LINENS N THINGS INC, 10-K405, 1999-03-26

LINENS N THINGS INC
10-K405, 1999-03-26
HOME FURNITURE, FURNISHINGS & EQUIPMENT STORES

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

- -------------------------------------------------------------------------------
FORM 10-K
- -------------------------------------------------------------------------------
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 1998

(No Fee Required)

Commission File Number 1-12381

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Linens 'n Things, Inc.
(Exact name of registrant as specified in its charter)

Delaware 22-3463939
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

6 Brighton Road
Clifton, New Jersey 07015
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (973) 778-1300

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class Name of Each Exchange on Which Registered
---------------- ----------------------------------------
Common Stock, $0.01 par value New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X

The aggregate market value of voting stock held by non-affiliates
of the Registrant on March 1, 1999, based on the closing sale price on the New
York Stock Exchange on such date, was approximately $1.4 billion.

The number of outstanding shares of the Registrant's common stock, $0.01 par
value, as of March 1, 1999 was 39,096,525.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended December 31, 1998 are incorporated by reference into Part II, and portions
of the Registrant's Proxy Statement for the 1999 Annual Meeting of Shareholders
are incorporated by reference into Part III.
<PAGE>

Table of Contents

<TABLE>
<CAPTION>
Form 10-K
Item No. Name of Item Page
- ------- ------------ ----

PART I
<S> <C> <C>
Item 1. Business.................................................................................. 3
Item 2. Properties................................................................................ 12
Item 3. Legal Proceedings......................................................................... 12
Item 4. Submission of Matters to a Vote of
Security Holders...................................................................... 12

PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters....................................................... 13
Item 6. Selected Financial Data................................................................... 13
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................................................................ 13
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk..................................................................... 13
Item 8. Financial Statements and Supplementary
Data.................................................................................. 13
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure............................................................................ 13

PART III
Item 10. Directors and Executive Officers of
the Registrant........................................................................ 14
Item 11. Executive Compensation.................................................................... 14
Item 12. Security Ownership of Certain Beneficial
Owners and Management................................................................. 14
Item 13. Certain Relationships and Related
Transactions.......................................................................... 14

PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................... 15
</TABLE>
<PAGE>

PART I
Item 1. Business

General

Linens 'n Things, Inc. and its subsidiaries ("Linens 'n Things" or the
"Company") is one of the leading, national large format retailers of home
textiles, housewares and home accessories operating 196 stores in 38 states as
of December 31, 1998. The Company's current store prototype ranges between
35,000 and 40,000 gross square feet in size and such stores are located in strip
centers and, to a lesser extent, in malls and as stand-alone stores. The
Company's business strategy is to offer a broad selection of high quality, brand
name merchandise at exceptional everyday values, provide superior guest service
and maintain low operating costs.

Linens 'n Things' extensive selection of over 30,000 Stock Keeping Units
("SKUs") in its superstores is driven by the Company's commitment to offering a
broad and deep selection 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, Martex, Waverly,
Laura Ashley, Royal Velvet, Croscill, Braun, Krups, Calphalon and Henckels. 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.

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 ranging
from 30,000 to 50,000 gross square feet. This superstore format offers a broad
merchandise selection in a more visually appealing, guest friendly format. The
Company's introduction of superstores has resulted in the closing or relocation
of 128 of the Company's traditional stores through December 31, 1998. As a
result of superstore openings and traditional store closings, the Company's
gross square footage more than tripled from 2.1 million to 6.5 million over the
last five years although its store base only increased 37% from 143 to 196
during this period.

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 selection 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 slightly less than 38% in 1998.

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 ("IPO") of 13,000,000 shares of the Company's common
stock, on a pre-split basis. Subsequent to the IPO, CVS owned approximately
32.5% of the Company's common stock, having retained 6,267,758 shares, on a
pre-split basis. During 1997, CVS sold substantially all of its remaining shares
of the Company's common stock in a public offering. At December 31, 1997, CVS
held no shares of the Company's common stock. Unless otherwise indicated, all
share information is adjusted to reflect the Company's two-for-one common stock
split effected in May 1998.

Executive Officers and Certain Key Personnel

The following table sets forth information regarding the executive officers of
the Company:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Norman Axelrod..................... 46 Chairman, Chief Executive Officer and President
Steven B. Silverstein.............. 39 Executive Vice President, Chief Merchandising Officer
Hugh J. Scullin.................... 50 Senior Vice President, Store Operations
Brian D. Silva .................... 42 Senior Vice President, Human Resources and Corporate Secretary
William T. Giles................... 39 Vice President, Chief Financial Officer
</TABLE>
<PAGE>

Mr. Axelrod has been Chief Executive Officer and President of the Company
since 1988 and was elected to the additional position of Chairman of the Board
of Directors of the Company effective as of January 1997. 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. Silverstein joined Linens 'n Things in 1992 as Vice President, General
Merchandise Manager, was promoted to Senior Vice President, General Merchandise
Manager in 1993, and was promoted to Executive Vice President, Chief
Merchandising Officer in 1998. Prior to joining Linens 'n Things, Mr.
Silverstein held various management positions at Bloomingdale's from 1985 to
1992 including Merchandise Vice President of Home Textiles. 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. Silva joined Linens 'n Things in 1995 as Vice President, Human
Resources and was promoted to Senior Vice President, Human Resources and
Corporate Secretary in 1997. 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.S. in Human Resources Management from New York Institute of
Technology. Mr. Silva received his B.A. from St. John's University.

Mr. Giles joined Linens 'n Things in 1991 as Assistant Controller, was
promoted to Vice President, Finance and Controller in 1994 and was promoted to
Vice President, Chief Financial Officer in 1997. From 1981 to 1990, Mr. Giles
was with Price Waterhouse LLP. 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.

The following table sets forth information regarding certain other key managers
of the Company:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Matthew J. Meaney.................. 52 Vice President, Management Information Systems
Dominick J. Trapasso............... 45 Vice President, Logistics
</TABLE>

Mr. Meaney joined Linens 'n Things in 1991 as Vice President, Management
Information Systems. From 1985 to 1991, Mr. Meaney was Vice President of
Management Information Systems 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. 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 and Transportation at Charming Shoppes, Inc. Mr.
Trapasso received his B.A. from New York University.
<PAGE>

Business Strategy

The Company's business strategy is to offer a broad selection of high
quality, brand name merchandise at exceptional everyday values, provide superior
guest service and maintain low operating costs. Key elements of the Company's
business strategy are:

Offer a Broad Selection of Quality Name Brands at Exceptional Everyday
Values. 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 exceptional everyday values. The Company offers over 30,000
SKUs in its superstores across six departments, including bath, home
accessories, housewares, storage, top of the bed and window treatments. The
Company is one of the largest retailers of brand names, including Wamsutta,
Martex, Waverly, Laura Ashley, Royal Velvet, Croscill, Braun, Krups, Calphalon
and Henckels. The Company also sells an increasing amount of merchandise under
its own private label which is designed to supplement the Company's offering of
brand name products by offering high quality merchandise at value prices.

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 baskets, Fieldcrest, Wamsutta, Martex, Royal
hampers, bathroom rugs and wall hardware Velvet, Springmaid and Guess

Home Accessories Decorative pillows, napkins, tablecloths, Waverly, Laura Ashley and Guess
placemats, lamps, gifts, picture frames
and framed art

Housewares Cookware, cutlery, kitchen gadgets, small Braun, Krups, Calphalon, Cuisinart,
electric appliances (such as blenders and Henckels, Mikasa, Circulon, Farberware,
coffee grinders), dinnerware, flatware Black & Decker, Kitchen Aid,
and glassware Copco and International Silver

Storage Closet-related items (such as hangers, Rubbermaid and Closetmaid
organizers and shoe racks)

Top of the Bed Sheets, comforters, comforter covers, Wamsutta, Laura Ashley, Revman,
bedspreads, bed pillows, blankets and Croscill, Fieldcrest, Springmaid,
mattress pads Guess, Royal Sateen and Beautyrest

Window Treatment Curtains, valances and window hardware Croscill, Graber, Waverly and Laura Ashley
</TABLE>

Provide Superior Guest Service and Shopping Convenience. To enhance guest
satisfaction and loyalty, Linens 'n Things strives to provide prompt,
knowledgeable sales assistance and enthusiastic guest 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 superior guest 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
in-store product seminars. In addition, the Company has taken initiatives to
enhance the speed of its guest service, including enhancing credit card
authorization and upgrading its current point-of-sale ("POS") system. The
Company has also transferred the inventory and receiving responsibilities from
the stores to the distribution center thereby allowing associates to redirect
their focus from the backroom to the selling floor which has enhanced the
guest's shopping experience. During 1997, the Company introduced gift registry
service in all its stores nationwide to also better serve its guests. The
Company's superstore format is designed to save the guest time by having
merchandise visible and accessible on the selling floor for immediate purchase.
The Company believes its knowledgeable sales staff and efficient guest service,
together with the Company's liberal return policy, create a positive shopping
experience which engenders guest loyalty.
<PAGE>

Maintain Low Operating Costs. A cornerstone of the Company's business
strategy is its commitment to maintain 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 centers. See "Forward-Looking
Statements."

Growth Strategy

New Superstore Expansion. The Company operates in a large, highly-
fragmented industry and has a market share of less than two percent of the
industry. 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. The Company
generally seeks to operate stores in 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. See "Forward-Looking Statements".

The following table sets forth information concerning the Company's
expansion program during the past 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>
1994 29 27 2,078 2,865 143 145
1995 28 18 2,865 3,691 145 155
1996 36 22 3,691 4,727 155 169
1997 25 18 4,727 5,493 169 176
1998 32 12 5,493 6,487 176 196
</TABLE>

Linens 'n Things focuses on opening new superstores in areas where it
believes it can become a leading retailer of home-related products. Markets for
new superstores are selected on the basis of demographic factors, such as
income, population and number of households. The Company's stores are located
predominantly in power strip centers and, to a lesser extent, in malls and as
stand-alone stores.

During the first quarter of 1999, the Company entered into certain lease
commitments in Canada. As part of the Company's overall store opening schedule,
it expects to open its first Canadian store by early fiscal 2000. The Company
continues to review its plans for Canada and does not expect any material impact
on operations for fiscal 1999 and fiscal 2000.

Increase Productivity of Existing Store Base. The Company is committed to
seeking to increase its net sales per square foot, inventory turnover ratio and
return on invested capital. The Company believes the following initiatives will
best position it to achieve these goals:

Enhance Merchandise Mix and Presentation. The Company
continues to explore opportunities to increase sales in its "things"
merchandise without sacrificing market share or guest image in the
"linens" side of the business. The Company expects these opportunities to
positively impact net sales per square foot, the average net sale per
guest and inventory turnover since "things" merchandise tends to be more
impulse driven merchandise as compared to the "linens" portion of the
business. See "Forward-Looking Statements." The Company is consistently
introducing new products which it expects will increase sales and generate
additional guest 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 guest services, such as a
gift registry, will further improve its store productivity. See
"Forward-Looking Statements".

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. See "Forward-Looking Statements." In July 1995, the Company
began full operation of its distribution center in Greensboro, North
Carolina. By the end of 1998, approximately 85% of merchandise was being
received at the distribution center. By mid-1999, the Company will begin
operation of its second distribution center in Southern New Jersey.
Management believes that the increased utilization of the Greensboro
distribution center has resulted in lower average freight costs, more
efficient scheduling of inventory shipments to the stores, better in-stock

<PAGE>

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 guest 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
management information systems 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
December 31, 1998, the Company operated 183 superstores, representing
approximately 95% of its total stores. Although the remaining 13
traditional stores are currently profitable, the Company currently plans
to close or relocate most of these stores by the end of 1999. See
"Forward-Looking Statements."

Industry

According to Industry Reports, 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 $67 billion in
1998. The market for home furnishings is large, highly-fragmented and
competitive. Specialty superstores are the fastest growing channel of
distribution in this market. In 1998, the Company estimates that the three
largest specialty superstore retailers of fashion home textiles (including the
Company) had aggregate sales representing less than 5% 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 as the following:

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 name brand 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
generally 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 generally represent only a small portion
of the total merchandise sales in these stores. The Company's competitive
advantage is that these stores offer a more limited merchandise selection with
fewer high quality name brands and lower quality merchandise at lower price
points. In addition, these mass merchandisers typically have more limited
customer service staffing than the Company.

Specialty Stores/Retailers: This category includes large format home
furnishings retailers 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 15,000 to 70,000 gross square feet and offer a home
furnishings merchandise selection of approximately 15,000 to 40,000 SKUs. These
retailers attempt 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 broad assortment within a specific niche.

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 merchandise. Off-price retailers typically offer
close-out or out of season name brand merchandise at competitive prices.

Merchandising

The Company offers quality home textiles, housewares and home accessories
at exceptional everyday values. The Company's strategy consists of a commitment
to offer a breadth and depth of selection and to create a merchandise
presentation that makes it easy to shop in a visually pleasing environment. The
stores feature a "racetrack" layout, enabling the guest to visualize and

<PAGE>

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 30,000 SKUs enables
its guests 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 guest's impression of a dominant
selection 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 believes that the
uniform application of its everyday low price policy is essential to maintaining
the integrity of its strategy. This is an important factor in establishing its
reputation as a price leader and in helping to build guest loyalty. In addition,
the Company offers, on a regular basis, "special" merchandise which it obtains
primarily through opportunistic purchasing to enhance its high value perception
among its guests.

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 it from the competition. To
facilitate the ease of shopping, the assisted self-service culture is
complemented by trained department specialists, zoned floor coverage, product
information displays and videos, self-demonstrations and in-store product
seminars. This philosophy is designed to encourage guest loyalty as well as
continually develop knowledgeable Company associates. 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 augmented by the transfer of
inventory receiving responsibilities from the stores, allowing sales associates
to focus on the sales floor. Sophisticated management systems which provide
efficient guest 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 concept and image. Because of the Company's commitment to exceptional
everyday values, advertising vehicles are aggressively used in positioning the
Company among new and existing guests by communicating price, value and breadth
and depth of selection. 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
guests which are also supplemented by direct mail marketing initiatives. In
addition, the Company periodically advertises on television during peak seasonal
periods or for promotional events. Grand opening promotional events are used to
support new stores, with more emphasis placed on those located in new markets.

Purchasing and Suppliers

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 10% of the
Company's total purchases in 1998. In 1998, the Company purchased a significant
number of products from other key suppliers. 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.

Distribution

The Company operates a distribution center in Greensboro, North Carolina.
The Company began full operation of the distribution center in 1995. The
utilization of the centralized distribution center has resulted in lower average
freight expense, more timely control of inventory shipments to stores, improved
inventory turnover, better in-stock positions and improved information flow. In
addition, transferring 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 guest 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.

<PAGE>

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 1998,
the Company received approximately 85% of its total inventory 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 Electronic Data Interchange technologies
between Linens 'n Things and its suppliers to exploit the most productive and
beneficial use of its assets and resources. In order to realize greater
efficiency, the Company also uses third party delivery services to ship its
merchandise from the distribution center to its stores.

To support the growth of the Company, a second distribution center
located in Southern New Jersey, has been secured and the Company currently
expects operation to begin by mid-1999.

Management Information Systems

Over the last several years, the Company has made significant
investments in technology to improve guest service, gain efficiencies and reduce
operating costs. Linens 'n Things has installed a customized IBM AS/400
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 has recently
upgraded. Information obtained daily by the system results in automatic
inventory replenishment in response to specific requirements of each store.

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 to enhance
the quantity, quality and timeliness of information available to management.

Store Management and 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.
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, complemented at the
associate level through daily in-store product seminars and structured register
training materials and proficiencies. The Company believes that its policy of
promoting from within, 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.

Inflation and Seasonality

The Company does not believe that its operating results have been
materially affected by inflation during the past year. There can be no
assurance, however, that the Company's operating results will not be affected by
inflation in the future.

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. 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.

Employees

As of December 31, 1998, the Company employed approximately 9,700 people
of whom approximately 4,100 were full-time employees and 5,600 were part-time
employees. None of the Company's employees are represented by unions, and the
Company believes that it has a good relationship with its employees.

<PAGE>

Competition

The Company believes that it will continue to face competition from
retailers in all four of the categories referred to in "Business--Industry." The
home textiles industry is becoming increasingly competitive and as the Company
expands into new markets, it will face new competitors. The visibility of the
Company may encourage additional competitors or existing competitors to imitate
the Company's format and methods.

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, guest 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.

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.

Forward-Looking Statements

This Form 10-K (including the information incorporated herein by
reference) contains forward-looking statements within the meaning of The Private
Securities Litigation Reform Act of 1995. The statements are made a number of
times throughout the document and may be identified by forward-looking
terminology as "expect," "believe," "may," "will," "intend" or similar
statements or variations of such terms. Such forward-looking statements involve
certain risks and uncertainties including levels of sales, store traffic,
acceptance of product offerings and fashions, competitive pressures from other
home furnishings retailers, availability of suitable future store locations,
schedule of store expansion plans and year 2000 readiness issues relating to the
Company's internal systems and those of third parties. These and other important
factors that may cause actual results to differ materially from such
forward-looking statements are included in the "Risk Factors" section of the
Company's Registration Statement on Form S-1 as filed with the Securities and
Exchange Commission on May 29, 1997, and may be contained in subsequent reports
filed with the Securities and Exchange Commission. You are urged to consider
such factors. The Company assumes no obligation for updating any such
forward-looking statements.
<PAGE>

Item 2. Properties

As of December 31, 1998 the Company operated 196 retail stores in 38
states. 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 10
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 and certain of the leases provide for contingent rent
(based upon store sales exceeding stipulated amounts). CVS guarantees the leases
of certain stores which were open prior to the Company's 1996 IPO. Following the
IPO, CVS no longer enters into commitments to guarantee future leases on behalf
of the Company.

The Company owns its distribution center in Greensboro, North Carolina.
The Company leases its corporate office in Clifton, New Jersey and its
distribution center in Southern New Jersey, which is expected to begin
operations in mid-1999.

The table below sets forth the number of stores located in each state as
of December 31, 1998:
<TABLE>
<CAPTION>
State Number of Stores State Number of Stores
----- ---------------- ----- ----------------
<S> <C> <C> <C>
Alabama 1 Missouri 2
Arizona 5 Nebraska 1
Arkansas 1 Nevada 2
California 25 New Hampshire 1
Colorado 4 New Jersey 9
Connecticut 7 New Mexico 2
Florida 17 New York 9
Georgia 8 North Carolina 7
Idaho 1 Ohio 3
Illinois 13 Oklahoma 1
Indiana 2 Oregon 3
Kansas 2 Pennsylvania 6
Kentucky 1 Rhode Island 1
Louisiana 2 Tennessee 5
Maine 1 Texas 16
Maryland 3 Utah 3
Massachusetts 7 Virginia 11
Michigan 3 Washington 6
Minnesota 4 Wisconsin 1
</TABLE>

Item 3. 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 disposition of these
matters will not have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1998.
<PAGE>

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

Linens 'n Things' common stock is listed on the New York Stock Exchange.
Its trading symbol is LIN. At December 31, 1998 there were approximately 7,850
beneficial shareholders. The high and low trading price of the Company's common
stock for each quarter of 1998 and 1997 (adjusted to give effect to the
Company's two-for-one common stock split effected in May 1998) is as follows:

<TABLE>
<CAPTION>
High Low
---- ---
For the Year Ended December 31, 1998
------------------------------------
<S> <C> <C>
First Quarter..................................... $28 1/2 $19 1/2
Second Quarter................................... 34 11/16 27 1/16
Third Quarter..................................... 35 7/8 23
Fourth Quarter.................................... 40 5/8 16 5/8
</TABLE>

<TABLE>
<CAPTION>
High Low
---- ---
For the Year Ended December 31, 1997
------------------------------------
<S> <C> <C>
First Quarter.................................... $13 $ 8 3/4
Second Quarter................................... 14 5/8 9 1/8
Third Quarter.................................... 18 1/8 13
Fourth Quarter................................... 22 1/4 15 5/16
</TABLE>

The Company paid no dividends on its common stock in 1998 and 1997.
Management of the Company currently intends to retain its earnings to finance
the growth and development of its business and does not currently anticipate
paying cash dividends in the foreseeable future. The payment of any future
dividends will be at the discretion of the Company's Board of Directors and will
depend upon, among other things, the future earnings, operations, capital
requirements and financial condition of the Company, satisfying all requirements
under its bank financing agreement and such other factors as the Company's Board
of Directors may consider relevant. In addition, the revolving credit facility
currently prohibits the Company to pay cash dividends.

Item 6. Selected Financial Data

The information required by this Item is incorporated by reference to
the Five-Year Financial Summary appearing on page 13 of the Company's 1998
Annual Report to Shareholders.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

The information required by this Item is incorporated by reference
to pages 14 through 17 of the Company's 1998 Annual Report to Shareholders.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 8. Financial Statements and Supplementary Data

The financial statements and financial information required by this
Item are incorporated by reference to pages 18 through 28 and page 30 of the
Company's 1998 Annual Report to Shareholders. These financial statements are
indexed under Item 14(a)(1). See also the financial statement schedule that is
included herein and is indexed under Item 14(a)(2).

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

There were no disagreements between the Company and its independent
public accountants on matters of accounting principles or practices.
<PAGE>

PART III

Item 10. Directors and Executive Officers of the Registrant

The information required by this Item concerning the Company's
directors is incorporated by reference to the Company's Proxy Statement to be
mailed to shareholders for the Company's 1999 Annual Meeting of Shareholders,
under the heading "Election of Two Directors."

The information required by this Item concerning the Company's
executive officers is incorporated by reference to Part I, Item 1, "Business -
Executive Officers and Certain Key Personnel."

The information required by this Item with respect to Section 16
reporting is incorporated by reference to the Company's Proxy Statement for the
Company's 1999 Annual Meeting of Shareholders, under the heading "Section 16(a)
Beneficial Ownership Reporting Compliance."

Item 11. Executive Compensation

The information required by this Item is incorporated by reference to
the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders, under
the headings "Director Compensation - Attendance; Committees" and "Executive
Compensation" other than information included therein under the subcaptions
"Report on Compensation of Executive Officers" and "Performance Graph" which are
not incorporated herein.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by this Item is incorporated by reference to
the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders, under
the heading "Beneficial Ownership of Common Stock."

Item 13. Certain Relationships and Related Transactions

The information required by this Item is incorporated by reference to
the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders, under
the heading "Certain Transactions with Related Parties."
<PAGE>

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) The following documents are filed as part of this Report.

1. Financial Statements:

The following Financial Statements of Linens 'n Things, Inc. are
incorporated by reference to the Company's 1998 Annual Report to Shareholders:
<TABLE>
<CAPTION>
Pages in Annual Report
to Shareholders
----------------------

<S> <C>
Consolidated Statements of Operations -
for the years ended December 31, 1998, 1997 and 1996............................... 18

Consolidated Balance Sheets -
as of December 31, 1998 and 1997................................................... 19

Consolidated Statements of Shareholders' Equity -
for the years ended December 31, 1998, 1997 and 1996............................... 20

Consolidated Statements of Cash Flows -
for the years ended December 31, 1998, 1997 and 1996............................... 21

Notes to Consolidated Financial Statements......................................... 22 through 28

Independent Auditors' Report....................................................... 30
</TABLE>

2. Schedules:

The supplementary income statement schedule is included in this Report.

3. Exhibits:

The Exhibits on the accompanying Exhibit Index are filed as part of, or
incorporated by reference into, this Annual Report on Form 10-K.
<PAGE>
<TABLE>
<CAPTION>
Schedule 1

Linens 'n Things, Inc. and Subsidiaries
Supplementary Income Statement Information
(in thousands)

Year Ended Year Ended Year Ended
Item December 31, 1998 December 31, 1997 December 31, 1996
---- ----------------- ----------------- -----------------

<S> <C> <C> <C>
Advertising Costs $28,913 $25,161 $19,743
======= ======= =======
</TABLE>
<PAGE>

EXHIBIT INDEX
Exhibit
Number Description
------ -----------

3.1 Certificate of Incorporation of the Registrant(1)
3.2 Amended and Restated Certificate of Incorporation(1)
3.3 By-Laws of the Registrant(1)
4 Specimen Certificate of Common Stock(1)
10.1 Transitional Services Agreement between the Registrant and
CVS Corporation(1)
10.2 Stockholder Agreement between the Registrant and CVS
Corporation(1)
10.3 Tax Disaffiliation Agreement between the Registrant and CVS
Corporation(1)
10.4 Subordinated Note between Registrant and CVS(1)
10.5 Credit Facility(1)
10.6 Employment Agreement with Norman Axelrod*(1)
10.8 Employment Agreement with Steven B. Silverstein*(1)
10.9 Employment Agreement with Hugh J. Scullin*(1)
10.10 1996 Incentive Compensation Plan*(1)
10.11 1996 Non-Employee Director Stock Plan*(1)
11 Computation of Net Income (Loss) Per Common Share(2)
12 Computation of Ratio of Earnings to Fixed Charges(2)
13 Annual Report to Shareholders for 1998 fiscal year**
21 List of Subsidiaries(3)
23a Consent of KPMG LLP(2)
27 Financial Data Schedule (filed electronically with SEC only)(2)

- -------------------------------------------------------------------------------
(1) Incorporated by reference to the Exhibits filed with the Company's
Registration Statement on Form S-1 (No. 333-12267), which Registration
Statement became effective on November 26, 1996.

(2) Filed with this Form 10-K.

(3) Incorporated by reference to Exhibit 21 to the Company's 1996 Annual
Report on Form 10-K.

* Management contract or compensatory plan or arrangement.

(b) Reports on Form 8-K:

No Current Reports on Form 8-K were filed by the Company during the last
quarter of 1998.

** With the exception of the information incorporated by reference to the
Annual Report to Shareholders in Items 6, 7, and 8 of Part II and Item 14
of Part IV of this Form 10-K, the Annual Report to Shareholders is not
deemed filed as part of this Form 10-K.
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.

Linens 'n Things, Inc.
(Registrant)

By: /S/ Norman Axelrod
--------------------------
Norman Axelrod
Chairman, Chief Executive Officer and President
Dated: March 25, 1999

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on its behalf of the Registrant in the capacities
and on the dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
---------------- ------- ------

<S> <C> <C>
/S/ Norman Axelrod Chairman, Chief Executive March 25, 1999
- ------------------------------------------- Officer and President
Norman Axelrod

/S/ Philip E. Beekman Director March 25, 1999
- --------------------------------------------
Philip E. Beekman

/S/ Harold F. Compton Director March 25, 1999
- -------------------------------------------
Harold F. Compton

/S/ Charles C. Conaway Director March 25, 1999
- -------------------------------------------
Charles C. Conaway

/S/ Stanley P. Goldstein Director March 25, 1999
- --------------------------------------------
Stanley P. Goldstein

/S/ William T. Giles Vice President, March 25, 1999
- ----------------------------------------------- Chief Financial Officer
William T. Giles (Principal Financial Officer)
</TABLE>

<TABLE>
<CAPTION>
EXHIBIT 11
Linens 'n Things, Inc. and Subsidiaries
Computation of Net Income (Loss) Per Common Share
(in thousands, except per share data)

1998 1997 1996 1995 1994
----------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
BASIC
Weighted average number of shares outstanding...... 38,895 38,578 38,536 38,536 38,536
=========== ============ ============= ============ =============
Net income (loss) before cumulative effect of
change in accounting principle................... $38,062 $25,790 $15,039 $ (34) $17,198
Cumulative effect of change in accounting
principle.......................................... -- -- -- 178 --
----------- ------------ ------------- ------------ -------------
Net income (loss) applicable to common shares...... $38,062 $25,790 $15,039 $(212) $17,198
=========== ============ ============= ============ =============

Per share amounts
Net income (loss) before cumulative effect
of change in accounting principle.................. $ 0.98 $ 0.67 $ 0.39 $ (0.00) $ 0.45
Cumulative effect of change in accounting
principle...................................... -- -- -- 0.01 --
----------- ------------ ------------- ------------ -------------
Net income (loss) per share........................ $ 0.98 $ 0.67 $ 0.39 $ (0.01) $ 0.45
=========== ============ ============= ============ =============

DILUTED
Weighted average number of shares outstanding
and diluted common share equivalents............... 40,407 39,537 38,558 38,536 38,536
=========== ============ ============= ============ =============
Net income (loss) before cumulative effect of
change in accounting principle..................... $38,062 $25,790 $15,039 $ (34) $17,198
Cumulative effect of change in accounting
Principle........................................ -- -- -- 178 --
----------- ------------ ------------- ------------ -------------
Net income (loss) applicable to common shares...... $38,062 $25,790 $15,039 $(212) $17,198
=========== ============ ============= ============ =============

Per share amounts
Net income (loss) before cumulative effect of
change in accounting principle..................... $ 0.94 $ 0.65 $ 0.39 $ (0.00) $ 0.45
Cumulative effect of change in accounting
principle.......................................... -- -- -- 0.01 --
----------- ------------ ------------- ------------ -------------
Net income (loss) per share........................ $ 0.94 $ 0.65 $ 0.39 $ (0.01) $ 0.45
=========== ============ ============= ============ =============
</TABLE>

<TABLE>
<CAPTION>
EXHIBIT 12

Linens 'n Things, Inc. and Subsidiaries
Computation of Ratio of
Earnings to Fixed Charges
($ in thousands, except Ratio of Earnings to Fixed Charges)

1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET EARNINGS
Net income (loss).................................... $38,062 $25,790 $15,039 $ (34) $ 17,198

Income taxes......................................... 23,843 18,704 10,952 1,108 11,874

Interest expense, excluding capitalized interest..... 594 1,405 4,692 7,059 3,170

Portion of rents deemed representative
of interest factor (1/3).......................... 27,819 23,271 17,774 12,946 9,504
------- ------- ------- -------- --------
$90,318 $69,170 $48,457 $ 21,079 $ 41,746
======= ======= ======= ======== ========
FIXED CHARGES
Gross interest expense............................... $ 774 $ 1,574 $ 4,692 $ 7,059 $ 3,170

Portion of rents deemed representative
of interest factor (1/3).......................... 27,819 23,271 17,774 12,946 9,504
------- ------- -------- -------- --------
$28,593 $24,845 $22,466 $ 20,005 $ 12,674
======= ======= ======== ======== ========

RATIO OF EARNINGS TO FIXED CHARGES 3.16 2.78 2.16 1.05 3.29
</TABLE>

EXHIBIT 13
Annual Report
Linens 'n Things, Inc.
1998
Five-Year Financial Summary (in thousands, except per share and selected operating data)
- ---------------------------------------------------------------------------------------------------------------------------------
1998(1) 1997(1) 1996(1) 1995(2) 1994
- ------------------------------------------------------ --------------- ------------- --------------- -------------- ---------------

<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net Sales.......................................... $1,066,194 $874,224 $696,107 $555,095 $440,118
Operating Profit................................... 61,988 45,507 30,683 8,133 32,242
Net Income (Loss).................................. 38,062 25,790 15,039 (212) 17,198
Net Income (Loss) Per Share(3)..................... $ 0.94 $ 0.65 $ 0.39 $ (0.01) $ 0.45
Weighted Average Shares Outstanding(4)............. 40,407 39,537 38,558 38,536 38,536

Balance Sheet Data:
Total Assets....................................... $ 560,844 $472,099 $423,957 $343,522 $273,167
Working Capital.................................... 154,893 123,375 113,582 69,399 42,568
Total Long-Term Debt............................... -- -- 13,500 -- --
Shareholders' Equity............................... $ 323,576 $280,035 $249,727 $ 76,678 $ 85,819

Selected Operating Data:
Number of Stores................................... 196 176 169 155 145
Total Gross Square Footage (000's)................. 6,487 5,493 4,727 3,691 2,865
Increase (Decrease) in Comparable
Store Net Sales................................. 8.3% 6.6% 1.1% (1.5%) 5.4%
</TABLE>

(1) Reflects diluted earnings per share for 1998, 1997 and 1996 in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share" ("SFAS No. 128"). Basic earnings per share for 1998,
1997 and 1996 was $0.98, $0.67 and $0.39, respectively, based on weighted
average shares outstanding of 38,895, 38,578 and 38,536, respectively.

(2) Reflects certain one-time special charges related to the CVS Strategic
Program. Operating profit in 1995, excluding the effect
of these charges, would have been $31.5 million.

(3) Unless otherwise stated, all references to common shares outstanding and
income per share in the consolidated financial statements, notes to
consolidated financial statements, and management's discussion and
analysis of financial condition and results of operations are on a
post-split basis.

(4) 1995 and prior reflect the actual shares issued upon the completion of the
Company's initial public offering on November 26,
1996 adjusted for the stock split in May 1998.
<PAGE>

Management's Discussion and Analysis of Financial Condition and Results of
Operations
- -------------------------------------------------------------------------------
The following table sets forth the percentage of net sales for certain items
included in the Company's consolidated statements of operations for the periods
indicated:

<TABLE>
<CAPTION>
December 31 1998 1997 1996
- -------------------------------- -------- -- -------- -- ---------

<S> <C> <C> <C>
Percentage of net sales
Net sales...................... 100.0% 100.0% 100.0%
Cost of sales, including
buying and warehousing costs. 60.0 60.4 61.2
-------- -------- ---------
Gross profit................... 40.0 39.6 38.8
Selling, general and
administrative expenses...... 34.2 34.4 34.4
-------- -------- ---------
Operating profit............... 5.8 5.2 4.4
Interest expense, net.......... 0.0 0.1 0.7
-------- -------- ---------
Income before income taxes..... 5.8 5.1 3.7
Provision for income taxes..... 2.2 2.1 1.5
-------- -------- ---------
Net income..................... 3.6% 3.0% 2.2%
</TABLE>

Year Ended December 31, 1998 Compared With Year Ended December 31, 1997

Net Sales

Net sales for 1998 were $1,066.2 million, an increase of 22.0% over 1997 sales
of $874.2 million, primarily as a result of new store openings and increased
comparable store net sales. The Company opened 32 superstores and closed 12
stores in 1998, as compared with opening 25 superstores and closing 18 stores in
1997. At December 31, 1998, the Company operated 196 stores, of which 183 were
superstores, as compared with 176 stores, of which 153 were superstores at
December 31, 1997. Comparable store net sales increased 8.3% in 1998 compared
with 6.6% in 1997. Comparable store net sales were driven not only by higher
consumer traffic, but by an increase in average transaction, which reflects the
increased focus the Company has placed on providing better guest service as well
as the continued expansion of "things" merchandise. In addition, the Company had
a strong holiday selling season during the fourth quarter when the Company
reported a comparable store net sales increase of 8.0%, compared with 7.3% for
the same period last year.

The Company's average net sales per store increased to $5.9 million in 1998 up
from $5.2 million in 1997. This increase was due to strong comparable store net
sales increases and the continued closing of lower volume traditional stores.
For the year ended December 31, 1998, net sales of "linens" merchandise
increased approximately 20% over the prior year, while net sales of "things"
merchandise increased approximately 30% for the same period. The greater
increase in net sales for "things" merchandise primarily resulted from the
continued expansion of product categories within the "things" business.

Gross Profit

Gross profit for 1998 was $427.1 million, or 40.0% of net sales, as compared
with $346.3 million, or 39.6% of net sales, in 1997. This increase as a
percentage of net sales resulted from improved selling mix, increased import
volume, improvements in buying and lower freight costs from the leveraging of
the Company's logistics network.
<PAGE>

Expenses

Selling, general and administrative expenses ("S,G&A") for 1998 were $365.1
million, or 34.2% of net sales, as compared with $300.8 million, or 34.4% of net
sales, in 1997. S,G&A expenses were leveraged as a result of an 8.3% comparable
store net sales increase, which was offset in part by increased store openings
as well as an investment in store payroll in order to provide better guest
service.

Operating profit for 1998 increased to $62.0 million, or 5.8% of net sales, up
from $45.5 million, or 5.2% of net sales, during 1997.

Net interest expense in 1998 decreased to $83,000 from $1.0 million, or 0.1% of
net sales, during 1997. This decrease was due to improved earnings and working
capital management as well as payment of the CVS Note in 1997.

The Company's income tax expense for 1998 was $23.8 million, as compared with
$18.7 million during 1997. Through planning initiatives implemented in 1998, the
Company's effective tax rate was reduced to 38.5% from 42.0% in 1997.

Net Income

Net income for 1998 was $38.1 million, or 3.6% of net sales as compared with
$25.8 million, or 3.0% of net sales in 1997.

Year Ended December 31, 1997 Compared With Year Ended December 31, 1996

Net Sales

Net sales for 1997 were $874.2 million, an increase of 25.6% over 1996 sales of
$696.1 million, primarily as a result of new store openings and increased
comparable store net sales. The Company opened 25 superstores and closed 18
stores in 1997, as compared with opening 36 superstores and closing 22 stores in
1996. At December 31, 1997, the Company operated 176 stores, of which 153 were
superstores, as compared with 169 stores, of which 132 were superstores at
December 31, 1996. Comparable store net sales increased 6.6% in 1997 compared
with 1.1% in 1996. Comparable store net sales were driven not only by higher
consumer traffic, but by an increase in average transaction, which reflects the
increased focus placed on providing better guest service as well as the
continued expansion of "things" merchandise. In addition, the Company had a
strong holiday selling season during the fourth quarter, having reported a
comparable store net sales increase of 7.3%.

The Company's average net sales per store increased to $5.2 million in 1997 from
$4.5 million in 1996. This increase was due to strong comparable store net sales
increases and the continued closing of the lower volume traditional stores. For
the year ended December 31, 1997, net sales of "linens" merchandise increased
approximately 20% over the prior year, while net sales of "things" merchandise
increased approximately 38% for the same period. The greater increase in net
sales for "things" merchandise primarily resulted from the continued expansion
of product categories within the "things" business.
<PAGE>

Gross Profit

Gross profit for 1997 was $346.3 million, or 39.6% of net sales, as compared
with $269.9 million, or 38.8% of net sales, in 1996. This increase as a
percentage of net sales resulted from improvements in buying, improved selling
mix and lower freight costs from the leveraging of the Company's logistics
network.

Expenses

Selling, general and administrative expenses for 1997 were $300.8 million, or
34.4% of net sales, as compared with $239.2 million, or 34.4% of net sales, in
1996.

As a result of the factors described above, operating profit for 1997 increased
to $45.5 million, or 5.2% of net sales, from $30.7 million, or 4.4% of net
sales, during 1996.

Net interest expense in 1997 decreased 78.4% to $1.0 million, or 0.1% of net
sales, from $4.7 million, or 0.7% of net sales, during 1996. This decrease was
due primarily to an increase in cash flow from operations in 1997, as well as
$158.0 million in capital contributions from CVS in 1996. These contributions
were used to repay the Company's intercompany debt to CVS prior to the initial
public offering ("IPO") in 1996.

The Company's income tax expense for 1997 was $18.7 million, as compared with
$11.0 million during 1996. The Company's effective tax rate in 1997 was 42.0%,
as compared with 42.1% in 1996.

Net Income

As a result of the factors described above, net income for 1997 was $25.8
million, or 3.0% of net sales, as compared with $15.0 million, or 2.2% of net
sales in 1996.

Liquidity and Capital Resources

The Company's capital requirements are primarily for investments in new stores,
new store inventory purchases and seasonal working capital, as well as the
second distribution center which is currently planned to open mid-1999. These
requirements are funded through a combination of internally generated cash from
operations, credit extended by suppliers and short-term borrowings.

The Company has available a three-year, $90 million senior revolving credit
facility agreement (the "Credit Agreement") with third party institutional
lenders expiring March 31, 2001. The amount of borrowings can be increased up to
$125 million provided certain terms and conditions contained in the Credit
Agreement are met. The Credit Agreement contains certain financial covenants,
including those relating to the maintenance of a minimum tangible net worth, a
minimum fixed charge coverage ratio, and a maximum leverage ratio, as defined in
the Credit Agreement. As of December 31, 1998, the Company was in compliance
with the terms of the Credit Agreement. The Credit Agreement also allows for up
to $25 million in borrowings from uncommitted lines of credit outside of the
Credit Agreement. As of December 31, 1998, the Company had no borrowings under
the Credit Agreement or against the uncommitted lines of credit. Management
currently believes that the Company's cash flows from operations, the revolving
credit facility and the uncommitted lines of credit will be sufficient to fund
anticipated capital expenditures and working capital requirements in the
foreseeable future.
<PAGE>

Net cash provided by operating activities for the year ended December 31, 1998
was $27.7 million as compared with $75.2 million for the same period in 1997.
This change was primarily a result of an increase in inventory levels over the
prior year. The increase in inventory reflects the impact of new store openings,
as well as the Company's decision to maintain and improve its in-stock position,
which is consistent with the Company's focus to improve guest service. The
increase in inventory was also in response to the strong comparable store net
sales increase during 1998. In addition, the Company reported a smaller change
in accounts payable than the prior year due to the timing of vendor payments.

Net cash used in investing activities for the year ended December 31, 1998 was
$46.3 million, as compared with $35.4 million for the same period in 1997. This
was a result of an increase in new store openings in 1998.

Net cash provided by financing activities for the year ended December 31, 1998
was $21.3 million compared with net cash used in financing activities of $26.8
million for the same period in 1997. Net cash provided by financing activities
in 1998 was primarily attributable to the timing of the settlement of vendor
payments, as well as proceeds from common stock exercised during the year under
stock incentive plans. Net cash used in financing activities in 1997 was
primarily attributable to the timing of the settlement of vendor payments as
well as the prepayment of the $10.0 million obligation on the CVS Note.

The Year 2000 Issue

The Company has conducted a comprehensive review of its computer systems to
identify material systems that could be affected by the "Year 2000" issue and
has developed an implementation plan intended to address this issue.

The Company has adopted a five-phase Year 2000 program, the principal components
of which are:

Phase I: Identification and ranking of those internal Company systems,
technology and equipment considered critical or substantially
important to the flow of its operations; and communication with
significant suppliers and vendors to the Company concerning their
Year 2000 readiness

Phase II: Assessment of items identified in Phase I

Phase III: Remediation or replacement of non-compliant identified internal
systems and components and determination of solutions for
non-compliant suppliers and vendors

Phase IV: Testing of systems and components

Phase V: Developing contingency plans to address the most reasonably likely
worst case scenarios with respect to Year 2000

The identification and assessment phases of the Year 2000 program with respect
to the Company's systems and equipment have been substantially completed for the
Company's mission critical and other major information technology systems and
hardware ("IT Systems") and for the Company's non-information technology
equipment known to the Company to have microchips or other embedded technology
and considered critical or substantially important to the flow of its operations
("non-IT Company Equipment"). The Company has also substantially completed

<PAGE>

the remediation phase for its IT Systems and its non-IT Company Equipment and
substantially completed testing for its mission critical IT Systems. The Company
currently expects to complete the testing phase for its IT Systems and non-IT
Company Equipment including installation and testing of Year 2000 versions, by
approximately the end of the second quarter of 1999. The Company will continue
periodic testing during fiscal 1999 for new installations, versions or changes.
Virtually all the compliance has been performed and is currently expected to be
performed using internal resources.

In addition to Year 2000 implementation for the Company's internal systems and
equipment, the Company is communicating with significant suppliers, vendors and
other third parties with whom the Company has a business relationship in order
to endeavor to determine their state of readiness with respect to Year 2000.
Assessment of significant third party Year 2000 readiness is expected to be
substantially completed in mid-1999. Failure of significant suppliers, vendors
or other third parties to timely address and remedy Year 2000 problems or to
develop and effect appropriate contingency plans could have a material adverse
effect on the Company's business and operations. The Company believes that the
geographically disbursed nature of its business and its large supplier and
vendor base should minimize such potential adverse effects.

The Company presently believes that with modifications to existing software and
conversions to new software for certain applications, the Year 2000 problem will
not cause a significant disruption of its operations. However, the Year 2000
problem is unique and the Company's Year 2000 compliance program is based on
various assumptions and expectations that cannot be assured. Potential risks
include loss of electric power or certain communication links, failure of
suppliers or vendors (or of entities which supply products, services or
materials to them) to be Year 2000 ready, other disruptions to its business such
as delayed deliveries from suppliers, as well as disruptions to the distribution
channels, including ports, transportation services and the Company's own
distribution center. The Company is in the process of developing a contingency
plan, which is expected to be completed by approximately the third quarter of
1999 and will be based on its continuing assessment of potential risks.

The Company does not expect the costs associated with addressing Year 2000
issues (including internal personnel costs) to be material to the Company's
financial condition or results of operations. Costs incurred to date have been
expensed and were budgeted costs funded through operating cash flows. The costs
associated with the completion of Year 2000 will be expensed as incurred and are
not currently expected to have a material adverse impact on the Company's
financial position or results of operations. The Company's cost estimates do not
include costs associated with addressing and resolving issues as a result of the
failure of third parties to be Year 2000 compliant.

Inflation and Seasonality

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.

<PAGE>

meaningful and the results for any quarter are not necessarily indicative of
future results.

Forward-Looking Statements

This Annual Report to Shareholders contains forward-looking statements within
the meaning of The Private Securities Litigation Reform Act of 1995. The
statements are made a number of times throughout the document and may be
identified by forward-looking terminology as "expect," "believe," "may," "will,"
"intend" or similar statements or variations of such terms. Such forward-looking
statements involve certain risks and uncertainties including levels of sales,
store traffic, acceptance of product offerings and fashions, competitive
pressures from other home furnishings retailers, availability of suitable future
store locations, schedule of store expansion plans and Year 2000 readiness
issues relating to the Company's internal systems and those of third parties.
These and other important factors that may cause actual results to differ
materially from such forward-looking statements are included in the "Risk
Factors" section of the Company's Registration Statement on Form S-1 as filed
with the Securities and Exchange Commission on May 29, 1997, and may be
contained in subsequent reports filed with the Securities and Exchange
Commission. You are urged to consider such factors. The Company assumes no
obligation for updating any such forward-looking statements.
<PAGE>

Consolidated Statements of Operations (in thousands, except per share amounts)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31 1998 1997 1996
- ---------------------------------------------------------- --------------- -------------- -------------

<S> <C> <C> <C>
Net sales................................................. $1,066,194 $874,224 $696,107
Cost of sales, including buying and
warehousing costs...................................... 639,138 527,924 426,196
--------------- -------------- -------------

Gross profit.............................................. 427,056 346,300 269,911
Selling, general and administrative expenses.............. 365,068 300,793 239,228
--------------- -------------- -------------

Operating profit.......................................... 61,988 45,507 30,683
Interest expense, net..................................... 83 1,013 4,692
--------------- -------------- -------------
Income before income taxes................................ 61,905 44,494 25,991
Provision for income taxes................................ 23,843 18,704 10,952
--------------- -------------- -------------

Net income................................................ $ 38,062 $ 25,790 $ 15,039
=============== ============== =============

Per share of common stock:

Basic
- -----
Net income................................................ $ 0.98 $ 0.67 $ 0.39
--------------- -------------- -------------

Weighted average shares outstanding....................... 38,895 38,578 38,536

Diluted
- -------
Net income................................................ $ 0.94 $ 0.65 $ 0.39
--------------- -------------- -------------

Weighted average shares outstanding....................... 40,407 39,537 38,558
</TABLE>

See accompanying notes to consolidated financial statements.
<PAGE>

Consolidated Balance Sheets (in thousands, except share amounts)
- ------------------------------------------------------------------------

<TABLE>
<CAPTION>
December 31 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................................ $ 42,638 $ 39,882
Accounts receivable, net................................................. 22,814 13,764
Inventories.............................................................. 271,389 223,188
Prepaid expenses and other current assets................................ 18,567 13,058
--------------- ----------------
Total current assets....................................................... 355,408 289,892
Property and equipment, net.............................................. 179,439 154,480
Goodwill, net of accumulated amortization of $6,514
in 1998 and $5,664 in 1997............................................ 20,676 21,526
Deferred charges and other noncurrent assets, net........................ 5,321 6,201
--------------- ----------------
Total assets................................................................... $560,844 $472,099
=============== ================

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable......................................................... $115,754 $ 98,418
Accrued expenses and other current liabilities........................... 84,761 68,099
--------------- ----------------
Total current liabilities.................................................. 200,515 166,517
Deferred income taxes and other long-term liabilities.................... 36,753 25,547

Shareholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized;
none issued and outstanding........................................... -- --
Common stock, $0.01 par value; 60,000,000 shares authorized;
39,091,281 issued and 39,037,948 outstanding at December 31, 1998
and 38,633,840 shares issued and outstanding at December 31, 1997..... 391 386
Additional paid-in capital............................................... 211,378 204,514
Retained earnings........................................................ 113,197 75,135
Treasury stock, at cost, 53,333 shares at December 31, 1998.............. (1,390) --
--------------- ----------------
Total shareholders' equity................................................. 323,576 280,035
--------------- ----------------

Total liabilities and shareholders' equity..................................... $560,844 $472,099
=============== ================

- ------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.
<PAGE>

Consolidated Statements of Shareholders' Equity
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional
------------ Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
- ---------------------------------------------- ------------- ----------- ------------ ----------- ----------- -----------
(in thousands, except number of shares)

<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995................. 200 $ -- $ 42,372 $ 34,306 $ -- $ 76,678
Net income................................... -- -- -- 15,039 -- 15,039

Capital contributions by CVS, net
of assets and liabilities transferred..... -- -- 158,010 -- -- 158,010
Conversion of common stock................... 38,535,316 386 (386) -- -- --
------------- ----------- ------------ ----------- ----------- -----------
Balance at December 31, 1996................. 38,535,516 386 199,996 49,345 -- 249,727
Net income................................... -- -- -- 25,790 -- 25,790
Common stock exercised under stock
incentive plans........................... 98,324 -- 1,018 -- -- 1,018
Capital contribution by CVS.................. -- -- 3,500 -- -- 3,500
------------- ----------- ------------ ----------- ----------- -----------
Balance at December 31, 1997................. 38,633,840 386 204,514 75,135 -- 280,035
Net income................................... -- -- -- 38,062 -- 38,062
Common stock exercised under stock
incentive plans........................... 457,441 5 6,864 -- -- 6,869
Purchase of treasury stock................... (53,333) -- -- -- (1,390) (1,390)
------------- ----------- ------------ ----------- ----------- -----------
Balance at December 31, 1998................. 39,037,948 $ 391 $211,378 $113,197 $(1,390) $323,576
============= =========== ============ =========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.
<PAGE>

Consolidated Statements of Cash Flows (in thousands)
- ----------------------------------------------------------------
<TABLE>
<CAPTION>

Years ended December 31 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 38,062 $ 25,790 $ 15,039
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization..................... 21,308 17,978 14,569
Deferred income taxes............................. 2,502 2,677 4,342
Loss on disposal of assets........................ 1,560 2,912 2,400
Changes in assets and liabilities:
(Increase) decrease in accounts receivable...... (9,050) 3,620 (3,429)
Increase in inventories......................... (48,201) (21,054) (25,241)
Increase in prepaid expenses and other
current assets.............................. (4,814) (690) (957)
Decrease (increase) in deferred charges
and other noncurrent assets.................. 175 (577) (329)
Increase in accounts payable.................... 472 23,424 9
Increase in accrued expenses and other
liabilities.................................. 25,671 21,078 13,836
-------------- ------------- -------------
Net cash provided by operating activities........... 27,685 75,158 20,239
-------------- ------------- -------------

Cash flows from investing activities:
Additions to property and equipment................. (46,272) (35,355) (46,429)
-------------- ------------- -------------

Cash flows from financing activities:
Proceeds from common stock exercised under
stock incentive plans............................. 6,869 1,018 --
Purchase of treasury stock.......................... (1,390) -- --
(Repayment) issuance of long-term note.............. -- (10,000) 13,500
Increase (decrease) in book overdrafts.............. 15,864 (17,853) (3,976)
Capital contributions by CVS........................ -- -- 158,010
Decrease in due to related parties.................. -- -- (118,652)
-------------- ------------- -------------
Net cash provided by (used in) financing
activities.......................................... 21,343 (26,835) 48,882
-------------- ------------- -------------

Net increase in cash and cash equivalents........... 2,756 12,968 22,692
Cash and cash equivalents at beginning of year...... 39,882 26,914 4,222
-------------- ------------- -------------
Cash and cash equivalents at end of year............... $ 42,638 $ 39,882 $ 26,914
-------------- ------------- -------------

Supplemental disclosure of cash flow information

Cash paid during the year for:
Interest (net of amounts capitalized)............... $ 727 $ 1,630 $ 4,957
Income taxes........................................ $ 16,756 $ 4,377 $ 6,590

- -------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.
<PAGE>

Notes to Consolidated Financial Statements
- -----------------------------------------------------------------------

1. Business

Linens 'n Things, Inc. and subsidiaries (collectively the "Company") operated
196 stores, including 183 superstores, in 38 states across the United States as
of December 31, 1998. The Company's stores emphasize a broad assortment of home
textiles, housewares and home accessories, carrying both national brand and
private label goods.

2. Initial Public Offering

The Company was a wholly-owned subsidiary of CVS Corporation ("CVS") until
November 26, 1996, when CVS completed an initial public offering ("IPO") of
13,000,000 shares of the Company's common stock (on a pre-split basis).
Subsequent to the IPO, CVS owned approximately 32.5% of the Company's common
stock. During 1997, CVS sold its remaining shares of the Company's common stock.

3. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include those of Linens 'n Things,
Inc. and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.

Accounting Changes

Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share" ("SFAS No.
128") which requires a dual presentation of earnings per share - basic and
diluted. Basic earnings per share has been computed by dividing net income
by the weighted average number of shares outstanding which were
approximately 38,895,000 in 1998, 38,578,000 in 1997 and 38,536,000 in
1996. Diluted earnings per share has been computed by dividing net income
by the weighted average number of shares outstanding including the dilutive
effects of stock options and deferred stock grants. The total shares
outstanding for the diluted earnings per share calculation were
approximately 40,407,000 in 1998, 39,537,000 in 1997 and 38,558,000 in
1996.

Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"). As permitted under SFAS No.
123, the Company elected not to adopt the fair value based method of
accounting for its stock-based compensation plans, but will account for
such compensation under the provisions of Accounting Principles Board
Opinion No. 25 ("APB No. 25"). The Company has, however, complied with the
disclosure requirements of SFAS No. 123.

Fair Value of Financial Instruments

SFAS No. 107, "Disclosures About Fair Value Of Financial Instruments,"
requires disclosure of the fair value of certain financial instruments.
Cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses are reflected in the consolidated financial statements at
carrying value which approximates fair value due to the short-term nature
of these instruments. The carrying value of the Company's borrowings
approximates the fair value based on the current rates available to the
Company for similar instruments.

Cash and Cash Equivalents

The Company's cash management program utilizes controlled disbursement
accounts. Accordingly, all book overdraft balances have been reclassified
to current liabilities. Cash equivalents are considered, in general, to be
those securities with maturities of three months or less when purchased.

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.

Property and Equipment
<PAGE>

Property and equipment are stated at cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of the assets (40 years
for building and 5 to 15 years for furniture, fixtures and equipment).
Capitalized software costs are amortized on a straight-line basis over
their estimated useful lives of 3 to 5 years, beginning in the year placed
in service. Leasehold improvements are amortized over the shorter of the
related lease term or the economic lives of the related assets. Fully
depreciated property and equipment is removed from the asset 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
adjustments to the asset and accumulated depreciation accounts of the items
renewed or replaced.

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.

Deferred Charges

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

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.

Shareholders' Equity

On April 14, 1998, the Board of Directors of the Company approved a
two-for-one split of its common stock to be effected in the form of a stock
dividend. The stock dividend was one additional share of common stock for
each outstanding share of common stock and was distributed on May 7, 1998
to shareholders of record on April 24, 1998. Unless otherwise stated, all
references to common shares outstanding and income per share in the
consolidated financial statements, notes to consolidated financial
statements, and management's discussion and analysis of financial condition
and results of operations are on a post-split basis.

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.

Advertising Costs

The Company charges production costs of advertising to expense the first
time the advertising takes place.

Income Taxes

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 bases. 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 statutory tax rates
is recognized in income in the period that includes the enactment date.

The Company and CVS have entered into a tax disaffiliation agreement. Under
the agreement, the Company is generally responsible for any of its tax with
respect to periods prior to the IPO, determined as if on a separate company
basis.

Use of Estimates in the Preparation of
Financial Statements
<PAGE>

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.

Reclassifications

Certain reclassifications were made to the 1997 consolidated financial
statements in order to conform to the 1998 presentation.

4. Accounts Receivable, Net

Accounts receivable, net, consisted of the
following at December 31 (in thousands): 1998 1997
- ---------------------------------------------------------------
Credit and charge card receivables..... $ 5,157 $ 4,299
Due from landlords and vendors......... 13,448 8,977
Other, net of allowance................ 4,209 488
---------- ----------
$22,814 $13,764
- ---------------------------------------------------------------

5. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current
assets consisted of the following at
December 31 (in thousands): 1998 1997
- ---------------------------------------------------------------
Deferred income taxes.................. $ 9,353 $ 8,658
Other.................................. 9,214 4,400
---------- ----------
$18,567 $13,058
- ---------------------------------------------------------------

6. Property and Equipment

Property and equipment consisted
of the following at December 31
(in thousands): 1998 1997
- ------------------------------------ -------------------------
Land................................ $ 430 $ 430
Building............................ 4,760 4,760
Furniture, fixtures and equipment... 172,502 139,827
Leasehold improvements.............. 59,745 53,311
Computer software................... 9,086 6,813
------------ -----------
246,523 205,141
Less accumulated depreciation
and amortization.................... 67,084 50,661
------------ -----------
$179,439 $154,480
- ---------------------------------------------------------------

7. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current
liabilities consisted of the following at
December 31 (in thousands): 1998 1997
- ---------------------------------------------------------------
Income taxes payable............. $13,754 $12,383
Other taxes payable.............. 15,512 10,987
Salaries and employee benefits... 7,794 8,148
Other............................ 47,701 36,581
---------- ----------
$84,761 $68,099
- ---------------------------------------------------------------
<PAGE>

8. Short-Term Borrowing Arrangements

The Company has available a three-year, $90 million senior revolving credit
facility agreement (the "Credit Agreement") with third party institutional
lenders expiring March 31, 2001. The amount of borrowings can be increased up to
$125 million provided certain terms and conditions contained in the Credit
Agreement are met. Interest on all borrowings is determined based upon several
alternative rates as stipulated in the Credit Agreement. The Credit Agreement
contains certain financial covenants, including those relating to the
maintenance of a minimum tangible net worth, a minimum fixed charge coverage
ratio, and a maximum leverage ratio, as defined in the Credit Agreement. As of
December 31, 1998, the Company was in compliance with the terms of the Credit
Agreement. The Credit Agreement also allows for up to $25 million in borrowings
from uncommitted lines of credit outside of the Credit Agreement. As of December
31, 1998, the Company had no borrowings under the Credit Agreement or against
the uncommitted lines of credit. The Company is not obligated under any formal
or informal compensating balance requirements.

9. Long-Term Note

In conjunction with the IPO, the Company issued a four-year, $13.5 million
subordinated note (the "Note") to CVS. The Note provided for forgiveness by CVS,
at varying amounts, based upon the proceeds from any sales by CVS of the
Company's common stock together with the market value of any common stock which
CVS continued to own at December 31, 1997. In May 1997, CVS sold shares of
Company common stock representing substantially all of its holdings as part of a
registered secondary offering. As a result of the net proceeds received by CVS,
$3.5 million of the Note was forgiven and contributed as equity by CVS. In July
1997, the Company prepaid the remaining $10.0 million to CVS utilizing cash
flows from operations. The Note contained no prepayment penalties. In 1997, the
average borrowing rate for the Note through the date of repayment was 7.2%.

10. Deferred Income Taxes and Other Long-Term
Liabilities

Deferred income taxes and other long-
term liabilities consisted of the following
at December 31 (in thousands):
1998 1997
- ------------------------------------------------------------
Deferred income taxes............ $18,566 $15,369
Other............................ 18,187 10,178
-------- ---------
$36,753 $25,547
- ------------------------------------------------------------

11. Leases

The Company has noncancelable operating leases, primarily for retail stores,
which expire through 2022. The leases generally contain renewal options for
periods ranging from 5 to 15 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 net sales. Net rental expense for all operating leases for
the years ended December 31 was as follows (in thousands):

1998 1997 1996
- -------------------------------------------------------------
Minimum rentals..... $83,881 $70,269 $53,264
Contingent rentals.. 139 116 210
--------- ---------- ---------
84,020 70,385 53,474
Less sublease rentals 563 572 151
--------- ---------- ---------
$83,457 $69,813 $53,323
- -------------------------------------------------------------
<PAGE>

At December 31, 1998, 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):

Year
- -----------------------------------------------------------
1999...................................... $ 87,461
2000...................................... 88,162
2001...................................... 88,745
2002...................................... 89,298
2003...................................... 87,578
Thereafter................................ 807,861
-------------
$1,249,105
-------------
Total future minimum sublease rentals..... $ 4,837
-------------
- -----------------------------------------------------------
In addition, as of February 3, 1999, the Company had fully executed leases for
29 stores planned to open in 1999.

12. Stock Incentive Plans

Concurrent with the IPO, the Company adopted the 1996 Incentive Compensation
Plan (the "Plan"), which provides for the granting of options, deferred stock
grants and other stock-based awards, up to a maximum of 4,624,264 shares of
common stock, to key employees. The Company also adopted the 1996 Non-Employee
Directors Stock Plan (the "Directors' Plan"), which provides for the granting of
options and stock unit grants to non-employee directors ("eligible directors"),
up to a maximum of 400,000 shares. The Company had reserved a total of
5,024,264 shares for issuance under these plans.

Stock options and grants under the Plan and the Directors' Plan are awarded at
the fair market value of the shares at the date of grant. The right to exercise
options generally commences one to five years after, and generally expires ten
years after, the grant date, provided the optionee or eligible director
continues to be employed by, or remains in service as director to, the Company.

Under the Directors' Plan, any person who becomes an eligible director currently
receives an initial option grant to purchase 6,000 shares of common stock, and,
at the date of each annual shareholders meeting thereafter, will receive an
option grant to purchase 2,000 shares and a stock unit grant for 400 shares.

As of December 31, 1998, 197,665 deferred stock grants were outstanding under
the Plan and the Directors' Plan. During 1998, 77,262 grants were released,
58,757 grants were awarded and 3,000 grants were canceled under the Plan and the
Directors' Plan.

As of December 31, 1998, 2,921,633 stock options were outstanding under the
Plan. During 1998, 839,708 options were granted, 378,611 options were exercised,
91,882 options were canceled and 702,066 options granted were exercisable at
December 31, 1998. As of December 31, 1998, 60,200 stock options were
outstanding under the Directors' Plan. During 1998, 14,000 options were granted,
no stock options were exercised or canceled and 18,550 stock options were
exercisable at December 31, 1998.

The following tables summarize information about stock option transactions for
the Plan and the Directors' Plan:

Number Weighted-
of Average
Shares Exercise Price
- ---------------------------------------------------------------

Balance at IPO Date and
December 31, 1996 2,016,660 $ 7.75
Options granted 763,382 $17.01
Options exercised 15,324 $ 7.75
Options canceled 166,100 $ 7.78
----------- ---------------
Balance at December 31, 1997 2,598,618 $10.47
----------- ---------------

Options granted 853,708 $30.31
Options exercised 378,611 $ 7.86
Options canceled 91,882 $12.56
----------- ---------------
Balance at December 31, 1998 2,981,833 $16.39
----------- ---------------

- ---------------------------------------------------------------
Options Exercisable as of:
- ---------------------------------------------------------------

<PAGE>

- ---------------------------------------------------------------
December 31, 1997 475,680 $ 7.75
December 31, 1998 720,616 $10.03
- ---------------------------------------------------------------

Options Outstanding
---------------------------------------------

Outstanding Weighted-
as of Average
Range of December 31, Remaining Weighted-Average
Exercise Price 1998 Contractual Life Exercise Price
- ----------------------------------------------------------------------------

$7.75-$ 7.99 1,423,362 7.9 years $ 7.75
$8.00-$11.99 28,850 8.2 years $10.36
$12.00-$15.99 5,200 8.6 years $14.11
$16.00-$19.99 673,213 8.9 years $17.44
$20.00-$23.99 200 9.1 years $20.23
$24.00-$27.99 65,633 5.6 years $26.10
$28.00-$31.99 780,125 9.9 years $30.65
$32.00-$35.99 5,000 9.4 years $33.72
$36.00-$39.99 250 10.0 years $39.97
------------ ------------- ---------

Total 2,981,833 8.6 years $16.39
============ ============= =========

Options Exercisable
------------------------------

Outstanding
as of Weighted-
Range of December 31, Average
Exercise Price 1998 Exercise Price
- ---------------------------------------------------

$7.75-$ 7.99 545,932 $ 7.75
$8.00-$11.99 6,650 $10.32
$12.00-$15.99 1,300 $14.11
$16.00-$19.99 166,734 $17.44
---------- ---------
Total 720,616 $10.03
========== =========

The fair value of each stock option grant is estimated on the date of grant
using the Black-Scholes option-pricing model using the following assumptions for
grants:

December 31 1998 1997 1996
- -------------------------------------------------------------------
Expected life (years).......... 4.5 5.0 5.0
Expected volatility............ 45.0% 45.0% 45.0%
Risk-free interest rate........ 4.7% 5.7% 6.0%
Expected dividend yield........ 0.0% 0.0% 0.0%

The Company applies APB No. 25 and related interpretations in accounting for its
stock-based compensation plans. Accordingly, no compensation cost has been
recognized in connection with these plans in the accompanying consolidated
financial statements. Set forth below are the Company's net income and net
income per share presented "as reported" and as if compensation cost had been
recognized in accordance with the provisions of SFAS No. 123:
<PAGE>

(in millions, except per share data) 1998 1997 1996
- ------------------------------------------------------------------
Net income:
As reported....................... $38.1 $25.8 $15.0
Pro forma......................... $36.2 $24.9 $14.9

Net income per share of common stock:
Basic:
As reported....................... $0.98 $0.67 $0.39
Pro forma......................... $0.93 $0.65 $0.39
Diluted:
As reported....................... $0.94 $0.65 $0.39
Pro forma......................... $0.89 $0.63 $0.39

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

The effects of applying SFAS No. 123 in this pro forma disclosure are not
necessarily indicative of future amounts.

13. Employee Benefit Plans

On December 1, 1996, the Company adopted a 401(k) savings plan. All employees
become eligible upon completion of twelve months of service within which 1,000
hours are worked, provided the employee is at least 21 years of age.
Participants may contribute between 2% and 15% of annual earnings, subject to
statutory limitations. Company contributions for the matching component amounted
to approximately $1.7 million, $1.2 million and $0.3 million for the years ended
December 31, 1998, 1997 and 1996, respectively.

14. 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):

1998 1997
- -------------------------------------------------------------
Deferred tax assets:
Employee benefits.......... $5,178 $5,346
Inventories................ 5,222 4,920
Other...................... 1,989 1,767
--------- ----------
Total deferred tax assets....... 12,389 12,033

Deferred tax liabilities:
Property and equipment..... 21,602 18,744
--------- ----------
Net deferred tax liability...... $9,213 $6,711

Based on the Company's historical and current pretax earnings, management
believes it is more likely than not that the Company will realize the deferred
tax assets.

The provision for income taxes comprised the following for the years ended:

December 31 (in thousands): 1998 1997 1996
- ----------------------------------------------------------------
Current:
Federal.......... $19,032 $12,102 $3,030
State............ 2,399 3,472 1,106
--------- ---------- ---------
21,431 15,574 4,136
--------- ---------- ---------
Deferred:
Federal.......... 2,148 2,416 5,484
State............ 264 714 1,332
--------- ---------- ---------
2,412 3,130 6,816
--------- ---------- ---------
Total $23,843 $18,704 $10,952

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

The following is a reconciliation between the statutory Federal income tax rate
and the effective rate for the years ended:
<PAGE>

December 31 1998 1997 1996
-------------------------------------------------------------
Effective tax rate......... 38.5% 42.0% 42.1%
State income taxes, net of
Federal benefit.......... (2.8) (6.1) (6.1)
Goodwill................... (0.5) (0.7) (1.1)
Other...................... (0.2) (0.2) 0.1
-------- ---------- ----------
Statutory Federal income
tax rate................. 35.0% 35.0% 35.0%

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

15. Related Party Transactions

Prior to the IPO, CVS provided financing and cash management for the Company,
allocated certain costs to the Company for services provided, and charged the
Company for costs related to participation in certain employee benefit programs.
Such charges terminated upon the completion of the IPO and have been replaced by
costs of the Company's own programs. If the Company had operated on a
stand-alone basis for the year ended December 31, 1996, it would have incurred a
net increase in expense of an estimated $755,000 pretax. The following is a
summary of the amounts charged or allocated to the Company:

Administrative Costs

CVS 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 for the year ended December 31, 1996 was approximately $0.9
million.

In addition, CVS guarantees the leases of certain stores operated by the
Company, and prior to the IPO, charged a fee for that service which
amounted to approximately $0.3 million for the year ended December 31,
1996.

Borrowings

The weighted average interest rate on borrowings from CVS and other
subsidiary divisions for the year ended December 31, 1996 was 6.2%. The
related interest expense recognized by the Company on such borrowings was
$4.6 million.

Employee Stock Ownership Plan

The Company's employees participated in CVS' Employee Stock Ownership Plan
("ESOP"). The ESOP was a defined contribution plan for all employees
meeting certain eligibility requirements.

CVS charged compensation expense to the Company based upon total payments
due to the ESOP. The charge allocated to the Company was based on the
Company's proportionate share of qualifying compensation expense and did
not reflect the manner in which CVS funded these costs or the related tax
benefits realized by CVS. As a result of the Company's allocation from CVS,
compensation expense of approximately $1.5 million was recognized for the
year ended December 31, 1996.

These costs, with the exception of interest expense, are included in selling,
general and administrative expenses in the Consolidated Statements of
Operations.

16. Commitments and Contingencies

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.
<PAGE>

17. Summary of Quarterly Results (unaudited)

(in thousands,
except per First Second Third Fourth
share data) Quarter Quarter Quarter Quarter Year
- --------------------------------------------------------------------
Net sales
1998 .......... $218,037 $222,094 $278,642 $347,421 $1,066,194
1997 .......... 179,911 185,723 225,239 283,351 874,224

Gross profit
1998 .......... 83,330 88,876 111,192 143,658 427,056
1997 .......... 68,315 72,519 89,246 116,220 346,300

Net income
1998 .......... 1,475 2,826 11,018 22,743 38,062
1997 .......... 352 990 7,532 16,916 25,790

Net income per
share
Basic(1)
- --------
1998 .......... $0.04 $0.07 $0.28 $0.58 $0.98
1997 .......... 0.01 0.03 0.20 0.44 0.67

Diluted(1)
- ----------
1998 .......... $0.04 $0.07 $0.27 $0.56 $0.94
1997 .......... 0.01 0.03 0.19 0.42 0.65

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

(1) Net Income per share amounts for each quarter are required to be computed
independently and may not equal the amount computed for the total year

18. Market Information

The Company's common stock is listed on the New York Stock Exchange. Its trading
symbol is LIN. The Company has not paid a dividend on its common stock. The high
and low trading price of the Company's common stock for each quarter of 1998 and
1997 is as follows:

For the Year Ended December 31, 1998 High Low
- ------------------------------------ ---- ---
First Quarter............................ $28 1/2 $19 1/2
Second Quarter....................... 34 11/16 27 1/16
Third Quarter............................ 35 7/8 23
Fourth Quarter........................... 40 5/8 16 5/8

For the Year Ended December 31, 1997 High Low
- ------------------------------------ ---- ---
First Quarter............................ $13 $ 8 3/4
Second Quarter........................... 14 5/8 9 1/8
Third Quarter............................ 18 1/8 13
Fourth Quarter........................... 22 1/4 15 5/16

At December 31, 1998, there were approximately 7,850 beneficial shareholders.
<PAGE>

Management's Responsibility for Financial Reporting
- -------------------------------------------------------

The integrity and objectivity of the financial statements and related financial
information in this report are the responsibility of the management of the
Company. The financial statements have been prepared in conformity with
generally accepted accounting principles and include, when necessary, the best
estimates and judgments of management.

The Company maintains a system of internal accounting controls designed to
provide reasonable assurance, at appropriate cost, that assets are safeguarded,
transactions are executed in accordance with management's authorization, and the
accounting records provide a reasonable basis for the preparation of the
financial statements. The system of internal accounting controls is continually
reviewed by management and improved and modified as necessary in response to
changing business conditions and recommendations of the Company's independent
auditors.

The Audit Committee of the Board of Directors, currently consisting solely of
outside non-management directors, will meet periodically with management and the
independent auditors to review matters relating to the Company's financial
reporting, the adequacy of internal accounting controls and the scope and
results of audit work. The independent auditors have free access to the Audit
Committee.

KPMG LLP, certified public accountants, are engaged to audit the consolidated
financial statements of the Company. Their Independent Auditors' Report, which
is based on an audit made in conformity with generally accepted auditing
standards, expresses an opinion as to the fair presentation of these financial
statements.

/s/ Norman Axelrod

Norman Axelrod
Chairman, Chief Executive Officer and President

/s/ William T. Giles

William T. Giles
Vice President, Chief Financial Officer

February 3, 1999
<PAGE>

Independent Auditors' Report
- -------------------------------------------------------

To the Board of Directors and Shareholders
Linens 'n Things, Inc.

We have audited the accompanying consolidated balance sheets of Linens 'n
Things, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles.

/s/ KPMG LLP

KPMG LLP

New York, New York
February 3, 1999

EXHIBIT 23a

Consent of Independent Auditors

The Board of Directors and Shareholders
Linens 'n Things, Inc.:

We consent to incorporation by reference in the Registration Statements Numbers
333-71903, 333-55803, 333-26827 and 333-26819 on Form S-8 of Linens 'n Things,
Inc. and Subsidiaries of our report dated February 3, 1999, relating to the
consolidated balance sheets of Linens 'n Things, Inc. and Subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1998, which report appears in the December
31, 1998 Annual Report on Form 10-K of Linens 'n Things, Inc.

/S/ KPMG LLP

KPMG LLP

New York, New York
March 25, 1999

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 42,638
<SECURITIES> 0
<RECEIVABLES> 22,814
<ALLOWANCES> 0
<INVENTORY> 271,389
<CURRENT-ASSETS> 355,408
<PP&E> 246,523
<DEPRECIATION> 67,084
<TOTAL-ASSETS> 560,844
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<BONDS> 0
0
0
<COMMON> 391
<OTHER-SE> 323,185
<TOTAL-LIABILITY-AND-EQUITY> 560,844
<SALES> 1,066,194
<TOTAL-REVENUES> 1,066,194
<CGS> 639,138
<TOTAL-COSTS> 365,068
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 83
<INCOME-PRETAX> 61,905
<INCOME-TAX> 23,843
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<EXTRAORDINARY> 0
<CHANGES> 0
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</TABLE>