Executive Officer and each of the other named executive officers of the
Company. The hypothetical present values on date of grant shown in the last
column below for stock options granted in 1996 are presented pursuant to the
rules of the Securities and Exchange Commission (the "SEC") and are calculated
under the modified Black-Scholes Model for pricing options. The Company is not
aware of any model or formula which will determine with reasonable accuracy a
present value for stock options. The actual before-tax amount, if any, realized
upon the exercise of stock options will depend upon the excess, if any, of the
market price of the Company's Common Stock over the exercise price per share of
Common Stock of the stock option at the time the stock option is exercised.
There is no assurance that the hypothetical present values of the stock options
reflected in this table will be realized. No stock appreciation rights ("SARs")
have been granted or are outstanding.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------------------
Number of Percent of
Securities Total Options Grant Date
Underlying Granted to Exercise or Present
Options Granted Employees in Base Price Expiration Value
Name (#)(1) Fiscal Year(2) ($/Share) Date ($)(3)
------ -------------- ------------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Norman Axelrod....................... 385,355 38.8% 15.500 11/24/2006 2,512,515
James M. Tomaszewski................. 75,000 7.5% 15.500 11/24/2006 489,000
Steven B. Silverstein................ 75,000 7.5% 15.500 11/24/2006 489,000
Hugh J. Scullin...................... 45,000 4.5% 15.500 11/24/2006 293,400
</TABLE>
- ----------
(1) These ten year options were granted under the 1996 Incentive Compensation
Plan at fair market value and vest and become exercisable with respect to
25% of the underlying shares on November 25, 1997, 1998, 1999 and 2000.
(2) Options were granted during 1996 to purchase a total of 994,330 shares.
(3) The hypothetical present values on grant date are calculated under the
modified Black-Scholes Model, which is a mathematical formula used to value
options traded on stock exchanges. This formula considers a number of
factors in hypothesizing an option's present value. Factors used to value
options granted include the stock's expected volatility rate (45%), risk
free rate of return (6.0%), dividend yield (0%), projected time of exercise
(5 years) and projected risk of forfeiture and non-marketability for the
vesting period (5% per annum).
Option Exercises And Year-End Option Holdings. The following table shows
information regarding option exercises during 1996 as well as 1996 year-end
option holdings for each of the named executive officers.
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Shares Number of Securities In-the-Money
Acquired Underlying Unexercised Options/SARs
on Value Options/SARs at FY- End at FY-End ($)
Exercise Realized (#) Exercisable/ Exercisable/
Name (#) ($) Unexercisable(1) Unexercisable(1)
----- -------- ------- --------------------- --------------
<S> <C> <C> <C> <C>
Norman Axelrod.............................. 0 0 0/385,355 0/1,589,589
James M. Tomaszewski........................ 0 0 0/75,000 0/309,375
Steven B. Silverstein....................... 0 0 0/75,000 0/309,375
Hugh J. Scullin............................. 0 0 0/45,000 0/185,625
</TABLE>
- ----------
(1) Each of the named executive officers also received from CVS, prior to the
IPO, options to purchase shares of CVS common stock. As of December 31,
1996 the number of exercisable and unexercisable securities underlying such
options were as follows: Mr. Axelrod 75,069/0, Mr. Tomaszewski 20,210/0,
Mr. Silverstein 25,214/0 and Mr. Scullin 12,705/0. The value of
unexercised, in-the-money options as of December 31, 1996, measured against
the closing price of CVS common stock of $41.375, for options that were
exercisable and for options that were unexercisable, is as follows: Mr.
Axelrod $676,562/0, Mr. Tomaszewski $169,025/0, Mr. Silverstein $159,768/0
and Mr. Scullin $30,908/0. Only Mr. Scullin exercised options during 1996,
for a realized value of $58,375 by exercising 9,816 options. The
information in this footnote reflects the spinoff by CVS of Footstar, Inc.
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 on the table and increasing the number of securities underlying such
options by 15.49%. None of such options, except those held by Mr. Axelrod
are currently outstanding. See footnote (3) to Summary Compensation Table.
6
<PAGE>
Employment Agreements and Change in Control Agreements. The Company has
entered into employment agreements with Messrs. Axelrod, Tomaszewski,
Silverstein, and Scullin (each an "Employment Agreement" and collectively the
"Employment Agreements"). The following briefly summarizes the principal terms
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, the base
salary will be $475,000, $279,000, $275,000 and $210,000 for Messrs. Axelrod,
Tomaszewski, Silverstein 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 retirement benefits, disability and life
insurance, and medical benefits); (iv) annual and long-term incentive
compensation opportunities; and (v) deferred compensation arrangements. In the
case of Mr. Axelrod, he received from the Company an initial crediting to a
deferred compensation account of approximately $2.2 million 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 over a 12 month
period an 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 to include a variety of events, including
significant changes in the stock ownership of the Company or a significant
subsidiary, certain 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 of the consolidated assets of the
Company. "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.
Report on Compensation of Executive Officers
The Company first established its Compensation Committee of the Board of
Directors on November 22, 1996, prior to the IPO. Compensation matters for the
Company's Chief Executive Officer and the other named executive officers for
fiscal 1996 prior to the IPO were determined by CVS, of which the Company was a
7
<PAGE>
wholly-owned indirect subsidiary of CVS prior to the IPO. Compensation decisions
for the Company's Chief Executive Officer and the other named executive officers
for fiscal 1997 will be reviewed and determined by the Compensation Committee of
the Board of Directors.
The overall objectives of the Company's executive compensation program are
to attract and retain the highest quality executives to manage and lead the
Company, and to provide annual and long term incentives to management, based on
both Company performance and individual performance, in order to build and
sustain value for shareholders.
The Company's executive compensation program as currently in place was
reviewed and approved by CVS at and prior to the Company's IPO. A national
compensation consultant was retained by CVS to assist in the design of the
executive compensation program for the Company to be in effect at the time of
the IPO. The consultant reviewed competitive compensation in connection with the
Company's senior officers, including the Chief Executive Officer and each of the
other named executive officers as well as other members of the management group.
This review included compensation levels reported for senior executives of a
survey group of 14 retailers.
Base Salary. Based on this survey group review, base salaries for the Chief
Executive Officer and the other named executives were established at
approximately the mean of the range of salaries considered in the survey group.
Actual total remuneration levels may range below or above target in any one year
and over a period of years based on performance against annual and long term
goals and return to shareholders. At the time of the November 1996 IPO, the
Company entered into employment agreements with the Chief Executive Officer and
each of the named executives under which the minimum base pay level for each
individual was established at the fiscal 1996 base pay level.
Incentive Awards. The CVS incentive program provided for cash bonuses based
on performance relative to predetermined objectives established for the year.
For 1996, the target award was 55% for the Chief Executive Officer and 40% for
each of the other named executives. Larger awards may be permitted from time to
time if performance exceeds predetermined objectives. Smaller or no awards may
be made if performance falls below such objectives. Eligible members of
management, including the Chief Executive Officer and the other named
executives, can defer receipt of a portion of their incentive award. Incentive
bonuses payable to the Chief Executive Officer and the other named executives
for 1996 were based on profit objectives established by CVS in early 1996 based
on the Company's earnings and the actual 1996 incentive awards were determined
to be twenty-five percent of target awards for each of the named executives.
Stock Based Compensation. At the time of the IPO the Company established
its 1996 Incentive Compensation Plan, which is further described under "Approval
of the Adoption of the 1996 Incentive Compensation Plan" below. The 1996
Incentive Compensation Plan provides for nonqualified stock options, incentive
stock options, grants of restricted or deferred shares, and other types of
awards. Pursuant to this plan, at the time of the IPO the Company granted both
restricted shares and stock options to the executive officers and certain other
employees of the Company.
The purpose of the restricted shares grant is to enhance the continuity of
management during the restricted grant period. The specific number of restricted
shares granted to management employees including the Chief Executive Officer was
determined by the Compensation Committee of the Board of Directors in
conjunction with discussions with CVS and the CVS compensation consultant. The
objective was to be competitive with restricted share grants of certain other
retail companies which had gone public. Stock options are granted at fair market
value and are intended to align executive compensation opportunities with
shareholder returns.
Stock options granted at the time of the IPO were made at levels determined
by the Compensation Committee of the Board of Directors of the Company, in
consultation with CVS and the CVS compensation consultant, to be competitive
with stock option grants of the survey group. The combination of stock options
and restricted stock grants at the time of the IPO was targeted to be at or near
the mean of the survey group for positions of similar size, scope and complexity
including the Chief Executive Officer position. Stock options are intended to
provide long term compensation incentive, and future grants of options or other
awards will be periodically reviewed and determined by the Compensation
Committee of the Board.
8
<PAGE>
Compliance with Internal Revenue Code Section 162(m). Section 162(m) of the
Internal Revenue Code, enacted in 1993, generally allows a deduction to publicly
traded companies for certain qualifying performance based compensation. Section
162(m), however, disallows a deduction to the extent of excess non-performance
based compensation over $1 million is paid to the Chief Executive Officer or to
any of the four other most highly compensated executive officers. The Company
believes that Section 162(m) deduction limits for fiscal 1997 will not be
applicable or, if applicable, would not be material in terms of net financial
effect or number of persons covered and therefore the Company does not intend to
seek to restructure any fiscal 1997 compensation arrangements. The Company and
the Compensation Committee will continue to monitor this matter.
Compensation Committee of the
Board of Directors (after the IPO):
Stanley P. Goldstein, Chairman
Charles C. Conaway
9
<PAGE>
Performance Graph
The following graph compares the percentage change in the cumulative total
shareholders' return on the Company's Common Stock from November 26, 1996, the
first trading day of the Company's Common Stock, to January 31, 1997, with the
cumulative total return on the Standard & Poor's Specialty Retail Index, the 14
Company Peer Group Index and the Standard & Poor's 500 Index for the same
period. In accordance with SEC rules, the returns are indexed to a value of $100
at November 26, 1996 and it is assumed that all dividends were reinvested.
The 14 Company Peer Group Index is comprised of the following companies in
the retail industry: Bed, Bath & Beyond; Bombay Company; Borders Group;
Fabri-Centers of America; General Nutrition Cos.; Haverty Furniture Cos.;
Lechters, Inc.; Michaels Stores, Inc.; Petsmart, Inc.; Pier 1 Imports, Inc.;
Sharper Image, Inc.; Sports Authority, Inc.; Strouds, Inc. and Williams-Sonoma,
Inc. The returns of each issuer in the 14 Company Peer Group Index has been
weighted according to the issuer's stock market capitalization at the beginning
of each period for which a return is indicated.
Comparison of Year End Cumulative Total Return of Linens 'n Things Inc.,
Standard & Poor's Specialty Retail Index,
14 Company Peer Group and Standard & Poor's 500 Index.
[The following table is represented by a line chart in printed material.]
11/26/96 11/29/96 12/31/96 1/31/97
------- ------- ------- -------
Linens 'n Things, Inc. ............ $100.0 $100.8 $126.6 $141.9
S&P Specialty Retail Index ........ 100.0 98.9 91.3 78.8
14 Company Peer Group ............. 100.0 99.2 95.3 100.5
Standard & Poor's 500 ............. 100.0 100.1 98.2 104.3
Compensation Committee Interlocks and Insider Participation. The
Compensation Committee of the Board of Directors is comprised of Mr. Goldstein
and Mr. Conaway. Mr. Goldstein is Chairman of the Board, Chief Executive Officer
and a Director of CVS and Mr. Conaway is Executive Vice President and Chief
Financial Officer of CVS. CVS owns approximately 32.5% of the Company's Common
Stock.
Certain Transactions With Related Parties. The Company was acquired by
Melville Corporation in 1983. After the Company's IPO in November 1996, CVS, as
successor in interest to Melville Corporation, was permitted to designate two
members of the Board of Directors of the Company.
10
<PAGE>
Administrative Costs. CVS has historically allocated various administrative
costs to the Company. Allocations were based on the Company's ratable share of
costs incurred by CVS on behalf of the Company for the combined programs. The
total costs allocated to the Company in 1996 through the date of the IPO was
approximately $900,000. Since the IPO, CVS no longer provides the real estate or
administrative services to the Company, except for the transitional services
referred to below.
CVS guaranteed the leases of certain stores operated by the Company and
prior to the IPO, charged a fee for that service which amounted to approximately
$300,000 in 1996. Since the IPO, CVS has: (i) remained obligated under its
guarantees of the Company's store leases where CVS 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) guaranteed 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 entered into a transitional services agreement (the
"Transitional Services Agreement") effective concurrently with the IPO under
which CVS provides or causes to be provided to the Company certain specified
services for a transitional period after the IPO. The transitional services to
be provided by CVS include; 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 a majority of the beneficial
ownership of Common Stock of the Company ("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 with respect to employees of the Company as of the IPO,
with the cost of such services to be paid by the Company.
Financing. The weighted average interest rate on borrowings by the Company
from CVS for 1996 through the IPO was 6.2%. Concurrently with the IPO, the
Company issued $13.5 million of subordinated indebtedness to CVS. The
Subordinated Note consisted of a $10 million tranche ("Tranche A") and a $3.5
million tranche ("Tranche B"), each of which is 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 Company's revolving credit
facility. There is no principal amortization prior to maturity. If the net
proceeds to CVS of the IPO 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 the
Company's Common Stock after the IPO 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 is 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 Subordinated Note
includes certain customary events of default. With the exception of the
Subordinated Note, subsequent to the IPO, the Company will no longer receive
financing assistance support from CVS.
The Stockholder Agreement. The Company, CVS and Nashua Hollis entered into
the Stockholder Agreement effective concurrently with the IPO under which the
Company and CVS agreed 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 receives prior
11
<PAGE>
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 with respect
to 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. 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 IPO and before CVS has exercised its rights with respect to
CVS's first registration right under the Securities Act of 1933 of its shares of
the Company's Common Stock: (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 or
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. CVS
will also have the right, which it may exercise from time to time, to include
the shares of Common Stock (and any other securities issued in respect of or in
exchange for such shares) held by it in certain other registrations of 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 of 1933 for the account of such person. Such rights are subject
to a "lock-up" 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
approximately six months after the IPO.
The Stockholder Agreement provides generally that CVS will cease to have
any liability under its employee benefit plans with respect to employees and
former employees of the Company after the IPO, except that (i) options and other
outstanding stock based awards with respect to CVS stock will generally 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. CVS and the Company have entered
into a tax disaffiliation agreement (the "Tax Disaffiliation Agreement") that
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 IPO and related matters such as the filing of tax returns and
the conduct of audits or other proceedings involving claims made by taxing
authorities.
12
<PAGE>
In general, CVS is responsible for filing consolidated federal and
consolidated, combined or unitary state income tax returns for periods through
the date on which the IPO was 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' contributions 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 IPO was
completed.
In general, the Company has agreed to indemnify CVS for taxes relating to a
tax period (or portion thereof) ending on or before the completion of the IPO 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 IPO. The Tax Disaffiliation
Agreement also provides 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 IPO
of certain tax attributes of the Company arising in tax periods or portions
thereof beginning after the completion of the IPO.
The Company and CVS have agreed 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 IPO. The Company and CVS have
each agreed to indemnify the other for liabilities arising as a result of the
breach of this agreement. The Company also agreed 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 continues to be a party after completion of the
IPO.
13
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
Certain Beneficial Owners. The following table sets forth certain
information as to beneficial ownership of each person known to the Company to
own beneficially more than 5% of the outstanding Common Stock of the Company as
of February 1, 1997. Except where otherwise indicated, such beneficial owner has
sole voting and investment power as to such shares.
Beneficial Owner Number of Shares Percent of Class
--------------- ---------------- --------------
CVS Corporation* ................. 6,267,758 32.5%
One CVS Drive
Woonsocket, Rhode Island 02895
- ----------
* According to the Schedule 13G filed by CVS on February 10, 1997, CVS is
listed as the beneficial owner of the 6,267,758 shares which are held by
Nashua Hollis CVS, Inc., an indirect subsidiary of CVS. Nashua Hollis CVS,
Inc. is a New Hampshire corporation with offices located at 670 White
Plains Road, Scarsdale, New York 10583.
Stock Ownership of Directors and Executive Officers. The following table
sets forth certain information as to beneficial ownership of the outstanding
Common Stock of the Company as of February 1, 1997, by each director and nominee
of the Company, each of the four named executive officers listed in the Summary
Compensation Table, and all executive officers and directors of the Company as a
group. Except as otherwise indicated, all persons listed below have sole voting
and investment power with respect to such shares. No director, nominee or
executive officer beneficially owns more than 1% of the total outstanding Common
Stock, and all directors and executive officers as a group own less than 1% of
the total outstanding Common Stock.
<TABLE>
<CAPTION>
No. of Shares No. of Shares
of Common of Common
Name of Beneficial Owner Stock (1)(2) Name of Beneficial Owner Stock(1)(2)
- ----------------------- ------------ ----------------------- ------------
<S> <C> <C> <C>
N. Axelrod (3) ................ 64,816 J. Tomaszewski .................... 18,750
P. Beekman .................... 1,000 S. Silverstein .................... 19,750
C. Conaway .................... 0 H. Scullin(4) ..................... 12,950
S. Goldstein .................. 0
All executive officers and
directors as a group ............ 117,266
</TABLE>
- ----------
(1) The shares listed include shares of restricted stock as follows: Mr.
Axelrod, 64,516, Mr. Tomaszewski, 18,750, Mr. Silverstein, 18,750 and Mr.
Scullin 11,250; and all executive officers as a group, 113,266.
(2) Mr. Conaway is a director of the Company and an officer of CVS. Mr.
Goldstein is a director of the Company and is also a director and officer
of CVS. Each disclaims beneficial ownership of the Common Stock of the
Company owned by CVS and such shares are not included in their individual
share ownership.
(3) Includes 200 shares held by Mr. Axelrod's minor children, as to which
shares Mr. Axelrod disclaims beneficial ownership.
(4) Includes 500 shares held by Mr. Scullin's minor child, as to which shares
Mr. Scullin disclaims beneficial ownership.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors to file reports regarding ownership of the
Company's Common Stock with the Securities and Exchange Commission, and to
furnish the Company with copies of all such filings. Based on a review of these
filings, the Company believes all filings were timely made, except that the
initial Form 3 for each of the above-named persons was not filed on the required
date.
14
<PAGE>
ITEM 2
APPROVAL OF THE ADOPTION OF THE
1996 INCENTIVE COMPENSATION PLAN
The Board of Directors is recommending for shareholder approval the
Company's 1996 Incentive Compensation Plan (the "1996 ICP") which was approved
by the Compensation Committee of the Board of Directors of the Company and by
CVS, as sole beneficial shareholder of the Company at the time of the IPO.
Approval of the 1996 ICP by the Company's public shareholders is being sought in
order to qualify certain compensation under the 1996 ICP as "performance-based
compensation" that is tax deductible by the Company without limitation under
Section 162 (m) of the Internal Revenue Code. As discussed above under the
caption "Report on Compensation of Executive Officers," Section 162(m) of the
Code and the regulations thereunder limit the Company's tax deductions for
compensation to the Chief Executive Officer and the other named executive
officers serving on the last day of the fiscal year to the extent the
individual's compensation exceeds $1,000,000. In accordance with the regulations
under Section 162(m), approval of the Company's public shareholders is being
sought in order that certain awards granted under the 1996 ICP after the Annual
Meeting to such individuals will qualify as "performance-based compensation"
that are tax deductible by the Company without limitation under Section 162(m)'s
$1,000,000 deductibility cap. For purposes of Section 162(m), shareholder
approval of the 1996 ICP relates to eligibility, per-person award limitations,
the performance objectives inherent in stock options and stock appreciation
rights ("SARs"), and the business criteria incorporated in performance
objectives under certain designated performance awards. In the event that
shareholders fail to approve these terms of the performance goals relating to
the 1996 ICP awards to be granted after the date of the Annual Meeting, such
awards will not be granted to the extent necessary to meet the requirements of
Treasury Regulation 1.162-27(e)(4). The awards granted under the 1996 ICP to
date are not conditioned on or subject to shareholder approval and therefore
will not be affected by such vote.
The 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, a copy
of which has been filed with the Securities and Exchange Commission. A copy of
the 1996 ICP will be provided to a shareholder free of charge upon written
request addressed to the Secretary of the Company.
Types of Awards. The terms of the 1996 ICP provide for grants of stock
options, 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. 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
15
<PAGE>
or other cash Award in respect of a performance period by any one participant is
$5 million.
The Compensation Committee of the Board of Directors (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. Approximately 175 persons are currently eligible under the 1996
ICP. The 1996 ICP will be administered by the Committee except to the extent the
Board elects to administer the 1996 ICP. The Committee will be comprised of two
or more directors designated by the Board each of whom, unless otherwise
determined by the Board, will be a "non-employee director" and an "outside
director" within the meaning of Rule 16b-3 under the Securities Exchange Act of
1934 and Section 162(m) of the Internal Revenue Code, respectively. Subject to
the terms and conditions of the 1996 ICP, the Committee is authorized to select
participants, determine the type and number of Awards to be granted and the
number of shares of Common Stock to which Awards will relate, specify times at
which Awards will be exercisable or settleable (including performance conditions
that may be required as a condition thereof), set other terms and conditions of
such Awards, prescribe forms of Award agreements, interpret and specify rules
and regulations relating to the 1996 ICP, and make all other determinations that
may be necessary or advisable for the administration of the 1996 ICP.
NEW PLAN BENEFITS
Linens 'n Things, Inc.
1996 Incentive Compensation Plan
Name and Position Dollar Value Number of Units
---------------- ----------- ---------------
Norman Axelrod, ............... Stock Options 2,512,515 385,355(1)
Chairman, ..................... Restricted Stock 999,353 64,516(2)
Chief Executive Officer
and President
James M. Tomaszewski, ......... Stock Options 489,000 75,000(1)
Senior Vice President, ........ Restricted Stock 290,438 18,750(2)
Chief Financial Officer
Steven B. Silverstein, ........ Stock Options 489,000 75,000(1)
Senior Vice President, ........ Restricted Stock 290,438 18,750(2)
General Merchandise Manager
Hugh J. Scullin, .............. Stock Options 293,400 45,000(1)
Senior Vice President, ........ Restricted Stock 174,263 11,250(2)
Store Operations
Executive Group (4 persons) ... Stock Options 3,783,915 580,355(1)
Restricted Stock 1,754,492 113,266(2)
16
<PAGE>
Name and Position Dollar Value Number of Units
---------------- ----------- ---------------
Non-Executive Director ........ Stock Options n/a n/a
Group ......................... Restricted Stock n/a n/a
Non-Executive Officer ......... Stock Options 2,699,117 413,975(1)
Employee Group ................ Restricted Stock 734,226 47,400(2)
- ----------
(1) Options to purchase the Company's Common Stock at an exercise price of
$15.50 per share, expiring on November 26, 2006. The options become
exercisable in one-fourth increments on November 25, 1997, November 25,
1998, November 25, 1999 and November 25, 2000. Option valuation is
calculated using the Black-Scholes option pricing model adapted for use in
valuing stock options. The options were valued with a discount for vesting
to reflect risk of forfeiture of 12.5% and without adjustment for
nontransferability, assuming a volatility of the rate of return of the
Company's Common Stock of 45%, a risk free rate of return of 6.0%, a
dividend yield rate of 0% on the Company's Common Stock and an option
exercise period of 5 years from the grant date. Volatility was calculated
on the basis of volatility of a sample of companies in the general retail
industry based on the average monthly stock price volatility rates over the
last one, two, three and four years and using the median of approximately
45% of the sample group. The sample companies are the same retail companies
as included in the survey group described in the Report on Compensation of
Executive Officers or the Peer Group index of selected retail apparel
companies set forth in the Performance Graph above. There is no assurance
that the value realized on any option will be at or near the values
estimated by the Black-Scholes model, which are based on a number of
theoretical assumptions. The actual value, if any, that an optionee
realizes will depend on the excess of the market price of the Company's
Common Stock over the option exercise price on the option exercise date.
(2) Awards of restricted shares of the Company's Common Stock, vesting in
one-fourth increments on July 1, 1997, July 1, 1998, July 1, 1999 and July
1, 2000. Valuation of the restricted stock is based on the initial public
offering price of the Company's Common Stock of $15.50 per share, net of
consideration paid of $0.01 per share.
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 a 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.
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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 the three other 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 Internal Revenue 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 shareholder
return; and (10) any of the above goals as compared to the performance of a
published or special index deemed applicable by the Committee including, but not
limited to, the Standard & Poor's 500 Stock Index. The Committee may, in its
discretion, determine that the amount payable as a final annual incentive or
performance award will be increased or reduced from the amount of any potential
Award, but may not exercise discretion to increase any such amount intended to
qualify under Internal Revenue 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
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<PAGE>
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 shareholder approval, except
shareholder 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.
Shareholder 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 shareholder 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. Effective upon the IPO, the Committee made the following
deferred stock grants: Mr. Axelrod -- 64,516 shares, Mr. Tomaszewski -- 18,750
shares, Mr. Silverstein -- 18,750 shares and Mr. Scullin -- 11,250 shares. These
Awards will vest in 25% increments on each July 1, commencing on July 1, 1997.
Effective upon the IPO, the Committee also made the following grants of
non-qualified stock options 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. Such options have an exercise price equal to $15.50
which was the initial public offering price of the Common Stock. These options
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 a 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
19
<PAGE>
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.
INDEPENDENT AUDITORS
The Board of Directors has selected KPMG Peat Marwick LLP as the Company's
independent auditors to make an examination of the accounts of the Company for
the 1997 fiscal year. KPMG Peat Marwick LLP served as independent auditors for
CVS, which wholly-owned the Company at the time of the IPO, and has served as
the independent auditors of the Company since the IPO. Representatives of KPMG
Peat Marwick LLP will be present at the Annual Meeting and will be available to
respond to appropriate questions and to make such statements as they may desire.
SHAREHOLDER PROPOSALS FOR THE 1998 ANNUAL MEETING
Any proposal of a shareholder intended to be presented at the Company's
1998 Annual Meeting of Shareholders must be received by the Secretary of the
Company, for inclusion in the Company's Proxy Statement, Notice of Meeting and
proxy relating to the 1998 Annual Meeting, not later than December 2, 1997.
The Company's Bylaws establish an advance written notice procedure for
shareholders seeking to nominate candidates for election as directors at any
Annual Meeting of Shareholders, or to bring business before an Annual Meeting of
Shareholders of the Company. The Bylaws provide that only persons who are
nominated by, or at the direction of, the Board, or by a shareholder who has
given timely written notice to the Secretary of the Company prior to the meeting
at which directors are to be elected, will be eligible for election as directors
of the Company. The Bylaws also provide that at any meeting of shareholders only
such business may be conducted as has been brought before the meeting by, or at
the direction of, the Board or, in the case of an Annual Meeting of
Shareholders, by a shareholder who has given timely written notice to the
Secretary of the Company of such shareholder's intention to bring such business
before such meeting. Under the Bylaws, for any such shareholder notice to be
timely, such notice must be received by the Company in writing not less than 60
days nor more than 90 days prior to the meeting, or in the event that less than
70 days' notice or prior public disclosure of the date of the Annual Meeting is
given or made to shareholders, to be timely, notice by the shareholders must be
received not later than the close of business on the 10th day following the day
on which such notice of the date of the meeting or such public disclosure was
made. Under the Bylaws, a shareholder's notice must also contain certain
information specified in the Bylaws.
ANNUAL REPORT
A copy of the Company's Annual Report has been mailed to all shareholders
of record. Shareholders, upon written request to the Investor Relations
Department of the Company, 6 Brighton Road, Clifton, New Jersey 07015, may
receive, without charge, a copy of the Company's Annual Report on Form 10-K,
including the financial statements and financial statement schedules, required
to be filed with the Securities and Exchange Commission for the 1996 fiscal
year.
OTHER MATTERS
As of the date of this Proxy Statement, the Company knows of no business
that will be presented for consideration at the Annual Meeting other than the
items referred to above. Proxies in the enclosed form will be voted in respect
of any other business that is properly brought before the Annual Meeting as
recommended by the Board of Directors or, if no such recommendation is given, in
the discretion of the proxy holders.
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PROXY
LINENS 'N THINGS, INC.
ANNUAL MEETING OF SHAREHOLDERS
May 6, 1997
This Proxy is Solicited on Behalf of the Board of Directors of
Linens 'n Things, Inc.
The undersigned hereby appoints Brian D. Silva and Denise Tolles, and each
or either of them, with power of substitution, proxies for the undersigned and
authorizes each of them to represent and vote, as designated, all of the shares
of stock of Linens 'n Things, Inc. (the "Company") which the undersigned may be
entitled to vote at the Annual Meeting of Shareholders of the Company to be held
at the Company's headquarters at 6 Brighton Road, Clifton, New Jersey on May 6,
1997, and at any adjournments or postponements of such meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO CONTRARY DIRECTION IS MADE, THIS
PROXY WILL BE VOTED "FOR" PROPOSALS 1 AND 2. PLEASE VOTE PROMPTLY.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE.
<PAGE>
[x] Please mark
votes as in
this example.
1. ELECTION OF ONE DIRECTOR
To elect Philip Beekman as Director for a three year term.
FOR WITHHELD
[ ] [ ]
2. 1996 INCENTIVE COMPENSATION PLAN
To approve the adoption of the 1996 Incentive Compensation Plan.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
MARK HERE
FOR ADDRESS
CHANGE AND
NOTE AT LEFT [ ]
MARK HERE
IF YOU PLAN
TO ATTEND
THE MEETING [ ]
Please sign exactly as your name or names appears hereon. When signing as
attorney, executor, administrator, trustee or guardian, please give your full
title as such. If a corporation, please print the full corporate name and sign
by president or other authorized officer. If a partnership, please print the
full partnership name and sign by authorized person.
Signature: Date:
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Signature: Date:
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