**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-K**

 

**(MarkOne)**

| **x**                                                 | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|-------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| ** **                                            | ** ** | ** **                                                                                              |
| **For the Fiscal Year Ended  December 29, 2007** |
| ** **                                            | ** ** | ** **                                                                                              |
| **Or**                                                |
| ** **                                            | ** ** | ** **                                                                                              |
| **o**                                                 | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

| **Commission  file numbers:** | ** ** | **333-135646-12** |
|-------------------------------|------------|-------------------|
|                          |       | **001-12381**     |
|                          |       | **333-135646-11** |

** **

**LINENSHOLDING CO.**

**LINENS**’**N THINGS, INC.**

**LINENS**’**N THINGS CENTER, INC.**

(Exact names of registrants as specified intheir charters)

 

| **Delaware**

**Delaware**

**California**                        | ** ** | **20-4192917**

**22-3463939**

**59-2740308** |
|-------------------------------------------------------------------|------------|------------------------------------------------|
| (States or other jurisdictions of  incorporation or organization) | * *   | (I.R.S.  Employer  Identification Nos.)        |

 

**6Brighton Road, Clifton, New Jersey  07015**

(Address of principal executive offices) (ZipCode)

 

**(973) 778-1300**

(Registrants’ telephone number, including areacode)

 

Securities registered pursuant to Section 12(b) or12(g) of the Act:

**None**

** **

Indicateby check mark if the registrants are well-known seasoned issuers, as defined inRule 405 of the Securities Act:

Yes   o      No   x

 

Indicateby check mark if the registrants are not required to file reports pursuant to Section 13or 15(d) of the Act:

Yes   o      No   x

 

Indicateby check mark whether the registrants (1) have filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrants were required to file such reports), and (2) have been subjectto such filing requirements for the past 90 days:

Yes   x      No   o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrants’ knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K:    x

 

Indicateby check mark whether the registrants are large accelerated filers, acceleratedfilers, or non-accelerated filers.  Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):

| Large  Accelerated Filers o |   | Accelerated  Filers o |   | Non-accelerated  Filers x                  |   | Smaller  reporting company o |
|----------------------------------|--------|----------------------------|--------|-------------------------------------------------|--------|-----------------------------------|
|                             |   |                       |   | (Do not check if  a  smaller reporting company) |   |                              |

 

Indicate by check markwhether the registrants are shell companies (as defined in Rule 12b-2 ofthe Exchange Act):

Yes   o      No   x

 

As of March 1,2008, there were 13,013,000 shares of Linens Holding Co. common stock,$0.01 par value, outstanding; 1,000 shares of Linens ’n Things, Inc.common stock, $0.01 par value, outstanding; and 100 shares of Linens ’n ThingsCenter, Inc. common stock, no par value, outstanding.  None is publicly traded.

 

**DOCUMENTS INCORPORATED BYREFERENCE**

None

 

 

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**Table of Contents**

 
| **Form 10-K** | ** **                                                                                                          | ** **       | ** ** |
|--------------------|---------------------------------------------------------------------------------------------------------------------|------------------|------------|
| **Item No.**       | ** **                                                                                                          | **Name of Item** | ** ** | **Page** |
| ** **         | ** **                                                                                                          | ** **       |
| ** **         | **PART I**                                                                                                     | ** **       |
|               |                                                                                                                |             |
| Item 1.            | Business                                                                                                            | 4                |
| Item 1A.           | Risk Factors                                                                                                        | 13               |
| Item 1B.           | Unresolved  Staff Comments                                                                                          | 22               |
| Item 2.            | Properties                                                                                                          | 23               |
| Item 3.            | Legal Proceedings                                                                                                   | 25               |
| Item 4.            | Submission  of Matters to a Vote of Security Holders                                                                | 25               |
| ** **         | ** **                                                                                                          | ** **       |
| ** **         | **PART II**                                                                                                    | ** **       |
| ** **         | ** **                                                                                                          | ** **       |
| Item 5.            | Market for  Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 26               |
| Item 6.            | Selected Financial  Data                                                                                            | 27               |
| Item 7.            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 32               |
| Item 7A.           | Quantitative  and Qualitative Disclosures about Market Risk                                                         | 52               |
| Item 8.            | Financial  Statements and Supplementary Data                                                                        | 54               |
| Item 9.            | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                               | 106              |
| Item 9A.           | Controls and Procedures                                                                                             | 106              |
| Item 9B.           | Other Information                                                                                                   | 106              |
| ** **         | ** **                                                                                                          | ** **       |
| ** **         | **PART III**                                                                                                   | ** **       |
| ** **         | ** **                                                                                                          | ** **       |
| Item 10.           | Directors,  Executive Officers and Corporate Governance                                                             | 107              |
| Item 11.           | Executive  Compensation                                                                                             | 111              |
| Item 12.           | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    | 124              |
| Item 13.           | Certain  Relationships and Related Transactions, and Director Independence                                          | 125              |
| Item 14.           | Principal  Accountant Fees and Services                                                                             | 127              |
| ** **         | ** **                                                                                                          | ** **       |
| ** **         | **PART IV**                                                                                                    | ** **       |
| ** **         | ** **                                                                                                          | ** **       |
| Item 15.           | Exhibits,  Financial Statement Schedules                                                                            | 128              |
|               | Signatures                                                                                                          | 132              |

 

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**EXPLANATORY NOTE**

 

In November 2005, Affiliatesof Apollo Management, L.P., National Realty & Development Corp. andSilver Point Capital Fund Investments LLC (collectively, the “Sponsors”) formedLinens Holding Co. (the “Company”) to serve as a holding company.  On February 14, 2006, the Companyacquired Linens ’n Things, Inc. when its newly formed subsidiary, LinensMerger Sub Co., merged with and into Linens ’n Things, Inc.(the “Merger”), and Linens ’n Things, Inc., as the surviving corporation,became a wholly owned subsidiary of the Company.  The Merger was financed in part by theissuance of $650.0 million aggregate principal amount of Senior SecuredFloating Rate Notes (the “Notes”) due 2014 of Linens ’n Things, Inc. andLinens ’n Things Center, Inc., a wholly owned subsidiary of Linens ’nThings, Inc.  The Notes areguaranteed by the Company and each of its domestic subsidiaries (other thanLinens ’n Things, Inc. and Linens ’n Things Center, Inc.).  This report also contains the consolidatedfinancial statements of the Company’s predecessor entity, Linens ’n Things, Inc.and its subsidiaries, for the period January 1, 2006 to February 13,2006 and for the fiscal year ended December 31, 2005.  The accompanying consolidated financialstatements are those of Linens Holding Co. and its subsidiaries.  The Company has not presented separatefinancial statements for Linens ’n Things, Inc. and its subsidiaries orLinens ’n Things Center, Inc. and its subsidiaries (collectively, the “Issuers”as described in Note 18 to the consolidated financial statements) becausemanagement has determined that the differences in such financial statements areminor.  Unless the context requiresotherwise, “we,” “us,” “our” or the “Company” refer to Linens Holding Co. andits subsidiaries and, for periods prior to February 14, 2006, the Company’spredecessor entity and its subsidiaries.

 

**FORWARD-LOOKING STATEMENTS**

 

Thisreport may contain forward looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995 (Section 27A of the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934) withrespect to the Company’s financial condition, results of operations andbusiness that is not historical information. All statements, other than statements of historical fact, included inthis report are forward looking statements. In particular, statements that the Company makes relating to its overallvolume trends, industry forces, margin trends, anticipated capital expendituresand its strategies are forward looking statements.  When used in this document, the words “believe,”“expect,” “anticipate,” “intend,” “estimate,” “project,” “plan,” and similarexpressions, as well as future or conditional verbs such as “will,” “should,” “would”and “could,” are intended to identify forward looking statements.

 

Thesestatements are based on assumptions and assessments made by the Company’smanagement in light of its experience and its perception of historical trends,current conditions, expected future developments and other factors it believesto be appropriate.  The Company believesthere is a reasonable basis for its expectations and beliefs, but they areinherently uncertain, the Company may not realize its expectations and itsbeliefs may not prove correct.  Anyforward looking statements are not guarantees of the Company’s futureperformance and are subject to risks and uncertainties that could cause actualresults, developments and business decisions to differ materially from thosedescribed or implied by any such forward-looking statements.  The Company undertakes no obligation topublicly update or revise any forward-looking statement, whether as a result ofnew information, future events or otherwise. Such factors include, withoutlimitation: general economic conditions; changes in the retailing environmentand consumer spending habits; inclement weather and natural disasters;competition from existing and potential competitors; the amount of merchandisemarkdowns; loss or retirement of key members of management; increases in thecosts of borrowings and unavailability of additional debt or equity capital;impact of the Company’s substantial indebtedness on its operating income andits ability to grow; the cost of labor; labor disputes; increased healthcarebenefit costs; other costs and expenses; and other important factors that couldcause actual results to differ materially from those described or implied bythe forward-looking statements contained in this report.

 

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**PART I– FINANCIAL INFORMATION**

 

**Item 1. Business**

 

**About the Company**

 

LinensHolding Co, a Delaware corporation (the “Company”), together with its whollyowned consolidated subsidiaries, including Linens ’n Things, Inc. and Linens ’n Things Center, Inc.,is an entity that was formed in connection with the acquisition of all of theoutstanding shares of common stock of Linens ’n Things, Inc. for aggregateconsideration of approximately $1.3 billion.  The Company was incorporated on November 7,2005.

 

InNovember 2005, Affiliates of Apollo Management, L.P., National Realty &Development Corp. and Silver Point Capital Fund Investments LLC (collectively,the “Sponsors”) formed the Company to serve as a holding company.  On February 14, 2006, the Companyacquired Linens ’n Things, Inc.when its newly formed subsidiary, Linens Merger Sub Co., merged with and intoLinens ’n Things, Inc.in the merger described in Note 3 to the consolidated financial statementsincluded elsewhere in this report (the “Merger”), and Linens ’n Things, Inc., as thesurviving corporation, became a wholly owned subsidiary of the Company.

 

Linens’n Things, Inc.,a Deleware corporation, was incorporated on September 10, 1996 and was awholly owned subsidiary of CVS Corporation (“CVS”), formerly MelvilleCorporation, until November 26, 1996, when CVS completed an initial publicoffering of the Linens ’n Things, Inc.common stock.  Linens ’n Things Center, Inc.,a California corporation and wholly owned subsidiary of Linens ’n Things, Inc., wasincorporated on January 12, 1996.

 

TheCompany is the second largest specialty retailer of home textiles, housewaresand home accessories in North America operating 589 stores in 47 U.S. statesand seven Canadian provinces as of December 29, 2007. The Company is adestination retailer, offering one of the broadest and deepest selections ofhigh quality brand-name as well as private label home furnishings merchandisein the industry. The Company’s average store size of approximately 33,000 grosssquare feet enables it to offer a more comprehensive product and brandselection than department stores and other retailers that sell homefurnishings.  The Company believes itsstore format coupled with its knowledgeable sales assistance and attentiveservice to its customers, who the Company refers to as its guests, creates anenjoyable shopping experience. The Company’s primary target guest is femalebetween the ages of 25 and 55 who is fashion and brand conscious, hasgood-to-better income and focuses on the home as a reflection of herindividuality.

 

TheCompany is committed to providing its guests with a one-stop shoppingdestination for home furnishings. The Company’s extensive merchandise offeringenables its guests to select from a wide assortment of styles, brands, colorsand designs across varying price points at competitive values. The Company’s “linens”product line includes home textiles such as bedding, towels, window treatmentsand table linens. Its “things” product line includes housewares and homeaccessories such as cookware, dinnerware, glassware, small appliances, candles,picture frames and storage and cleaning products. The Company offers a widearray of national home furnishing brands, including All-Clad, Braun, Calphalon,Conair, Croscill, Cuisinart, Henckels, Krups, KitchenAid, Nautica, OXO,Wamsutta and Yankee Candle. It also offers products under its LNT Home privatelabel brand, which is designed to complement its brand name products byoffering its guests quality merchandise at value prices. The Company alsocarries a number of exclusive products, including several high-fashion hometextile patterns from the Waverly collection.

 

TheCompany’s store format features an efficient racetrack layout in a visuallyappealing format that encourages guests to shop the entire store. It operatesvarious store size formats generally ranging from 25,000 to 40,000 gross squarefeet. This allows the Company to match the size of its stores with the marketpotential of each location. The Company’s stores are located predominately inpower strip centers adjacent to complementary broad-based retail chains. Inaddition, its stores are generally located in geographic trading areas with atleast 150,000 people within a 5 to 10 mile radius and with demographiccharacteristics that match its target guest profile.

 

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**Business Strategy**

 

Underthe leadership of Robert J. DiNicola, who assumed the role of Chairman andChief Executive Officer in 2006, the Company intends to focus on growing itssales per square foot to improve the productivity of its existing store base,which the Company believes is key to improving its profitability and cash flow.

 

Beginningin March 2006, the Company instituted a long-term three phase multi-yearplan to turn the Company around.  Thefirst phase consists of getting back to basics, which the Company is now deeplycommitted to.

 

Aspart of this committment, the Company intends to pursue the followinginitiatives:

 

***Improve Its Overall MerchandiseAssortments.***    The Company intends tomaximize merchandise productivity by continuing to implement the followingassortment planning initiatives:

 

·                  Reduce its overall SKUs andincrease the in-stock positions of its most popular merchandise;

 

·                  Re-allocate space in itsstores to more productive categories; and,

 

·                  Selectively expand existingmerchandise categories and key vendor assortments as well as introduce newmerchandise product lines that better reflect the style preferences of itsguests.

 

***Establish a Key Item Program.***    TheCompany has established a “Best Bets” program in order to provide its guestssuperior value on the Company’s top 100 selling items. The Company prices thesekey items competitively and maintains deep in-stock positions to meet guestdemand. The Company believes that its key item program will help drive storetraffic, improve sales per square foot and strengthen the Linens ’n Things brand over thelong-term.

 

***Increase the Effectiveness of ItsMarketing Expenditures.***    TheCompany has implemented an aggressive new, multi-tiered marketing campaign thatre-invigorates the Linens ’n Things brand, emphasizes its commitment to its “Best Bets” programand drives traffic to its stores. Its marketing expenditures were approximately$157.0 million in fiscal 2007, or 5.6% of net sales. The Company expectsmarketing expenditures in fiscal 2008 to be similar to the prior year,broadening its reach with a more diversified mix of marketing utilizingbroadcast media, preprint, newspaper advertising and direct mail. The Companybelieves that these changes, coupled with a greater emphasis on nationaladvertising, will be more effective in communicating its merchandising strategywhile attracting new guests into its stores and enhancing its brand.

 

***Improve Its Guests’ ShoppingExperience.***    The Company’s goal is toexceed its guests’ expectations in every store, every day. It intends toachieve this goal by building on its existing service philosophy and bycreating a more inviting atmosphere for its guests. The Company believes it canmake its guests’ shopping experience more efficient and enjoyable throughenhanced merchandise presentation, including more stimulating product displaysand clearer in-store signage.

 

***Improve ItsOperating Free Cash Flow.***    TheCompany is highly committed to increasing its operating free cash flow. As aresult, it plans to reduce new store openings over the next few years and focuson improving the operations of its existing stores. During fiscal 2007, theCompany opened 18 new stores as opposed to an average of approximately 47 newstores per year during the three fiscal years preceding fiscal 2007.  The Company currently expects to openapproximately 10 new stores in fiscal 2008. As a result, the Company currently expects its fiscal 2008 capitalexpenditures to be approximately $25 million, as opposed to$37.0 million in fiscal 2007.  Inaddition, in connection with its merchandise assortment planning and salesproductivity initiatives, the Company expects to improve its inventory turnsand reduce its working capital. Its new business strategy does not require anyout of the ordinary or one-time capital expenditures.

 

***Realize Improved Financial Performance as Recently Opened StoresMature.***    As of December 29,2007, the Company operates 589 stores, 104 of which were opened since thebeginning of 2005. These 104 stores have not yet reached sales and store-levelEBITDA consistent with the Company’s stores that were opened before 2005.Store-level EBITDA represents operating profit derived for each store, beforedepreciation for all fixed assets located at each store and amortization, whereoperating profit is based on each store’s actual sales less direct expenses 

 

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excluding an allocation of overhead. Historically, new stores take fourto five years to reach the financial performance of a mature store.

** **

**Competitive Strength**

** **

***Strong Brand Name Recognition.***    TheLinens ’n Things brandname has a strong reputation as a leading provider of home furnishings. Itsbrand recognition is reinforced by its national footprint and highly visiblestore locations. Additionally, the Company utilizes extensive national andlocal advertising through multiple formats to reinforce its guest recognitionand support its promotional events. According to the Company’s most recentstudy, nine out of 10 U.S. households located in its markets recognize theLinens ’n Things brand.

 

***Leading Destination for HomeFurnishings.***    The Company is the secondlargest specialty retailer of home textiles, housewares and home accessories inNorth America and operates 589 stores in 47 U.S. states and seven Canadianprovinces with an aggregate of approximately 19.4 million gross squarefeet as of December 29, 2007.  Withover 25,000 SKUs, the Company markets one of the broadest and deepestselections of home furnishings in the industry, providing the Company with acompetitive advantage over department stores and mass merchants who offer amore limited product selection. The Company’s more comprehensive product andbrand selection provides its guests with a one-stop shopping destination fortheir home furnishing needs.

*** ***

***Well Maintained Store Base withAttractive Real Estate.***    TheCompany’s portfolio of stores is primarily located in high traffic suburbanlocations that are convenient and accessible to its core guests and in closeproximity to other high quality, national retailers. According to its mostrecent study, the Company’s real estate is extremely competitive as to locationand size with other national specialty retailers of home furnishings. TheCompany’s store base is up to date with an average age per store ofapproximately seven years. The Company believes that the average age of itsstore base minimizes its near-term maintenance and remodeling capitalexpenditure requirements.

 

***Strong and Diversified VendorRelationships.***    The Company is one of thelargest purchasers of home furnishings in the United States and has developedstrong long-term relationships with its vendors, from whom it consistentlypurchases large quantities of quality merchandise. The Company believes thatits strong and diversified vendor relationships coupled with its buying powerprovides it a competitive advantage in the U.S. home furnishings market. Inaddition, due to its broad range of branded products, the Company’s success isnot dependent on any one specific product or vendor. In fiscal 2007, theCompany’s largest single vendor accounted for approximately 7% of itspurchases.

 

***Strong Guest Base.***    TheCompany has cultivated a strong base of loyal guests who return to its storestime and again. This is complemented by its Internet website which allowsguests both to purchase its products and receive product information. TheCompany has a large customer database that it uses to reach its target gueststhrough, among other things, direct mail events. The Company defines activeguests as those who have visited its stores at least once in the last12 months. The Company has over 10 million active guests in itsdatabase, who on average visit its stores approximately 2.0 times each year. Tofurther strengthen its guest base, the Company also offers a private label chargecard program, which has built-in loyalty programs to encourage more frequentvisits and allows it to more efficiently target its direct mail efforts.

 

**Products and Merchandising**

 

TheCompany offers quality home textiles, housewares and home accessories atcompelling values. The Company’s extensive merchandise offering of over 25,000SKUs in an average store enables its guests to select from within each of itsmajor product lines a wide assortment of styles, brands, colors and designsthat exceed the selection generally available in department stores. The Company’s“linens” product line includes home textiles such as bedding, towels, windowtreatments and table linens. Its “things” product line includes housewares,home accessories and storage and cleaning, such as cookware, dinnerware,glassware, small appliances, candles and picture frames. The Company iscommitted to maintaining a consistent in-stock inventory position and ensuringthat its stores carry a broad and deep merchandise selection.

 

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TheCompany also intends to continue to implement its assortment planning and spacemanagement initiatives to maximize productivity.  It will continue to re-allocate space in itsstores to merchandise categories that better reflect guest demand. This effortallows the Company the opportunity to maximize productivity by expandinghigh-growth categories.  As a result, theCompany’s stores now carry a deeper, more balanced selection of merchandisethat more closely corresponds with the preferences of its guests. In addition,the Company’s merchandise is displayed with impactful presentations in groupsof related product lines, and seasonal merchandise and impulse items areprominently displayed in the front of the store. The presentation of itsmerchandise is designed to maximize customer convenience and reinforce itsguests’ impression that the Company offers a wide selection. For fiscal 2008,the Company intends to continue its focus on adding more newness in its assortmentby offering updated merchandise and building brands both within a category andacross categories. As part of its back to basics approach, the Company willcontinue to clear aged and non-productive inventory, reinvesting those dollarsinto more productive categories, classifications and key items, particularly insupport of the “Best Bets” program to highlight the top 100 best selling coreitems, reinvigorating the textile side of the business with a concerted effortto focus on sheets, towels, pillows and comforters, and emphasizing tabletopbeginning with a focus on dinnerware, glassware and flatware.  In addition, the Company intends to focus onimproving the in-store experience with enhanced merchandise presentation andclearer signage.

 

Merchandiseand sample brands offered in each major department are highlighted below:

 
| **Department**        | ** ** | **Items Sold**                                                                                                                           | ** ** | **Sample Brands**                                                                                                           |
|-----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|
| Bath                  |       | Towels,  shower curtains, waste baskets, bathroom rugs and wall hardware                                                                 |       | Croscill,  Nautica and Wamsutta                                                                                             |
| Home  Accessories     |       | Decorative  pillows, napkins, tablecloths, placemats, lamps, gifts, picture frames,  candles and framed art                              |       | Colonial  Candle, Waverly and Yankee Candle                                                                                 |
| Housewares            |       | Cookware,  cutlery, kitchen gadgets, small electric appliances (such as blenders and  coffee makers), dinnerware, flatware and glassware |       | All-Clad,  Black & Decker, Braun, Calphalon, Circulon, Cuisinart, Farberware,  Henckels, KitchenAid, Krups and OXO |
| Storage  and Cleaning |       | Closet-related  items (such as hangers, organizers and shoe racks), cleaning and laundry care  products                                  |       | Bissell,  Dyson, Euro-Pro, Hoover, Rowenta and Rubbermaid                                                                   |
| Bedding               |       | Sheets,  comforters, comforter covers, bedspreads, bed pillows, blankets and mattress  pads                                              |       | Croscill,  Liz Claiborne, Nautica, Wamsutta and Waverly                                                                     |
| Window  Treatment     |       | Curtains,  valances and window hardware                                                                                                  |       | Croscill,  Nautica, Wamsutta and Waverly                                                                                    |

 

TheCompany’s merchandise procurement is done centrally rather than in storeoperations. The Company utilizes an auto-replenishment system, wherebyapproximately 95% of its core products are replenished from a centralizedmonitoring system, accounting for approximately 60% of the Company’s receipts.

 

**Guest Service and Marketing**

 

TheCompany treats every customer as a guest. The Company’s philosophy is toenhance its guests’ entire shopping experience so that it will become the storeof first choice for its guests’ home furnishing needs. To facilitate the easeof shopping, the Company’s assisted self-service culture is complemented bytrained department specialists, zoned floor coverage, product informationdisplays and videos, self-demonstrations and in-store product seminars. Theentire store team is trained to be highly visible in order to assist guestswith their selections. The use of modern technologies reduces the need for itsassociates to manage “back office” activities so that the majority of theirtime can be focused on greeting and assisting guests and delivering attentiveservice. Sophisticated management systems that provide efficient guest serviceand the Company’s fair return policies are geared toward making each guest’svisit a convenient, efficient and pleasant experience.

 

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**Sales Associates**

 

TheCompany seeks to maintain a sales force of knowledgeable, professional and well-trainedsales associates to deliver personal attention and service to its guests. TheCompany offers competitive wages and on-going training and personneldevelopment in order to attract and retain qualified, motivated associatescommitted to providing superior guest service. Training at the sales associatelevel focuses on the areas of guest interaction, product knowledge and storesystems usage.

 

**Marketing and Advertising**

 

The Company uses its advertising programs to communicate, build andstrengthen the Linens ’n Things brand.The Company has implemented an aggressive new, multi-tiered marketing campaignthat re-invigorates the Linens ’n Things brand, emphasizes the Company’scommitment to its “Best Bets” key-item program and drives traffic to its stores.The Company expects marketing expenditures in fiscal 2008 to be similar to theprior year and to continue its initiatives started in fiscal 2006 to broadenits reach with a more diversified mix of marketing utilizing broadcast media,preprint and newspaper advertising and direct mail. The Company believes thatthese changes, coupled with a greater emphasis on national advertising, will bemore effective in communicating its merchandising strategy while attracting newguests into its stores and enhancing its brand. The Company focuses itsadvertising programs during key selling seasons such as spring/summer,back-to-school and holidays. In addition, it utilizes its proprietary marketingdatabase to track the buying habits of its guests.

 

**Private Label Charge Card**

 

Tofurther strengthen its guest base and build guest loyalty, the Company offers aprivate label charge card program. Through a points program, guests receiveenhanced value by using the card. The program also allows the Company toprovide consistent and effective communication with its guests, whileincreasing its information base of its guests’ purchasing patterns. Subject tocustomary exceptions, credit risk relating to this program is borne by GEMoney, a top issuer of private label credit cards.

 

**Vendor Relationships**

 

TheCompany’s merchandise assortment consists of a wide selection of high quality,brand name fashion home textiles, housewares and home accessories from bothestablished and emerging vendors. The Company communicates with its vendorsfrequently, providing feedback on current demand for their products. Many ofthe Company’s key vendors limit the number of retail channels they use to selltheir merchandise, and competition among retailers to obtain and sell thesekey-vendor-sourced goods is intense. The Company’s relationships with itsvendors have been a significant contributor to its past success. The Companymonitors and evaluates the sales and profitability performance of each vendorand adjusts its future purchasing decisions from time to time based upon theresults of this analysis. The Company has no guaranteed supply arrangementswith its principal merchandising sources.

 

TheCompany purchases its merchandise from a diverse vendor base of approximately1,000 suppliers, of which approximately 18% are located overseas. In fiscal2007, products supplied by the Company’s 25 largest vendors representedapproximately 43% of its purchases, with its top three vendors supplyingapproximately 13% of its purchases and its largest single vendor supplyingapproximately 7% of its purchases. The Company believes that this buying powerand its ability to make centralized purchases generally allow it to acquireproducts at favorable terms. In addition, the breadth of the Company’s sourcinghelps mitigate risks associated with a single brand or designer.

 

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**Store Operations**

 

**Store Management and Operations**

 

TheCompany places a strong emphasis on its people, their development and theiropportunity for advancement, and is committed to maintaining a high internalpromotion rate. The Company’s practice is to open each new store with aseasoned management team, which usually includes managers who have significantexperience with the Company. Additionally, the Company’s structuredmanagement-training program requires that each new manager learn all facets ofthe business within the framework of a fully operational store. This programincludes, among other things, product knowledge, merchandise presentation,business and sales perspective, employee relations and manpower planning. Atthe sales associate level, the Company focuses its training on guestinteraction, product knowledge and store systems usage. The Company believesthat its policy of promoting from within, as well as the opportunities foradvancement from its store expansion program, serve as incentives to attractand retain quality individuals.

 

Linens’n Things’stores are open seven days a week, generally from 9:00 am to 9:30 pm Mondaythrough Saturday and 10:00 am to 7:00 pm on Sunday unless affected by locallaws.

 

**Distribution**

 

TheCompany currently operates distribution centers in Shepherdsville, Kentucky;Swedesboro, New Jersey and Greensboro, North Carolina. It also uses third-partylogistics companies to supplement its distribution centers. The Companybelieves that the utilization of centralized distribution centers has resultedin lower average freight expense, more timely control of inventory shipments tostores and improved information flow. The Company also believes strongdistribution support for its stores is a critical element in its strategy andis central to its ability to maintain a low cost operating structure.

 

TheCompany manages the distribution process centrally from its corporateheadquarters. Purchase orders issued by the Company are electronicallytransmitted to nearly all of its suppliers. The Company plans to continue itsefforts to ship as much merchandise through its distribution centers aspossible to ensure all benefits of its logistics strategy are fully utilized.Continued growth will also facilitate new uses of electronic data interchangetechnologies between its suppliers and the Company to exploit the mostproductive and beneficial use of its assets and resources. In order to realizegreater efficiency, the Company also uses third-party freight carriers to shipits merchandise from its distribution centers to its stores.

 

**Management Information Systems**

 

TheCompany continually evaluates and upgrades its management information systemsto enhance the quantity, quality and timeliness of information available tomanagement. The Company believes its management information systems have fullyintegrated its stores, headquarters and distribution process. Over the last severalyears, the Company has made significant investments in technology to improveguest service such as Internet and online bridal and gift registry tools. TheCompany operates an IBM AS/400 management information system that integratesall major aspects of its business, including sales, distribution, purchasing,inventory control, merchandise planning and replenishment and financialsystems. Information obtained from management information systems results inautomatic inventory replenishment in response to specific requirements of eachstore, thereby improving in-stock positions and enhancing guest service. TheCompany also utilizes hand-held scanners with inventory status and pricelook-up capabilities, which allow its sales associates to remain accessible toguests on the selling floor.

 

**Competition**

 

TheU.S. retail home furnishings market is highly fragmented. The market includesmany different types of retailers including, among others, department stores,mass merchandisers and discounters, specialty retailers, home improvementcenters and warehouse clubs. The Company believes that its ability to competesuccessfully in its 

 

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market is influenced by several factors, including price, breadth andquality of product selection, in-stock availability of merchandise, effectivemerchandise presentation, guest service and superior store locations. TheCompany believes that it is well positioned to compete on the basis of thesefactors. Nevertheless, there can be no assurance that any or all of the factorsthat enable the Company to compete favorably will not be adopted by companieshaving greater financial and other resources. The Company generally classifiesits competition as follows:

 

***Department Stores***

 

Thiscategory includes national and regional department stores such as J.C. PenneyCompany Inc., Sears, Roebuck and Co., a wholly owned subsidiary of SearsHoldings Corporation, and the department store chains operated by FederatedDepartment Stores, Inc. These retailers offer name brand merchandise aswell as their own private label furnishings. In general, department storesoffer a more limited selection of home furnishings merchandise than the Companydoes.  The prices offered by departmentstores during off-sale periods generally are significantly higher than those ofthe Company and during on-sale periods are comparable to or slightly higherthan those of the Company.

 

***Mass Merchandisers***

 

Thiscategory includes companies such as Wal-Mart Stores, Inc. and Target Corporation.Fashion home furnishings generally represent only a small portion of the totalmerchandise sales in these stores; however, this channel of distribution makesup the largest portion of home furnishings sales. These stores generally offera more limited merchandise selection with fewer high quality name brands andlower quality merchandise at lower price points. In addition, these massmerchandisers typically have more limited guest service staffing than theCompany does.

 

***Specialty Stores/Retailers***

 

Thiscategory includes large format home furnishings retailers including Bed Bath &Beyond, Inc., Home Goods, a division of TJX Companies, Inc. andsmaller format retailers such as Pier One Inc., Crate & Barreland Williams-Sonoma, Inc. The Company estimates that the large formatstores range in size from approximately 25,000 to 70,000 gross square feetoffering home furnishing merchandise selection of approximately 15,000 to40,000 SKUs. These retailers attempt to develop loyal guests and increase guesttraffic by providing a single outlet to satisfy the guest’s household needs.The smaller format retailers generally offer a more limited selection ofmerchandise within a specific niche and generally range in size from 2,000 to20,000 gross square feet.

 

***Other Retailers***

 

Thiscategory includes mail order retailers, such as Domestications; off-priceretailers, such as Kohl’s Corporation; the T.J. Maxx and Marshall’s divisionsof the TJX Companies, Inc.; home improvement stores, such as The HomeDepot, Inc. and Lowe’s Companies, Inc.; warehouse clubs, such asCostco Wholesale Corporation and Sam’s Club and smaller local retail stores.These retailers, with the exception of off-price retailers, generally offer amore limited selection of merchandise. Off-price retailers typically offercloseout or out of season name brand merchandise at competitive prices.

 

**Seasonality and Inflation**

 

TheCompany’s business is subject to substantial seasonal variations.  Historically, the Company has realized asignificant portion of its net sales and, prior to the Merger before theCompany became highly leveraged, substantially all of its net income for theyear during the third and fourth quarters. The Company’s quarterly results of operations may also fluctuatesignificantly as a result of a variety of other factors, including the timingof new store openings.  The Companybelieves this is the general pattern associated with its segment of the retailindustry 

 

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and expects this pattern will continue in the future.  Consequently, comparisons between quartersare not necessarily meaningful and the results for any quarter are notnecessarily indicative of future results.

 

TheCompany does not believe that its operating results have been materiallyaffected 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 thefuture.

 

**Intellectual Property**

 

TheCompany uses “Linens ’n Things” and “LNT”as trademarks and as service marks in connection with retail services. TheCompany has registered the “Linens ’n Things” and “LNT” marks with both theUnited States Patent and Trademark Office and the Canadian IntellectualProperty Office. The Company believes that the name “Linens ’n Things” and its relatedmarks are important elements of its business. Its corporate website address is*www.lnt.com.*

** **

**Employees**

 

Asof December 29, 2007, the Company employed approximately 17,500individuals, of whom approximately 6,600 were full-time employees and 10,900were part-time employees. None of its employees is represented by a union, andthe Company believes that it has a good relationship with its employees.

** **

**Government Regulation**

 

TheCompany’s operations are affected by numerous federal and state laws thatimpose disclosure and other requirements upon the origination, servicing andenforcement of credit accounts and limitations on the maximum amount of financecharges that may be charged by a credit provider. In addition to itsproprietary credit cards, credit to its guests is also provided through thirdparties such as American Express, Visa and MasterCard. Any change in theregulation of credit that would materially limit the availability of credit toits guest base could adversely affect the Company’s results of operations orfinancial condition.

 

TheCompany’s and its competitors’  practicesare subject to review in the ordinary course of business by the Federal TradeCommission and are subject to numerous federal and state laws. Additionally,the Company is subject to certain customs, truth-in-advertising and other laws,including consumer protection regulations that regulate retailers generallyand/or govern the importation, promotion and sale of merchandise. The Companyundertakes to monitor changes in these laws and believes that it is in materialcompliance with all applicable state and federal regulations with respect tosuch practices.

** **

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**Foreign Sales**

 

TheCompany’s current international business is in Canada. The following tablerepresents a summary of net sales and long-lived assets:

 
| ** **                                 | ** ** | ** **             | ** ** | ** **                      | ** ** | **February 14, 2006 to** | ** ** | **January 1, 2006 to** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------------------|------------|---------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|------------|------------|------------|------------|
| ** **                                 | ** ** | **Fiscal 2007**   | ** ** | **December 30, 2006** | ** ** | **February 13, 2006**         | ** ** | **Fiscal 2005**                  | ** ** |
| ** **                                 | ** ** | **(in millions)** | ** ** |
| **Net  sales from stores located within:** |       |                   |       |                            |       |                                    |       |                                  |       |       |       |       |       |   |   |   |   |
| ** **                                 |       |                   |       |                            |       |                                    |       |                                  |       |       |       |       |       |   |   |   |   |
| United States                              |       | $                      | 2,539.4    |                            | 90.9       | %                                       | $          | 2,346.2                               |       | 92.6       | %          | $          | 267.5      |   | 93.9 | % | $ | 2,535.5 |   | 94.1 | % |
| Canada                                     |       | 255.4                  |       | 9.1                             | %          | 188.2                                   |       | 7.4                                   | %          | 17.5       |       | 6.1        | %          | 159.2 |   | 5.9 | % |
| Total                                      |       | $                      | 2,794.8    |                            | 100.0      | %                                       | $          | 2,534.4                               |       | 100.0      | %          | $          | 285.0      |   | 100.0 | % | $ | 2,694.7 |   | 100.0 | % |
|                                       |       |                   |       |                            |       |                                    |       |                                  |       |       |       |       |       |   |   |   |   |
| **Long-lived  assets(1)(2)**               |       |                   |       |                            |       |                                    |       |                                  |       |       |       |       |       |   |   |   |   |
| United States                              |       | $                      | 811.8      |                            | 92.3       | %                                       | $          | 922.3                                 |       | 93.8       | %          | $          | 1,010.9    |   | 94.3 | % | $ | 601.2 |   | 93.6 | % |
| Canada                                     |       | 67.6                   |       | 7.7                             | %          | 60.9                                    |       | 6.2                                   | %          | 61.1       |       | 5.7        | %          | 41.2 |   | 6.4 | % |
| Total                                      |       | $                      | 879.4      |                            | 100.0      | %                                       | $          | 983.2                                 |       | 100.0      | %          | $          | 1,072.0    |   | 100.0 | % | $ | 642.4 |   | 100.0 | % |

 

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*(1) *Includes property and equipment, net of accumulated depreciation;identifiable intangible assets, net of accumulated amortization; goodwill anddeferred financing costs and other noncurrent assets, net.

(2) Amounts presented at February 13, 2006 are after purchase accountingadjustments in connection with the Merger of Linens ’n Things, Inc.

 

**Available Information**

 

Priorto the consummation of the Merger on February 14, 2006, when the commonstock of Linens ’n Things, Inc.was publicly traded on the New York Stock Exchange, the Company made availablefree of charge through its website, *www.lnt.com*,all materials that Linens ’n Things, Inc. filed electronically with the Securities andExchange Commission (“SEC”), including annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K andamendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Securities Exchange Act of 1934, as soon as reasonablypracticable after electronically filing such materials with, or furnishing themto, the SEC.

 

Asa result of becoming a privately-held company upon the consummation of theMerger and the issuance in a private placement of the Senior Secured FloatingRate Notes due 2014, the Company was not required to file these reports withthe SEC.  However, in accordance with theindenture governing these notes, reports were prepared on a basis that wasequivalent to, but not filed with, the SEC, and such reports were furnished tonoteholders by making them available on the Company’s website.  In August 2006 the notes were exchangedfor new notes with terms that were identical to the original notes except thatthe exchange notes were registered under the Securities Act.  At such time, the Company once again becamesubject to filing obligations with the SEC pursuant to the Securities ExchangeAct.  The Company has made available freeof charge through its website all materials subsequently filed by the Companyelectronically with the SEC, including its Registration Statement on Form S-4,quarterly reports on Form 10-Q and current reports on Form 8-K, andamendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Securities Exchange Act, as soon as reasonably practicableafter electronically filing such materials with, or furnishing them to, theSEC.

 

Investorsmay also read and copy any materials filed by the Company with the SEC at theSEC’s Public Reference Room at 100 F Street, N.E., Room 1580,Washington, DC  20549-0102.  You may obtain information on the operationof the Public Reference Room by calling the SEC at 1-800-SEC-0330.  In addition, the SEC maintains an Internetwebsite, *www.sec.gov*, that contains reports,proxy and information statements and other information which the Company or itspredecessor, Linens ’n Things, Inc.,filed electronically with the SEC.

 

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**Item 1A.  RiskFactors**

 

The following risks comprise all the material risks of whichthe Company is aware of; however, these risks and uncertainties may not be theonly ones the Company faces.  Additionalrisks and uncertainties not presently known to the Company or that it currentlybelieves are immaterial may also adversely affect the Company’s business orfinancial performance.  The followingrisks could materially harm the Company’s business, financial condition, futureresults of operations and cash flow.

 

**Risks Related to the Company’sBusiness**

 

***The Company’s profitability would beadversely affected if its merchandise selections do not match guestpreferences.***

 

Theretail industry is subject to changing merchandise trends and consumerpreferences. The Company’s success depends in large part on its ability toidentify merchandise trends as well as to anticipate, gauge and react tochanging consumer demands in a timely manner. The Company cannot give assurancethat its merchandise selections will accurately reflect the preferences of itsguests at any given time. In addition, any decline in the popularity or qualityof any of its key brands could adversely affect its business. Furthermore, theproducts the Company sells often require long lead times to order and mustappeal to consumers whose preferences cannot be predicted with certainty andoften change rapidly. Consequently, the Company must stay abreast of changinglifestyle and consumer trends and anticipate trends and fashions that willappeal to its guests. If the Company miscalculates the market for itsmerchandise or the purchasing preferences of its guests, its business andfinancial results could be adversely affected.

 

***The Company does not have long-termcontracts with any of its vendors and if the Company is unable to purchasesuitable merchandise in sufficient quantities at competitive prices, it may beunable to offer a merchandise mix that is attractive to its guests and itssales may be harmed.***

 

Third-partyvendors manufacture virtually all of the products that the Company offers. Infiscal 2007, the Company purchased its merchandise from approximately 1,000vendors. Many of the Company’s key vendors limit the number of retail channelsthey use to sell their merchandise and competition among retailers to obtainand sell these goods is intense. In addition, nearly all of the brands of itstop vendors are sold by competing retailers, and some of its top vendors alsohave their own dedicated retail stores. Moreover, the Company typically buysproducts from its vendors on a purchase order basis. The Company has nolong-term purchase contracts with any of its vendors and, therefore, has nocontractual assurances of continued supply, pricing or access to products, andany vendor could change the terms upon which they sell to the Company ordiscontinue selling to the Company at any time. In fiscal 2007, productssupplied by its 25 largest vendors represented approximately 43% of itspurchases, with its top three vendors supplying approximately 13% and itslargest single vendor supplying approximately 7% of its purchases for the year.

 

Ifthe Company’s relationships with its vendors are disrupted, it might not beable to acquire the merchandise the Company requires in sufficient quantitiesor on terms acceptable to it. Any inability to acquire suitable merchandisewould have a negative effect on the Company’s business and operating resultsbecause it would be missing products from its merchandise mix unless and untilalternative supply arrangements were made, resulting in deferred or lost guestsales.

 

***Delays in receipt of merchandise inconnection with either the manufacturing or shipment of such merchandise couldaffect the Company’s performance.***

 

Virtuallyall of the Company’s merchandise is delivered to it by its vendors as finishedgoods and is manufactured in numerous locations. The Company’s vendors rely onthird-party carriers to deliver merchandise to its distribution facilities. Inaddition, the Company’s success depends on its ability to efficiently sourceand distribute merchandise to its retail stores and online guests. Events suchas labor disputes, natural disasters, availability of raw materials, vendorfinancial liquidity, general conditions in the credit markets, includingincreased challenges faced by vendors seeking to factor or insure theirreceivables from their retail customers, inclement 

 

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weather, work stoppages or boycotts affecting the manufacturing ortransportation sectors could increase the cost or reduce the supply ofmerchandise available to the Company and could adversely affect its results ofoperations. Upon the loss of one or more of its vendors, the Company may not beable to develop relationships with new vendors, and products from alternativesources, if available, may be more expensive or of a different or inferiorquality from the ones the Company currently sells.

 

Inaddition, a significant portion of the Company’s merchandise is currently sourcedby it or by its domestic suppliers from foreign vendors. As a result, eventsresulting in the disruption of trade from other countries or the imposition ofadditional regulations relating to duties upon imports could cause significantdelays or interruptions in the supply of its merchandise or increase its costs,either of which could have a material adverse effect on its business. Examplesof such events include:

 

·                  politicalunrest, terrorist activities, war or other hostilities;

 

·                  strikesand labor problems;

 

·                  economicupheaval;

 

·                  importduties and quotas; and

 

·                  lossor change in “Most Favored Nation” status of the United States with aparticular foreign country.

 

Anincrease in the cost to manufacture, or a disruption in shipment to the Companyof, foreign-sourced products could decrease its sales and profitability.

 

***The Company’s future growth andprofitability could be adversely affected if its advertising and marketingprograms are not effective in generating sufficient levels of customer awarenessand traffic.***

 

TheCompany relies heavily on print advertising, including direct mail, to promotenew store openings, to increase consumer awareness of its product offerings andpricing and to drive store traffic. In addition, the Company relies and willincreasingly rely on other forms of media advertising. The Company’s futuregrowth and profitability will depend in large part upon the effectiveness andefficiency of its advertising and marketing programs. In order for itsadvertising and marketing programs to be successful, it must:

 

·                  effectivelymanage advertising and marketing costs in order to maintain acceptableoperating margins and return on its marketing investment; and

 

·                  convertcustomer awareness into actual store visits and product purchases.

 

TheCompany’s planned advertising and marketing expenditures may not result inincreased total or comparable store sales or generate sufficient levels ofproduct awareness. The Company may not be able to manage its advertising andmarketing expenditures on a cost-effective basis.

 

Thereare a limited number of companies capable of distributing the Company’s directmail advertising at the volume levels it requires. If any of these companiescease operations, or if their expenses (e.g., postage, printing and papercosts) increase substantially, then it is likely that the Company’s advertisingexpenses will increase, which will have a negative effect on its business andoperating results.

 

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***Weak economic conditions may significantly impact discretionaryconsumer spending and reduce the Company’s sales and profitability.***

 

Mostof the products that the Company sells are not consumer necessities. Purchasesof the Company’s merchandise are largely dependent upon discretionary spendingby its guests. A number of external economic factors could affect purchases byits guests of the type of merchandise it offers, including:

 

·                  disposableincome or consumer confidence in future economic conditions;

 

·                  generaleconomic and business conditions; and

 

·                  increasedinterest rates or consumer debt levels.

 

Decreasesin consumer confidence and consumer spending could adversely impact the Company’ssales and results of operations. Reduced consumer spending may also requireincreased markdowns and increased promotional expenses, which would adverselyimpact its results of operations.

 

***Competitive factors could reduce the Company’s sales and profitability.***

 

TheU.S. retail home furnishings market is highly fragmented and intenselycompetitive. The Company competes with many different types of retailers,including among others department stores, mass merchandisers and discounters,specialty retail stores, home improvement centers, warehouse clubs and otherretailers. Some of the Company’s competitors sell many of the same products andbrands that it sells. The competitive challenges facing the Company include:

 

·                  anticipatingand quickly responding to changing consumer demands;

 

·                  increasingcustomer awareness and traffic to its stores;

 

·                  varietyand fashion of the products it offers;

 

·                  maintainingfavorable brand recognition and achieving customer perception of value;

 

·                  effectivelymarketing and competitively pricing its products to its target guests; and

 

·                  competingwith entities that have substantially greater financial and other resourcesthan the Company does.

 

Competitionby existing or future competitors, including aggressive price competition,could result in the need to reduce the Company’s prices or increase itsspending and could result in a decrease in its sales and profitability andrequire a change in its operating strategies.

 

***Attrition among the Company’s buyers or key sales associates couldadversely affect its financial performance and its growth.***

 

TheCompany’s success is largely dependent on the efforts and abilities of itsbuyers and key sales associates. The Company’s ability to meet its labor needsgenerally is subject to numerous factors, including the availability of asufficient number of qualified persons in the work force, unemployment levels,the wages and benefits it pays, prevailing wage rates, changing demographics,health and other insurance costs and changes in employment legislation. If theCompany were to lose buyers or key sales associates and not promptly fill theirpositions with comparably qualified individuals, its ability to benefit fromlong-standing relationships with key vendors or to provide relationship-basedguest service may suffer. The Company cannot give assurance that it will notsuffer significant attrition among its current buyers or key sales associates.The loss of these individuals could adversely affect its business.

 

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***The Company may not be successful in opening and operating new storesprofitably or making its recently opened stores profitable.***

 

Althoughat a decreased rate as compared to prior years, the Company plans to open anumber of new stores as part of its growth strategy. There are many risksinherent in its store expansion strategy, and the Company cannot give assurancethat it will be able to achieve its expansion goals. The Company’s ability to growits store base and operate its new and recently opened stores profitably willbe affected by many factors, including:

 

·                  risksinherent in constructing, furnishing and supplying a store in a timely and costeffective manner, including obtaining necessary permits and zoning approvals;

 

·                  integratingthe new store into its distribution network;

 

·                  itsability to maintain financing on commercially reasonable terms;

 

·                  itsability to identify and secure favorable sites for its new stores inwell-trafficked areas and to negotiate satisfactory rent and other lease terms;

 

·                  thecompetition for favorable store sites;

 

·                  thepresence of other complementary retail outlets at the locations where theCompany opens its new stores;

 

·                  theproximity of its competitors’ stores;

 

·                  theimpact on sales at its existing stores if the Company locates new stores in thesame market;

 

·                  itsability to invest in and expand its distribution, information technology,management and logistics infrastructure to support a continually increasingstore base;

 

·                  itsability to attract, train and retain good and experienced store managers andstore personnel for its new stores; and

 

·                  acceptanceof its new stores in markets where the Company has limited or no existingpresence.

 

TheCompany intends to open additional stores in new markets, as well as inexisting markets, in fiscal years 2008, 2009 and beyond. The new markets theCompany enters may have different competitive conditions, consumer trends anddiscretionary spending patterns than its existing markets, which may cause theCompany’s stores in these new markets to be less successful than stores in its existingmarkets.

 

Wherethe Company adds stores into its existing markets, it may not be able toattract sufficient new customers to these new stores and, in addition, thesenew stores may have the effect of reducing sales from the Company’s existingstores in those markets, which may have an adverse effect on its results ofoperations.

 

TheCompany cannot give assurance that its new or recently opened stores will meetits internal financial operating targets or that it will be able to operate itsnew or recently opened stores profitably. The Company also cannot give assurance that the operating results of itsnew or recently built stores will be comparable to the operating results of itsmature existing stores.

 

***A disruption in the operation of the Company’s distribution centerswould impact its ability to deliver merchandise to its stores, which couldadversely impact its sales and its results of operations.***

 

TheCompany’s inventory is generally shipped by its suppliers to one of its threedistribution centers, which are located in Shepherdsville, Kentucky;Swedesboro, New Jersey and Greensboro, North Carolina. At its distributioncenters, the merchandise is processed, sorted and shipped to its stores. Eventssuch as fire or other catastrophic events, any malfunction or disruption of itscentralized information systems or shipping problems may result in delays ordisruptions in the timely distribution of merchandise to its stores, whichcould adversely impact 

 

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the Company’s sales and its results of operations. Additionally,increases in variable expenses such as fuel costs associated with itsdistribution operations may adversely impact the Company’s results ofoperations.

 

***The Company’s revenues and cash requirements are affected by theseasonal nature of its business.***

 

TheCompany’s business is subject to substantial seasonal variations.  Historically, the Company has realized asignificant portion of its net sales for the year during the third and fourthquarters, with a majority of net sales realized in the fourth quarter.  The Company’s quarterly results of operationsmay also fluctuate significantly as a result of a variety of other factors,including the timing of new store openings, holiday spending patterns andgeneral economic conditions.  The Companybelieves this is the typical pattern associated with its segment of the retailindustry, and the Company expects this pattern will continue in the future.  In anticipation of its peak selling season, theCompany incurs substantial additional costs, including additional inventory,payroll and advertising costs.  If forany reason the Company’s sales during the fourth quarter of any year weresignificantly below expectations, its results of operations for that full yearwould be materially adversely affected.

 

***A problem with the Company’s management information systems couldimpact its flow of product and information and adversely affect its operatingproductivity and results of operations.***

 

TheCompany relies heavily upon its existing management information systems inoperating and monitoring all aspects of its business, including sales,warehousing, distribution, purchasing, inventory control, merchandise planningand replenishment and its financial systems. The bulk of the Company’s management information systems are centrallylocated at its headquarters, with offsite backup at other locations.  Any extended disruption in the operation ofthe Company’s management information systems could have an adverse effect onits operating productivity and results of operations.

 

Furthermore,to keep pace with changing technology, the Company must continuously providefor the design and implementation of new information technology systems as wellas enhancements of its existing systems. Any failure to adequately maintain and update the information technologysystems supporting the Company’s sales operations or inventory control couldprevent it from processing and delivering merchandise, which could adverselyaffect its business.

 

***The Company’s business can be affected by extreme or unseasonableweather conditions.***

 

Extremeweather conditions in the areas in which the Company’s stores are located couldadversely affect its business.  Forexample, heavy snowfall, rainfall or other extreme weather conditions over aprolonged period might make it difficult for the Company’s guests to travel toits stores and thereby reduce its sales and profitability.  The Company’s business is also susceptible tounseasonable weather conditions.  Forexample, extended periods of unseasonably warm weather temperatures during thewinter seasons could render a portion of the Company’s inventory incompatiblewith those conditions.  Reduced salesfrom extreme or prolonged unseasonable weather conditions would adverselyaffect the Company’s business.

 

***Acts of terrorism could adversely affect the Company’s business.***

 

Theeconomic downturn that followed the terrorist attacks of September 11,2001 had a material adverse effect on its business. Any further acts ofterrorism or other future conflict may disrupt commerce and undermine consumerconfidence, cause a downturn in the economy generally, cause consumer spendingor shopping center traffic to decline or reduce the desire of its guests tomake discretionary purchases. Any of the foregoing factors could negativelyimpact the Company’s sales revenue, particularly in the case of any terroristattack targeting retail space, such as a shopping center. Furthermore, an actof terrorism or war, or the threat thereof, could negatively impact the Company’sbusiness by interfering with its ability to obtain merchandise from foreignmanufacturers. Any future inability to obtain merchandise from its foreignmanufacturers or to substitute other manufacturers, at similar costs and in atimely manner, could adversely affect its business.

 

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***The Company is subject to numerous regulations that could affect itsoperations.***

 

TheCompany is subject to customs, truth-in-advertising and other laws, includingconsumer protection regulations and zoning and occupancy ordinances, whichregulate retailers generally and/or govern the importation, promotion and saleof merchandise and the operation of retail stores and warehouse facilities.  Although the Company undertakes to monitorchanges in these laws, if these laws change without its knowledge, or areviolated by importers, designers, manufacturers or distributors, the Companycould experience delays in shipments and receipt of goods or be subject tofines or other penalties under the controlling regulations, any of which couldadversely affect its business.

 

***If the Company is unable to enforce its intellectual propertyrights, or if it is accused of infringing on a third party’s intellectualproperty rights, its profitability may be adversely affected*****.**

 

TheCompany and its subsidiaries currently own its trademarks and service marks,including the “Linens ’n Things” and “LNT”marks.  The Company’s trademarks andservice marks are registered with both the United States Patent and TrademarkOffice and the Canadian Intellectual Property Office.  The laws of some foreign countries do notprotect proprietary rights to the same extent as do the laws of the UnitedStates.  Moreover, the Company is unableto predict the effect that any future foreign or domestic intellectual propertylegislation or regulation may have on its existing or future business.  The loss or reduction of any of the Company’ssignificant proprietary rights could have an adverse effect on its business.

 

Additionally,third parties may assert claims against the Company alleging infringement,misappropriation or other violations of their trademarks, copyrights or patents(including with respect to alleged proprietary designs) or other proprietaryrights, whether or not the claims have merit. Claims like these may be time consuming and expensive to defend andcould result in the Company being required to cease using the trademark,copyright or patent, design or other rights and selling the allegedlyinfringing products or to acquire licenses to continue using such intellectualproperty.  This might have an adverseaffect on the Company’s sales or business operations and cause it to incursignificant litigation costs and expenses.

 

***If the Company significantly overestimates its sales, its profitabilitymay be adversely affected.***

 

TheCompany makes decisions regarding the purchase of its merchandise well inadvance of the season in which it will be sold, generally six months to oneyear.  If the Company’s sales during anyseason, particularly a peak season, are significantly lower than it expects forany reason, the Company may not be able to adjust its expenditures forinventory and other expenses in a timely fashion and may be left with asubstantial amount of unsold inventory. If that occurs, the Company may be forced to rely on markdowns orpromotional sales to dispose of excess inventory.  This could have an adverse effect on theCompany’s margins and operating income. At the same time, if the Company fails to purchase a sufficient quantityof merchandise or if its vendors do not have the capacity to handle its newpurchase commitments, it may not have an adequate supply of products to meetguest demand.  This may cause the Companyto lose sales or adversely affect its reputation.

 

***Changes in its credit card arrangements, applicable regulations andconsumer credit patterns could adversely impact the Company’s ability tofacilitate the provision of consumer credit to its guests and adversely affectits business.***

 

TheCompany maintains a proprietary credit card program through which credit isextended to guests under the “Linens ’n Things” name.  Changes in the Company’s proprietary creditcard arrangements that adversely impact its ability to facilitate the provisionof consumer credit may adversely affect its performance.  Credit card operations are subject tonumerous federal and state laws that impose disclosure and other requirementsupon the origination, servicing and enforcement of credit accounts andlimitations on the maximum amount of finance charges that may be charged by acredit provider.  Any effect of theseregulations or change in the regulation of credit arrangements that wouldmaterially limit the availability of credit to the Company’s guest base couldadversely affect its business. In addition, changes in credit card use, paymentpatterns and default rates may result 

 

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from general conditions in the credit markets and a variety ofeconomic, legal, social and other factors that the Company cannot control orpredict with certainty.

 

***Failure to maintain competitive terms under the Company’s loyaltyprograms could adversely affect its business.***

 

Aspart of its strategy, the Company intends to formalize and maintain loyaltyprograms that are designed to cultivate long-term relationships with itscustomers and enhance the quality of service the Company provides to itscustomers.  The Company must constantlymonitor and update the terms of its loyalty programs so that it continues tomeet the demands and needs of its customers and remains competitive withloyalty programs offered by its competitors. The Company’s failure to provide quality service and competitive loyaltyprograms to its customers could adversely affect its business.

 

***If the Company is unable to renew orreplace its store leases or enter into leases for new stores on favorableterms, or if any of its current leases are terminated prior to the expirationof their stated term and it cannot find suitable alternate locations, itsgrowth and profitability could be harmed.***

 

TheCompany leases all of its store locations. The Company’s current leases expireat various dates through 2029 subject, in many cases, to renewal options forperiods ranging from five to 20 years in total. The Company’s ability to renew any expired lease or, if such leasecannot be renewed, its ability to lease a suitable alternate location, and itsability to enter into leases for new stores on favorable terms will depend onmany factors which are not within the Company’s control, such as conditions inthe local real estate market, competition for desirable properties and itsrelationships with current and prospective landlords.  If the Company is unable to renew existingleases or lease suitable alternate locations, or enter into leases for newstores on favorable terms, its growth and its profitability may besignificantly harmed.

 

***Restrictions contained in some of the Company’s leasesrelating to change of control of the Company may make any change of controlmore difficult or impair the Company’s ability to retain such leases in theevent of a change of control.***

 

Someof the Company’s leases contain, and leases related to new stores may contain,various restrictions relating to a change of control of the Company.  In such cases, a change of control of theCompany without the consent of the landlord may result in a violation of theterms of such lease, thereby exposing it to potential damages or leasetermination.  This, in turn, could harmthe Company’s growth and profitability. The presence of such provisions may also make any change of control inthe future more difficult.

 

***The Company has previously identified certain issues relating to itsinternal controls and procedures, which, if not remedied effectively, couldhave an adverse effect on its business.***

 

Atthe end of fiscal 2006, the Company determined that its control procedures didnot include adequate review over the completeness and accuracy of the incometax accounts to ensure compliance with generally accepted accountingprinciples.  The Company out-sourced thepreparation of the income tax provision to a third party and did not apply athorough review to detect misstatements. This deficiency resulted in material errors in the Company’s preliminaryincome tax provision in the 2006 consolidated financial statements.  The Company corrected the provision forincome taxes and related balances prior to the issuance of the financialstatements.  Accordingly, managementdetermined that this condition constituted a material weakness.

 

Amaterial weakness is a deficiency (within the meaning of paragraph A7 of thePublic Company Accounting Oversight Board (“PCAOB”) Auditing Standard No. 5),or a combination of deficiencies, in internal control over financial reporting,such that there is a reasonable possibility that a material misstatement of theCompany’s annual or interim financial statements will not be prevented ordetected on a timely basis.

 

Althoughthe Company has taken certain actions to address this issue, if it is unable toidentify and remedy all such issues promptly and effectively, it could have amaterial adverse effect on its business, results of operations and financialcondition.  Maintaining effective controlover financial reporting is necessary for the Company to produce 

 

19

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reliable financial reports and is important in helping to preventfinancial fraud.  If the Company’smanagement or its independent registered public accounting firm were toconclude again in the future that its internal control over financial reportingwas ineffective, investors could lose confidence in the Company’s reportedfinancial information.

 

***The Company is indirectly owned and controlled by the Sponsors, andtheir interests as equity holders may conflict with creditors.***

 

TheCompany is indirectly owned and controlled by the Sponsors, and the Sponsorshave the ability to elect all of the members of its board of directors andthereby control its policies and operations, including the appointment ofmanagement, future issuances of its common stock or other securities, thepayment of dividends, if any, on its common stock, the incurrence of debt bythe Company, amendments to its certificate of incorporation and bylaws and theentering into of extraordinary transactions. The interests of the Sponsors maynot in all cases be aligned with the interests of noteholders. For example, ifthe Company encounters financial difficulties or is unable to pay itsindebtedness as it matures, the interests of its equity holders might conflictwith the interests of noteholders. In addition, the Company’s equity holdersmay have an interest in pursuing acquisitions, divestitures, financings orother transactions that, in their judgment, could enhance their equityinvestments, even though such transactions might involve risks to noteholders.Furthermore, the Sponsors may in the future own businesses that directly or indirectlycompete with the Company. One or more of the Sponsors also may pursueacquisition opportunities that may be complementary to the Company’s business,and as a result, those acquisition opportunities may not be available to theCompany.  So long as the Sponsorscontinue to own a significant amount of the Company’s combined voting power,even if such amount is less than 50%, they will continue to be able to stronglyinfluence or effectively control the Company’s decisions.

 

**Risks Related to the Company’sSubstantial Debt**

 

***The Company’s substantial leverage may impair its financial conditionand prevent it from fulfilling its obligations under the Notes.***

 

 TheCompany has a substantial amount of indebtedness, which could have importantconsequences to investors, including:

 

·                  makingit more difficult for the Company to satisfy its obligations with respect tothe Notes;

 

·                  increasingthe Company’s vulnerability to general adverse economic and industry conditionsby making it more difficult for it to react quickly to changing conditions;

 

·                  limitingthe Company’s ability to obtain additional financing to fund future workingcapital, capital expenditures, acquisitions and other general corporaterequirements;

 

·                  requiringa substantial portion of the Company’s cash flow from operations for thepayment of interest on its indebtedness and reducing the Company’s ability touse its cash flow to fund working capital, capital expenditures, acquisitionsand general corporate requirements;

 

·                  exposingthe Company to risks inherent in interest rate fluctuations because some of theCompany’s borrowings will be at variable rates of interest, which could resultin a higher interest expense in the event of increases in interest rates;

 

·                  limitingthe Company’s flexibility in planning for, or reacting to, changes in itsbusiness, and the industry in which it operates; and

 

·                  placingthe Company at a competitive disadvantage compared with its competitors thathave less indebtedness.

 

20

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***Despite current indebtedness levels, the Company and its subsidiariesmay still be able to incur substantially more indebtedness. This could furtherexacerbate the risks associated with its substantial leverage.***

 

Subjectto specified limitations, the indenture governing the Notes and the creditagreement governing its asset-based revolving credit facility permits theCompany and its subsidiaries to incur substantial additional indebtedness,including $700.0 million of borrowings under the Company’s asset-basedrevolving credit facility, which is not subject to any financial maintenancecovenants and ranks equally with the Notes. If new indebtedness is added to the Company’s and its subsidiaries’current indebtedness levels, the risks described above could intensify.

 

***Covenant restrictions under the Company’s indebtedness may limit itsability to operate its business.***

 

Theindenture governing the Notes and the credit agreement governing the Company’sasset-based revolving credit facility do, and its future indebtednessagreements may, contain covenants that may restrict the Company’s ability tofinance future operations or capital needs or to engage in other businessactivities. The Company’s indenture and its asset-based revolving creditfacility restrict, among other things, its ability and the ability of itsrestricted subsidiaries to:

 

·                  incur,assume or guarantee additional indebtedness;

 

·                  issueredeemable stock and preferred stock;

 

·                  repurchasecapital stock;

 

·                  makeother restricted payments including, without limitation, paying dividends andmaking investments;

 

·                  createliens;

 

·                  redeemdebt that is junior in right of payment to the Notes;

 

·                  sellor otherwise dispose of assets, including capital stock of subsidiaries;

 

·                  enterinto agreements that restrict dividends from subsidiaries;

 

·                  enterinto mergers or consolidations;

 

·                  enterinto transactions with affiliates; and

 

·                  enterinto sale/leaseback transactions.

 

Inaddition, the Company’s asset-based revolving credit facility contains certaincustomary affirmative and negative covenants and events of default but nofinancial maintenance covenants.  Eventsbeyond the Company’s control, including changes in general economic andbusiness conditions, may result in a breach of any of these covenants andresult in a default under the Company’s indenture and its asset-based revolvingcredit facility. If an event of default under its asset-based revolving creditfacility occurs, the lenders could terminate all commitments to lend and electto declare all amounts outstanding thereunder, together with accrued interest,to be immediately due and payable. If the Company was unable to pay suchamounts, the lenders could proceed against the collateral pledged to them.  All obligations under the Company’sasset-based revolving credit facility, and the guarantees of those obligations,are secured, subject to certain exceptions, by substantially all of the assetsof the borrowers including: (1) a first-priority security interest ininventory, accounts receivable, cash, securities and other general intangibles;and (2) a second-priority security interest in equipment, intellectualproperty rights and related general intangibles and all of the capital stock ofLinens ’n Things, Inc.and the capital stock of certain subsidiaries. Should the lenders proceed against the collateral pledged to them, theCompany cannot give assurance that it would have sufficient assets to payamounts due on the Notes. As a result, an investor may receive less than thefull amount that the investor would be otherwise entitled to receive on the Notes.

 

21

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***The Company will require a significant amount of cash, and its abilityto generate sufficient cash depends upon many factors, some of which are beyondits control.***

 

TheCompany’s ability to make payments on and refinance its indebtedness and tofund working capital needs and planned capital expenditures depends on itsability to generate adequate cash flow in the future. To some extent, this issubject to general economic, financial, competitive, legislative and regulatoryfactors and other factors that are beyond its control. For example, the Company’sneed to stock substantial inventory could increase its working capital needs.Also, current conditions in the credit markets generally and those relating tothe retail sector specifically, including the ability of vendors to factor orinsure their receivables from their retail customers, could result in reducedcash flow or increased challenges in obtaining additional financing orrefinancing.  The Company cannot give assurancethat its business will continue to generate cash flow from operations atcurrent levels or that its cash needs will not increase. If the Company isunable to generate sufficient cash flow from operations in the future toservice its indebtedness and meet its other needs, it may have to refinance allor a portion of its existing indebtedness, obtain additional financing, reduceexpenditures that it deems necessary to its business or sell assets. TheCompany cannot give assurance that any refinancing of this kind would bepossible or that any additional financing could be obtained or could beobtained on commercially reasonable terms. The inability to obtain additionalfinancing could have a material adverse effect on the Company’s financialcondition and on its ability to meet its obligations to an investor under theNotes.

 

***Variable rate indebtedness subjects the Company to interest rate risk,which could cause its debt service obligations to increase significantly.***

 

Certainof the Company’s borrowings, primarily borrowings under its asset-basedrevolving credit facility and the Notes, are, and are expected to continue tobe, at variable rates of interest and expose the Company to interest rate risk.If interest rates increase, the Company’s debt service obligations on thevariable rate indebtedness would increase even though the amount borrowedremained the same, and its net income would decrease.  Borrowings under the Company’s asset-basedrevolving credit facility bear interest at a rate equal to, at the Company’soption, either (a) an alternate base rate determined by reference to thehigher of (1) the base rate in effect on such day and (2) the federalfunds effective rate plus 0.50% or (b) a LIBOR rate, with respect to anyEurodollar borrowing, determined by reference to the costs of funds for U.S.dollar deposits for the interest period relevant to such borrowing adjusted forcertain additional costs, in each case plus an applicable margin.  The initial applicable margin for borrowingsunder the revolving commitment is 0.25% with respect to alternate base rateborrowings and 1.50% with respect to LIBOR borrowings.  The applicable margin with respect to theTranche B commitment (consisting of per annum rate margins) is 2.75% in thecase of Eurodollar borrowings and, in the event the adjusted LIBOR rate is notavailable, 1.25% in the case of alternate base rate borrowings.  The applicable margin for borrowings underthe asset-based revolving credit facility is subject to adjustment based on itsexcess availability.  As of December 29,2007, such margins remained at the intial levels established.  The applicable fixed margin with respect tothe Notes is a percentage per annum equal to 5.625%. Assuming all revolvingloans are fully drawn, each quarter point change in interest rates would resultin a $3.4 million change in annual interest expense on the Company’sasset-based revolving credit facility and the Notes.  Pursuant to the indenture governing theNotes, the Company is required to enter into interest rate swaps, involving theexchange of floating for fixed rate interest payments, or other forms ofderivative transactions, to reduce interest rate volatility.  In July 2006 the Company entered intotwo derivative financial instruments to reduce interest rate volatility throughJanuary 15, 2009; however, beyond this date, the Company may not be ableto successfully enter into interest rate swaps, or other forms of derivativetransactions, on commercially reasonable terms or at all.

 

**Item 1B. Unresolved SEC Staff Comments**

 

None.

 

22

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**Item 2. Properties**

 

The Company leases its corporate headquarters, which is located at 6Brighton Road, in Clifton, New Jersey. Concurrent with the acquisition of the building by the landlord in December 2006,the Company entered into a lease with a 20-year primary lease term providingfor fixed rent during the first seven years and certain tenant-drivenrefinancing options at the end of the seventh year consisting of an outrightpurchase, prepaying rent in one lump sum for the remaining 13 years orreplacing the landlord’s mortgage with a successor mortgage.

 

As of December 29, 2007, the Company operated 589 stores in 47U.S. states and seven Canadian provinces. The Company’s stores generally range in size from 25,000 to 40,000 grosssquare feet.  The Company’s stores arepredominately located in power strip centers containing other complementarybroad-based retail chains.  The Companycurrently leases all of its existing stores and expects that its policy of leasingrather than owning will continue.

*** ***

***Distribution Centers***

 

TheCompany owns its Greensboro, North Carolina distribution center and leases itsSwedesboro, New Jersey and Shepherdsville, Kentucky distribution centers.  Combined total square footage for theseCompany-operated facilities is approximately 1.2 million.  Both the New Jersey and Kentucky distributioncenters can be expanded.

*** ***

***Leased Properties***

 

AtDecember 29, 2007, the Company leased the real property of all 589 of itsstores.  The aggregate rent paid forfiscal 2007 was $300.8 million.  TheCompany believes that none of its leases is individually material to it.  The Company has non-cancelable operatingleases, primarily for retail stores, which expire through 2029.  The Company’s leases provide for originallease terms that generally range from 10 to 20 years and most of the leasesprovide for one or more renewal options ranging from five to 20 years intotal.  Generally leases provide forscheduled rent increases and many of the leases provide for contingent rent(based upon store sales exceeding stipulated amounts).  Most of the Company’s leases require it topay costs such as real estate taxes and common area maintenance costs.

 

23

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Thetable below sets forth the number and location of the Company’s 551 stores inthe United States as of December 29, 2007:

 
| **State**     | ** ** | **Number of  Stores** | ** ** | **State**      | ** ** | **Number of  Stores** |
|---------------|------------|-----------------------|------------|----------------|------------|-----------------------|
| Alabama       |       | 6                     |       | Nebraska       |       | 3                     |
| Arizona       |       | 17                    |       | Nevada         |       | 5                     |
| Arkansas      |       | 4                     |       | New Hampshire  |       | 5                     |
| California    |       | 65                    |       | New Jersey     |       | 23                    |
| Colorado      |       | 13                    |       | New Mexico     |       | 3                     |
| Connecticut   |       | 13                    |       | New York       |       | 30                    |
| Delaware      |       | 1                     |       | North Carolina |       | 19                    |
| Florida       |       | 48                    |       | North Dakota   |       | 1                     |
| Georgia       |       | 20                    |       | Ohio           |       | 14                    |
| Idaho         |       | 2                     |       | Oklahoma       |       | 4                     |
| Illinois      |       | 26                    |       | Oregon         |       | 7                     |
| Indiana       |       | 9                     |       | Pennsylvania   |       | 17                    |
| Iowa          |       | 1                     |       | Rhode Island   |       | 4                     |
| Kansas        |       | 3                     |       | South Carolina |       | 7                     |
| Kentucky      |       | 4                     |       | South Dakota   |       | 1                     |
| Louisiana     |       | 7                     |       | Tennessee      |       | 9                     |
| Maine         |       | 5                     |       | Texas          |       | 53                    |
| Maryland      |       | 6                     |       | Utah           |       | 3                     |
| Massachusetts |       | 22                    |       | Vermont        |       | 1                     |
| Michigan      |       | 12                    |       | Virginia       |       | 12 (1)                |
| Minnesota     |       | 7                     |       | Washington     |       | 15                    |
| Mississippi   |       | 2                     |       | West Virginia  |       | 1                     |
| Missouri      |       | 9                     |       | Wisconsin      |       | 9                     |
| **Montana**   | ** ** | 3                     | ** ** | ** **     | ** ** |                  |

 

----

 (1) For reporting purposes,District of Columbia is included in Virginia total stores.  This is consistent with the prior year.

 

24

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Thetable below sets forth the number and location of the Company’s 38 stores inCanada as of December 29, 2007:

 
| **Province**          | ** ** | **Number of   Stores** | ** ** |
|-----------------------|------------|------------------------|------------|
|                  |       |                   |       |
| Alberta               |       | 9                      |       |
| British  Columbia     |       | 6                      |       |
| Manitoba              |       | 1                      |       |
| Nova  Scotia          |       | 2                      |       |
| Ontario               |       | 18                     |       |
| Prince  Edward Island |       | 1                      |       |
| Saskatchewan          |       | 1                      |       |

 

TheCompany believes that it will be able to negotiate acceptable extensions of theleases for those locations that it intends to continue operating.  Beyond termination of the Company’scontractual lease obligations through the end of the term, early termination ofthese leases would not result in significant penalty to the Company.  A total of 8 leases will be expiring infiscal 2008 or 2009.

 

Whenappropriate, the Company has chosen to sell and then lease-back certainproperties.  Factors leading to thisdecision include alternative desires for use of cash and minimalization of therisks associated with owning the property, especially changes in the valuationdue to population shifts, urbanization and proximity to high volume streets.

 

Thefollowing table sets forth information concerning the Company’s store expansionprogram during the past five years:

 
| ** **       | ** ** | ** **          | ** ** | ** **          | ** ** | **Total Square Footage  (In Thousands)** | ** ** | **Store Count**  | ** ** |
|------------------|------------|---------------------|------------|---------------------|------------|------------------------------------------|------------|------------------|------------|
| **Fiscal  Year** | ** ** | **Store  Openings** | ** ** | **Store  Closings** | ** ** | **Beginning  of Year**                   | ** ** | **End  of Year** | ** ** | **Beginning  of Year** | ** ** | **End  of Year** | ** ** |
|             |       |                |       |                |       |                                     |       |             |       |   |   |   |   |
| 2003             |       | 58                  |       | 9                   |       | 13,607                                   |       | 15,106           |       | 391 |   | 440 |   |
| 2004             |       | 54                  |       | 2                   |       | 15,106                                   |       | 16,702           |       | 440 |   | 492 |   |
| 2005             |       | 55                  |       | 5                   |       | 16,702                                   |       | 18,071           |       | 492 |   | 542 |   |
| 2006             |       | 31                  |       | 2                   |       | 18,071                                   |       | 18,928           |       | 542 |   | 571 |   |
| 2007             |       | 18                  |       | 0                   |       | 18,928                                   |       | 19,423           |       | 571 |   | 589 |   |

 

**Item 3.  LegalProceedings**

 

TheCompany is involved in various claims and legal, regulatory and administrativeactions arising in the ordinary course of business, including actions beforethe Equal Employment Opportunity Commission. In the opinion of management, the ultimate disposition of these mattersis not expected to have a material adverse effect on the Company’s consolidatedfinancial position, results of operations or liquidity.

 

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

 

None.

 

25

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**PART II**

 

**Item 5. Market for Registrants’ Common Equity, Related Stockholder Matters andIssuer Purchases of Equity Securities**

 

Priorto the Merger, the common stock of Linens ’n Things, Inc., par value $0.01(the “Predecessor Common Stock”) was listed on the New York Stock Exchange (“NYSE”).  Its trading symbol was LIN.

 

Inconnection with the closing of the Merger, each share of Predecessor CommonStock was converted into the right to receive cash for aggregate considerationof approximately $1.3 billion.

 

Thelast trading day of the Predecessor Common Stock was February 14,2006.  On the following day the stock wasdelisted from the NYSE and a Form 25 was filed with the SEC by the NYSE tostrike the Predecessor Common Stock from listing and registration thereon.

 

As a result of the Merger, the Company’s common stock isprivately held, and there is no established trading market for its stock. As ofthe date of the filing of this report, there were four holders of record of theCompany’s common stock.

 

***Dividends***

 

TheCompany has not declared dividends on its common stock for the two most recentfiscal years.  The indenture governingthe Notes and the credit agreement governing the Company’s asset-basedrevolving credit facility contain covenants that restrict the Company’s abilityto pay dividends.

 

**Securities Authorized for Issuance under EquityCompensation Plans**

 

The following table sets forth information about the Company’s commonstock that may be issued upon exercise of options, warrants and rights underall of the Company’s equity compensation plans as of December 29, 2007.

 
| ** **                                                  | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under equity compensation  plans (excluding  securities reflected in  column (a))** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Plan Category**                                           | ** ** | **(a)**                                                                                             | ** ** | **(b)**                                                                            | ** ** | **(c)**                                                                                                                                              | ** ** |
|                                                        |       |                                                                                                |       |                                                                               |       |                                                                                                                                                 |       |
| Equity  compensation plans approved by security holders     |       | 911,696                                                                                             |       | $                                                                                  | 50.00      |                                                                                                                                                 | 305,602    |   |
|                                                        |       |                                                                                                |       |                                                                               |       |                                                                                                                                                 |       |   |
| Equity  compensation plans not approved by security holders |       | 53,000                                                                                              |       | $                                                                                  | 50.00      |                                                                                                                                                 | —     |   |
|                                                        |       |                                                                                                |       |                                                                               |       |                                                                                                                                                 |       |
| Total                                                       |       | 964,696                                                                                             |       | $                                                                                  | 50.00      |                                                                                                                                                 | 305,602    |   |

 

*StockOption Plan*

 

OnFebruary 14, 2006, the board of directors and stockholders of the Companyadopted the Linens Holding Co. Stock Option Plan.  The plan provides employees or directors ofthe Company or its subsidiaries, who are in a position to contribute to thelong-term success of these entities, with options to acquire shares in the Companyto aid in attracting, retaining and motivating persons of outstandingability.  The plan was amended in March 2006to increase the number of shares of common stock, par value $0.01 per share, ofthe Company available for issuance under the Plan to 1,157,298 shares.  If any shares reserved for an option areforfeited or any option otherwise terminates without a payment being made tothe optionee in the form of stock, the shares underlying such option will alsobecome available for future option grants under the plan.  The stock options granted under the plan toeach optionee are equally 

 

26

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divided between a “Time Option” and a “Performance Option,” as thoseterms are defined in the standard form of option grant letter.  The options expire seven years after the dateof grant.

* *

*Director Options*

 

OnJune 13, 2006, the board of directors of the Company approved and adopteda director compensation policy, which provided for the grant to the Chairman ofthe Board and each non-employee director, upon first election to the board ofdirectors, of a non-qualified stock option to purchase a minimum of 5,000shares of the Company’s common stock, such number to be determined by the boardof directors in its discretion, and such grants to be made outside of theLinens Holding Co. Stock Option Plan and to be fully exercisable upongrant.  The director options ascontemplated in the director compensation policy were also authorized andapproved by the stockholders of the Company in June 2006.

* *

*Investment Options*

 

Inconnection with three purchases of shares of common stock from the Company bydirectors or executive officers during the fiscal year ended December 30,2006, the board of directors of the Company approved the grant of anon-qualified stock option to purchase the same number of shares at an exerciseprice equal to the purchase price per share. Each of these option grants was fully exercisable on the date of grant.  These options were made outside of the LinensHolding Co. Stock Option Plan.

 

**Item6.  Selected Financial Data**

 

Thefollowing table sets forth select consolidated historical financialinformation.  This information should beread in conjunction with the consolidated financial statements of the Company andrelated notes thereto and “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” appearing elsewhere herein.

 

Asa result of the transactions related to the Merger, the financial results forthe 52 weeks ended December 30, 2006 are separately presented in the tablebelow between the “Successor Entity,” covering the period February 14,2006 through December 30, 2006, and the “Predecessor Entity,” covering theperiod January 1, 2006 through February 13, 2006, which is the dateof the consummation of the Merger.  Thefinancial results for the 52 weeks ended December 29, 2007 are presentedunder “Successor Entity” and the results for each of the 52 weeks ended December 31,2005, January 1, 2005 and January 3, 2004 are presented under “PredecessorEntity.”

 

27

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**Five-Year FinancialSummary (dollars in thousands, except for ratios and store data)**

 
| ** **                                                     | ** ** | **Successor**                                           | ** **    | **Predecessor**                                              | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------------|---------------|--------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **Fiscal Year  Ended  December 29,  2007(1)** | ** **    | **February 14,  2006 to  December 30,  2006** | ** ** | **January 1,  2006 to  February 13,  2006** | ** ** | **Fiscal Year  Ended  December 31,  2005(1)** | ** ** | **Fiscal Year  Ended  January 1,  2005(1)(2)** | ** ** | **Fiscal Year  Ended  January 3,  2004(1)** | ** ** |
|                                                           |       |                                                    |          |                                                         |       |   |   |   |   |   |   |   |   |
| **Income  Statement Data:**                                    |       |                                                    |          |                                                         |       |   |   |   |   |   |   |   |   |
| **Net  sales**                                                 | ** ** | **$**                                                   | **2,794,776** | ** **                                                   | **$**      | **2,534,365** | ** ** | **$** | **284,971** | ** ** | **$** | **2,694,742** | ** ** | **$** | **2,661,469** | ** ** | **$** | **2,395,272** |   |
| Cost of sales,  including buying and distribution costs        |       | 1,747,904                                               |          | 1,557,011                                                    |       | 180,675 |   | 1,595,394 |   | 1,589,700 |   | 1,428,706 |   |
|                                                           |       |                                                    |          |                                                         |       |   |   |   |   |   |   |   |   |
| **Gross  profit**                                              | ** ** | **1,046,872**                                           | ** **    | **977,354**                                                  | ** ** | **104,296** | ** ** | **1,099,348** | ** ** | **1,071,769** | ** ** | **966,566** |   |
|                                                           |       |                                                    |          |                                                         |       |   |   |   |   |   |   |   |   |
| Selling, general  and administrative expenses                  |       | 1,221,324                                               |          | 1,040,680                                                    |       | 175,424 |   | 1,036,599 |   | 975,840 |   | 849,334 |   |
| Impairment of  property and equipment                          |       | 16,779                                                  |          | 27,992                                                       |       | — |   | 4,059 |   | 900 |   | — |   |
| Impairment of  identifiable intangible asset                   |       | 100                                                     |          | 3,119                                                        |       | — |   | — |   | — |   | — |   |
|                                                           |       |                                                    |          |                                                         |       |   |   |   |   |   |   |   |   |
| **Operating  (loss) profit**                                   | ** ** | **(191,331**                                            | **)**         | **(94,437**                                                  | **)**      | **(71,128** | **)** | **58,690** | ** ** | **95,029** | ** ** | **117,232** |   |
|                                                           |       |                                                    |          |                                                         |       |   |   |   |   |   |   |   |   |
| Interest income                                                |       | (386                                                    | )             | (190                                                         | )          | (668 | ) | (894 | ) | (542 | ) | (169 | ) |
| Interest expense                                               |       | 101,042                                                 |          | 79,795                                                       |       | — |   | 4,860 |   | 3,903 |   | 4,001 |   |
| Writeoff of  deferred financing costs                          |       | 6,986                                                   |          | —                                                       |       | — |   | — |   | — |   | — |   |
|                                                           |       |                                                    |          |                                                         |       |   |   |   |   |   |   |   |   |
| Interest expense  (income), net                                |       | 107,642                                                 |          | 79,605                                                       |       | (668 | ) | 3,966 |   | 3,361 |   | 3,832 |   |
|                                                           |       |                                                    |          |                                                         |       |   |   |   |   |   |   |   |   |
| Other income,  net                                             |       | (6,251                                                  | )             | (657                                                         | )          | (1,286 | ) | (3,137 | ) | (6,261 | ) | (4,334 | ) |
|                                                           |       |                                                    |          |                                                         |       |   |   |   |   |   |   |   |   |
| **(Loss)  income before (benefit) provision for income taxes** | ** ** | **(292,722**                                            | **)**         | **(173,385**                                                 | **)**      | **(69,174** | **)** | **57,861** | ** ** | **97,929** | ** ** | **117,734** |   |
| (Benefit)  provision for income taxes                          |       | (50,631                                                 | )             | (66,852                                                      | )          | (21,270 | ) | 21,879 |   | 37,408 |   | 44,975 |   |
|                                                           |       |                                                    |          |                                                         |       |   |   |   |   |   |   |   |   |
| **Net  (loss) income**                                         | ** ** | **$**                                                   | **(242,091**  | **)**                                                        | **$**      | **(106,533** | **)** | **$** | **(47,904** | **)** | **$** | **35,982** | ** ** | **$** | **60,521** | ** ** | **$** | **72,759** |   |
|                                                           |       |                                                    |          |                                                         |       |   |   |   |   |   |   |   |   |
| **Other  Financial Data:**                                     |       |                                                    |          |                                                         |       |   |   |   |   |   |   |   |   |
| Adjusted  EBITDA(4)                                            |       | $                                                       | (26,235       | )                                                            | $          | 75,744 |   | $ | (14,170 | ) | $ | 175,158 |   | $ | 229,052 |   | $ | 216,934 |   |
| Depreciation and  amortization                                 |       | $                                                       | 130,301       |                                                         | $          | 114,509 |   | $ | 12,642 |   | $ | 90,270 |   | $ | 81,318 |   | $ | 71,348 |   |
| Capital  expenditures                                          |       |                                                    |          |                                                         |       |   |   |   |   |   |   |   |   |
| New stores                                                     |       | $                                                       | 25,210        |                                                         | $          | 43,090 |   | $ | 10,055 |   | $ | 95,008 |   | $ | 79,254 |   | $ | 82,806 |   |
| Existing stores  and other                                     |       | 11,812                                                  |          | 23,190                                                       |       | 901 |   | 33,904 |   | 31,189 |   | 30,765 |   |
|                                                           |       |                                                    |          |                                                         |       |   |   |   |   |   |   |   |   |
| Total capital  expenditures                                    |       | $                                                       | 37,022        |                                                         | $          | 66,280 |   | $ | 10,956 |   | $ | 128,912 |   | $ | 110,443 |   | $ | 113,571 |   |
|                                                           |       |                                                    |          |                                                         |       |   |   |   |   |   |   |   |   |
| Cash interest  expense                                         |       | $                                                       | 91,113        |                                                         | $          | 58,577 |   | $ | 135 |   | $ | 4,851 |   | $ | 4,018 |   | $ | 3,888 |   |
| Ratio of  earnings to fixed charges(3)                         |       | (0.40                                                   | )x            | (0.05                                                        | )x         | (5.09 | )x | 1.66 | x | 2.23 | x | 2.65 | x  |
|                                                           |       |                                                    |          |                                                         |       |   |   |   |   |   |   |   |   |
| **Store  Data:**                                               |       |                                                    |          |                                                         |       |   |   |   |   |   |   |   |   |
| Number of stores  (at period end)                              |       | 589                                                     |          | 571                                                          |       | 542 |   | 542 |   | 492 |   | 440 |   |
| Total gross  square footage (000’s) (at period end)       |       | 19,423                                                  |          | 18,928                                                       |       | 18,071 |   | 18,071 |   | 16,702 |   | 15,106 |   |
| Average net  sales per store (millions)                        |       | $                                                       | 4.8           |                                                         | $          | 4.6 |   | $ | 0.5 |   | $ | 5.2 |   | $ | 5.6 |   | $ | 5.7 |   |
| Net sales per  average square foot                             |       | $                                                       | 146           |                                                         | $          | 137 |   | $ | 16 |   | $ | 156 |   | $ | 166 |   | $ | 167 |   |
| Comparable store  sales(5)(6)                                  |       | (3.4                                                    | )%            | (0.7                                                         | )%         | NA |   | (6.0 | )% | 1.8 | % | 1.3 | % |
|                                                           |       |                                                    |          |                                                         |       |   |   |   |   |   |   |   |   |
| **Balance  Sheet Data (at period end****):**                   |       |                                                    |          |                                                         |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                     |       | $                                                       | 16,071        |                                                         | $          | 12,526 |   | $ | 90,333 |   | $ | 158,158 |   | $ | 204,009 |   | $ | 136,129 |   |
| Working capital                                                |       | 414,390                                                 |          | 428,043                                                      |       | 507,899 |   | 537,516 |   | 519,686 |   | 458,519 |   |
| Total assets                                                   |       | 1,740,387                                               |          | 1,857,934                                                    |       | 1,614,744 |   | 1,650,834 |   | 1,591,884 |   | 1,467,456 |   |
| Senior secured  notes and other long-term debt                 |       | 855,859                                                 |          | 689,876                                                      |       | 2,131 |   | 2,139 |   | 2,196 |   | — |   |
| Total  shareholders’ equity(7)                            |       | 322,784                                                 |          | 544,743                                                      |       | 831,858 |   | 849,863 |   | 809,353 |   | 737,377 |   |
|                                                           |       |                                                    |          |                                                         |       |   |   |   |   |   |   |   |   |
| **Cash  Flow:**                                                |       |                                                    |          |                                                         |       |   |   |   |   |   |   |   |   |
| Cash (used in)  provided by:                                   |       |                                                    |          |                                                         |       |   |   |   |   |   |   |   |   |
| Operating  activities                                          |       | $                                                       | (123,354      | )                                                            | $          | 2,202 |   | $ | (61,956 | ) | $ | 79,097 |   | $ | 167,259 |   | $ | 151,167 |   |
| Investing  activities                                          |       | (31,622                                                 | )             | (1,266,865                                                   | )          | (10,956 | ) | (128,912 | ) | (110,443 | ) | (113,571 | ) |
| Financing  activities                                          |       | 157,813                                                 |          | 1,277,249                                                    |       | 4,962 |   | 3,803 |   | 10,200 |   | 11,375 |   |

 

28

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*(1) *Fiscal 2007, 2005, 2004 and2003 were 52-week periods.

 

*(2) *Fiscal 2004 results includethe implementation of the provisions of EITF 02-16.  Prior to January 4, 2004, certain fundsreceived from vendors were reflected immediately as a reduction of advertisingexpense in SG&A or cost of sales. Effective January 4, 2004, inconnection with the implementation of EITF 02-16, the Company treats thesevendor funds as a reduction of the cost of inventory and, as a result, thesefunds are recognized as a reduction of cost of sales when the inventory issold.  The effect of the implementationof EITF 02-16 was to reduce income before provision for income taxes by $21.5million ($13.3 million, net of tax) for the fiscal year ended January 1,2005.

 

*(3) *For purposes of calculatingthe ratio of earnings to fixed charges, earnings represent income (loss) fromcontinuing operations before income taxes plus fixed charges. Fixed chargesinclude interest expense, including amortization of debt issuance costs and onethird of rental expense which management believes is representative of theinterest component of rental expense.

 

*(4) *EBITDA represents (loss)income before (benefit) provision for income taxes, interest expense (income),net and depreciation and amortization. Adjusted EBITDA represents EBITDAfurther adjusted to exclude non-cash and unusual items. Management uses EBITDAand Adjusted EBITDA as additional tools to assess the Company’s operatingperformance.  Management considers EBITDAand Adjusted EBITDA to be useful measures in highlighting trends in the Company’sbusiness and in analyzing the profitability of similar enterprises.  It is also used as a measurement for thecalculation of management incentive compensation. Management believes thatEBITDA and Adjusted EBITDA are effective, when used in conjunction with netincome, in evaluating asset performance and differentiating efficient operatorsin the industry. Furthermore, management believes that EBITDA and AdjustedEBITDA provide useful information to, and is commonly used by, investors,analysts and others to measure operating performance and because it providesinsights into management’s evaluation of the Company’s results ofoperations.  EBITDA and Adjusted EBITDA(as calculated with contractually-specified adjustments) are also one of thekey measures used in calculating compliance with covenants in the Company’snotes. Non-compliance with financial covenants could prevent the Company fromengaging in certain activities or result in a default under its notes.

 

EBITDAand Adjusted EBITDA are not measures of financial performance under GAAP, arenot intended to represent cash flow from operations under GAAP and should notbe used as an alternative to net income as an indicator of operatingperformance or to cash flow from operating, investing or financing activitiesas a measure of liquidity. Management compensates for the limitations of usingEBITDA and Adjusted EBITDA by using it only to supplement the Company’s GAAPresults to provide a more complete understanding of the factors and trendsaffecting its business. EBITDA and Adjusted EBITDA have limitations as ananalytical tool, and investors should not consider them in isolation or as asubstitute for analysis of the Company’s results of operations and cash flowsas reported under GAAP. Some of the limitations of EBITDA and Adjusted EBITDAare:

 

·                  EBITDAand Adjusted EBITDA do not reflect the Company’s cash used for capitalexpenditures;

 

·                  althoughdepreciation and amortization are non-cash charges, the assets beingdepreciated or amortized often will have to be replaced and EBITDA and AdjustedEBITDA do not reflect the cash requirements for such replacements;

 

·                  EBITDAand Adjusted EBITDA do not reflect changes in, or cash requirements for, theCompany’s working capital requirements;

 

·                  EBITDAand Adjusted EBITDA do not reflect the cash necessary to make payments ofinterest or principal on the Company’s indebtedness; and

 

·                  EBITDAand Adjusted EBITDA do not reflect non-recurring expenses which qualify asextraordinary such as one-time write-offs to inventory and reserve accruals.

 

29

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While EBITDA and Adjusted EBITDA are frequently used as ameasure of operations and of the Company’s ability to meet indebtedness servicerequirements, they are not necessarily comparable to other similarly titledcaptions of other companies due to potential inconsistencies in the method ofcalculation.

 

The following table reconciles EBITDA and Adjusted EBITDA aspresented above, to net loss (income) as presented in the Company’sconsolidated statements of operations and in accordance with GAAP (inthousands):

 
| ** **                                                | ** ** | **Successor**                                   | ** **  | **Predecessor**                                         | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------------|-------------|---------------------------------------------------------|------------|
| ** **                                                | ** ** | **Fiscal Year  Ended  December 29,  2007** | ** **  | **February 14,  2006 to  December 30,  2006** | ** ** | **January 1,  2006 to  February  13, 2006** | ** ** | **Fiscal Year  Ended  December 31,  2005** | ** ** | **Fiscal Year Ended  January 1, 2005** | ** ** | **Fiscal Year  Ended  January 3,  2004** | ** ** |
|                                                      |       |                                            |        |                                                    |       |   |   |   |   |   |   |   |   |
| Net (loss) income                                         |       | $                                               | (242,091    | )                                                       | $          | (106,533 | ) | $ | (47,904 | ) | $ | 35,982 |   | $ | 60,521 | ** ** | $ | 72,759 | ** ** |
| (Benefit)  provision for income taxes                     |       | (50,631                                         | )           | (66,852                                                 | )          | (21,270 | ) | 21,879 |   | 37,408 |   | 44,975 |   |
| Interest expense (income), net                            |       | 107,642                                         |        | 79,605                                                  |       | (668 | ) | 3,966 |   | 3,361 |   | 3,832 |   |
| Depreciation and amortization                             |       | 130,301                                         |        | 114,509                                                 |       | 12,642 |   | 90,270 |   | 81,318 |   | 71,348 |   |
|                                                      |       |                                            |        |                                                    |       |   |   |   |   |   |   |   |   |
| **EBITDA**                                                | ** ** | **(54,779**                                     | **)**       | **20,729**                                              | ** ** | **(57,200** | **)** | **152,097** | ** ** | **182,608** | ** ** | **192,914** | ** ** |
|                                                      |       |                                            |        |                                                    |       |   |   |   |   |   |   |   |   |
| Non-cash rent expense(a)                                  |       | 9,227                                           |        | 10,739                                                  |       | 534 |   | 4,739 |   | 7,978 |   | 8,052 |   |
| Non-cash lease transactions(m)                            |       | (2,470                                          | )           | (2,112                                                  | )          | — |   | — |   | — |   | — |   |
| Non-cash  landlord allowance amortization(b)              |       | (1,357                                          | )           | (875                                                    | )          | (2,959 | ) | (21,633 | ) | (19,968 | ) | (17,283 | ) |
| Cash landlord  allowances received(c)                     |       | 3,034                                           |        | 6,004                                                   |       | 1,277 |   | 28,697 |   | 29,096 |   | 30,410 |   |
|                                                      |       |                                            |        |                                                    |       |   |   |   |   |   |   |   |   |
| **EBITDA  after rent-related adjustments**                | ** ** | **(46,345**                                     | **)**       | **34,485**                                              | ** ** | **(58,348** | **)** | **163,900** | ** ** | **199,714** | ** ** | **214,093** | ** ** |
|                                                      |       |                                            |        |                                                    |       |   |   |   |   |   |   |   |   |
| Transaction expenses(d)                                   |       | —                                          |        | 1,824                                                   |       | 31,730 |   | 3,322 |   | — |   | — |   |
| Non-cash  impairment of property and equipment(e)         |       | 16,779                                          |        | 27,992                                                  |       | — |   | 4,059 |   | 900 |   | 760 |   |
| Non-cash  impairment of identifiable intangible asset (n) |       | 100                                             |        | 3,119                                                   |       | — |   | — |   | — |   | — |   |
| Non-cash  writeoff of property and equipment(o)           |       | 21                                              |        | 671                                                     |       | — |   | 1,433 |   | 2,209 |   | 1,265 |   |
| Non-cash  stock-based compensation(f)                     |       | —                                          |        | 37                                                      |       | 3,143 |   | 1,243 |   | 510 |   | 816 |   |
| Accounting  change for vendor allowances(g)               |       | —                                          |        | —                                                  |       | — |   | — |   | 21,468 |   | — |   |
| Non-recurring  consulting expenses(h)                     |       | —                                          |        | —                                                  |       | — |   | 5,412 |   | 4,251 |   | — |   |
| Accelerated  payment of stock option(i)                   |       | —                                          |        | —                                                  |       | 9,305 |   | — |   | — |   | — |   |
| Stock-based  compensation expense(p)                      |       | 3,189                                           |        | 4,263                                                   |       | — |   | — |   | — |   | — |   |
| Executive  severance(j)                                   |       | 21                                              |        | 3,353                                                   |       | — |   | — |   | — |   | — |   |
| Visa/MasterCard  litigation settlement(k)                 |       | —                                          |        | —                                                  |       | — |   | (2,211 | ) | — |   | — |   |
| Gain on sale of lease(l)                                  |       | —                                          |        | —                                                  |       | — |   | (2,000 | ) | — |   | — |   |
|                                                      |       |                                            |        |                                                    |       |   |   |   |   |   |   |   |   |
| **Adjusted EBITDA**                                       | ** ** | **$**                                           | **(26,235** | **)**                                                   | **$**      | **75,744** | ** ** | **$** | **(14,170** | **)** | **$** | **175,158** | ** ** | **$** | **229,052** | ** ** | **$** | **216,934** | ** ** |

 

----

*(a) *Represents the straight-lineeffect of scheduled rent increases over the expected lease term.

 

*(b) *Non-cash landlord allowanceamortization represents the amortization of cash allowances received fromlandlords at inception of leases. Non-cash landlord allowance amortization hasthe effect of reducing rent expense.

 

*(c) *Represents cash allowancesreceived from landlords at inception of leases.

 

*(d) *Transaction costs representlegal and other merger-related expenses.

 

*(e) *Represents the non-cashaccelerated write-down of the book value of certain underperforming propertyand equipment.

 

*(f) *Represents non-cashcompensation expense related to predecessor period restricted stock grants.

 

30

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*(g) *Prior to January 4,2004, certain funds received from vendors were reflected immediately as areduction of advertising expense in SG&A or cost of sales. Effective January 4,2004, in connection with the implementation of EITF 02-16, the Company treatsthese vendor funds as a reduction of the cost of inventory and, as a result,these funds are recognized as a reduction of cost of sales when the inventoryis sold.  The effect of theimplementation of EITF 02-16 was to reduce income before provision for incometaxes by $21.5 million for the fiscal year ended January 1, 2005.

 

*(h) *Represents non-recurringconsulting costs related to a strategic corporate profitability project thatbegan in 2004 and was completed in 2005 and that was significantly greater inscope and costs than what the Company typically incurs or is expected to incur.

 

* (i) *Representsacceleration of compensation expense related to stock option grants, as aresult of the acquisition of the Company by the Sponsors.

 

*(j) *Charges related to severancefor a former executive coupled with individuals affected under the Company’scost containment initiative.

 

*(k) *Represents the Company’sshare of the Visa/MasterCard antitrust litigation settlement.

 

*(l) *Represents non-recurringgain from sale of favorable lease.

 

(m) Representsnon-cash unfavorable lease amortization for leases valued below market as aresult of the acquisition of the Company by the Sponsors.

 

(n) Representsthe non-cash accelerated write-down of a certain identifiable intangible asset.

 

(o) Representsthe non-cash disposal of fixed assets for locations that have closed.

 

(p) Representsstock-based compensation expense related to stock option grants under Statementof Financial Accounting Standards No. 123 (Revised 2004), “*Share-Based Payment*”.

 

*(5) *Comparablestore sales include the Company’s internet sales and sales for its storesbeginning on the first day of the month following the 13th full month ofsales.  In the case of a store to bepermanently closed, such store’s sales are not considered comparable once thestore closing process has commenced.

 

(6) Forthe 52-week period ended December 30, 2006.

 

(7) Thebalance at December 31, 2005 includes the cumulative effect of theadoption of SEC Staff Accounting Bulletin No. 108 – see Note 2 to theconsolidated financial statements under “*Staff Accounting Bulletin No. 108.*”

 

31

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** **

**Item7.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

*The following discussion of the Company’s financialcondition and results of operations should be read in conjunction with itsaudited historical consolidated financial statements and related notes theretoappearing elsewhere in this report.  Theresults described below are not necessarily indicative of the results to beexpected in any future periods. This discussion contains forward-lookingstatements based on the Company’s current expectations, which are inherentlysubject to risks and uncertainties. Actual results may differ significantlyfrom those projected in such forward-looking statements due to a number offactors. The Company undertakes no obligation to update or revise anyforward-looking statement.*

 

**Introduction**

 

The Company, together with its wholly owned consolidated subsidiaries,including Linens ’n Things, Inc. and Linens ’n Things Center, Inc.,is an entity that was formed in connection with the February 2006acquisition of all of the outstanding shares of common stock of Linens ’nThings, Inc. (the “Predecessor Entity” or “Predecessor”) for aggregateconsideration of approximately $1.3 billion.

 

In November 2005, Affiliates of the Sponsors formed the Company toserve as a holding company.  On February 14,2006, the Company acquired Linens ’n Things, Inc. when its newly formedsubsidiary, Linens Merger Sub Co., merged with and into Linens ’n Things, Inc.in the merger described in Note 3 to the consolidated financial statementsincluded elsewhere in this report, and Linens ’n Things, Inc., as thesurviving corporation, became a wholly owned subsidiary of the Company.

 

The Company is the second largest specialty retailer of home textiles,housewares and home accessories in North America operating 589 stores under theLinens ’n Things, Inc. banner in 47 U.S. states and seven Canadianprovinces at December 29. 2007. During fiscal 2007, the Company opened 18 new stores, increasing itstotal net square footage by 2.6% to approximately 19.4 million.

 

**Acquisition of the Company by Apollo Management, L.P.Together with Certain Co-Investors**

 

On November 8, 2005, Linens Merger Sub Co. and the Company enteredinto an Agreement and Plan of Merger with Linens ’n Things, Inc.to acquire Linens ’n Things, Inc. through a merger (the “Merger”).  Pursuant to the merger agreement, each shareof common stock of Linens ’n Things, Inc. (other than sharesheld in treasury or owned by Linens Merger Sub Co., the Company or anyaffiliate of Linens Merger Sub Co. and other than shares held by stockholderswho properly demanded and perfected appraisal rights) would be converted intothe right to receive cash for aggregate consideration of approximately$1.3 billion. The Merger was structured as a reverse subsidiary merger,and on February 14, 2006, Linens Merger Sub Co. was merged with and intoLinens ’n Things, Inc., with Linens ’n Things, Inc.as the surviving corporation.  As thesurviving corporation in the Merger, Linens ’n Things, Inc.assumed by operation of law all of the rights and obligations of Linens MergerSub Co., including $650.0 million aggregate principal amount of SeniorSecured Floating Rate Notes (the “Notes”) due 2014 of Linens ’n Things, Inc.and Linens ’n Things Center, Inc. (collectively, the “Issuers”)issued on the same day and the related indenture. Linens ’n ThingsCenter, Inc., a direct wholly owned subsidiary of Linens ’n Things, Inc.,is a co-issuer of the Notes.

 

Affiliates of Apollo Management, L.P., National Realty &Development Corp. and Silver Point Capital Fund Investments LLC (the “Sponsors”)collectively contributed approximately $648 million as equity to LinensMerger Sub Co. immediately prior to the Merger.

 

The Sponsors financed the purchase of Linens ’n Things, Inc.and paid related fees and expenses through the offering of the Notes, theequity investment described above and excess cash on hand at Linens ’n Things, Inc.  At closing, Linens ’n Things, Inc.did not draw on a new asset-based revolving credit facility entered into inconnection with the closing.

 

These transactions, including the Merger and payment of any costsrelated to these transactions, are collectively referred to herein as the “Transactions.”  In connection with the Transactions, Linens ’n Things, Inc.incurred significant indebtedness and became highly leveraged.

 

Immediately following the Merger, Linens ’n Things, Inc.became a wholly owned subsidiary of Linens Holding Co.  Linens Holding Co. is an entity that wasformed in connection with the Transactions and has no assets or liabilitiesother than the shares of Linens Merger Sub Co. and its rights and obligationsunder and in connection with

 

32

----

 

the merger agreement with Linens ’n Things, Inc. and theequity commitment letters and debt financing commitment letters provided inconnection with the Transactions.

 

Theclosing of the Merger occurred on February 14, 2006 simultaneously with:

 
| · | the  closing of the Note offering;                                                                                                                                                                            |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                          |
| · | the  closing of Linens ’n Things, Inc.’s  $600.0 million senior secured asset-based revolving credit facility (the  “Original Credit Facility”);                      |
|   |                                                                                                                                                                                                          |
| · | the  termination of Linens ’n Things, Inc.’s existing $250.0 million unsecured  revolving credit facility and CAD $40.0 million unsecured credit  facility agreements; and |
|   |                                                                                                                                                                                                          |
| · | the  equity investments described above.                                                                                                                                                                      |

 

The consummation of the Note offering was conditioned upon theconsummation of the Merger, the closing of the Original Credit Facility and theequity investments described above, all of which were completed on February 14,2006.

 

As a result of the Merger, all of Linens ’n Things, Inc.’sissued and outstanding capital stock was acquired by Linens Holding Co.  At such time, investment funds associatedwith or designated by the Sponsors acquired approximately 99.7% of the commonstock of Linens Holding Co. through an investment vehicle controlled by ApolloManagement V, L.P., or one of its affiliates, and Robert J. DiNicola, theChairman and Chief Executive Officer of the Company, acquired the remaining0.3% at the same price paid by the Sponsors.

 

As a result of becoming a privately-held company upon the consummationof the Transactions and the issuance in a private placement of the seniorsecured floating rate notes, Linens ’n Things, Inc. delisted its shares ofcommon stock from the New York Stock Exchange, deregistered under Section 12of the Securities Exchange Act upon the filing of a Form 25 with the SECand was no longer required to file reports with the SEC.  However, in accordance with the indenturegoverning these notes, reports were prepared on a basis that was equivalent to,but not filed with, the SEC, and such reports were furnished to noteholders by makingthem available on the Company’s website. In September 2006 the notes were exchanged for new notes with termsthat were identical to the original notes except that the exchange notes wereregistered under the Securities Act upon the filing of a Form S-4 and arelated amendment in July 2006 and August 2006, respectively, withthe SEC.  At such time, the Company onceagain became subject to a filing obligation with the SEC.

 

The Original Credit Facility was subsequently amended and restated in May 2007(the “Old Credit Facility”) and then replaced in its entirety by a new $700.0million senior secured asset-based revolving credit facility in October 2007(the “New Credit Facility”).

 

**Effect of the Transactions**

 

The Merger was accounted for as a businesscombination using the purchase method of accounting, whereby the purchase price(including liabilities assumed) was allocated to the assets acquired based ontheir estimated fair market values at the date of acquisition.  The purchase price paid by the Company toacquire Linens ’n Things, Inc.and related purchase accounting adjustments were “pushed down” and recorded inLinens ’n Things, Inc. andits subsidiaries’ financial statements and resulted in a new basis ofaccounting for the “Successor” period beginning on the day the Merger wascompleted.  The purchase price andrelated costs were allocated to the estimated fair values of the assetsacquired and liabilities assumed at the time of the Merger based on management’sbest estimates of the values of certain of the tangible and intangible assetsacquired.  The Company’s assets andliabilities were adjusted to fair value as of the closing date of theTransactions (see Note 3 to the consolidated financial statements), and theexcess of the total purchase price over the fair value of the Company’s netassets was allocated to goodwill.

 

33

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The following table presents the initialpreliminary allocation of the excess of cost of acquisition over net assetsacquired as of the closing date of the Transactions (in thousands):

 
| ***Cost  of Acquisition***                                       |       |       |      |      |        |
|------------------------------------------------------------------|------------|------------|-----------|-----------|-------------|
| Cash paid                                                        |       | $          | 1,295,834 |      |        |   |
| Transaction  costs                                               |       | 22,824     |      |      |        |
|                                                             |       |       |      |      |        |
| Cost of  acquisition                                             |       |       |      | $         | 1,318,658   |   |
|                                                             |       |       |      |      |        |
| ***Net  Assets Acquired:***                                      |       |       |      |      |        |
| Historical net  assets                                           |       | $          | 831,858   |      |        |   |
| Add: deferred  rent reversed                                     |       | 252,236    |      |      |        |
| Less: new basis  of accounting for previous ownership percentage |       | (1,112     | )         |      |        |
| Less: historical  goodwill                                       |       | (18,126    | )         |      |        |
| Write-off  Southern Linens                                       |       | (252       | )         |      |        |
|                                                             |       |       |      |      |        |
| Net assets  acquired                                             |       |       |      | 1,064,604 |        |
|                                                             |       |       |      |      |        |
| **Excess  of cost of acquisition over net assets acquired**      | ** ** | ** ** |      | **$**     | **254,054** |   |
|                                                             |       |       |      |      |        |
| ***Allocated  to:***                                             |       |       |      |      |        |
| Property and  equipment                                          |       |       |      | $         | (57         | ) |
| Definite-lived  intangible assets                                |       |       |      | 38,330    |        |
| Indefinite-lived  intangible assets                              |       |       |      | 122,688   |        |
| Unfavorable  lease liability                                     |       |       |      | (20,000   | )           |
| Goodwill                                                         |       |       |      | 265,985   |        |
| Deferred Income  taxes                                           |       |       |      | (152,892  | )           |
|                                                             |       |       |      |      |        |
| ** **                                                       |       | ** ** |      | **$**     | **254,054** |   |

 

Intangibleassets identified in the initial preliminary purchase price allocation aboveincluded the following:

 
| ***Definite-lived  intangible assets (liabilities)***                               |   |    |    |
|-------------------------------------------------------------------------------------|--------|---------|---------|
| Credit card  customer relationships and customer list (estimated life 3 to 5 years) |   | $       | 10,542  |   |
| Favorable leases  (average life 8 years)                                            |   | 27,788  |    |
| Unfavorable  leases (average life 8 years)                                          |   | (20,000 | )       |
| ***Indefinite-lived  intangible assets***                                           |   |    |    |
| Trademark and  trade names                                                          |   | $       | 122,688 |   |

 

34

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Aspresented in the above table, the Company’s assets and liabilities wereadjusted to fair value as of the closing date of the Transactions, and theexcess of the total purchase price over the fair value of the Company’s netassets was allocated to goodwill.  Thefollowing table presents an analysis of the change in goodwill since theclosing date of the Transactions:

 
| **(in thousands)**                                                    | ** ** | **Amount**  | ** **  |
|----------------------------------------------------------------------------|------------|-------------|-------------|
|                                                                       |       |        |        |
| Balance at  February 13, 2006 (predecessor entity)                    |       | $           | 18,126      | (1) |
| Purchase  accounting adjustments from preliminary allocation               |       | 259,309     |        |
|                                                                       |       |        |        |
| Initial  preliminary balance at February 14, 2006                     |       | 277,435     |        |
| SAB 108  adjustment (see Note 2 to the consolidated financial statements)  |       | (11,450     | )           |
|                                                                       |       |        |        |
| **Balance  at February 14, 2006 (Successor Entity)**                  | ** ** | **265,985** |        |
| Pre-existing tax  adjustments                                              |       | 1,885       |        |
| Pre-existing  book adjustments, net                                        |       | (618        | )           |
| Book adjustment  for returned deposit on building purchase option assigned |       | 722         |        |
| Other – foreign  currency translation                                 |       | (144        | )           |
|                                                                       |       |        |        |
| **Balance  at December 30, 2006 (Successor Entity)**                  | ** ** | **267,830** |        |
| Pre-existing tax  adjustments                                              |       | 12,635      |        |
| Pre-existing  book adjustments, net                                        |       | (11,130     | )           |
| Other – foreign  currency translation                                 |       | 3,085       |        |
|                                                                       |       |        |        |
| **Balance  at December 29, 2007 (Successor Entity)**                  |       | **$**       | **272,420** |   |

 

----

*(1) * The predecessor entity goodwillhas been written-off in purchase accounting.

 

In connection with the Transactions, theCompany incurred significant additional indebtedness, including$650.0 million aggregate principal amount on the Notes issued by two ofthe Company’s subsidiaries, which increased the Company’s interestexpense.  Payments required to servicethis indebtedness substantially increased the Company’s liquidity requirementsbeginning in fiscal 2006 into fiscal 2007 and will continue to do so in futureyears.  The Company’s depreciation andamortization expense increased significantly as well, primarily due todecreases in the depreciable lives of tangible assets and an increase in thefair values of the Company’s amortizable intangible assets.

 

**Overview of Business**

 

The Company is a destination retailer,offering one of the broadest and deepest selections of high quality brand-nameas well as private label home furnishings merchandise in the industry. TheCompany’s average store size of approximately 33,000 gross square feet enablesit to offer a more comprehensive product and brand selection than departmentstores and other retailers that sell home furnishings. The Company believes itsstore format coupled with its knowledgeable sales assistance and attentiveservice to its customers, whom the Company refers to as “guests,” creates anenjoyable shopping experience. The Company’s primary target guest is femalebetween the ages of 25 and 55 who is fashion and brand conscious, hasgood-to-better income and focuses on the home as a reflection of herindividuality.

 

The Company’s financial performance is significantlyaffected by the Transactions.  Theincurrence of long-term debt to finance the Transactions results in materiallyhigher interest expense and the application of purchase accounting results insignificantly higher depreciation and amortization, which make the net loss ofthe Company not comparable to net income of the Predecessor Entity before theTransactions. None of these effects of the Merger affect the Company’sunderlying fundamentals, which management believes remain strong, including itsstrong brand name recognition and attractive real estate locations.  Effective upon the consummation of theTransactions, Robert J. DiNicola became the Company’s Chairman and ChiefExecutive Officer.  Mr. DiNicola isa 35-year veteran of the retail industry, with extensive experience in retail,including home furnishings.  Previously, Mr. DiNicolaserved as Executive Chairman of General Nutrition Centers, Inc. and asChairman and Chief Executive Officer of Zale Corporation. Under the leadershipof Mr. DiNicola, the Company continues to focus on growing its sales persquare foot and improving the productivity of its existing store base, which itbelieves is key to improving the Company’s profitability and cash flow. TheCompany plans to capitalize on its national presence and use its leverage andits buying power in the long-term and its marketing skills in the short-term tohelp drive the Company to the appropriate

 

35

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level of business.  Since thecompletion of the Merger, the Company has implemented a long-term, three phasemulti-year plan to restore the Company to a competitive position within themarketplace.  The overriding operatingphilosophy of the Company in the first phase of the plan has been to go “backto basics.”  During this first phase, theCompany is taking steps necessary to rebuild the core business.

 

As a result of the transactions related tothe Merger, the financial results for the 52 weeks ended December 30, 2006are separately presented in the table below between the “Successor Entity,”covering the period February 14, 2006 through December 30, 2006, andthe “Predecessor Entity,” covering the period January 1, 2006 through February 13,2006, which is the date of the consummation of the Merger.  For comparative purposes, the Companycombines the two periods in its discussion below for the 52 weeks ended December 30,2006.  This combination is not a GAAPpresentation.  However, the Companybelieves this presentation is useful to provide the reader a more accurate andmeaningful comparison.  The financialresults for the 52 weeks ended December 29, 2007 are presented under “SuccessorEntity” and the results for the 52 weeks ended December 31, 2005 arepresented under “Predecessor Entity.”

 

The following table sets forth the results ofoperations and percentages of net sales included in the Company’s ConsolidatedStatements of Operations for the 52 weeks ended December 29, 2007, theperiods February 14, 2006 to December 30, 2006 and January 1,2006 to February 13, 2006 (collectively, “fiscal 2006”) and the 52 weeksended December 31, 2005 (“fiscal 2005”):

 
| ** **                                                 | ** ** | **Fiscal Year Ended** | ** ** | **February 14, 2006 to** | ** ** | **January 1, 2006 to** | ** ** | **Fiscal Year Ended** | ** ** |
|------------------------------------------------------------|------------|---------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|---------------------------------|------------|
| ** **                                                 | ** ** | **December 29, 2007** | ** ** | **December 30, 2006(1)**      | ** ** | **February 13, 2006**       | ** ** | **December 31, 2005** | ** ** |
| **(dollars in thousands)**                       | ** ** | **(Successor)**                 | ** ** | **(Successor)**                         | ** ** | **(Predecessor)**                     | ** ** | **(Predecessor)**               | ** ** |
|                                                       |       |                            |       |                                    |       |                                  |       |                            |       |   |   |   |   |   |   |   |   |
| Net sales                                                  |       | $                               | 2,794,776  |                                    | 100.0      | %                                     | $          | 2,534,365                       |       | 100.0 | % | $ | 284,971 |   | 100.0 | % | $ | 2,694,742 |   | 100.0 | % |
| Cost of sales                                              |       | 1,747,904                       |       | 62.5                                    | %          | 1,557,011                             |       | 61.4                            | %          | 180,675 |   | 63.4 | % | 1,595,394 |   | 59.2 | % |
|                                                       |       |                            |       |                                    |       |                                  |       |                            |       |   |   |   |   |   |   |   |   |
| Gross profit                                               |       | 1,046,872                       |       | 37.5                                    | %          | 977,354                               |       | 38.6                            | %          | 104,296 |   | 36.6 | % | 1,099,348 |   | 40.8 | % |
|                                                       |       |                            |       |                                    |       |                                  |       |                            |       |   |   |   |   |   |   |   |   |
| Selling, general  and administrative expenses              |       | 1,221,324                       |       | 43.7                                    | %          | 1,040,680                             |       | 41.1                            | %          | 175,424 |   | 61.6 | % | 1,036,599 |   | 38.5 | % |
| Impairment of property  and equipment                      |       | 16,779                          |       | 0.6                                     | %          | 27,992                                |       | 1.1                             | %          | — |   | — | % | 4,059 |   | 0.1 | % |
| Impairment of  identifiable intangible asset               |       | 100                             |       | —                                  | %          | 3,119                                 |       | 0.1                             | %          | — |   | — | % | — |   | — | % |
|                                                       |       |                            |       |                                    |       |                                  |       |                            |       |   |   |   |   |   |   |   |   |
| Operating (loss)  profit                                   |       | (191,331                        | )          | (6.8                                    | )%         | (94,437                               | )          | (3.7                            | )%         | (71,128 | ) | (25.0 | )% | 58,690 |   | 2.2 | % |
|                                                       |       |                            |       |                                    |       |                                  |       |                            |       |   |   |   |   |   |   |   |   |
| Interest expense  (income), net (2)                        |       | 107,642                         |       | 3.9                                     | %          | 79,605                                |       | 3.1                             | %          | (668 | ) | (0.2 | )% | 3,966 |   | 0.2 | % |
| Other income,  net                                         |       | (6,251                          | )          | (0.2                                    | )%         | (657                                  | )          | —                          | %          | (1,286 | ) | (0.5 | )% | (3,137 | ) | (0.1 | )% |
|                                                       |       |                            |       |                                    |       |                                  |       |                            |       |   |   |   |   |   |   |   |   |
| (Loss) income  before (benefit) provision for income taxes |       | (292,722                        | )          | (10.5                                   | )%         | (173,385                              | )          | (6.8                            | )%         | (69,174 | ) | (24.3 | )% | 57,861 |   | 2.1 | % |
| (Benefit)  provision for income taxes                      |       | (50,631                         | )          | (1.8                                    | )%         | (66,852                               | )          | (2.6                            | )%         | (21,270 | ) | (7.5 | )% | 21,879 |   | 0.8 | % |
|                                                       |       |                            |       |                                    |       |                                  |       |                            |       |   |   |   |   |   |   |   |   |
| Net (loss)  income                                         |       | $                               | (242,091   | )                                       | (8.7       | )%                                    | $          | (106,533                        | )          | (4.2 | )% | $ | (47,904 | ) | (16.8 | )% | $ | 35,982 |   | 1.3 | % |

 

----

*(1)*

Theconsolidated financial statements for the period after February 13, 2006are presented on a different basis than that for the periods before February 14,2006, as a result of the application of purchase accounting as of February 14,2006 and therefore are not comparable.

*(2)*

Fiscal2007 includes the writeoff of deferred financing costs totaling approximately$7.0 million.

 

36

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The Company uses a number of key indicatorsof financial condition and operating performance to evaluate the performance ofits business, including the following:

 
| ** **                                   | ** ** | ** **                      | ** ** | ** **                              | ** ** | **January 1, 2006 to** | ** ** | ** **                      | ** ** |
|----------------------------------------------|------------|---------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|---------------------------------|------------|
| ** **                                   | ** ** | **Fiscal Year Ended** | ** ** | **February 14, 2006 to** | ** ** | **February 13, **           | ** ** | **Fiscal Year Ended** | ** ** |
| ** **                                   | ** ** | **December 29, 2007** | ** ** | **December 30, 2006**         | ** ** | **2006**                              | ** ** | **December 31, 2005** | ** ** |
| **Key Performance Indicators**     | ** ** | **(Successor)**                 | ** ** | **(Successor)**                         | ** ** | **(Predecessor)**                     | ** ** | **(Predecessor)**               | ** ** |
| Net sales  growth(1)                         |       | (0.9                            | )%         | 4.6                                     | %          | N/A                                   |       | 1.2                             | %          |
| Comparable store  sales growth(1)            |       | (3.4                            | )%         | (0.7                                    | )%         | N/A                                   |       | (6.0                            | )%         |
| Net sales per  average square foot           |       | $                               | 146        |                                    | $          | 137                                   |       | $                               | 16         |   | $ | 156 |   |
| Average net  sales per store (in millions)   |       | $                               | 4.8        |                                    | $          | 4.6                                   |       | $                               | 0.5        |   | $ | 5.2 |   |
| Gross profit as  a % of net sales            |       | 37.5                            | %          | 38.6                                    | %          | 36.6                                  | %          | 40.8                            | %          |
| SG&A as a %  of net sales(3)             |       | 43.7                            | %          | 41.1                                    | %          | 61.6                                  | %          | 38.5                            | %          |
| SG&A per  average square foot(4)         |       | $                               | 63.73      |                                    | $          | 56.32                                 |       | $                               | 9.71       |   | $ | 59.83 |   |
| Impairment as a % of net sales(3)            |       | 0.6                             | %          | 1.2                                     | %          | —                                | %          | 0.1                             | %          |
| Impairment per average square foot(4)        |       | $                               | 0.88       |                                    | $          | 1.68                                  |       | $                               | —     |   | $ | 0.23 |   |
| Operating (loss)  profit as a % of net sales |       | (6.8                            | )%         | (3.7                                    | )%         | (25.0                                 | )%         | 2.2                             | %          |
| Net (loss)  income as a % of net sales       |       | (8.7                            | )%         | (4.2                                    | )%         | (16.8                                 | )%         | 1.3                             | %          |
| Inventory  turnover(2)                       |       | 2.1                             |       | 2.0                                     |       | N/A                                   |       | 2.0                             |       |
| Inventory per  square foot                   |       | $                               | 40.95      |                                    | $          | 41.90                                 |       | $                               | 45.35      |   | $ | 43.57 |   |
| Net square  footage growth(1)                |       | 2.6                             | %          | 4.7                                     | %          | N/A                                   |       | 8.2                             | %          |

 

----

| (1) – | amount  for the period February 14, 2006 to December 30, 2006 represents  growth for the entire 52 weeks ended December 30, 2006.                                                                                    |
|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) – | amount  for the period February 14, 2006 to December 30, 2006 represents  turnover for the entire 52 weeks ended December 30, 2006.                                                                                  |
| (3) – | transaction  expenses incurred during the periods February 14, 2006 to  December 30, 2006 and January 1, 2006 to February 13, 2006  increased these percentages compared to other periods presented as follows: |

 
| ** **            | ** ** | **February 14, 2006 to  December 30, 2006****(****Successor****)** | ** ** | ** ** | **January 1, 2006 to  February 13,****2006  (Predecessor)** | ** ** |
|-----------------------|------------|---------------------------------------------------------------------------------------------|------------|------------|---------------------------------------------------------------------------------|------------|
| Transaction  expenses |       | 0.1                                                                                         | %          |       | 15.4                                                                            | %          |
| All other  SG&A   |       | 41.0                                                                                        | %          |       | 46.2                                                                            | %          |

 
| (4) | detailed  as follows for the periods February 14, 2006 to December 30, 2006  and January 1, 2006 to February 13, 2006: |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------|

 
| ** **            | ** ** | **February 14, 2006 to  December 30, 2006****(****Successor****)** | ** ** | ** ** | **January 1, 2006 to  February 13,****2006  (Predecessor)** | ** ** |
|-----------------------|------------|---------------------------------------------------------------------------------------------|------------|------------|---------------------------------------------------------------------------------|------------|
| Transaction  expenses |       | $                                                                                           | 0.10       |       |                                                                            | $          | 2.43 |   |
| All other  SG&A   |       | $                                                                                           | 56.22      |       |                                                                            | $          | 7.28 |   |

 

Following completion of the Merger in February 2006,the Company developed its initial plans to focus on growing its sales persquare foot and improving the productivity of its existing store base, which itbelieves is key to improving its profitability and cash flow.  The Company laid the groundwork to improveits overall merchandise assortment, establish a formalized key item program,increase the effectiveness and diversify the mix of its marketing expenditures,improve its guests shopping experience with consistent store execution andimprove its operating free cash flow.

 

TheCompany’s focus on improving merchandise began with its efforts to clear agedand discontinued merchandise in order to re-invest in more productivecategories, classifications and key items. The paring down of distressed inventory has been a top priority in thefirst stage of the Company’s nine-year three-phase turn around program.  As a result of this on-going strategy,inventory per square foot continued to decrease in fiscal 2007 as it did infiscal 2006.  Inventory per square footdecreased 2.3% to $40.95 in fiscal 2007 compared to $41.90 in fiscal 2006 asthe Company continued to eliminate inventory it considered to be non-core whilemaintaining appropriate depth to ensure that its in-stock position remainedstrong in its core offerings.  While theeffort to clear aged and non-productive inventory has reached a more balancedapproach compared to the defined focus of last year, the Company will continueto reduce its levels of this merchandise in a timely and consistent mannergoing forward.

 

37

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The Company launched the “Best Bets” programduring fiscal 2006 to feature its top-100 best selling core items within itsstores with enhanced marketing and improved in-stock levels.  These items are considered important trafficdrivers in establishing consistency with in-stock execution and in solidifyingthe Company’s value proposition with its customers.  The Company continues to invest in thebasics, and its overall inventory ownership in fiscal 2007 reflects the Company’scontinued commitment to its key classifications.  The Company also improved its store executionstandards, focusing on its top-101 stores as a means to both enhanceproductivity and customer satisfaction. Additional programs undertaken were focused on reinvigorating itstextile and tabletop categories, re-focusing its marketing campaign to emphasizekey items and value, and reducing the overall SKU level to free up inventorydollars, eliminate clutter and reduce confusion in the stores and create asharper presentation to the Company’s customers.

 

The Company was focused on making fiscal 2007the year that it began to recapture lost market share in textiles.  In fiscal 2007, the Company’s textilebusiness began to show evidence of a rebound. A renewed marketing focus on the top-of-bed categories coupled with astrong foundation in the basics such as sheets and pillows has helped the Companyto recapture in the second half of the year some of the lost market share thatit has experienced in the past.

 

Comparable store sales for fiscal 2007 were(3.4) % compared to (0.7) % for fiscal 2006. The Company’s sales performance in fiscal 2007 reflects the sluggishoverall economy in general and the challenging retail environment inparticular.  A highly promotional salesenvironment across the home furnishing sector resulted in a negative impact of90 basis points to the Company’s gross margin rate to 37.5% in fiscal 2007 from38.4% in fiscal 2006.  Although theCompany experienced an increase of 60 basis points over the prior year in itsSG&A rate to 43.7% from 43.1%, primarily due to the deleveraging of higheroccupancy and marketing costs in light of negative comparable store sales,SG&A cost per average square foot decreased $2.09, or approximately 3.2%,to $63.73 in fiscal 2007 from $65.82 for all of fiscal 2006.  In fiscal 2007, the Company implemented amore disciplined strategy to reduce its cost structure and eliminated certainexcess administrative expenses.

 

The Company slowed its square footage growthin fiscal 2007 and continued to refine its stores’ design in order to improvethe guest shopping experience and improve its stores’ productivity.  In fiscal 2008, the Company expects to openapproximately 10 new stores as opposed to opening 18 new stores in fiscal 2007and an average of approximately 47 new stores per year during the immediatethree fiscal years preceding fiscal 2007. Additionally, real estate typically has a 12 to 18 month lead-time,and although the Company believes that there are ample real estateopportunities, it will continue to be selective in executing its real estatestrategy.

 

InOctober 2007, the Company entered into a new senior secured asset-basedrevolving credit facility agreement.  Thenew credit facility is beneficial compared to the prior credit facility that itreplaced in several respects, including the use of higher advance rates oninventory and accounts receivable in the borrowing base computation and thetotal elimination of all financial maintenance covenants.  All of the agent banks that were party to theprevious credit facility continued to be participants in the new creditfacility.  As a result of entering intothis agreement, the Company’s liquidity position was significantly enhanced.

 

The overall economy in general andthe retail environment in particular remain challenging.  Yet, the Company believes that it isbeginning to see a healthier merchandise mix that reflects its commitment torecapture market share in the textiles business.  Despite a difficult retail landscape, theCompany remains focused on executing its turnaround strategies.

 

**Consolidated Results of Operations**

 

The following discusses the consolidatedresults of operations for each of the 52 weeks ended December 29, 2007, December 30,2006 and December 31, 2005.  Forcomparative purposes in its discussion below, for fiscal 2006 the Companycombined the “Predecessor Entity” covering the period January 1, 2006through February 13, 2006 and the “Successor Entity” covering the period February 14,2006 through December 30, 2006. This combination is not a GAAP presentation.  However, the Company believes thispresentation is a more meaningful presentation for the reader and provides amore accurate comparison, except with respect to net income, which, as notedabove, is not comparable as a result of the significant change in the Company’scapital structure following the Transactions.

 

38

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***Fiscal 2007 Compared with Fiscal2006***

 

*Net Sales*

 

Net sales for fiscal 2007 decreasedapproximately 0.9% to $2,794.8 million compared to $2,819.3 million for fiscal2006.  Net sales consist of gross sales tocustomers, net of returns, discounts and incentives.  Provisions for estimated future sales returnsare recorded in the period that the related sales are recorded.  The Company determines the amount ofprovision based on historical information. Sales discounts, coupons, cash rebates and other similar incentives arerecorded as a reduction of sales revenue in the period when the related salesare recorded.  The decrease in net saleswas primarily due to the impact of a 3.4% decline in comparable store salesoffset by the opening of new stores in fiscal 2007.  The Company opened 18 stores and closed nostores in fiscal 2007 as compared with opening 31 stores and closing two storesin fiscal 2006.  Net square footageincreased 2.6% to 19.4 million at December 29, 2007 compared with 18.9million at December 30, 2006.

 

Comparable store sales decreased 3.4% infiscal 2007 compared to a decrease of 0.7% for fiscal 2006.  Comparable store sales percentages are basedon total net sales.  Comparable storesales include the Company’s Internet sales and sales for its stores beginningon the first day of the month following the 13th full month of sales.  In the case of a store to be permanentlyclosed, such store’s sales are not considered comparable once the store closingprocess has commenced.  The decline incomparable store sales was primarily due to a decline in guest transactions andstrong clearance sales in fiscal 2006 following the Merger to pare down andclear aged, discontinued and distressed merchandise, which were not assignificant a component of sales in fiscal 2007.

 

The Company’s average net sales per storewere $4.8 million in fiscal 2007 and $5.1 million in fiscal 2006.  The decrease in average net sales per storewas attributable to the comparable store sales decrease of 3.4% for fiscal2007.

 

The Company’s core business strategy is tooffer a broad and deep selection of high quality brand name “linens” (e.g.,bedding, towels and table linens) and “things” (e.g., housewares and homeaccessories) merchandise.  For fiscal2007, net sales of “linens” merchandise decreased approximately 1.3% comparedto a increase of 2.4% in fiscal 2006, while net sales of “things” increasedapproximately 0.4% compared to a 7.5% increase in fiscal 2006.  While the Company has shown a modest 0.4%increase in its “things” merchandise in fiscal 2007, its textile businessremained challenging.  As part of itsback-to-basics initiative, the Company has undertaken a concerted effort toimprove its core textiles businesses beginning with its sheet, towel, pillowand comforter programs which showed improvement in the later half of the fiscalyear.

 

The Company’s proprietary merchandiseaccounted for approximately 12% of fiscal 2007 sales. Such proprietarymerchandise is an important point of differentiation from its competitors,providing its guests with high value merchandise in categories that the Companybelieves are underserved by national brand names.

 

*Gross Profit*

 

In addition to the cost of inventory sold,the Company includes its buying and distribution expenses in its cost ofsales.  Buying expenses include alldirect and indirect costs to procure merchandise.  Distribution expenses include the cost ofoperating the Company’s distribution centers and freight expense related totransporting merchandise.  For fiscal2007, gross profit was $1,046.9 million, or 37.5% of net sales, compared with$1,081.7 million, or 38.4% of net sales, for fiscal 2006.  The decrease in gross profit as a percentageof net sales was due to the highly promotional sales environment across thehome furnishing sector.

 

*Expenses*

 

The Company’s selling, general andadministrative expenses consist of store selling expenses, occupancy costs,advertising expenses and corporate office expenses.  SG&A for fiscal 2007 was $1,221.3million, or 43.7% of net sales, compared with $1,216.1 million, or 43.1% of netsales, for fiscal 2006, which included approximately $46.0 million of costsrelated to the Merger, or 1.6% of net sales. SG&A also included depreciation and amortization of $130.3 million,or 4.7% of net sales for fiscal 2007, compared with $127.2 million, or 4.5% ofnet sales, for fiscal 2006.  The increasein SG&A (excluding depreciation and amortization and costs related to theMerger in the prior year) as a percentage of net sales to 39.0% in fiscal 2007from 37.0% in fiscal 2006 was primarily due to higher occupancy costs andmarketing costs in light of negative comparable store sales.  SG&A cost per average square foot 

 

39

----

 

(excluding costs related to the Merger) increased approximately 0.6% to$63.73 in fiscal 2007 from $63.33 in fiscal 2006.

 

The Company determined that the carryingvalue of certain property and equipment exceeded its related estimated futureundiscounted cash flows.  As a result,the Company reduced the carrying value of property and equipment to its fairvalue by approximately $16.8 million in fiscal 2007, or 0.6% of net sales,compared to $28.0 million, or 1.0% of net sales, in fiscal 2006, which isincluded in impairment of property and equipment on the consolidated statementsof operations.

 

Operating loss for fiscal 2007 wasapproximately $191.3 million, or (6.8%) of net sales, compared with anoperating loss of $165.6 million, or (5.9%) of net sales, for fiscal 2006.

 

Interest expense, net for fiscal 2007increased to approximately $107.6 million from $78.9 million for fiscal 2006primarily due to the additional interest expense associated with theNotes.  In addition, the Company’s newasset-based revolving credit facility required it to accelerate the writeoff ofapproximately $7.0 million of deferred financing costs related to the earlierasset-based credit facility arrangement, as amended and restated, which itreplaced.

 

*Income Taxes*

 

TheCompany recorded an income tax benefit of $50.6 million for fiscal 2007compared with an income tax benefit of $88.1 million for fiscal 2006.  The Company’s effective tax benefit rate forfiscal 2007 decreased to 17.3% compared to 36.3% for fiscal 2006 primarily dueto the $55.6 million valuation allowance which was recorded against UnitedStates net operating losses in the current year.  See Note 15 to the consolidated financialstatements for additional detail concerning the valuation allowance.

 

*Net Loss*

 

The Company’s net loss for fiscal 2007 wasapproximately $242.1 million compared with a net loss of $154.4 million forfiscal 2006.  As noted above, the netloss for the current year is not necessarily comparable to the net loss for theprior year as the current year includes the tax valuation allowance, while theprior period includes significantly higher costs related to the Mergerpartially offset by lower interest, depreciation and amortization recordedprior to the completion of the Merger in February 2006.

 

***Fiscal 2006Compared with Fiscal 2005***

** **

TheCompany changed its method of accounting for stock-based payments in fiscal2006 as more fully described below.

 

*Adoption of SFAS No. 123(Revised 2004)*

* *

In connection with the adoption of SFAS No. 123(Revised 2004) on January 1, 2006 the Company was required to recognizecompensation expense beginning in fiscal 2006 in the consolidated statements ofoperations related to the fair value of its employee stock-based options.  By the Company’s election to use the modifiedprospective method of transition, prior periods were not restated.  Prior to adopting SFAS No. 123 (Revised2004), the Company applied the recognition and measurement principles ofAccounting Principles Board Opinion No. 25 and relatedinterpretations.  All employee stockoptions were granted at or above the grant date market price.  Accordingly, for fiscal 2005 the Company didnot recognize compensation expense for stock option grants and amortizedcompensation expense for restricted stock unit awards at fair market value atthe date of award over specified vesting periods.  The Company also disclosed the pro-formaeffect on net income related to compensation expense as a note to itsconsolidated financial statements.

 

For the period January 1,2006 to February 13, 2006, the Company recognized approximately $9.3million and $3.2 million of total unrecognized compensation cost as of December 31,2005 related to stock option grants and restricted stock unit awards,respectively, under the Linens ’n Things, Inc. stock option plans. The consummation of the Merger accelerated the recognition ofcompensation cost, and, accordingly, all of this cost was included in selling,general and administrative expenses in the consolidated statements ofoperations during the period January 1, 2006 to

 

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February 13, 2006.  Inconnection with the Merger, the Company adopted the Linens Holding Co. StockOption Plan.  The compensation cost thatwas charged against income for stock option grants to eligible employees of theCompany and its subsidiaries was $4.3 million during the period February 14,2006 to December 30, 2006 and is included in selling, general andadministrative expenses in the consolidated statements of operations.

 

*Net Sales*

 

Net sales for fiscal 2006 were $2,819.3million, an increase of 4.6% over fiscal 2005 net sales of$2,694.7 million, primarily as a result of new store openings offset by a0.7% decrease in comparable store sales. The Company opened 31 new stores and closed two stores in fiscal 2006,compared with opening 55 stores and closing five stores in fiscal 2005.  Net square footage increased 4.7% to18.9 million at December 30, 2006 compared with 18.1 million at December 31,2005.

 

Comparable store sales decreased 0.7% forfiscal 2006 compared with a decrease of 6.0% in fiscal 2005. The improvement incomparable store sales as compared with the decrease for fiscal 2005 isprimarily attributable to higher guest traffic, which was positively impactedby the repositioning of the Company’s marketing program, offset by a decreasein average transaction value due to markdowns associated with the Company’sefforts to clear nonproductive and aged inventory.

 

The Company’s average net sales per storewere $5.1 million in fiscal 2006 and $5.2 million in fiscal2005.  The slight decrease in average netsales per store was attributable to the comparable store sales decrease of 0.7%for fiscal 2006.

 

The Company’s core business strategy is to offera broad and deep selection of high quality brand name “linens” (e.g., bedding,towels and table linens) and “things” (e.g., housewares and home accessories)merchandise.  For fiscal 2006, net salesof “linens” merchandise increased approximately 2.4% compared to a decrease of2.7% in fiscal 2005, while net sales of “things” increased approximately 7.5%compared to a 6.1% increase in the prior year. While the Company showed improvement over the previous year, its textilebusiness remained challenging.  As partof its back-to-basics initiative, in fiscal 2006 the Company undertook aconcerted effort to improve its core textiles businesses beginning with itssheet, towel, pillow and comforter programs.

 

The Company’s proprietary merchandiseaccounted for approximately 12.5% of fiscal 2006 sales. Such proprietarymerchandise is an important point of differentiation from its competitors,providing its guests with high value merchandise in categories that the Companybelieves are underserved by national brand names.

 

*Gross Profit*

 

Gross profit for fiscal 2006 was$1,081.7 million, or 38.4% of net sales, compared with$1,099.3 million, or 40.8% of net sales, for fiscal 2005. The decrease ingross profit as a percentage of net sales was primarily caused by increasedmarkdowns and lower mark-on.  Themarkdowns were associated with the Company’s efforts to sell nonproductive andaged inventory in order to transition to newer assortments, expand the “BestBets” program to highlight the top 100 best selling core items and drivetraffic to the stores.

 

*Expenses*

 

The Company’s selling, general andadministrative expenses consist of store selling expenses, occupancy costs,advertising expenses, corporate office expenses and costs related to theMerger.  SG&A for fiscal 2006 was$1,216.1 million, or 43.1% of net sales, which included approximately$46.0 million of costs related to the Merger, or 1.6% of net sales.  SG&A for fiscal 2005 was$1,036.6 million or 38.5% of net sales, which included approximately $3.3million of costs related to the Merger, or 0.1% of net sales.  SG&A also included depreciation andamortization of $127.2 million, or 4.5% of net sales, for fiscal 2006, comparedwith $90.3 million, or 3.3% of net sales, for fiscal 2005.  The increase in SG&A (excludingdepreciation and amortization and costs related to the Merger) as a percentageof net sales to 37.0% in fiscal 2006 from 35.1% in fiscal 2005 was primarilydue to the deleveraging of higher occupancy and other costs in light ofnegative comparable store sales and higher depreciation and amortizationexpense as a result of the implementation of purchase accounting.  As a result, SG&A per average square foot(excluding costs related to the Merger) increased 6.2% to $63.33 in fiscal 2006compared to $59.64 in fiscal 2005.

 

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The Company determined that the carryingvalues of (1) certain property and equipment and (2) a certainidentifiable intangible asset exceeded their respective estimated futureundiscounted cash flows.  As a result,the Company reduced the carrying value of (1) property and equipment toits fair value by approximately $28.0 million in fiscal 2006, or 1.0% of netsales, compared to $4.1 million, or 0.1% of net sales, in fiscal 2005 and (2) theidentifiable intangible asset to its fair value by approximately $3.1 millionin fiscal 2006 only, or 0.1% of net sales, which is included in impairment ofproperty and equipment and impairment of identifiable intangible asset,respectively, on the consolidated statements of operations.

 

Operating loss for fiscal 2006 was $165.6million, or (5.9%) of net sales, compared with an operating profit of$58.7 million, or 2.2% of net sales for fiscal 2005.

 

Net interest expense in fiscal 2006 was$78.9 million compared to $4.0 million in fiscal 2005.  The significant increase in interest expensewas principally due to the additional interest expense associated with theNotes issued on February 14, 2006. In addition, approximately $3.9 million of deferred financing costsrelated to the Notes and the Company’s original asset-based credit facility wasrecognized in interest expense. Furthermore, higher average borrowings required to fund working capitalneeds and an increase in average borrowing interest rates offset by loweraverage investment balances also contributed to the overall increase in netinterest expense.

 

*Income Taxes*

 

The Company recorded an income tax benefit of$88.1 million for fiscal 2006, compared with income tax expense of$21.9 million for fiscal 2005. Primarily due to additional expenses related to the Merger, includinginterest expense on the Notes, a loss was generated in fiscal 2006 with aresulting fiscal 2006 tax benefit rate of 36.3% compared to a fiscal 2005 taxexpense rate of 37.8%.  The lower fiscal2006 tax benefit rate was due to Merger-related non-deductible expenses.

 

*Net Income*

 

The Company’s net loss for fiscal 2006 was$154.4 million compared with net income of $36.0 million for fiscal2005.  As noted above, the net loss forfiscal 2006 is not comparable to the net income for fiscal 2005 due to thesignificant change in the Company’s capital structure and the increaseddepreciation and amortization associated with purchase accounting in connectionwith the Merger.

 

**Liquidityand Capital Resources**

 

Inconnection with the Merger, the Company incurred $650.0 million of debt throughthe issuance of the Senior Secured Floating Rate Notes.  The Company also entered into the$600.0 million Original Credit Facility, which was subsequently amendedand restated in May 2007 and then replaced in its entirety by the $700.0million New Credit Facility in October 2007.

 

Cash outlays for the payment of interest aresignificantly higher in fiscal 2007 and fiscal 2006 than in prior years as aresult of the Notes.

 

*Senior Secured FloatingRate Notes due 2014*

 

The Notes consist of $650.0 million aggregateprincipal amount of Senior Secured Floating Rate Notes due 2014 of Linens ’nThings, Inc. and Linens ’n Things Center, Inc. (the “Issuers”).  The Notes bear interest at a per annum rateequal to LIBOR plus 5.625%, which is payable every three months on January 15,April 15, July 15 and October 15, commencing April 15,2006.  The interest rate on the Notes isreset quarterly.  The Notes mature on January 15,2014.  As of December 29, 2007, theinterest rate on the Notes was 10.9%, based on a LIBOR rate of 5.2%.

 

On July 7, 2006, the Company enteredinto a zero cost interest rate collar agreement to hedge the cash flowsassociated with the LIBOR component of the interest rate on the Notes.  On July 7, 2006, the Company alsopurchased a one-year forward-starting interest rate cap agreement which tookeffect on January 15, 2008 (see Note 11 to the consolidated financialstatements).

 

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The Notes are fully and unconditionallyguaranteed jointly and severally on a senior basis by the Company and bycertain of the Company’s domestic subsidiaries other than the Issuers(collectively, the “Note Guarantors”), and are secured by first-priority lienson all of the Company’s and Note Guarantors’ equipment, intellectual propertyrights and related general intangibles and the capital stock of the Issuers andcertain subsidiaries and by second-priority liens on the Issuers’ and the NoteGuarantors’ inventory, accounts receivable, cash, securities and other generalintangibles.  The lien on capital stockmay be released under certain circumstances. As a result of the filing and effectiveness of an exchange offerregistration statement with the SEC and the issuance of registered Notes, theIssuers and the Note Guarantors became subject to applicable SEC rules,including reporting requirements.  To theextent that the securities of any Issuer or Note Guarantor constitutecollateral for the Notes and the value of the securities equals or exceeds 20%of the principal amount, or $130.0 million of the Notes, separate financialstatements of the Issuer or Note Guarantor would be required under these SEC rules tobe included in the Company’s SEC filings. The indenture that governs the Notes provides, however, with respect toany direct or indirect subsidiary of Linens ’n Things, Inc., that thesecurities of the subsidiary are released from the lien on capital stock on thedate that the lien triggers this separate financial statement requirement.  Accordingly, for any subsidiary withsecurities that equal or exceed the 20% threshold, the lien on the capitalstock securing the Notes has been released with respect to those securities.  The lien on the capital stock of Linens ’nThings, Inc. remains in place.

 

If the Issuers sell certain assets orexperience specific kinds of changes in control, the Issuers must offer torepurchase the Notes.  The Issuers may,at their option, redeem the Notes at any time on or after January 15, 2008at pre-determined prices.

 

*Senior Secured Asset-BasedRevolving Credit Facility Agreement*

 

In February 2006, the Company entered into the $600.0 millionOriginal Credit Facility with third-party institutional lenders, which had anexpiration date of February 14, 2011. In May 2007, the Company amended the Original Credit Facility byentering into an amended and restated credit agreement for $700.0 million underthe Old Credit Facility.  The provisionsof the Old Credit Facility were substantially the same as in the OriginalCredit Facility with several modifications that were generally favorable to theCompany.  The provisions of the OldCredit Facility were modified for: (1) a $100.0 million increase in theOld Credit Facility maximum availability from $600.0 million to $700.0 million;(2) a decrease in the “Excess Availability” threshold for purposes ofmandatory compliance with certain financial ratio maintenance covenants from$75.0 million to $70.0 million; and (3) several other modifications thatwere all favorable to the Company.  TheOld Credit Facility required the Company to comply with financial ratiomaintenance covenants if the excess availability under the Old Credit Facility,at any time, did not exceed $70.0 million. The Company always maintained excess availability above $70.0 millionduring fiscal 2007 until October 2007. In October 2007, all outstanding amounts under the Old CreditFacility were paid off and the Old Credit Facility was terminated when theCompany entered into the New Credit Facility.

 

On October 24, 2007, the Company entered into the $700.0 millionNew Credit Facility with third-party institutional lenders, which expires October 24,2012.  The New Credit Facility extends$700.0 million of revolving credit facilities to the Company, comprised of (1) a$625.0 million Revolving Commitment and (2) a $75.0 million Tranche BCommitment, both of which are subject to a borrowing base.  A portion of the New Credit Facility, not toexceed $40.0 million, is also available to a Canadian subsidiary of the Companysubject to the Canadian borrowing base. The borrowing base is a formula based on certain eligible inventory andreceivables, minus certain reserves.  TheNew Credit Facility reflects increases in the Company’s advance rates on thiscollateral, which enhances the liquidity position of the Company in comparisonto the Old Credit Facility.  The NewCredit Facility also eliminates all financial maintenance covenants.  These changes result in an increase to theCompany’s aggregate borrowing base and excess availability as compared with theOld Credit Facility.  Other terms andconditions in the New Credit Facility are similar to those under the Old CreditFacility.

 

All obligations under the New Credit Facility are unconditionallyguaranteed by the Company and certain of its existing and future domesticsubsidiaries.  All obligations under theNew Credit Facility, and the guarantees of those obligations, are secured,subject to certain exceptions, by substantially all of the assets of theborrowers, consisting of Linens ’n Things, Inc., Linens ’n Things Center, Inc.and Linens ’n Things Canada Corp. (collectively, the “Borrowers”), and thesubsidiary guarantors, including: (1) a first-priority security interestin inventory, accounts receivable, cash, securities and other generalintangibles; and (2) a second-priority security interest in equipment,intellectual property rights and related general intangibles and all of thecapital stock of Linens ’n Things, Inc. and the capital stock of certainsubsidiaries.

 

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Borrowings under the New Credit Facility bear interest at a rate equalto, at the Borrowers’ option, either (a) an alternate base rate determinedby reference to the higher of (1) the base rate in effect on such day and (2) thefederal funds effective rate plus 0.50% or (b) a LIBOR rate, with respectto any Eurodollar borrowing, determined by reference to the costs of funds forU.S. dollar deposits for the interest period relevant to such borrowing adjustedfor certain additional costs, in each case plus an applicable margin.  The initial applicable margin for borrowingsunder the $625.0 million Revolving Commitment is 0.25% with respect toalternate base rate borrowings and 1.50% with respect to LIBOR borrowings.  The applicable margin with respect to the$75.0 million Tranche B Commitment (consisting of per annum rate margins) shallbe 2.75% in the case of Eurodollar borrowings and, in the event the adjusted LIBORrate is not available, 1.25% in the case of alternate base rateborrowings.  The applicable margin forborrowings under the New Credit Facility will be subject to adjustment based onthe excess availability under the New Credit Facility.  In addition to paying interest on outstandingprincipal under the New Credit Facility, the Borrowers are required to pay acommitment fee, initially 0.375% per annum, in respect of the unutilizedcommitments thereunder and the commitment fee will be subject to adjustmentbased on the excess availability under the New Credit Facility.  The New Credit Facility contains certaincustomary affirmative and negative covenants and events of default, but allfinancial maintenance covenants were eliminated.  The Borrowers must also pay customary letterof credit fees and agency fees.  TheBorrowers initiated borrowings under the New Credit Facility on October 24,2007 to meet operational working capital needs. A portion of the proceeds of the New Credit Facility was used to pay offthe outstanding amounts under and terminate the Old Credit Facility.

 

As of December 29, 2007, the Issuers had (1) $205.9 millionin borrowings outstanding under the New Credit Facility at an average interestrate of 7.0%, (2) $16.1 million of cash on hand, (3) $53.0 million ofletters of credit outstanding issued under the New Credit Facility, whichincludes standby letters of credit and import letters of credit used formerchandise purchases and (4) $302.9 million of excess availability underthe New Credit Facility.

 

The Company incurred total deferred financing costs of approximately$16.8 million, $2.1 million and $6.1 million related to the OriginalCredit Facility, the Old Credit Facility and the New Credit Facility,respectively.  The New Credit Facilityrequired the Company to accelerate the writeoff of approximately $7.0 millionof deferred financing costs related to the earlier asset-based credit facilityarrangement, as amended and restated, which it replaced, and is included inwriteoff of deferred financing costs on the consolidated statements ofoperations.

 

*Historical*

 

The Company funds its operations through a combination of internallygenerated cash from operations and from borrowings under the New CreditFacility.  The Company’s primary uses ofcash are working capital requirements, new store expenditures, new storeinventory purchases and debt service requirements.  The Company anticipates that cash generatedfrom operations together with amounts available under the New Credit Facility willbe sufficient to meet its future working capital requirements, new storeexpenditures, new store inventory purchases and debt service obligations asthey become due.  However, the Company’sability to fund future operating expenses and capital expenditures and itsability to make scheduled payments of interest on, to pay principal on orrefinance indebtedness and to satisfy any other present or future debtobligations will depend on future operating performance, prevailing conditionsin the credit markets generally and in the retail sector specifically, as wellas general economic, financial and other factors beyond the Company’s control,including those disclosed under “Risk Factors” in this report.

 

As a result of the Merger, the cash flow results for fiscal 2006 havebeen separately presented in the consolidated statements of cash flows splitbetween the “Predecessor Entity”, covering the period January 1, 2006 to February 13,2006 and the “Successor Entity” covering the period February 14, 2006 to December 30,2006.  The comparable period results forfiscal 2007 are presented under “Successor Entity.”  For comparative purposes, the Companycombined the two periods from January 1, 2006 through December 30,2006 in its discussion below.  Thiscombination is not a GAAP presentation. However, the Company believes this combination is useful to provide thereader a more accurate comparison and is provided to enhance the reader’sunderstanding of cash flows for the periods presented.

 

Net cash used inoperating activities for fiscal 2007 was $123.4 million compared with net cashused in operating activities for fiscal 2006 of $59.8 million, determined bycombining $2.2 million of net cash provided by operating activities for theperiod February 14, 2006 to December 30, 2006 and net cash used inoperating activities of 

 

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$62.0 million forthe period January 1, 2006 to February 13, 2006.  The $63.6 million additionaluse of net cash is primarily due to the decrease in operating profit and higherinterest payments, partially offset by a decrease in working capital.

 

Net cash used in investing activities forfiscal 2007 was $31.6 million compared with $1,277.8 million of net cash used in investing activities for fiscal 2006, determined by combiningnet cash used in investing activities of $1,266.8 million and $11.0 million for the periods February 14,2006 to December 30, 2006 and January 1, 2006 to February 13,2006, respectively.  Excludingacquisition costs in connection with the Transactions, net cash used ininvesting activities for fiscal 2006 was $72.3 million.  The $40.7million decrease in net use of cash in fiscal 2007 compared to fiscal 2006(excluding acquisition costs) is primarily due to fewer new storeopenings.  The Company currently estimatescapital expenditures will be approximately $25 million in fiscal 2008,primarily to open approximately 10 new stores, to maintain existing stores andfor system enhancements and other capital additions.  For fiscal 2007, such amounts totaledapproximately $25.2 million, $6.7 million and $5.1 million to open new stores,to maintain existing stores and for system enhancements and other capitaladditions, respectively.

 

Net cash provided by financing activities forfiscal 2007 was $157.8 million compared with $1,282.2 million of net cash provided by financing activities forfiscal 2006, determined bycombining net cash provided by financing activities of $1,277.2 million and $5.0 million for the periods February 14,2006 to December 30, 2006 and January 1, 2006 to February 13,2006, respectively.  Excluding fiscal2006 cash flows resulting from the Transactions, net cash provided by financingactivities was $37.0 million.  The $120.8 million additional net cashfrom financing activities in fiscal 2007 compared to fiscal 2006 (excludingacquisition costs) is due to higher borrowings under the asset-based revolvingcredit facility to fund working capital needs.

 

Managementregularly reviews and evaluates its liquidity and capital needs.  The Company experiences peak periods for itsliquidity needs generally during the third quarter and fourth quarter of thefiscal year.  Such peak periods mayrequire increases in the amounts available under its New Credit Facility fromthose currently existing and/or other debt or equity funding.  Management currently believes that theCompany’s cash flows from operations and its availability under the New CreditFacility will be sufficient to fund its expected capital expenditures andworking capital requirements as they become due; however, this is dependent onthe factors noted above (including those disclosed under “Risk Factors” in thisreport) and no assurance can be given that the Company will be able to obtainaccess to increases to its credit facility or additional capacity from newcredit facilities in the future should they become necessary.

 

**Off-Balance Sheet Arrangements**

 

The Company does not have any transactions orrelationships that could be considered material off-balance sheet arrangements.

 

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**ContractualCommitments**

 

Thefollowing table summarizes existing contractual obligations requiring the useof cash, as of December 29, 2007:

 
| **Payments Due By Period (in millions)** | ** ** |
|-------------------------------------------------------------------|------------|
| **Contractual Obligations**                                  | ** ** | **Total** | ** ** | **Less  Than  1 Year** | ** ** | **2-3  Years** | ** ** | **4-5  Years** | ** ** | **More  Than  5 Years** | ** ** |
| Operating  leases—real property                              |       | $ | 2,344.0 |   | $ | 306.5 |   | $ | 613.0 |   | $ | 558.1 |   | $ | 866.4 |   |
| Operating  leases—personal property                          |       | 7.0 |   | 3.2 |   | 3.6 |   | 0.2 |   | — |   |
|                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Total operating  leases(1)                                        |       | 2,351.0 |   | 309.7 |   | 616.6 |   | 558.3 |   | 866.4 |   |
| Inventory  purchases                                              |       | 314.7 |   | 314.7 |   | — |   | — |   | — |   |
| New store  capital additions                                      |       | 2.6 |   | 2.6 |   | — |   | — |   | — |   |
| Long-term debt  obligations(2)(3)                                 |       | 1,395.0 |   | 96.3 |   | 188.8 |   | 386.3 |   | 723.6 |   |
| Total                                                             |       | $ | 4,063.3 |   | $ | 723.3 |   | $ | 805.4 |   | $ | 944.6 |   | $ | 1,590.0 |   |

 

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*(1)*

As of December 29, 2007, the Company hasfully executed leases for 23 stores planned to open in fiscal 2008 and 2009 forwhich aggregate minimum rental payments over the term of the leases isapproximately $107.6 million. The table above includes payments for storesthat had fully executed leases as of December 29, 2007.

 

The Company also has assigned property at aretail location in which it guarantees the payment of rent over the specifiedlease term in the event of non-performance. As of December 29, 2007, the maximum potential amount of futurepayments the Company could be required to make under such guarantee isapproximately $0.4 million.

 

(2)

Long-termdebt obligations include senior notes and the asset-based revolving creditfacility through their respective maturity dates.  Any future indebtedness under the asset-basedrevolving credit facility, which will significantly increase the Company’slong-term liabilities, is not included.

 

(3)

Estimatedfloating interest rate payments related to the senior notes and the asset-basedrevolving credit facility are included in the above table using actual interestrates in effect as of the end of the fiscal year.  As of December 29, 2007, the Company had(1) $650.0 million aggregate principal amount in senior notes at aninterest rate of 10.9%, based on a LIBOR rate of 5.2%, and (2) $205.9million in borrowings outstanding under its asset-based revolving creditfacility at an average interest rate of 7.0%. The senior notes bear interest at a per annum rate equal to LIBOR plus5.625%.  Borrowings under the asset-basedrevolving credit facility bear interest at a rate equal to, at the Company’soption, either (a) an alternate base rate determined by reference to thehigher of (1) the base rate in effect on such day and (2) the federalfunds effective rate plus 0.50% or (b) a LIBOR rate, with respect to anyEurodollar borrowing, determined by reference to the costs of funds for U.S.dollar deposits for the interest period relevant to such borrowing adjusted forcertain additional costs, in each case plus an applicable margin.  The effect of any future changes in the baserates is not included.

 

**Seasonality**

 

TheCompany’s business is subject to substantial seasonal variations.  Historically, the Company has realized asignificant portion of its net sales and, prior to the Merger before theCompany became highly leveraged, substantially all of its net income for theyear during the third and fourth quarters. The Company’s quarterly results of operations may also fluctuatesignificantly as a result of a variety of other factors, including the timingof new store openings.  The Companybelieves this is the general pattern associated with its segment of the retailindustry and expects this pattern will continue in the future.  Consequently, comparisons between quartersare not necessarily meaningful and the results for any quarter are notnecessarily indicative of future results.

 

**Accounting Pronouncements**

 

In December 2007, the FinancialAccounting Standards Board (“FASB”) issued SFAS No. 160, “*Noncontrolling Interests in Consolidated Financial Statements, anamendment of ARB No. 51*” (“SFAS No. 160”).  SFAS No. 160 amends Accounting ResearchBulletin No. 51 to establish accounting and reporting standards for aCompany’s noncontrolling interest in a subsidiary and for the deconsolidationof a subsidiary.  It clarifies that anoncontrolling interest in a subsidiary is an ownership interest in theconsolidated entity that should be reported as equity.  SFAS No. 160 requires consolidated netincome to be reported at amounts that include the amounts attributable to boththe parent and the noncontrolling interest and also requires separatedisclosure of the amounts of consolidated net income attributable to the parentand to the noncontrolling interest.  SFASNo. 160 is effective for fiscal years, and interim periods within thosefiscal years, 

 

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beginning on or after December 15, 2008.  The adoption of SFAS No. 160 is notexpected to have a material effect on the Company’s financial position, resultsof operations or cash flows.

 

In December 2007, theFASB issued SFAS No. 141 (Revised 2007), “*BusinessCombinations*” (“SFAS No. 141R”).  This statement replaces FASB Statement No. 141,“*Business Combinations*” (“SFAS No. 141”).  SFAS No. 141R retains the fundamentalrequirements of SFAS No. 141 that the purchase method of accounting beused for all business combinations and for an acquirer to be identified foreach business combination.  However, thescope of SFAS No. 141R is broader than that of SFAS No. 141, whichapplied only to business combinations in which control was obtained bytransferring consideration.  By applyingthe purchase method of accounting to all transactions and other events in whichone entity obtains control over one or more other businesses, SFAS No. 141Rimproves the comparability of the information about business combinationsprovided in financial reports.  SFAS No. 141Restablishes principles and requirements for how an acquirer recognizes andmeasures in its financial statements the identifiable assets acquired,including goodwill, the liabilities assumed and any non-controlling interest inthe acquiree.  It also establishesdisclosure requirements to enable users of the financial statements to evaluatethe nature and financial effects of the business combination.  SFAS 141R is effective for businesscombinations for which the acquisition date is on or after the beginning of thefirst fiscal year beginning on or after December 15, 2008.  The impact of adopting SFAS 141R will bedependent on the future business combinations that the Company may pursue, ifany, after its effective date.

 

 In February 2007, the FASB issuedStatement of Financial Accounting Standards No. 159, “*The FairValue Option for Financial Assets and Financial Liabilities - Including anAmendment of FASB Statement No. 115*” (“SFAS No. 159”).  SFAS No. 159 permits, but does notrequire, companies to report at fair value the majority of recognized financialassets, financial liabilities and firm commitments.  Under this standard, unrealized gains andlosses on items for which the fair value option is elected are reported inearnings at each subsequent reporting date. The adoption of SFAS No. 159 is not expected to have a materialeffect on the Company’s financial position, results of operations or cash flowswhen it becomes effective on December 30, 2007.

 

In September 2006, theFASB issued Statement of Financial Accounting Standards No. 158, “*Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and132(R)*”**(“SFAS No. 158”). SFAS No. 158requires, among other items, recognition of the overfunded or underfundedstatus of an entity’s defined benefit postretirement plan as an asset orliability, respectively, in the balance sheet, requires the measurement ofdefined benefit postretirement plan assets and obligations as of the end of theemployer’s fiscal year, and requires recognition of changes in funded status ofdefined benefit postretirement plans in the year in which the changes occur inother comprehensive income.  SFAS No. 158became effective as of December 29, 2007. The adoption of SFAS No. 158 did not have a material effect on theCompany’s financial position, results of operations or cash flows.

 

In September 2006, theFASB issued Statement of Financial Accounting Standards No. 157, “*Fair Value Measurements*” (“SFAS No. 157”) which iseffective for fiscal years beginning after November 15, 2007 and forinterim periods within those years.  In December 2007,the FASB provided a one year deferral of SFAS No. 157 for nonfinancialassets and nonfinancial liabilities. This statement defines fair value, establishes a framework for measuringfair value and expands the related disclosure requirements.  SFAS No. 157 does not require any newfair value measurements.  However, iteliminates inconsistencies in the guidance provided in previous accountingpronouncements.  The adoption of SFAS No. 157on December 30, 2007 is not expected to have a material impact on theCompany’s financial position, results of operations or cash flows with respectto its financial assets and financial liabilities.  The Company is currently evaluating theimpact of SFAS No. 157 with respect to its non-financial assets andliabilities.

 

In June 2006,the FASB issued FASB Interpretation No. 48, “*Accountingfor Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109*”(“FIN No. 48”).  FIN No. 48prescribes a recognition threshold and measurement process for recording in thefinancial statements uncertain tax positions taken or expected to be taken in atax return in accordance with SFAS No. 109, “*Accountingfor Income Taxes.*”  Taxpositions must meet a more-likely-than-not recognition threshold at theeffective date to be recognized upon the adoption of FIN No. 48 and insubsequent periods.  Additionally, FIN No. 48provides guidance on derecognition, classification, accounting in interimperiods, interest and penalties and disclosure requirements for uncertain taxpositions.  The accounting provisions ofFIN No. 48 became effective for the Company beginning on the first day offiscal 2007.  The Company, in its openingbalance sheet for fiscal 2007, was required to reflect, as cumulativeadjustments to the Company’s 

 

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retainedearnings, the impact of  FIN No. 48on its income tax accruals for all prior years subject to adjustment byfederal, state, local and foreign taxing authorities (open years).  The Company has undertaken an analysis of allmaterial tax positions in its tax accruals for all open years and hasidentified all of its outstanding tax positions and estimated the transitionamounts with respect to each item at the effective date.  The Company has determined that no adjustmentto shareholders’ equity was required as a result of applying FIN No. 48.  The Company will continue its policy ofclassifying interest on tax liabilities as part of its provision for incometaxes.

 

In June 2006, the FASB’sEmerging Issues Task Force reached a consensus on Issue No. 06-3, “*How Taxes Collected from Customers and Remitted to GovernmentalAuthorities Should be Presented in the Income Statement (That Is, Gross versusNet Presentation)*” (“EITF 06-3”). EITF 06-3 includes sales, use, value-added and some excise taxes thatare assessed by a governmental authority on specific revenue producingtransactions between a seller and a customer.  EITF 06-3 requires disclosure of the method ofaccounting for the applicable assessed taxes and the amount of assessed taxesincluded in revenues if such taxes are accounted for under the gross method.  EITF 06-3 became effective for both interimand annual periods beginning in fiscal 2007. EITF 06-3 did not impact the Company’s method for recording theseapplicable assessed taxes because the Company has historically presented salesexcluding such taxes (e.g., a “net” presentation).

 

**Impact of Inflation**

 

The Company does not believe that itsoperating results have been materially affected by inflation during thepreceding three years. There can be no assurance, however, that the Company’soperating results will not be affected by inflation in the future.

 

**Critical Accounting Policies**

 

The preparation of financial statements inconformity with U.S. generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts and timing ofrevenues and of expenses during the reporting periods.  The Company bases its estimates on historicalexperience and on other assumptions that it believes to be relevant under thecircumstances, the results of which form the basis for making judgments aboutthe carrying value of assets and liabilities that are not readily apparent fromother sources.  The Company’s managementbelieves the following critical accounting estimates involve significantestimates and judgments inherent in the preparation of the consolidatedfinancial statements.  The Company basesthese estimates on historical results and various other assumptions believed tobe reasonable at the time.   Managementdiscussed the development and selection of these critical accounting estimateswith the audit committee of the board of directors.

 

*Business Combination*

 

    On February 14,2006, the Company acquired all of the outstanding common stock of the Company’spredecessor entity, Linens ’n Things, Inc., for total cash considerationof approximately $1.3 billion.  TheMerger was accounted for as a business combination in accordance with theprovisions set forth in Statement of Financial Accounting Standards No. 141,“*Business Combinations*” (“SFAS No. 141”), using thepurchase method of accounting, whereby the purchase price (includingliabilities assumed) was allocated to the assets acquired based on theirestimated fair market values at the date of acquisition.  The purchase price paid by the Company toacquire Linens ’n Things, Inc. and related purchase accounting adjustmentswere “pushed down” and recorded in Linens ’n Things, Inc. and itssubsidiaries’ financial statements and resulted in a new basis of accountingfor the “Successor” period beginning on the day the Merger was completed.  The purchase price and related costs wereallocated to the estimated fair values of the assets acquired and liabilitiesassumed at the time of the Merger based on management’s best estimates of thevalues of certain of the tangible and intangible assets acquired.  The Company’s assets and liabilities wereadjusted to fair value as of the closing date of the Transactions (see Note 3to the consolidated financial statements), and the excess of the total purchaseprice over the fair value of the Company’s net assets was allocated togoodwill.

 

48

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*Valuation of Inventory*

 

Merchandise inventory is a significantportion of the Company’s balance sheet, representing approximately 45.7% oftotal assets at December 29, 2007.  Inventories are valued using the lower of cost ormarket value, determined by the retail inventory method (“RIM”).  Under RIM, the valuation of inventories atcost and the resulting gross margins are determined by applying a calculatedcost-to-retail ratio to the retail value of inventories.  RIM is an averaging method that is used inthe retail industry due to its practicality. Inherent in RIM calculations are certain significant managementjudgments and estimates including, among others, merchandise mark-on, mark-up,markdowns and shrinkage based on historical experience between the dates ofphysical inventories, all of which significantly impact the ending inventoryvaluation at cost.  The methodologiesutilized by the Company in its application of RIM are consistent for allperiods presented.  Such methodologiesinclude the development of the cost-to-retail ratios, the development of shrinkagereserves and the accounting for price changes. At any one time, inventories include items that have been written downto the Company’s best estimate of their realizable value.  Factors considered in estimating realizablevalue include the age of merchandise and anticipated demand.  Actual realizable value could differmaterially from this estimate based upon future customer demand or economicconditions.

 

*Sales Returns*

 

The Company estimates future sales returnsand records a provision in the period that the related sales are recorded basedon historical return rates.  Shouldactual returns differ from the Company’s estimates, the Company may be requiredto revise estimated sales returns. Although these estimates have not varied materially from historicalprovisions, estimating sales returns requires management judgment as to changesin preferences and quality of products being sold, among other things;therefore, these estimates may vary materially in the future.  The sales returns calculations are regularlycompared with actual return experience. In preparing its consolidated financial statements as of December 29,2007 and December 30, 2006, the Company’s sales returns reserve wasapproximately $8.7 million and $5.9 million, respectively.

 

*Impairment of Long-Lived Assets (including Goodwill)*

 

Inaccordance with SFAS No. 144, “*Accounting for Impairmentor Disposal of Long-Lived Assets,*”**long-livedassets, such as property and equipment and purchased intangible assets subjectto amortization, are reviewed for impairment whenever events or changes incircumstances indicate that the carrying value of an asset may not be fullyrecoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to estimated undiscounted futurecash flows expected to be generated by the asset. If the carrying amount of anasset exceeds its estimated future cash flows, an impairment charge isrecognized for the amount that the carrying value of the asset exceeds the fairvalue of the asset, which is determined by discounting the future cash flowsexpected to be generated by the asset.

 

Inaccordance with SFAS No. 142, “*Goodwill and OtherIntangible Assets,*” goodwill and intangible assets that haveindefinite useful lives are tested annually for impairment. These assets aretested for impairment more frequently if events and circumstances indicate thatthe asset might be impaired. An impairment loss is recognized to the extentthat the carrying amount exceeds the asset’s fair value.  For goodwill, the impairment determination ismade at the reporting unit level and consists of two steps. First, the Companydetermines the fair value of a reporting unit and compares it to its carryingamount. Second, if the carrying amount of a reporting unit exceeds its fairvalue, an impairment loss is recognized for any excess of the carrying amountof the reporting unit’s goodwill over the implied fair value of the goodwill.The implied fair value of goodwill is determined by allocating the fair valueof the reporting unit in a manner similar to a purchase price allocation, inaccordance with SFAS No. 141*.*  The residual fair value after this allocationis the implied fair value of the reporting unit goodwill.

 

TheCompany’s judgments regarding the existence of impairment indicators are basedon market conditions and operational performance.  Future events could cause the Company toconclude that impairment indicators exist and that the value of long-livedassets and goodwill is impaired.  As of December 29,2007 and December 30, 2006, the Company’s net book value for property andequipment was approximately $425.5 million and $530.8 million, respectively,goodwill was approximately $272.4 million and $267.8 million, respectively, andidentifiable intangible assets  was$142.8 million and $150.0 million, respectively.

 

49

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Duringfiscal 2007, the period February 14, 2006 to December 30, 2006 andfiscal 2005, the Company determined that the carrying value of certain assetsexceeded their related estimated future undiscounted cash flows.  As a result, the Company reduced the carryingvalue of property and equipment to their fair value by approximately $16.8million, $28.0 million and $4.1 million for fiscal 2007, the period February 14,2006 to December 30, 2006 and fiscal 2005, respectively.  The related impairment loss was recognized inimpairment of property and equipment on the Company’s consolidated statementsof operations.  In addition, during fiscal2007 and the period February 14, 2006 to December 30, 2006, theCompany reduced the carrying value of favorable leases included in identifiableintangible assets, net by approximately $0.1 million and $3.1 million,respectively, with a corresponding charge to impairment of identifiableintangible asset.  The Company alsoperformed its annual impairment test on goodwill and determined that noimpairment exists.

 

*Self-Insurance*

 

TheCompany purchases third-party insurance for workers’ compensation, medical andgeneral liability costs that exceed certain limits for each type of insuranceprogram.  The Company is responsible forthe payment of claims under these insured excess limits.  The Company establishes accruals for itsinsurance programs based on available claims data and historical trend andexperience, as well as loss development factors for its medical insurance,workers’ compensation and general liability insurance.  Workers’ compensation is recorded at its netpresent value.  In preparing the estimates,the Company also considers the nature and severity of the claims, analysisprovided by third-party claims administrators, as well as current legal,economic and regulatory factors.

 

TheCompany evaluates the accrual and the underlying assumptions periodically andmakes adjustments as needed. The ultimate cost of these claims may vary fromthe established accrual.  While theCompany believes that the recorded amounts are adequate, there can be noassurance that changes to management’s estimates will not occur due tolimitations inherent in the estimate process. In the event the Company determines the accruals should be increased orreduced, the Company would record such adjustments in the period in which suchdetermination is made.

 

The accrued obligation for these self-insurance programs wasapproximately $17.4 million and $16.2 million as of December 29, 2007and December 30, 2006, respectively.

 

*Stock-based Compensation*

 

SFASNo. 123 (Revised 2004) requires the recognition of compensation expense inthe consolidated statements of operations related to the fair value of employeestock-based options. The Company uses the Monte Carlo simulation option-pricingmodel for estimating the fair value of performance-based options and the BlackScholes option pricing model for time-based options issued under its stockoption plan.  Both models include variousassumptions, including the expected life of stock options, the expectedvolatility and the expected risk-free interest rate.  These assumptions reflect the Company’s bestestimates, but they involve inherent uncertainties based on certain conditionsgenerally outside the control of the Company. As a result, if other assumptions had been used, total stock-basedcompensation cost, as determined in accordance with SFAS No. 123 (Revised2004) could have been materially impacted. Furthermore, if the Company uses different assumptions for futuregrants, stock-based compensation cost could be materially impacted in futureperiods.

 

Under SFAS No. 123 (Revised 2004), theCompany is also required to record stock-based compensation expense, net ofestimated forfeitures.  The Company’sforfeiture rate assumption used in determining its stock-based compensationexpense is estimated primarily based upon historical data.  The actual forfeiture rate could differ fromthese estimates.

 

*Income Taxes*

* *

The Company uses the assetand liability method to account for income taxes.  Deferred tax assets andliabilities are recognized for the future tax consequences attributable to thedifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases and operating loss and taxcredit carryforwards.  Deferred taxassets and liabilities are measured using enacted tax rates expected to beapplied to taxable income in the year in which temporary differences areexpected to be recovered or settled.  The effect of a change in taxrates on deferred tax assets and liabilities is recognized in the consolidatedstatement of operations in the period that includes the enactment date.

 

50

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Determining the provisionfor income taxes and related accruals, deferred tax assets and deferred taxliabilities requires judgment.  There aretransactions and calculations arising in the ordinary course of business wherethe ultimate tax outcome is uncertain. Additionally, tax returns filed by the Company are subject to audit byvarious tax authorities. Although the Company believes that its estimates arereasonable, actual results could differ from these estimates.

 

Inassessing the realizability of deferred tax assets included in the consolidatedbalance sheets, management considers whether it is more likely than not thatsome portion or all of the tax assets will not be realized.  The ultimate realization of deferred taxassets is dependent upon the generation of future taxable income during theperiods in which those temporary differences become deductible.  Management considers the scheduled reversal ofdeferred tax liabilities, projected future taxable income and tax planningstrategies in making this assessment.  Inaccordance with this policy and the requirements of SFAS No. 109, “*Accounting for Income Taxes*,” a valuation allowance isestablished for the estimated portion of tax assets that will not be realized.

 

*Litigation*

 

The Company records an estimated liabilityrelated to various claims and legal actions arising in the ordinary course ofbusiness, which is based on available information and advice from outsidecounsel where applicable.  As additionalinformation becomes available, the Company assesses the potential liabilityrelated to its pending claims and may adjust its estimates accordingly.

 

51

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**Item 7A.  Quantitative andQualitative Disclosures About Market Risk**

 

TheCompany continuously evaluates the market risk associated with its financialinstruments.  Market risks relating tothe Company’s operations result primarily from changes in interest rates.  The Company does not engage in financialtransactions for trading or speculative purposes.

 

Sincefiscal 2005, market risk exposure has significantly increased due to theissuance of the Notes in connection with the Merger and Transactions.

 

**InterestRate Risk**

 

TheCompany’s financial instruments include cash and cash equivalents andborrowings under the senior secured asset-based revolving credit facility andthe Notes.  The asset-based revolvingcredit facility and the Notes carry floating rate interest and, therefore, theCompany’s consolidated statements of operations and the consolidated statementsof cash flows will be exposed to changes in interest rates.  As of December 29, 2007, the Company had(1) $16.1 million of cash on hand, (2) $205.9 million inborrowings outstanding under the New Credit Facility at an average interestrate of 7.0%, (3) $53.0 million of letters of credit outstanding issuedunder the New Credit Facility, which includes standby letters of credit andimport letters of credit used for merchandise purchases, (4) $302.9million of excess availability under the New Credit Facility and (5) $650.0million aggregate principal amount in Notes at an interest rate of 10.9%, basedon a LIBOR rate of 5.2%.  As of December 29,2007 and December 30, 2006, a hypothetical one percentage point change infloating rate interest would cause an increase to interest expense ofapproximately $8.6 million and $6.9 million, respectively.

 

TheCompany employs derivative financial instruments to manage its exposure tointerest rate changes and to limit the volatility and impact of interest ratechanges on earnings and cash flows.

 

TheCompany does not enter into other derivative financial instruments for tradingor speculative purposes.  The Company facescredit risk if the counterparties to these transactions are unable to performtheir obligations.  However, the Companyseeks to minimize this risk by entering into transactions with counterpartiesthat are major financial institutions with high credit ratings.

 

On July 7, 2006, the Company entered into a zero cost interestrate collar agreement (the “Collar Agreement”) to hedge the cash flowsassociated with the LIBOR component of the interest rate on the Notes.  The Collar Agreement provided for payments tobe made to or received from the counterparty when the LIBOR rate in effect forthe Notes is below 4.45% or above 6.51% for a given reset period.  Such payments represent the differencebetween the rates stated above in the Collar Agreement and those in effect onthe Notes for the given reset period. Payment and reset dates under the Collar Agreement are matched exactlyto those of the Notes.  The CollarAgreement matured on January 15, 2008. At December 29, 2007, the notional amount of debt related to theCollar Agreement was $650.0 million and the fair value of the Collar Agreementwas zero.  At December 30, 2006, thenotional amount of debt related to the Collar Agreement was $650.0 million andthe fair value of the Collar Agreement was approximately a $0.1 millionliability.

 

On July 7, 2006, the Company also purchased a one-yearforward-starting interest rate cap agreement (the “Cap Agreement”) which tookeffect on January 15, 2008.  The CapAgreement provides for payments to be received from the counterparty where therate in effect on a LIBOR-based borrowing arrangement is above 6.51% for agiven reset period.  Such paymentsrepresent the difference between the LIBOR rate stated above in the CapAgreement and those in effect on a LIBOR-based borrowing arrangement for thegiven reset period.  Payment and resetdates under the Cap Agreement are matched exactly to those of the LIBOR-basedborrowing arrangement.  The Cap Agreementhas an ultimate maturity of January 15, 2009.  The Issuers paid a premium of $0.7 million topurchase the Cap Agreement.  The CapAgreement consists of two components, a forward contract and an interest ratecap agreement.  The Company’s intent isto hedge the cash flow associated with the LIBOR component of the interest rateon a LIBOR-based borrowing arrangement beyond 6.51% for the period January 15,2008 through January 15, 2009.  Theforward contract enabled the Company to achieve this objective.  Once the forward contract became an interestrate cap agreement, effectiveness was assessed and documented as a newrelationship.  The interest rate capagreement was perfectly effective at such time, and the Company will continueto subsequently verify and document that the critical terms of the interestrate cap agreement and the hedged item continue to match exactly over theremaining life of the 

 

52

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relationship.  At December 29,2007, the notional amount of debt related to the Cap Agreement was $650.0million and the fair value of the instrument was a de minimis asset.  At December 30, 2006, the notionalamount of debt related to the Cap Agreement was $650.0 million and the fairvalue of the instrument was approximately a $0.1 million asset.

 

TheCompany has determined that the Collar Agreement and the Cap Agreement havebeen appropriately designated and documented as cash flow hedges under SFAS No. 133.  As such, changes in the fair value of theCollar Agreement and the Cap Agreement have been recorded in accumulated othercomprehensive income (loss) on the consolidated balance sheets.  During fiscal 2007 and the period frominception of the derivative arrangement on July 7, 2006 to December 30,2006, the Company has recorded a de minimis gain and a loss of approximately $0.7million ($0.4 million, net of tax), respectively, in accumulated othercomprehensive income (loss) related to these changes in fair value.  The Collar Agreement and the Cap Agreementhad no ineffectiveness and provided no amounts received or paid under thehedges that affected net loss during the periods.  Both agreements are expected to have noineffectiveness during their contractual lives.

 

**ForeignCurrency Risk**

 

TheCompany enters into some purchase obligations outside of the United States,which are predominately settled in U.S. dollars, and therefore, the Companydoes not have a material exposure to foreign currency exchange risks.  The Company operated 38 stores in Canada asof December 29, 2007.  The Companybelieves its foreign currency translation risk is not material, as ahypothetical 10% strengthening or weakening of the U.S. dollar relative to theCanadian dollar would not materially affect the Company’s results fromoperations or cash flow for fiscal 2007 and fiscal 2006.  As of December 29, 2007 and for thefiscal year then ended the Company did not hedge against foreign currencyrisks.

 

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**Item 8.  Financial Statements andSupplementary Data**

 

The financial statements andfinancial information required by the Item are included below.  The financial statements are indexed underItem 15(a)(1).

 

**Report of Independent Registered Public Accounting Firm**

 

The Board of Directors and Shareholders

Linens Holding Co.

 

We have audited the accompanying consolidatedbalance sheet of Linens Holding Co. and subsidiaries (the “Company”) as of December 29,2007, and the related consolidated statement of operations, shareholders’equity and comprehensive income (loss), and cash flows for the year ended December 29,2007.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audit.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. We believe thatour audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of Linens Holding Co. and subsidiaries at December 29,2007, and the consolidated results of their operations and their cash flows forthe year ended December 29, 2007, in conformity with U.S. generallyaccepted accounting principles.

 

As discussed in Note 2 to the consolidatedfinancial statements, in 2007, the Company adopted FASB Interpretation No. 48,“Accounting for Uncertainty in Income Taxes, an Interpretation of FASBStatement No. 109.”

 

 
|                | **/s/ Ernst & Young LLP** |
|---------------------|------------------------------------|
|                |                               |
|                |                               |
| Iselin, New Jersey  |                               |
| March 20, 2008 |                               |

 

54

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

The Board of Directors and Shareholders

Linens Holding Co.:

 

We have audited the accompanying consolidatedbalance sheet of Linens Holding Co. and subsidiaries (the Company) as of December 30,2006 (Successor Period), and the related consolidated statements of operations,shareholders’ equity and comprehensive income (loss) and cash flows for theperiod February 14, 2006 to December 30, 2006 (Successor Period), theperiod January 1, 2006 to February 13, 2006 (Predecessor Period) andthe year ended December 31, 2005 (Predecessor Period). These consolidatedfinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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 financialstatements referred to above present fairly, in all material respects, thefinancial position of the Company as of December 30, 2006 (SuccessorPeriod), and the related consolidated statements of operations, shareholders’equity and comprehensive income (loss) and cash flows for the period February 14,2006 to December 30, 2006 (Successor Period), the period January 1, 2006to February 13, 2006 (Predecessor Period) and for the year ended December 31,2005 (Predecessor Period), in conformity with U.S. generally acceptedaccounting principles.

 

As discussed in Notes 2 and 13 to theconsolidated financial statements, the Company changed its method of accountingfor share-based payments in 2006 and as discussed in Note 2, the Companychanged its method of quantifying errors in 2006.

 

** **
| **/s/ KPMG LLP**    |   |
|---------------------|--------|
|                |   |
|                |   |
| New York, New York  |   |
| March 26, 2007 |   |

 

55

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**LINENS HOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

** CONSOLIDATED STATEMENTS OF OPERATIONS**

**(In thousands)**

** **
| ** **                                                     | ** ** | **Fiscal Year  Ended  December 29,  2007** | ** **    | **February 14,  2006 to  December 30,  2006** | ** ** | **January 1, 2006  to February 13,  2006** | ** ** | **Fiscal Year  Ended  December 31,  2005** | ** **  |
|----------------------------------------------------------------|------------|------------------------------------------------------|---------------|--------------------------------------------------------------|------------|----------------------------------------------------------------|------------|------------------------------------------------------|-------------|
| ** **                                                     | ** ** | **Successor Entity**                            | ** **    | **Successor Entity**                                    | ** ** | **Predecessor Entity**                                    | ** ** | **Predecessor Entity**                          | ** **  |
| **Net  sales**                                                 | ** ** | **$**                                                | **2,794,776** | ** **                                                   | **$**      | **2,534,365**                                                  | ** ** | **$**                                                | **284,971** | ** ** | **$** | **2,694,742** | ** ** |
| Cost of sales,  including buying and distribution costs        |       | 1,747,904                                            |          | 1,557,011                                                    |       | 180,675                                                        |       | 1,595,394                                            |        |
|                                                           |       |                                                 |          |                                                         |       |                                                           |       |                                                 |        |
| **Gross  profit**                                              | ** ** | **1,046,872**                                        | ** **    | **977,354**                                                  | ** ** | **104,296**                                                    | ** ** | **1,099,348**                                        | ** **  |
|                                                           |       |                                                 |          |                                                         |       |                                                           |       |                                                 |        |
| Selling, general  and administrative expenses                  |       | 1,221,324                                            |          | 1,040,680                                                    |       | 175,424                                                        |       | 1,036,599                                            |        |
| Impairment of  property and equipment                          |       | 16,779                                               |          | 27,992                                                       |       | —                                                         |       | 4,059                                                |        |
| Impairment of  identifiable intangible asset                   |       | 100                                                  |          | 3,119                                                        |       | —                                                         |       | —                                               |        |
|                                                           |       |                                                 |          |                                                         |       |                                                           |       |                                                 |        |
| **Operating  (loss) profit**                                   | ** ** | **(191,331**                                         | **)**         | **(94,437**                                                  | **)**      | **(71,128**                                                    | **)**      | **58,690**                                           | ** **  |
| ** **                                                     | ** ** | ** **                                           | ** **    | ** **                                                   | ** ** | ** **                                                     | ** ** | ** **                                           | ** **  |
| Interest income                                                |       | (386                                                 | )             | (190                                                         | )          | (668                                                           | )          | (894                                                 | )           |
| Interest expense                                               |       | 101,042                                              |          | 79,795                                                       |       | —                                                         |       | 4,860                                                |        |
| Writeoff of  deferred financing costs                          |       | 6,986                                                |          | —                                                       |       | —                                                         |       | —                                               |        |
|                                                           |       |                                                 |          |                                                         |       |                                                           |       |                                                 |        |
| Interest expense  (income), net                                |       | 107,642                                              |          | 79,605                                                       |       | (668                                                           | )          | 3,966                                                |        |
|                                                           |       |                                                 |          |                                                         |       |                                                           |       |                                                 |        |
| Other income,  net                                             |       | (6,251                                               | )             | (657                                                         | )          | (1,286                                                         | )          | (3,137                                               | )           |
|                                                           |       |                                                 |          |                                                         |       |                                                           |       |                                                 |        |
| **(Loss)  income before (benefit) provision for income taxes** | ** ** | **(292,722**                                         | **)**         | **(173,385**                                                 | **)**      | **(69,174**                                                    | **)**      | **57,861**                                           | ** **  |
| (Benefit)  provision for income taxes                          |       | (50,631                                              | )             | (66,852                                                      | )          | (21,270                                                        | )          | 21,879                                               |        |
|                                                           |       |                                                 |          |                                                         |       |                                                           |       |                                                 |        |
| **Net  (loss) income**                                         | ** ** | **$**                                                | **(242,091**  | **)**                                                        | **$**      | **(106,533**                                                   | **)**      | **$**                                                | **(47,904** | **)** | **$** | **35,982** | ** ** |
| ** **                                                     | ** ** | ** **                                           | ** **    | ** **                                                   | ** ** | ** **                                                     | ** ** | ** **                                           | ** **  | ** ** | ** ** | ** ** | ** ** |

 

*See accompanying Notes to Consolidated Financial Statements.*

 

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**LINENS HOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

 

** CONSOLIDATED BALANCE SHEETS**

 

** (in thousands, exceptshare amounts)**

 
| ** **                                                                                              | ** ** | **December 29,  2007** | ** **    | **December 30,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------------|---------------|-----------------------------|------------|
|                                                                                                    |       |                        |          |                        |       |
| **Assets**                                                                                              |       |                        |          |                        |       |
| **Current  assets:**                                                                                    |       |                        |          |                        |       |
| Cash and cash  equivalents                                                                              |       | $                           | 16,071        |                        | $          | 12,526 |   |
| Accounts  receivable                                                                                    |       | 34,189                      |          | 37,063                      |       |
| Inventories                                                                                             |       | 795,371                     |          | 793,002                     |       |
| Prepaid expenses  and other current assets                                                              |       | 14,869                      |          | 15,308                      |       |
| Current deferred  income taxes                                                                          |       | 469                         |          | 16,815                      |       |
|                                                                                                    |       |                        |          |                        |       |
| **Total  current assets**                                                                               | ** ** | **860,969**                 | ** **    | **874,714**                 | ** ** |
| Property and  equipment, net                                                                            |       | 425,536                     |          | 530,829                     |       |
| Identifiable  intangible assets, net                                                                    |       | 142,754                     |          | 150,044                     |       |
| Goodwill                                                                                                |       | 272,420                     |          | 267,830                     |       |
| Deferred financing  costs and other noncurrent assets, net                                              |       | 38,708                      |          | 34,517                      |       |
|                                                                                                    |       |                        |          |                        |       |
| **Total  assets**                                                                                       | ** ** | **$**                       | **1,740,387** | ** **                  | **$**      | **1,857,934** | ** ** |
|                                                                                                    |       |                        |          |                        |       |
| **Liabilities  and Shareholders’ Equity**                                                          |       |                        |          |                        |       |
| **Current  liabilities:**                                                                               |       |                        |          |                        |       |
| Accounts payable                                                                                        |       | $                           | 179,026       |                        | $          | 204,760 |   |
| Accrued expenses  and other current liabilities                                                         |       | 267,553                     |          | 241,911                     |       |
|                                                                                                    |       |                        |          |                        |       |
| **Total  current liabilities**                                                                          | ** ** | **446,579**                 | ** **    | **446,671**                 | ** ** |
| Senior secured  notes and other long-term debt                                                          |       | 650,000                     |          | 652,076                     |       |
| Asset-based  credit facility                                                                            |       | 205,859                     |          | 37,800                      |       |
| Noncurrent  deferred income taxes                                                                       |       | 52,224                      |          | 125,977                     |       |
| Other long-term  liabilities                                                                            |       | 62,941                      |          | 50,667                      |       |
|                                                                                                    |       |                        |          |                        |       |
| **Total  liabilities**                                                                                  | ** ** | **1,417,603**               | ** **    | **1,313,191**               | ** ** |
|                                                                                                    |       |                        |          |                        |       |
| **Shareholders’  equity:**                                                                         |       |                        |          |                        |       |
| Common stock;  $0.01 par value; 15,000,000 shares authorized; 13,013,000 shares issued and  outstanding |       | 131                         |          | 131                         |       |
| Additional  paid-in capital                                                                             |       | 655,584                     |          | 652,395                     |       |
| Accumulated  deficit                                                                                    |       | (348,624                    | )             | (106,533                    | )          |
| Accumulated  other comprehensive income (loss)                                                          |       | 15,693                      |          | (1,250                      | )          |
|                                                                                                    |       |                        |          |                        |       |
| **Total  shareholders’ equity**                                                                    | ** ** | **322,784**                 | ** **    | **544,743**                 | ** ** |
|                                                                                                    |       |                        |          |                        |       |
| **Total  liabilities and shareholders’ equity**                                                    | ** ** | **$**                       | **1,740,387** | ** **                  | **$**      | **1,857,934** | ** ** |

 

*See accompanying Notes to Consolidated Financial Statements.*

 

57

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**LINENS HOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

** CONSOLIDATED STATEMENTS OF SHAREHOLDERS’EQUITY ANDCOMPREHENSIVE INCOME (LOSS)**

** **
| ** **                                                                     | ** ** | **Common Stock**                        | ** ** | **Additional  Paid-in** | ** ** | **Retained  Earnings  (Accumu-  lated** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Treasury**           | ** **   | ** ** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------------------|------------|-------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|------------------------|--------------|------------|------------|
| ** **                                                                     | ** ** | **Shares**                                   | ** ** | **Amount**              | ** ** | **Capital**                             | ** ** | **Deficit)**                          | ** ** | **Income (Loss)** | ** **   | **Stock**  | ** ** | **Total** | ** ** |
| **Predecessor Entity**                                                         | ** ** | **(in thousands, except number of shares )** | ** ** |
| ** **                                                                     | ** ** | ** **                                   | ** ** |
| **Balance  at January 1, 2005**                                           | ** ** | **45,200,896**                               | ** ** | **$**                   | **455**    | ** **                              | **$**      | **372,627**                           | ** ** | **$**                  | **440,914**  | ** ** | **$**      | **2,619** | ** ** | **$** | **(7,262** | **)** | **$** | **809,353** | ** ** |
| Net income                                                                     |       | —                                       |       | —                  |       | —                                  |       | 35,982                                |       | —                 |         | —     |       | 35,982 |   |
| Currency  translation adjustment                                               |       | —                                       |       | —                  |       | —                                  |       | —                                |       | 668                    |         | —     |       | 668 |   |
|                                                                           |       |                                         |       |                    |       |                                    |       |                                  |       |                   |         |       |       |   |   |
| Comprehensive  income                                                          |       |                                         |       |                    |       |                                    |       |                                  |       |                   |         |       |       | 36,650 |   |
| Common stock  issued under stock incentive plans and related tax benefits      |       | 193,487                                      |       | 2                       |       | 4,103                                   |       | —                                |       | —                 |         | —     |       | 4,105 |   |
| Increase in  treasury stock, net                                               |       | (4,408                                       | )          | —                  |       | —                                  |       | —                                |       | —                 |         | (245       | )          | (245 | ) |
|                                                                           |       |                                         |       |                    |       |                                    |       |                                  |       |                   |         |       |       |   |   |
| **Balance  at December 31, 2005**                                         | ** ** | **45,389,975**                               | ** ** | **457**                 | ** ** | **376,730**                             | ** ** | **476,896**                           | ** ** | **3,287**              | ** **   | **(7,507** | **)**      | **849,863** | ** ** |
| Cumulative  effect of adoption of SAB No. 108, net of tax                 |       | —                                       |       | —                  |       | —                                  |       | 11,450                                |       | —                 |         | —     |       | 11,450 |   |
|                                                                           |       |                                         |       |                    |       |                                    |       |                                  |       |                   |         |       |       |   |   |
| **Adjusted  balance at January 1, 2006**                                  | ** ** | **45,389,975**                               | ** ** | **457**                 | ** ** | **376,730**                             | ** ** | **488,346**                           | ** ** | **3,287**              | ** **   | **(7,507** | **)**      | **861,313** | ** ** |
|                                                                           |       |                                         |       |                    |       |                                    |       |                                  |       |                   |         |       |       |   |   |
| Net loss for  period January 1, 2006 to February 13, 2006            |       | —                                       |       | —                  |       | —                                  |       | (47,904                               | )          | —                 |         | —     |       | (47,904 | ) |
| Currency  translation adjustment                                               |       | —                                       |       | —                  |       | —                                  |       | —                                |       | 253                    |         | —     |       | 253 |   |
|                                                                           |       |                                         |       |                    |       |                                    |       |                                  |       |                   |         |       |       |   |   |
| Comprehensive  loss                                                            |       |                                         |       |                    |       |                                    |       |                                  |       |                   |         |       |       | (47,651 | ) |
| Stock-based  compensation under stock incentive plans                          |       | —                                       |       | —                  |       | 13,224                                  |       | —                                |       | —                 |         | —     |       | 13,224 |   |
| Tax benefit from  exercise of stock options in connection with the acquisition |       | —                                       |       | —                  |       | 4,298                                   |       | —                                |       | —                 |         | —     |       | 4,298 |   |
| Decrease in  treasury stock, net                                               |       | —                                       |       | —                  |       | —                                  |       | —                                |       | —                 |         | 674        |       | 674 |   |
|                                                                           |       |                                         |       |                    |       |                                    |       |                                  |       |                   |         |       |       |   |   |
| **Balance  at February 13, 2006 (prior to acquisition transactions)**     | ** ** | **45,389,975**                               | ** ** | **457**                 | ** ** | **394,252**                             | ** ** | **440,442**                           | ** ** | **3,540**              | ** **   | **(6,833** | **)**      | **831,858** | ** ** |
| Acquisition  transactions                                                      |       | (32,389,975                                  | )          | (327                    | )          | 253,231                                 |       | (440,442                              | )          | (3,540                 | )            | 6,833      |       | (184,245 | ) |
|                                                                           |       |                                         |       |                    |       |                                    |       |                                  |       |                   |         |       |       |   |   |
|                                                                           |       |                                         |       |                    |       |                                    |       |                                  |       |                   |         |       |       |   |   |
| **Successor  Entity**                                                          |       |                                         |       |                    |       |                                    |       |                                  |       |                   |         |       |       |   |   |
| ** **                                                                     |       |                                         |       |                    |       |                                    |       |                                  |       |                   |         |       |       |   |   |
| **Balance  at February 14, 2006**                                         | ** ** | **13,000,000**                               | ** ** | **130**                 | ** ** | **647,483**                             |       | —                                |       | —                 |         | —     | ** ** | **647,613** | ** ** |
| Net loss for the  period February 14, 2006 to December 30, 2006      |       | —                                       |       | —                  |       | —                                  |       | (106,533                              | )          | —                 |         | —     |       | (106,533 | ) |
| Currency  translation adjustment                                               |       | —                                       |       | —                  |       | —                                  |       | —                                |       | (820                   | )            | —     |       | (820 | ) |
| Unrealized loss  on hedge arrangements                                         |       | —                                       |       | —                  |       | —                                  |       | —                                |       | (708                   | )            | —     |       | (708 | ) |
| Tax effect of  period changes to accumulated other comprehensive loss          |       | —                                       |       | —                  |       | —                                  |       | —                                |       | 278                    |         | —     |       | 278 |   |
|                                                                           |       |                                         |       |                    |       |                                    |       |                                  |       |                   |         |       |       |   |   |
| Comprehensive  loss                                                            |       |                                         |       |                    |       |                                    |       |                                  |       |                   |         |       |       | (107,783 | ) |
| Stock-based  compensation under stock incentive plans                          |       | —                                       |       | —                  |       | 4,263                                   |       | —                                |       | —                 |         | —     |       | 4,263 |   |
| Common stock  issued                                                           |       | 13,000                                       |       | 1                       |       | 649                                     |       | —                                |       | —                 |         | —     |       | 650 |   |
|                                                                           |       |                                         |       |                    |       |                                    |       |                                  |       |                   |         |       |       |   |   |
| **Balance  at December 30, 2006**                                         | ** ** | **13,013,000**                               | ** ** | **131**                 | ** ** | **652,395**                             | ** ** | **(106,533**                          | **)**      | **(1,250**             | **)**        | **—** | ** ** | **544,743** | ** ** |
| Net loss                                                                       |       | —                                       |       | —                  |       | —                                  |       | (242,091                              | )          | —                 |         | —     |       | (242,091 | ) |
| Cumulative  translation adjustments                                            |       | —                                       |       | —                  |       | —                                  |       | —                                |       | 16,937                 |         | —     |       | 16,937 |   |
| Unrealized gain  on hedge arrangements                                         |       | —                                       |       | —                  |       | —                                  |       | —                                |       | 10                     |         | —     |       | 10 |   |
| Tax effect of  period changes to accumulated other comprehensive loss          |       | —                                       |       | —                  |       | —                                  |       | —                                |       | (4                     | )            | —     |       | (4 | ) |
|                                                                           |       |                                         |       |                    |       |                                    |       |                                  |       |                   |         |       |       |   |   |
| Comprehensive  loss                                                            |       |                                         |       |                    |       |                                    |       |                                  |       |                   |         |       |       | (225,148 | ) |
| Stock-based  compensation under stock incentive plans                          |       | —                                       |       | —                  |       | 3,189                                   |       | —                                |       | —                 |         | —     |       | 3,189 |   |
|                                                                           |       |                                         |       |                    |       |                                    |       |                                  |       |                   |         |       |       |   |   |
| **Balance  at December 29, 2007**                                         | ** ** | **13,013,000**                               | ** ** | **$**                   | **131**    | ** **                              | **$**      | **655,584**                           | ** ** | **$**                  | **(348,624** | **)**      | **$**      | **15,693** | ** ** | **$** | **—** | ** ** | **$** | **322,784** | ** ** |

 

*See accompanying Notes toConsolidated Financial Statements*

 

58

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**LINENS HOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

 

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(in thousands)**

** **
| ** **                                                                                           | ** ** | **Fiscal Year  Ended  December 29,  2007** | ** ** | **February 14,  2006 to  December 30,  2006** | ** ** | **January 1,  2006  to February 13,  2006** | ** ** | **Fiscal Year  Ended  December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                           | ** ** | **Successor  Entity**                                | ** ** | **Successor  Entity**                                        | ** ** | **Predecessor  Entity**                                    | ** ** | **Predecessor  Entity**                              | ** ** |
| **Cash  inflows (outflows) from operating activities:**                                              |       |                                                 |       |                                                         |       |                                                       |       |                                                 |       |
| Net (loss)  income                                                                                   |       | $                                                    | (242,091   | )                                                            | $          | (106,533                                                   | )          | $                                                    | (47,904    | ) | $ | 35,982 |   |
| Adjustments to  reconcile net (loss) income to net cash (used in) provided by operating  activities: |       |                                                 |       |                                                         |       |                                                       |       |                                                 |       |
| Depreciation and  amortization                                                                       |       | 130,301                                              |       | 114,509                                                      |       | 12,642                                                     |       | 90,270                                               |       |
| Deferred income  taxes                                                                               |       | (66,518                                              | )          | (73,641                                                      | )          | (6,725                                                     | )          | (11,265                                              | )          |
| Stock-based  compensation                                                                            |       | 3,189                                                |       | 4,263                                                        |       | 12,484                                                     |       | 1,243                                                |       |
| Writeoff of  deferred financing costs                                                                |       | 6,986                                                |       | —                                                       |       | —                                                     |       | —                                               |       |
| Amortization of deferred financing charges                                                           |       | 7,441                                                |       | 3,930                                                        |       | 43                                                         |       | 154                                                  |       |
| Loss on sales  and disposals of property and equipment                                               |       | 539                                                  |       | 671                                                          |       | —                                                     |       | 1,433                                                |       |
| Impairment of  property and equipment                                                                |       | 16,779                                               |       | 27,992                                                       |       | —                                                     |       | 4,059                                                |       |
| Impairment of  identifiable intangible asset                                                         |       | 100                                                  |       | 3,119                                                        |       | —                                                     |       | —                                               |       |
| (Increase)  decrease in assets, net of effect of acquisition:                                        |       |                                                 |       |                                                         |       |                                                       |       |                                                 |       |
| Accounts  receivable                                                                                 |       | 3,539                                                |       | 8,727                                                        |       | (2,240                                                     | )          | (17,704                                              | )          |
| Inventories                                                                                          |       | 7,615                                                |       | 26,133                                                       |       | (31,886                                                    | )          | (70,657                                              | )          |
| Prepaid expenses  and other current assets                                                           |       | 5,490                                                |       | 13,482                                                       |       | (12,153                                                    | )          | 20,544                                               |       |
| Identifiable  intangible assets and other noncurrent assets                                          |       | 20                                                   |       | 124                                                          |       | 9,580                                                      |       | (1,360                                               | )          |
| Increase (decrease) in liabilities, net of effect of  acquisition:                                   |       |                                                 |       |                                                         |       |                                                       |       |                                                 |       |
| Accounts payable                                                                                     |       | (31,035                                              | )          | (26,921                                                      | )          | 12,010                                                     |       | 14,687                                               |       |
| Accrued expenses  and other liabilities                                                              |       | 34,291                                               |       | 6,347                                                        |       | (7,807                                                     | )          | 11,711                                               |       |
|                                                                                                 |       |                                                 |       |                                                         |       |                                                       |       |                                                 |       |
| **Net  cash (used in) provided by operating activities**                                             | ** ** | **(123,354**                                         | **)**      | **2,202**                                                    | ** ** | **(61,956**                                                | **)**      | **79,097**                                           | ** ** |
|                                                                                                 |       |                                                 |       |                                                         |       |                                                       |       |                                                 |       |
| **Cash  inflows (outflows) from investing activities:**                                              |       |                                                 |       |                                                         |       |                                                       |       |                                                 |       |
| Acquisition of  the Predecessor Entity, net of cash acquired(1)                                      |       | —                                               |       | (1,205,502                                                   | )          | —                                                     |       | —                                               |       |
| Additions to  property and equipment                                                                 |       | (37,022                                              | )          | (66,280                                                      | )          | (10,956                                                    | )          | (128,912                                             | )          |
| Proceeds from  sales of property and equipment                                                       |       | 5,400                                                |       | 3,100                                                        |       | —                                                     |       | —                                               |       |
| Proceeds from  return of building purchase option deposit                                            |       | —                                               |       | 1,817                                                        |       | —                                                     |       | —                                               |       |
|                                                                                                 |       |                                                 |       |                                                         |       |                                                       |       |                                                 |       |
| **Net  cash used in investing activities**                                                           | ** ** | **(31,622**                                          | **)**      | **(1,266,865**                                               | **)**      | **(10,956**                                                | **)**      | **(128,912**                                         | **)**      |
|                                                                                                 |       |                                                 |       |                                                         |       |                                                       |       |                                                 |       |
| **Cash  inflows (outflows) from financing activities:**                                              |       |                                                 |       |                                                         |       |                                                       |       |                                                 |       |
| Issuance of  common stock to Linens Investors LLC and others                                         |       | —                                               |       | 650,650                                                      |       | —                                                     |       | —                                               |       |
| Issuance of  floating rate notes                                                                     |       | —                                               |       | 650,000                                                      |       | —                                                     |       | —                                               |       |
| Financing and  direct acquisition costs                                                              |       | (8,170                                               | )          | (60,447                                                      | )          | —                                                     |       | —                                               |       |
| Premium paid for  derivative financial instrument                                                    |       | —                                               |       | (700                                                         | )          | —                                                     |       | —                                               |       |
| Issuance of  common stock under stock incentive plans                                                |       | —                                               |       | —                                                       |       | —                                                     |       | 3,614                                                |       |
| Federal tax  benefit from common stock issued under stock incentive plans                            |       | —                                               |       | —                                                       |       | 4,298                                                      |       | 492                                                  |       |
| Change in  borrowings under revolving credit facilities:                                             |       |                                                 |       |                                                         |       |                                                       |       |                                                 |       |
| Proceeds from  borrowings                                                                            |       | 1,422,558                                            |       | 965,328                                                      |       | —                                                     |       | 435,049                                              |       |
| Repayments                                                                                           |       | (1,254,499                                           | )          | (927,528                                                     | )          | —                                                     |       | (435,049                                             | )          |
| Decrease  (increase) in treasury stock                                                               |       | —                                               |       | —                                                       |       | 674                                                        |       | (245                                                 | )          |
| Payments on  mortgage note                                                                           |       | (2,076                                               | )          | (54                                                          | )          | (10                                                        | )          | (58                                                  | )          |
|                                                                                                 |       |                                                 |       |                                                         |       |                                                       |       |                                                 |       |
| **Net  cash provided by financing activities**                                                       | ** ** | **157,813**                                          | ** ** | **1,277,249**                                                | ** ** | **4,962**                                                  | ** ** | **3,803**                                            | ** ** |
|                                                                                                 |       |                                                 |       |                                                         |       |                                                       |       |                                                 |       |
| Effect of  exchange rate changes on cash and cash equivalents                                        |       | 708                                                  |       | (60                                                          | )          | 125                                                        |       | 161                                                  |       |
|                                                                                                 |       |                                                 |       |                                                         |       |                                                       |       |                                                 |       |
| Net increase  (decrease) in cash and cash equivalents                                                |       | 3,545                                                |       | 12,526                                                       |       | (67,825                                                    | )          | (45,851                                              | )          |
| **Cash  and cash equivalents at beginning of period**                                                | ** ** | **12,526**                                           | ** ** | **—**                                                   | ** ** | **158,158**                                                | ** ** | **204,009**                                          | ** ** |
|                                                                                                 |       |                                                 |       |                                                         |       |                                                       |       |                                                 |       |
| **Cash  and cash equivalents at end of period**                                                      | ** ** | **$**                                                | **16,071** | ** **                                                   | **$**      | **12,526**                                                 | ** ** | **$**                                                | **90,333** | ** ** | **$** | **158,158** | ** ** |

 

59

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| ** **                                                        |   | **Fiscal Year  Ended  December 29,  2007** | ** ** | **February 14,  2006 to  December 30,  2006** | ** ** | **January 1,  2006  to February 13,  2006** | ** ** | **Fiscal Year  Ended  December 31,  2005** |   |
|-------------------------------------------------------------------|--------|------------------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------|--------|
| ** **                                                        |   | **Successor  Entity**                                | ** ** | **Successor  Entity**                                        | ** ** | **Predecessor  Entity**                                    | ** ** | **Predecessor  Entity**                              |   |
| ** **                                                        |   |                                                 |       |                                                         |       |                                                       |       |                                                 |   |
| **Supplemental  disclosure of cash flow information**             |   |                                                 |       |                                                         |       |                                                       |       |                                                 |   |
| **Cash  paid during the period for:**                             |   |                                                 |       |                                                         |       |                                                       |       |                                                 |   |
| Interest (net of  amounts capitalized)(2)                         |   | $                                                    | 91,113     |                                                         | $          | 58,577                                                     |       | $                                                    | 135    |   | $ | 4,851 |   |
| Income taxes                                                      |   |                                                 |       |                                                         |       |                                                       |       |                                                 |   |
| Income taxes  paid                                                |   | $                                                    | 17,638     |                                                         | $          | 42,010                                                     |       | $                                                    | 57     |   | $ | 33,684 |   |
| Income tax  refunds                                               |   | $                                                    | 1,473      |                                                         | $          | 22,914                                                     |       | $                                                    | — |   | $ | 875 |   |
|                                                              |   |                                                 |       |                                                         |       |                                                       |       |                                                 |   |
| **Non-cash  transactions:**                                       |   |                                                 |       |                                                         |       |                                                       |       |                                                 |   |
| Decrease in  accrued additions to property and equipment          |   | $                                                    | 5,429      |                                                         | $          | 1,940                                                      |       | $                                                    | 3,180  |   | $ | 1,330 |   |
| Increase in  goodwill due to purchase accounting adjustments, net |   | $                                                    | 1,505      |                                                         | $          | 1,845                                                      |       | $                                                    | — |   | $ | — |   |
| Unrealized  income (loss) on hedge arrangements, net of tax       |   | $                                                    | 6          |                                                         | $          | (430                                                       | )          | $                                                    | — |   | $ | — |   |

 

----

*(1)*

In connection with the Merger, net cash settlements ofapproximately $20.0 million and $4.4 million for stock options andrestricted stock units, respectively, are included in “Acquisition of thePredecessor Entity, net of cash acquired.”

* *

*(2)*

Excludes deferred financing costs of approximately $48.2million, $2.1 million and $6.1 million incurred in connection with the Merger,the May 2007 amended revolving credit facility and the Oct 2007 newrevolving credit facility, respectively. Such costs are being charged-off to interest expense over the life ofthe related financing commitments.

 

*See accompanying Notes to Consolidated Financial Statements.*

 

60

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**LINENS HOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

 

**1. Business**

 

LinensHolding Co., a Delaware corporation, together with its wholly ownedconsolidated subsidiaries, including Linens ’n Things, Inc. and Linens ’nThings Center, Inc. (collectively, the “Company”), is an entity that wasformed in connection with the February 2006 acquisition of all of theoutstanding shares of common stock of Linens ’n Things, Inc. for aggregateconsideration of approximately $1.3 billion (see Note 3 for additionaldetails about the acquisition of Linens ’n Things, Inc. by LinensHolding Co.).

 

TheCompany operates in one segment, the retail industry, and had 589 stores in 47states across the United States and in seven provinces in Canada as of December 29,2007. The Company’s stores offer a broad assortment of home textiles,housewares and home accessories, carrying both national brands and privatelabel goods.

 

**2. Summary of Significant Accounting Policies**

 

***Basis of Presentation***

 

Theaccompanying consolidated financial statements present the financial positionof successor entity Linens Holding Co. and its wholly owned subsidiaries (the “Successor”or “Successor Entity”), and predecessor entity Linens ’n Things, Inc.and its wholly owned subsidiaries (the “Predecessor” or “Predecessor Entity”). Theconsolidated financial statements as of December 29, 2007 and December 30,2006, for the 52 weeks ended December 29, 2007 and for the period February 14,2006 to December 30, 2006 show the financial position and results ofoperations and cash flows of the Successor Entity. The consolidated financialstatements for the period January 1, 2006 to February 13, 2006 andthe 52 weeks ended December 31, 2005 show the results of operations andcash flows of the Predecessor Entity. All significant intercompanybalances and transactions have been eliminated.

 

TheCompany has not presented separate financial statements for Linens ’n Things, Inc.and its subsidiaries or Linens ’n Things Center, Inc. and its subsidiaries(collectively, the “Issuers” as described in Note 18) because management hasdetermined that the differences in such financial statements are minor.

 

***Immaterial Reclassifications***

 

Inorder to enhance the presentation of the consolidated financial statements, theCompany reclassified certain accounts in fiscal 2007; accordingly, certainprior period amounts have been reclassified to conform to the current periodpresentation. As of December 29, 2007 and December 30, 2006,approximately $62.9 million and $55.3 million, respectively, of amounts due tocustomers have been reclassified to accrued expenses and other currentliabilities from accounts payable on the consolidated balance sheets. Theconsolidated statements of operations now include other income, net, which waspreviously included in selling, general and administrative expenses. Suchamounts total $6.3 million, $0.7 million, $1.3 million and $3.1 million for the52 weeks ended December 29, 2007 (“fiscal 2007”), the period February 14,2006 to December 30, 2006, the period January 1, 2006 to February 13,2006 and the 52 weeks ended December 31, 2005 (“fiscal 2005”),respectively.

 

***Staff Accounting Bulletin No. 108***

 

InSeptember 2006, the SEC staff issued Staff Accounting Bulletin No. 108,“Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements” (“SAB No. 108”). ThisSAB provides guidance on the consideration of the effects of prior yearmisstatements in quantifying current year misstatements for the purpose of amateriality assessment. SAB No. 108 establishes an approach that requiresquantification of financial statement errors based on the effects on each ofthe Company’s financial statements and related financial statement disclosures.The SAB permits existing public companies to record the cumulative effect ofinitially applying this approach in the first year ending after November 15,2006 by recording the necessary correcting adjustments to the carrying valuesof assets and liabilities as of the beginning of that year with the offsettingadjustment recorded to the opening balance of retained earnings. Additionally,the use of the cumulative effect transition method requires detailed disclosureof the nature and amount of each individual error being corrected

 

61

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through the cumulative adjustment and how and when it arose. At December 31,2006, the Company recorded an adjustment under SAB No. 108.

 

Thetransition provisions of SAB No. 108 permit the Company to adjust for thecumulative effect on retained earnings of immaterial errors relating to prioryears. SAB No. 108 also requires the adjustment of any prior quarterlyfinancial statements within the fiscal year of adoption for the effects of sucherrors on the quarters when the information is next presented. Such adjustmentsdo not require previously filed reports with the SEC to be amended.

 

TheCompany adopted SAB No. 108 effective the beginning of the 52-week periodended December 30, 2006. In accordance with the requirements of SAB No. 108,the Company has adjusted the opening retained earnings of its PredecessorEntity for 2006 in the accompanying consolidated financial statements for anadjustment to its net deferred income tax liability.

 

Atthe end of 2006, the Company re-evaluated its deferred income tax asset andliability balances. This review resulted in a determination that the Company’snoncurrent deferred income tax liability for depreciation was overstated byapproximately $10.4 million and other net current deferred tax liabilities wereoverstated by approximately $1.1 million for an aggregate amount of $11.5million. Consequently, the Company recorded an adjustment to decrease its netdeferred income tax liability and increase opening retained earnings of itsPredecessor Entity by approximately $11.5 million. The adjustment had no impacton income tax expense. The adjustment was due to the carryover impact of excessdeferred income tax liabilities from prior years which had accumulated over aperiod of years prior to 2002. The Company considers this adjustment to beimmaterial as it did not impact the consolidated statements of operations andthe adjustment to the excess deferred tax liability was not material to theconsolidated balance sheets in prior periods.

 

Thecumulative effect of the adjustment above on the opening balances of thePredecessor Entity’s balance sheet prior to the acquistion is as follows (inthousands):

 
| ** **                                                                  | ** ** | **As of January 1, 2006** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| **Balance Sheet Account Adjusted  Increase (Decrease)** | ** ** | **Assets**                                    | ** ** | **Liabilities  and  Shareholders’  Equity** | ** ** |
| ** **                                                                  | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Retained  earnings                                                          | ** ** | **$**                                         | **—** |   | $ | 11,450 |   |
| Noncurrent  deferred income taxes                                           | ** ** | **—**                                    |       | (10,371 | ) |
| Current deferred  income taxes                                              |       | 1,079                                         | ** ** | **—** | ** ** |
|                                                                        |       |                                          | ** ** | ** ** | ** ** |
| Total                                                                       |       | $                                             | 1,079      |   | $ | 1,079 |   |

 

***Fiscal Periods***

 

The Company utilizes a 52/53-week period ending on theSaturday nearest the last day of December. However, because of the acquisition(see Note 3), the presentation of results of operations and cash flows for the52 weeks ended December 30, 2006 (“fiscal 2006”) has been segregatedbetween the Successor Entity and Predecessor Entity. Fiscal years 2007, 2006and 2005 were each 52-week periods.

 

***Use of Estimates in the Preparation ofFinancial Statements***

 

The preparation of financial statements inconformity with U.S. generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts and timing ofrevenues and of expenses during the reporting periods. The Company bases itsestimates on historical experience and on other assumptions that it believes tobe relevant under the circumstances, the results of which form the basis formaking judgments about the carrying value of assets and liabilities that arenot readily apparent from other sources. Judgment is used in such areas as thevaluation of inventory, the allocation of purchase price to assets acquired andin the determination of goodwill in a business combination using the purchasemethod of accounting, estimating future sales returns, recognizing charges foran impairment of long-lived assets including goodwill,

 

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establishing accruals for store closures,self-insurance and litigation, assumptions used to determine the fair value ofstock option grants and estimating forfeiture rates used in the determinationof stock-based compensation expense, accounting for derivative financialinstruments used as a cash flow hedge, and determining the provision for incometaxes and related accruals, deferred tax assets and deferred tax liabilities,and tax asset valuation allowance. Actual results could differ from theseestimates.

 

***Business Combination***

 

OnFebruary 14, 2006, the Company acquired all of the outstanding commonstock of the Company’s predecessor entity, Linens ’n Things, Inc., for total cashconsideration of approximately $1.3 billion. The acquisition of Linens ’n Things, Inc. was accounted for as abusiness combination in accordance with the provisions set forth in Statementof Financial Accounting Standards (“SFAS”) No. 141, “*Business Combinations*” (“SFAS No. 141”) using the purchasemethod of accounting, whereby the purchase price (including liabilitiesassumed) was allocated to the assets acquired based on their estimated fairmarket values at the date of acquisition. The purchase price paid by theCompany to acquire Linens ’nThings, Inc. and related purchase accounting adjustments were “pushed down”and recorded in Linens ’n Things, Inc.and its subsidiaries’ financial statements and resulted in a new basis ofaccounting for the “Successor” period beginning on the day the acquisition wascompleted. The purchase price and related costs were allocated to the estimatedfair values of the assets acquired and liabilities assumed at the time of theacquisition based on management’s best estimates of the values of certain ofthe tangible and intangible assets acquired. The Company’s assets andliabilities were adjusted to fair value as of the closing date of theTransactions (see Note 3), and the excess of the total purchase price over thefair value of the Company’s net assets was allocated to goodwill.

 

***Revenue Recognition***

 

TheCompany recognizes revenue at the time merchandise is purchased by customers atits retail stores and when shipped for merchandise purchased from its websiteor ordered by telephone. Shipping terms for merchandise purchased from itswebsite or ordered by telephone are FOB shipping point and title passes to thecustomer upon delivery of the merchandise to the carrier. Shipping and handlingfees billed to customers in a sale transaction are included in sales.

 

Revenuefrom gift cards, gift certificates and merchandise credits are recognized whenredeemed. As part of the Company’s private-label credit card (“PLCC”) program,when customers purchase merchandise using their PLCC they earn points thatenable them to receive future free or discounted merchandise once they reachcertain purchase thresholds. The value of these points is accrued for on eachPLCC purchase, net of an estimate for points never to be redeemed. Theresulting net value of these points is reflected as an increase in cost ofgoods sold in the consolidated statements of operations.

 

Provisionsfor estimated future sales returns are recorded in the period that the relatedsales are recorded. The Company determines the amount of provision based onhistorical information. Sales discounts, coupons, cash rebates and othersimilar incentives are recorded as a reduction of sales in the period when therelated sales are recorded. The Company periodically offers rebate programs inwhich customers receive either a check or a gift card upon receipt of anapproved rebate claim form. During the promotion period for each respectiverebate promotion, the Company accrues the total amount eligible to be disbursedat the time each item is sold. During the period when the related qualifyingsales subject to rebate are recorded, the Company records cash rebates earnedas a reduction of sales and gift cards to be awarded as an increase to cost ofsales in the consolidated statements of operations.

 

***Sales Tax Recognition***

 

Inaccordance with local laws, the Company collects sales tax on merchandisepurchased by customers. Sales tax collections are presented in the accompanyingconsolidated statements of operations on a net basis (excluded from revenues).

 

***Sales Returns***

 

The Company estimates future sales returnsand records a provision in the period that the related sales are recorded basedon historical return rates. Should actual returns differ from the Company’sestimates, the Company

 

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may be required to revise estimated salesreturns. Although these estimates have not varied materially from historicalprovisions, estimating sales returns requires management judgment as to changesin preferences and quality of products being sold, among other things;therefore, these estimates may vary materially in the future. The sales returnscalculations are regularly compared with actual return experience. In preparingits consolidated financial statements as of December 29, 2007 and December 30,2006, the Company’s sales returns reserve was approximately $8.7 million and$5.9 million, respectively.

 

***Costs of Sales***

 

Inaddition to the cost of inventory sold, the Company includes its buying anddistribution expenses in its cost of sales. Buying expenses include all directand indirect costs to procure merchandise. Distribution expenses include thecost of operating the Company’s distribution centers and freight expenserelated to transporting merchandise.

 

***Vendor Allowances***

 

TheCompany receives various types of allowances from its merchandise vendors,which are based on negotiated terms, to cover costs such as freight expense andmarkdowns. These allowances are recorded as an offset to the expense asincurred or when the merchandise is sold, as applicable, and is reflected as areduction of cost of sales in accordance with the provisions of the EmergingIssues Task Force Issue No. 02-16, “*Accounting by a Customer(Including a Reseller) for Certain Consideration Received from a Vendor*”(“EITF 02-16”).

 

EITF02-16 states that cash consideration received from a vendor is presumed to be areduction of the prices of the vendor’s products or services and should,therefore, be characterized as a reduction of cost of merchandise sold whenrecognized in the Company’s consolidated statement of operations. Thatpresumption may be overcome when the consideration is either a reimbursement ofspecific, incremental and identifiable costs incurred to sell the vendor’sproducts, or a payment for assets or services delivered to the vendor. Inaccordance with EITF 02-16, the Company treats certain funds received fromvendors as a reduction to the cost of inventory and, as a result, these fundsare recognized as a reduction to cost of merchandise sold when the inventory issold. Vendor allowances, which are reflected as a reduction of inventory, andvendor purchase discounts are amortized to reduce cost of sales on an inventoryturn basis.

 

***Selling, General and AdministrativeExpenses***

 

Otherselling, general and administrative expenses (“SG&A”) in the consolidatedstatements of operations include store payroll and selling expenses, storeoccupancy costs, advertising and other corporate expenses.

 

***Impairment of Long-Lived Assets (includingGoodwill)***

 

Inaccordance with SFAS No. 144, “*Accounting for Impairmentor Disposal of Long-Lived Assets,*”**long-livedassets, such as property and equipment and purchased intangible assets subjectto amortization, are reviewed for impairment whenever events or changes incircumstances indicate that the carrying value of an asset may not be fullyrecoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to estimated undiscounted futurecash flows expected to be generated by the asset. If the carrying amount of anasset exceeds its estimated future cash flows, an impairment charge isrecognized for the amount that the carrying value of the asset exceeds the fairvalue of the asset, which is determined by discounting the future cash flowsexpected to be generated by the asset.

 

Inaccordance with SFAS No. 142, “*Goodwill and OtherIntangible Assets,*” goodwill and intangible assets that haveindefinite useful lives are tested annually for impairment. These assets aretested for impairment more frequently if events and circumstances indicate thatthe asset might be impaired. An impairment loss is recognized to the extentthat the carrying amount exceeds the asset’s fair value. For goodwill, theimpairment determination is made at the reporting unit level and consists oftwo steps. First, the Company determines the fair value of a reporting unit andcompares it to its carrying amount. Second, if the carrying amount of areporting unit exceeds its fair value, an impairment loss is recognized for anyexcess of the carrying amount of the reporting unit’s goodwill over the impliedfair value of the goodwill. The implied fair value of goodwill is determined byallocating the fair value of the reporting unit in a manner similar to apurchase price allocation, in accordance with SFAS No. 141*.*The residual fair value after thisallocation is the implied fair value of the reporting unit goodwill.

 

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TheCompany’s judgments regarding the existence of impairment indicators are basedon market conditions and operational performance. Future events could cause theCompany to conclude that impairment indicators exist and that the value oflong-lived assets and goodwill is impaired. As of December 29, 2007 and December 30,2006, the Company’s net book value for property and equipment was approximately$425.5 million and $530.8 million, respectively, goodwill was approximately$272.4 million and $267.8 million, respectively, and identifiable intangible assetswas $142.8 million and $150.0 million, respectively.

 

Duringfiscal 2007, the period February 14, 2006 to December 30, 2006 andfiscal 2005, the Company determined that the carrying value of certain assetsexceeded their related estimated future undiscounted cash flows. As a result,the Company reduced the carrying value of property and equipment to their fairvalue by approximately $16.8 million, $28.0 million and $4.1 million for fiscal2007, the period February 14, 2006 to December 30, 2006 and fiscal2005, respectively. The related impairment loss was recognized in impairment ofproperty and equipment on the Company’s consolidated statements of operations. Inaddition, during fiscal 2007 and the period February 14, 2006 to December 30,2006, the Company reduced the carrying value of favorable leases included inidentifiable intangible assets, net by approximately $0.1 million and $3.1million, respectively, with a corresponding charge recognized in impairment ofidentifiable intangible asset on the Company’s consolidated statements ofoperations. The Company also performed its annual impairment test on goodwilland determined that no impairment exists.

 

***Advertising Costs***

 

TheCompany expenses the production costs of advertising at the commencement dateof the advertisement. Advertising costs, recorded as a component of SG&A,were $157.0 million for fiscal 2007, $115.0 million for the period February 14,2006 to December 30, 2006, $12.0 million for the period January 1,2006 to February 13, 2006 and $114.0 million for fiscal 2005.

 

***Store Opening and Closing Costs***

 

Newstore opening costs are charged to expense as incurred. Certain legal andconstruction-related overhead costs are capitalized. Store opening costsprimarily include rent, store payroll and general operating costs incurredprior to the store opening.

 

Inthe event a store is closed before its lease expires, the remaining leaseobligation, less anticipated sublease rental income, asset impairment chargesrelated to improvements and fixtures, inventory writedowns and othermiscellaneous closing costs associated with the disposal activity is recognizedwhen they are incurred.

 

***Stock-Based Compensation***

 

OnJanuary 1, 2006, the Company adopted SFAS No. 123 (Revised 2004), “*Share-Based Payment*” (“SFAS No. 123 (Revised 2004)”),requiring the recognition of compensation cost for all equity classified awardsgranted, modified or settled after the effective date and for the unvestedportion of awards outstanding as of the effective date using the fair-valuemeasurement method.

 

Priorto adopting SFAS No. 123 (Revised 2004), the Company accounted for itsstock-based compensation plans using the intrinsic value method prescribedunder the provisions of Accounting Principles Board Opinion No. 25, aspermitted under SFAS No. 148, “*Accounting for Stock-BasedCompensation - Transition and Disclosure - an amendment of FASB Statement No. 123.*”(“SFASNo. 148”). During the period January 1, 2006 to February 13,2006 and fiscal 2005, the Company recognized compensation expense forrestricted stock unit awards over the related service period in theconsolidated statements of operations, but did not recognize compensationexpense for stock options, since the Company’s stock options had been grantedat fair market value on the date of grant.

 

Inconnection with the adoption of SFAS No. 123 (Revised 2004) the Companyelected the modified prospective method of transition; accordingly, priorperiods have not been restated. During the period January 1, 2006 to February 13,2006, the Company did not grant any stock options. Upon completion of theacquisition (see Note 3) and in accordance with the terms of the stock plans,all of the outstanding stock options and restricted stock units became fullyvested and immediately exercisable. Accordingly, under SFAS No. 123(Revised 2004) the Company recorded stock-based compensation expense for theentire portion of previously granted stock-based awards that remained unvestedat the date of the adoption.

 

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OnFebruary 14, 2006, the board of directors and stockholders of LinensHolding Co. adopted the Linens Holding Co. Stock Option Plan (the “Plan”). Underthe Plan, the Company grants stock options for a fixed number of shares to keyemployees and directors. The Company recognizes the cost of all time-basedemployee stock option grants on a straight-line attribution basis and the costof all performance-based employee stock options on an accelerated basis inaccordance with Financial Accounting Standards Board Interpretation No. 28,“*Accounting for Stock Appreciation Rights and OtherVariable Stock Option or Award Plans*” over their respective vestingperiods, net of estimated forfeitures. There are no restricted stock unitsunder the Plan.

 

TheCompany uses the Monte Carlo simulation option-pricing model for estimating thefair value of performance-based options and the Black Scholes option pricingmodel for time-based options issued under the Plan. Both models include variousassumptions, including the expected life of stock options, the expectedvolatility and the expected risk-free interest rate. These assumptions reflectthe Company’s best estimates, but they involve inherent uncertainties based oncertain conditions generally outside the control of the Company. As a result,if other assumptions had been used, total stock-based compensation cost, asdetermined in accordance with SFAS No. 123 (Revised 2004) could have beenmaterially impacted. Furthermore, if the Company uses different assumptions forfuture grants, stock-based compensation cost could be materially impacted infuture periods.

 

UnderSFAS No. 123 (Revised 2004), the Company is also required to recordstock-based compensation expense, net of estimated forfeitures. The Company’sforfeiture rate assumption used in determining its stock-based compensationexpense is estimated, primarily based upon historical data. The actualforfeiture rate could differ from these estimates.

* *

***Financial Instruments***

 

Cash and cashequivalents, accounts receivable, accounts payable and accrued expenses arereflected in the consolidated financial statements at carrying values whichapproximate fair value due to the short-term nature of these instruments. Thecarrying amount for borrowings under the Company’s revolving credit facilityapproximates fair value because of the variable market interest rate charged tothe Company for these borrowings. The fair value of the Company’s Notes isdetermined based on quoted bid prices. As of December 29, 2007, the fair value of theCompany’s $650.0 million senior secured notes is approximately $320.1 million.

 

***Cash and Cash Equivalents***

 

Cashequivalents are considered to be those securities with maturities of threemonths or less when purchased. The Company’s cash management program utilizeszero balance disbursement accounts. Accordingly, outstanding checks have beenreclassified to accounts payable or accrued expenses and other currentliabilities in the consolidated balance sheets. Such outstanding checks includedin accounts payable totaled $40.7 million and $24.6 million at December 29,2007 and December 30, 2006, respectively, and outstanding checks includedin accrued expenses and other current liabilities totaled $49.9 millionand $48.0 million at December 29, 2007 and December 30, 2006,respectively.

 

***Inventories***

 

Inventoriesconsist of the cost of finished goods purchased from domestic and foreignvendors, including inbound freight and other importation costs, productdevelopment costs and certain vendor allowances.

 

Inventories are valued using the lower of cost or marketvalue, determined by the retail inventory method (“RIM”). Under RIM, thevaluation of inventories at cost and the resulting gross margins are determinedby applying a calculated cost-to-retail ratio to the retail value ofinventories. Amounts areremoved from inventory at their weighted-average cost. RIM is an averaging method that is used in the retail industry due to itspracticality. Inherent in RIM calculations are certain significant managementjudgments and estimates including, among others, merchandise mark-on, mark-up,markdowns and shrinkage based on historical experience between the dates ofphysical inventories, all of which significantly impact the ending inventoryvaluation at cost. The methodologies utilized by the Company in its applicationof RIM are consistent for all periods presented. Such methodologies include thedevelopment of the cost-to-retail ratios, the development of shrinkage reservesand the accounting for price changes. At any one time, inventories includeitems that have been written down to the Company’s best estimate of theirrealizable value. Factors considered in estimating realizable value include theage of merchandise and anticipated demand. Actual realizable value could differmaterially from this estimate based upon future customer demand or

 

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economic conditions.

 

***Property and Equipment***

 

Additionsto property and equipment are stated at cost. Depreciation and amortization iscomputed on a straight-line basis over the estimated useful lives of the assets(5 to 10 years for furniture, fixtures and equipment and 3 to 5 years forcomputer hardware and capitalized software costs). Leasehold improvements areamortized over the lesser of the expected useful life and expected lease term,including renewal periods in those instances where such renewal periods arereasonably assured of being exercised at the inception of the lease.

 

Maintenanceand repairs are charged directly to expense as incurred. Major renewals orreplacements are capitalized after making the necessary adjustments to theasset and accumulated depreciation accounts of the items renewed or replaced.

 

***Deferred Charges***

 

Deferredcharges, principally lease acquisition fees, are amortized on a straight-linebasis, generally over the expected lease term, beginning when the Company firstobtains possession of the premises, including renewal periods in thoseinstances where such renewal periods are reasonably assured of being exercisedat the inception of the lease.

 

***DerivativeFinancial Instruments***

* *

Inaccordance with SFAS No. 133, “*Accounting for DerivativeInstruments and Hedging Activities*” (“SFAS No. 133”), asamended, the Company designated certain derivative instruments entered into on July 7,2006 as cash flow hedges and recognizes the fair value of the instruments onthe consolidated balance sheet. Gains and losses related to a hedge and thatresult from changes in the fair value of the hedge are either recognized inincome to offset the gain or loss on the hedged item, or deferred and reportedas a component of accumulated other comprehensive income (loss) in stockholders’equity on the consolidated balance sheets and subsequently recognized in incomewhen the hedged item affects net income. The ineffective portion of the changein fair value of a hedge is recognized in income immediately. There was nohedge ineffectiveness during the period from inception of the derivativearrangement on July 7, 2006 to December 29, 2007.

 

***Self-Insurance***

 

TheCompany purchases third-party insurance for workers’ compensation, medical andgeneral liability costs that exceed certain limits for each type of insuranceprogram. The Company is responsible for the payment of claims under theseinsured excess limits. The Company establishes accruals for its insuranceprograms based on available claims data and historical trend and experience, aswell as loss development factors for its medical insurance, workers’compensation and general liability insurance. Workers’ compensation is recordedat its net present value. In preparing the estimates, the Company alsoconsiders the nature and severity of the claims, analysis provided bythird-party claims administrators, as well as current legal, economic andregulatory factors.

 

TheCompany evaluates the accrual and the underlying assumptions periodically andmakes adjustments as needed. The ultimate cost of these claims may vary fromthe established accrual. While the Company believes that the recorded amountsare adequate, there can be no assurance that changes to management’s estimateswill not occur due to limitations inherent in the estimate process. In theevent the Company determines the accruals should be increased or reduced, theCompany would record such adjustments in the period in which such determinationis made.

 

The accrued obligation for these self-insurance programs wasapproximately $17.4 million and $16.2 million as of December 29, 2007and December 30, 2006, respectively.

 

***Deferred Rent***

 

TheCompany accrues for scheduled rent increases contained in its leases on astraight-line basis over the expected lease term, beginning when the Companyfirst obtains possession of the premises, including renewal periods in thoseinstances where such renewal periods are reasonably assured of being exercisedat the inception of the lease.

 

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***Income Taxes***

 

TheCompany uses the asset and liability method to account for income taxes. Deferredtax assets and liabilities are recognized for the future tax consequencesattributable to the differences between the financial statement carryingamounts of existing assets and liabilities and their respective tax bases andoperating loss and tax credit carryforwards. Deferred tax assets andliabilities are measured using enacted tax rates expected to be applied totaxable income in the year in which temporary differences are expected to berecovered or settled. The effect of a change in tax rates on deferred taxassets and liabilities is recognized in the consolidated statement ofoperations in the period that includes the enactment date.

 

Determiningthe provision for income taxes and related accruals, deferred tax assets anddeferred tax liabilities requires judgment. There are transactions andcalculations arising in the ordinary course of business where the ultimate taxoutcome is uncertain. Additionally, tax returns filed by the Company aresubject to audit by various tax authorities. Although the Company believes thatits estimates are reasonable, actual results could differ from these estimates.

 

Inassessing the realizability of deferred tax assets included in the consolidatedbalance sheets, management considers whether it is more likely than not thatsome portion or all of the tax assets will not be realized. The ultimaterealization of deferred tax assets is dependent upon the generation of futuretaxable income during the periods in which those temporary differences becomedeductible. Management considers the scheduled reversal of deferred taxliabilities, projected future taxable income and tax planning strategies inmaking this assessment. In accordance with this policy and the requirements ofSFAS No. 109, “*Accounting for IncomeTaxes*,” a valuation allowance is established for the estimatedportion of tax assets that will not be realized.

 

TheCompany adopted the provisions of Financial Accounting Standards Board (“FASB”)Interpretation No. 48, “*Accounting for Uncertaintyin Income Taxes – an Interpretation of FASB Statement No. 109*”(“FIN No. 48”) at the beginning of the current fiscal year. FIN No. 48addresses the determination of how tax benefits claimed or expected to beclaimed on a tax return should be recorded in the financial statements. UnderFIN No. 48, the Company must recognize the tax benefit from an uncertaintax position only if it is more likely than not that the tax position will besustained on examination by the taxing authorities, based on the technicalmerits of the position. The Company’s estimates of the tax benefit fromuncertain tax positions may change in the future due to new developments ineach matter.

* *

***Litigation***

 

The Company records an estimated liabilityrelated to various claims and legal actions arising in the ordinary course ofbusiness, which is based on available information and advice from outsidecounsel where applicable. As additional information becomes available, theCompany assesses the potential liability related to its pending claims and mayadjust its estimates accordingly.

 

**3. Acquisition of Linens** ’**n Things, Inc. byLinens Holding Co.**

 

OnNovember 8, 2005, Linens Merger Sub Co. and the Company entered into anAgreement and Plan of Merger with Linens ’n Things, Inc. to acquireLinens ’n Things, Inc. through a merger (the “Merger”). Pursuant tothe merger agreement, each share of common stock of Linens ’n Things, Inc.(other than shares held in treasury or owned by Linens Merger Sub Co., theCompany or any affiliate of Linens Merger Sub Co. and other than shares held bystockholders who properly demanded and perfected appraisal rights) would beconverted into the right to receive cash for aggregate consideration ofapproximately $1.3 billion. The Merger was structured as a reversesubsidiary merger, and on February 14, 2006, Linens Merger Sub Co. wasmerged with and into Linens ’n Things, Inc., with Linens ’n Things, Inc.as the surviving corporation. As the surviving corporation in the Merger,Linens ’n Things, Inc. assumed by operation of law all of the rightsand obligations of Linens Merger Sub Co., including $650.0 millionaggregate principal amount of Senior Secured Floating Rate Notes (the “Notes”)due 2014 of Linens ’n Things, Inc. and Linens ’n Things Center, Inc.(collectively, the “Issuers”) issued on the same day and the related indenture.Linens ’n Things Center, Inc., a direct wholly owned subsidiary ofLinens ’n Things, Inc., is a co-issuer of the Notes.

 

Affiliatesof Apollo Management, L.P., National Realty & Development Corp. andSilver Point Capital Fund Investments LLC (the “Sponsors”) collectivelycontributed approximately $648 million as equity to Linens Merger Sub Co.immediately prior to the Merger.

 

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TheSponsors financed the purchase of Linens ’n Things, Inc. and paidrelated fees and expenses through the offering of the Notes, the equityinvestment described above and excess cash on hand at Linens ’n Things, Inc.At closing, Linens ’n Things, Inc. did not draw on a new asset-based revolvingcredit facility entered into in connection with the closing.

 

Thesetransactions, including the Merger and payment of any costs related to thesetransactions, are collectively referred to herein as the “Transactions.” Inconnection with the Transactions, Linens ’n Things, Inc. incurredsignificant indebtedness and became highly leveraged.

 

Immediatelyfollowing the Merger, Linens ’n Things, Inc. became a wholly ownedsubsidiary of Linens Holding Co. Linens Holding Co. is an entity that wasformed in connection with the Transactions and has no assets or liabilitiesother than the shares of Linens Merger Sub Co. and its rights and obligationsunder and in connection with the merger agreement with Linens ’n Things, Inc.and the equity commitment letters and debt financing commitment lettersprovided in connection with the Transactions.

 

Theclosing of the Merger occurred on February 14, 2006 simultaneously with:

 

·*     *the closing of the Note offering;

 

·*     *the closing of Linens ’n Things, Inc.’s$600.0 million senior secured asset-based revolving credit facility (the “OriginalCredit Facility”);

 

·*     *the termination of Linens ’n Things, Inc.’sexisting $250.0 million unsecured revolving credit facility and CAD$40.0 million unsecured credit facility agreements; and

 

·*     *the equity investments described above.

 

Theconsummation of the Note offering was conditioned upon the consummation of theMerger, the closing of the Original Credit Facility and the equity investmentsdescribed above, all of which were completed on February 14, 2006.

 

TheNotes bear interest at a per annum rate equal to LIBOR plus 5.625%, which ispayable every three months on January 15, April 15, July 15 and October 15,commencing April 15, 2006. The interest rate on the Notes is resetquarterly. The Notes mature on January 15, 2014.

 

OnJuly 7, 2006, the Company entered into a zero cost interest rate collaragreement to hedge the cash flows associated with the LIBOR component of theinterest rate on the Notes. On July 7, 2006, the Company also purchased aone-year forward-starting interest rate cap agreement which took effect on January 15,2008 (see Note 11 for disclosures regarding these derivatives).

 

TheNotes are fully and unconditionally guaranteed, jointly and severally, on asenior basis by the Company and by each of the Company’s direct and indirectsubsidiaries (other than the Issuers) that guarantee the New Credit Facilityexcept for its Canadian subsidiaries (collectively, the “Note Guarantors”).

 

Allobligations under the Notes, and the guarantees of those obligations, aresecured by first-priority liens, subject to permitted liens, on all of theCompany’s, the Issuers’ and the Note Guarantors’ equipment, intellectualproperty rights and related general intangibles and the capital stock of theIssuers and certain of the subsidiaries.

 

Thelien on capital stock may be released under certain circumstances. As a resultof the filing and effectiveness of a registration statement on Form S-4,and amendment thereto, with the SEC with respect to the Notes, the Issuersand the Note Guarantors became subject to applicable SEC rules withrespect to information required to be included in the prospectus in theregistration statement. To the extent that the securities of any Issueror Guarantor constitute collateral for the Notes and the value of thesecurities equals or exceeds 20% of the principal amount, or $130.0million of the Notes, separate financial statements of the Issueror Guarantor would be required under these SEC rules to be includedin the Company’s SEC filings. The indenture that governs the Notesprovides, however, with respect to any direct or indirect subsidiary of Linens’n Things, Inc., that the securities of the subsidiary are released fromthe lien on capital stock on the date that the lien triggers this separatefinancial statement requirement. Accordingly, for any subsidiary withsecurities that equal or exceed the 20% threshold, the lien on the capitalstock securing the Notes has been released with respect to those securities. Thelien on the capital stock of Linens ’n Things, Inc. remains in place.

 

TheNotes and guarantees are also secured by second-priority liens, subject topermitted liens, on all of the Issuers’ and the Note Guarantors’ inventory,accounts receivable, cash, securities and other general intangibles.

 

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Ifthe Issuers sell certain assets or experience specific kinds of changes incontrol, the Issuers must offer to repurchase the Notes. The Issuers may, attheir option, redeem the Notes at any time on or after January 15, 2008 atpre-determined prices.

 

TheOriginal Credit Facility was subsequently amended and restated in May 2007(the “Old Credit Facility”) and then replaced in its entirety by a new $700.0million senior secured asset-based revolving credit facility in October 2007(the “New Credit Facility”) with third-party institutional lenders, whichexpires October 24, 2012.

 

TheNew Credit Facility extends $700.0 million of revolving credit facilities tothe Company, comprised of (1) a $625.0 million Revolving Commitment and (2) a$75.0 million Tranche B Commitment, both of which are subject to a borrowingbase. A portion of the New Credit Facility, not to exceed $40.0 million, isalso available to a Canadian subsidiary of the Company subject to the Canadianborrowing base. The borrowing base is a formula based on certain eligibleinventory and receivables, minus certain reserves. The New Credit Facilityreflects increases in the Company’s advance rates on this collateral, whichenhances the liquidity position of the Company in comparison to the Old CreditFacility. The New Credit Facility also eliminates all financial maintenancecovenants. These changes result in an increase to the Company’s aggregateborrowing base and excess availability as compared with the Old CreditFacility. Other terms and conditions in the New Credit Facility are similar tothose under the Old Credit Facility.

 

Allobligations under the New Credit Facility are unconditionally guaranteed by theCompany and certain of its existing domestic subsidiaries. All obligationsunder the New Credit Facility, and the guarantees of those obligations, are secured,subject to certain exceptions, by substantially all of the assets of theborrowers, consisting of Linens ’n Things, Inc., Linens ’n Things Center, Inc.and Linens ’n Things Canada Corp. (collectively, the “Borrowers”), and thesubsidiary guarantors, including: (1) a first-priority security interestin inventory, accounts receivable, cash, securities and other generalintangibles; and (2) a second-priority security interest in equipment,intellectual property rights and related general intangibles and all of thecapital stock of Linens ’n Things, Inc. and the capital stock of certainsubsidiaries.

 

Borrowingsunder the New Credit Facility bear interest at a rate equal to, at theBorrowers’ option, either (a) an alternate base rate determined by referenceto the higher of (1) the base rate in effect on such day and (2) thefederal funds effective rate plus 0.50% or (b) a LIBOR rate, with respectto any Eurodollar borrowing, determined by reference to the costs of funds forU.S. dollar deposits for the interest period relevant to such borrowingadjusted for certain additional costs, in each case plus an applicable margin. Theinitial applicable margin for borrowings under the $625.0 million RevolvingCommitment is 0.25% with respect to alternate base rate borrowings and 1.50%with respect to LIBOR borrowings. The applicable margin with respect to the$75.0 million Tranche B Commitment (consisting of per annum rate margins) shallbe 2.75% in the case of Eurodollar borrowings and, in the event the adjusted LIBORrate is not available, 1.25% in the case of alternate base rate borrowings. Theapplicable margin for borrowings under the New Credit Facility will be subjectto adjustment based on the excess availability under the New Credit Facility. Inaddition to paying interest on outstanding principal under the New CreditFacility, the Borrowers are required to pay a commitment fee, initially 0.375%per annum, in respect of the unutilized commitments thereunder and thecommitment fee will be subject to adjustment based on the excess availabilityunder the New Credit Facility. The New Credit Facility contains certaincustomary affirmative and negative covenants and events of default, but allfinancial maintenance covenants were eliminated. The Borrowers must also paycustomary letter of credit fees and agency fees. The Borrowers initiatedborrowings under the New Credit Facility on October 24, 2007 to meetoperational working capital needs. A portion of the proceeds of the New CreditFacility was used to pay off the outstanding amounts under and terminate theOld Credit Facility.

 

Asa result of the Merger, all of Linens ’n Things, Inc.’s issued andoutstanding capital stock was acquired by Linens Holding Co. At such time,investment funds associated with or designated by the Sponsors acquiredapproximately 99.7% of the common stock of Linens Holding Co. through aninvestment vehicle controlled by Apollo Management V, L.P., or one of itsaffiliates, and Robert J. DiNicola, the Chairman and Chief Executive Officer ofthe Company, acquired the remaining 0.3% at the same price paid by theSponsors.

 

Uponconsummation of the Transactions and the issuance in a private placement of thesenior secured floating rate notes, Linens ’n Things, Inc. delistedits shares of common stock from the New York Stock Exchange (the “NYSE”) andderegistered under Section 12 of the Securities Exchange Act of 1934. Thelast day of trading on the NYSE was February 14, 2006. In September 2006the notes were exchanged for new notes with terms that were identical to theoriginal notes except that the exchange notes were registered under theSecurities Act upon the filing of a Form S-4 and a related amendment in July 2006and August 2006, respectively, with the SEC. At such time, the Companyonce again became subject to a filing obligation with the SEC.

 

70

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Totalfees and expenses related to the Transactions were approximately $109.6million, consisting of approximately $49.1 million of pre-merger transactioncost incurred by the Company’s predecessor entity, Linens ’n Things, Inc.,$12.3 million of direct acquisition costs of the Company and$48.2 million of deferred financing costs. Such fees include commitment,placement, financial advisory and other transaction fees as well as legal,accounting and other professional fees. The direct acquisition costs wereincluded in the purchase price and is a component of goodwill. Deferredfinancing costs of approximately $17 million relates to the OriginalCredit Facilty. The New Credit Facility entered into in October 2007required the Company to accelerate the writeoff of approximately $7 million ofdeferred financing costs in fiscal 2007; the balance is being amortized overfive years on a straight-line basis. Deferred financing costs of approximately$31 million relates to the Notes, which are amortized over eight yearsusing the effective interest method.

 

TheMerger was accounted for as a business combination using the purchase method ofaccounting, whereby the purchase price (including liabilities assumed) wasallocated to the assets acquired based on their estimated fair market values atthe date of the Merger.

 

Asa result of the consummation of the Transactions, a new entity was formed withan effective date of February 14, 2006, consisting of Linens Holding Co.and Subsidiaries. The consolidated financial statements for the successorentity as of December 29, 2007 and December 30, 2006 and for fiscal2007 and the period February 14, 2006 to December 30, 2006 show theoperations and cash flows of the successor entity, Linens Holding Co. andSubsidiaries. The consolidated financial statements for the periods January 1to February 13, 2006 and fiscal 2005 are shown under the “predecessorentity” caption, consisting of Linens ’n Things, Inc. andSubsidiaries.

 

Asa result of the consummation of the Transactions, the consolidated financialstatements for the period after February 13, 2006 are presented on adifferent basis than that for the periods before February 14, 2006 as aresult of the application of purchase accounting as of February 14, 2006and therefore are not comparable.

 

71

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Areconciliation of the purchase price adjustments recorded in connection withthe Transactions is presented below (in thousands):

 
| ** **                                                 | ** ** | **Predecessor Entity**       | ** **    | **Successor Entity**          | ** ** |
|------------------------------------------------------------|------------|-----------------------------------|---------------|------------------------------------|------------|
| ** **                                                 | ** ** | **February 13,   2006** | ** **    | **Transaction   Adjustments** | ** ** | **February 14,   2006** | ** ** |
|                                                       |       |                              |          |                               |       |   |   |
| **Assets**                                                 |       |                              |          |                               |       |   |   |
| **Current  assets:**                                       |       |                              |          |                               |       |   |   |
| Cash and cash  equivalents                                 |       | $                                 | 90,333        |                               | $          | (15,701 | ) | $ | 74,632 |   |
| Accounts  receivable                                       |       | 45,833                            |          | —                             |       | 45,833 |   |
| Inventories                                                |       | 819,600                           |          | —                             |       | 819,600 |   |
| Prepaid expenses  and other current assets                 |       | 29,499                            |          | —                             |       | 29,499 |   |
| Current deferred  income taxes                             |       | 1,211                             | (2)           | —                             |       | 1,211 |   |
| ** **                                                 | ** ** | ** **                        | ** **    | ** **                         | ** ** | ** ** | ** ** |
| **Total  current assets**                                  | ** ** | **986,476**                       | ** **    | **(15,701**                        | **)**      | **970,775** | ** ** |
| Property and  equipment, net                               |       | 607,787                           |          | (57                                | )          | 607,730 |   |
| Identifiable  intangible assets, net                       |       | 1,276                             |          | 159,742                            |       | 161,018 |   |
| Goodwill                                                   |       | 18,126                            |          | 247,859                            |       | 265,985 |   |
| Deferred  financing costs and other noncurrent assets, net |       | 1,079                             |          | 36,172                             |       | 37,251 |   |
| ** **                                                 | ** ** | ** **                        | ** **    | ** **                         | ** ** | ** ** | ** ** |
| **Total  assets**                                          | ** ** | **$**                             | **1,614,744** | ** **                         | **$**      | **428,015** | ** ** | **$** | **2,042,759** | ** ** |
| ** **                                                 | ** ** | ** **                        | ** **    | ** **                         | ** ** | ** ** | ** ** |
| **Liabilities  and Shareholders’ Equity**             |       |                              |          |                               |       |   |   |
| **Current  liabilities:**                                  |       |                              |          |                               |       |   |   |
| Accounts payable                                           |       | $                                 | 232,039       |                               | $          | — |   | $ | 232,039 |   |
| Accrued expenses  and other current liabilities            |       | 238,362                           |          | 39,388                             | (1)        | 277,750 |   |
| Current deferred  income taxes                             |       | 8,176                             |          | —                             |       | 8,176 |   |
| ** **                                                 | ** ** | ** **                        | ** **    | ** **                         | ** ** | ** ** | ** ** |
| **Total  current liabilities**                             | ** ** | **478,577**                       | ** **    | **39,388**                         | ** ** | **517,965** | ** ** |
| Senior secured  notes and other long-term debt             |       | 2,131                             |          | 650,000                            |       | 652,131 |   |
| Noncurrent  deferred income taxes                          |       | 31,723                            | (2)           | 152,892                            |       | 184,615 |   |
| Other long-term  liabilities                               |       | 270,455                           |          | (230,020                           | )(3)       | 40,435 |   |
| ** **                                                 | ** ** | ** **                        | ** **    | ** **                         | ** ** | ** ** | ** ** |
| **Total  liabilities**                                     | ** ** | **782,886**                       | ** **    | **612,260**                        | ** ** | **1,395,146** | ** ** |
| ** **                                                 | ** ** | ** **                        | ** **    | ** **                         | ** ** | ** ** | ** ** |
| **Shareholders’  equity**                             | ** ** | **831,858**                       | ** **    | **(184,245**                       | **)**      | **647,613** | ** ** |
| ** **                                                 | ** ** | ** **                        | ** **    | ** **                         | ** ** | ** ** | ** ** |
| **Total  liabilities and shareholders’ equity**       | ** ** | **$**                             | **1,614,744** | ** **                         | **$**      | **428,015** | ** ** | **$** | **2,042,759** | ** ** |

 

----

*(1) *Represents anaccrual for unpaid transaction expenses.

(2)   Reflects adjustment of the carrying value ofdeferred tax liabilities of the Predecessor Entity totaling $11.5 million as ofJanuary 1, 2006 to correct the effects of a difference between the bookand tax bases of property and equipment and other adjustments.

*(3) *Consists of thefollowing purchase accounting adjustments:

 
| Unfavorable  leases |   | $        | 20,000   |   |
|---------------------|--------|----------|----------|--------|
| Deferred rents      |   | (250,020 | )        |
|                |   |     |     |
|                |   | $        | (230,020 | )      |

 

72

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Aspresented in the above table, the Company’s assets and liabilities wereadjusted to fair value as of the closing date of the Transactions, and theexcess of the total purchase price over the fair value of the Company’s netassets was allocated to goodwill.  Thefollowing table presents an analysis of the change in goodwill.

 
| **(in thousands)**                                                    | ** ** | **Amount**  | ** **  |
|----------------------------------------------------------------------------|------------|-------------|-------------|
|                                                                       |       |        |        |
| Balance at  February 13, 2006 (predecessor entity)                    |       | $           | 18,126      | (1) |
| Purchase  accounting adjustments from preliminary allocation               |       | 259,309     |        |
|                                                                       |       |        |        |
| Initial  preliminary balance at February 14, 2006                     |       | 277,435     |        |
| SAB 108 adjustment  (see Note 2)                                           |       | (11,450     | )           |
|                                                                       |       |        |        |
| **Balance  at February 14, 2006 (Successor Entity)**                  | ** ** | **265,985** |        |
| Pre-existing tax  adjustments                                              |       | 1,885       |        |
| Pre-existing  book adjustments, net                                        |       | (618        | )           |
| Book adjustment  for returned deposit on building purchase option assigned |       | 722         |        |
| Other – foreign  currency translation                                 |       | (144        | )           |
|                                                                       |       |        |        |
| **Balance  at December 30, 2006 (Successor Entity)**                  | ** ** | **267,830** |        |
| Pre-existing tax  adjustments                                              |       | 12,635      |        |
| Adjustment for  transaction fee paid to the Sponsors                       |       | (10,500     | )           |
| Other  pre-existing book adjustment                                        |       | (630        | )           |
| Other – foreign  currency translation                                 |       | 3,085       |        |
|                                                                       |       |        |        |
| **Balance  at December 29, 2007 (Successor Entity)**                  | ** ** | **$**       | **272,420** | ** ** |

 

----

(1)  The predecessorentity goodwill has been written-off in purchase accounting.

 

Theunaudited pro forma results of operations presented below for the fiscal yearsended December 30, 2006 and December 31, 2005 are presented as thoughthe Transactions had occurred at the beginning of the periods presented, aftergiving effect to purchase accounting adjustments relating to depreciation andamortization of the revalued assets, interest expense associated with the Notesand the Credit Facility and other acquisition-related adjustments in connectionwith the Transactions.  The pro formaresults of operations are not necessarily indicative of the combined resultsthat would have occurred had the Transactions been consummated at the beginningof the periods presented, nor are they necessarily indicative of futureoperating results.

 
| **(In Thousands)**               | ** ** | **Fiscal Year Ended  December 30, 2006** | ** ** | **Fiscal Year Ended  December 31, 2005** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                            | ** ** | ** **                                                   | ** ** | ** **                                                   | ** ** |
| Net sales                             |       | $                                                            | 2,819,336  |                                                         | $          | 2,694,742 |   |
| Loss before  benefit for income taxes |       | $                                                            | (213,896   | )                                                            | $          | (71,626 | ) |
| Net loss                              |       | $                                                            | (130,850   | )                                                            | $          | (43,523 | ) |

 

**4. Restructuring and Asset Impairment Charge**

 

Infiscal 2001, the Predecessor developed and committed to a strategic initiativedesigned to improve store performance and profitability.  This initiative called for the closing ofcertain under-performing stores, which did not meet the Predecessor’s profitobjectives. In connection with this initiative, the Predecessor recorded apre-tax restructuring and asset impairment charge of $37.8 million($23.7 million after-tax) in fiscal 2001 consisting of a reserve of$20.5 million for estimated lease commitments, a writedown of $9.5 millionfor  impairment of property andequipment, a reserve of $4.0 million for other estimated miscellaneousstore closing costs and a charge of $3.8 million included in cost of salesfor estimated inventory markdowns below cost for the stores to be closed.

 

73

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Thefollowing table displays a roll forward of the activity for fiscal 2007 andfiscal 2006, and the reserves remaining as of December 29, 2007, which isincluded in accrued expenses and other current liabilities in the consolidatedbalance sheets (in millions):

 
| ** **         | ** ** | **Remaining at   December 31,   2005** | ** ** | **2006 Net ** | ** ** | **Remaining at  December 30,  2006** | ** ** | **2007 Net ** | ** ** | **Remaining at  December 29,  2007** | ** ** |
|--------------------|------------|------------------------------------------------------------|------------|-------------------------|------------|------------------------------------------------|------------|-------------------------|------------|------------------------------------------------|------------|
| ** **         | ** ** | **(Predecessor)**                                          | ** ** | **Usage**               | ** ** | **(Successor)**                                | ** ** | **Usage**               | ** ** | **(Successor)**                                | ** ** |
|               |       |                                                       |       |                    |       |                                           |       |                    |       |                                           |       |
| Lease  commitments |       | $                                                          | 5.4        |                    | $          | (1.8                                           | )          | $                       | 3.6        |                                           | $          | (1.3 | ) | $ | 2.3 |   |
|               |       |                                                       |       |                    |       |                                           |       |                    |       |                                           |       |
| ** **         | ** ** | **$**                                                      | **5.4**    | ** **              | **$**      | **(1.8**                                       | **)**      | **$**                   | **3.6**    | ** **                                     | **$**      | **(1.3** | **)** | **$** | **2.3** |   |

 

Restructuringexpense related to the reserve was $0.2 million, $1.8 million and $1.5million for fiscal 2007, the period February 14, 2006 to December 30,2006 and fiscal 2005, respectively, and is included in other income, net in theCompany’s consolidated statements of operations.

 

**5. Accounts Receivable**

** **
| **Accounts receivable consisted of the   following (in thousands):** | ** ** | **December 29,   2007** | ** ** | **December 30,   2006** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                              | ** ** | ** **                        | ** ** | ** **                        | ** ** |
| Credit card  settlements due                                                                            |       | $                                 | 27,972     |                              | $          | 28,730 |   |
| Due from  landlords                                                                                     |       | 1,284                             |       | 2,598                             |       |
| Other                                                                                                   |       | 4,933                             |       | 5,735                             |       |
|                                                                                                    |       |                              |       |                              |       |
| ** **                                                                                              | ** ** | **$**                             | **34,189** | ** **                        | **$**      | **37,063** | ** ** |

 

TheCompany’s bad debt experience has historically been insignificant and,accordingly, a minimal allowance for doubtful accounts has been established forthese receivables.

 

Amountsdue from landlords are allowances provided by landlords recorded as deferredrent credits included in other long-term liabilities on the consolidatedbalance sheets.  Deferred rent creditsare amortized as a reduction of rent expense over the expected lease term,including renewal periods in those instances where such renewal periods arereasonably assured of being exercised at the inception of the lease.

 

**6. Property and Equipment**

** **
| **Property and equipment consisted of the   following (in thousands):** | ** ** | **December 29,  2007** | ** **  | **December 30,   2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|-----------------------------------|------------|
|                                                                                                            |       |                        |        |                              |       |
| Land                                                                                                            |       | $                           | 1,030       |                              | $          | 1,480 |   |
| Building                                                                                                        |       | 5,010                       |        | 6,031                             |       |
| Furniture,  fixtures and equipment                                                                              |       | 349,468                     |        | 334,579                           |       |
| Leasehold  improvements                                                                                         |       | 264,269                     |        | 266,886                           |       |
| Computer  hardware and software                                                                                 |       | 25,873                      |        | 19,687                            |       |
| Construction-in-progress                                                                                        |       | —                      |        | 2,782                             |       |
|                                                                                                            |       |                        |        |                              |       |
| ** **                                                                                                      | ** ** | **645,650**                 | ** **  | **631,445**                       | ** ** |
| Less:                                                                                                           |       |                        |        |                              |       |
| Accumulated  depreciation and amortization                                                                      |       | 220,114                     |        | 100,616                           |       |
|                                                                                                            |       |                        |        |                              |       |
| ** **                                                                                                      | ** ** | **$**                       | **425,536** | ** **                        | **$**      | **530,829** | ** ** |

 

74

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Depreciationexpense for fiscal 2007, the period February 14, 2006 to December 30,2006, the period January 1, 2006 to February 13, 2006 and fiscal 2005was approximately $122.8 million, $106.7 million, $12.6 million and$90.1 million, respectively.

 

Duringfiscal 2007, the period February 14, 2006 to December 30, 2006 andfiscal 2005, the Company determined that the carrying value of certain assetsexceeded their related estimated future undiscounted cash flows.  As a result, the Company reduced the carryingvalue of property and equipment to their fair value by approximately $16.8million, $28.0 million and $4.1 million for fiscal 2007, the period February 14,2006 to December 30, 2006 and fiscal 2005, respectively.  The related charge is included in impairmentof property and equipment in the consolidated statements of operations.

 

**7. Identifiable Intangible Assets**

 

Inconnection with the Transactions, the Company’s intangible assets wererevalued.  The carrying amount andaccumulated amortization of identifiable intangible assets consisted of thefollowing:

 
| **Identifiable intangible assets, net consisted of the   following (in thousands):** | ** ** | **December 29,   2007** | ** **  | **December 30,   2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|-------------|-----------------------------------|------------|
|                                                                                                                              |       |                              |        |                              |       |
| Intangible  assets subject to amortization:                                                                                       |       |                              |        |                              |       |
| Credit card  customer relationships                                                                                               |       | $                                 | 10,273      |                              | $          | 10,129 |   |
| Customer list                                                                                                                     |       | 406                               |        | 406                               |       |
| Favorable leases                                                                                                                  |       | 23,967                            |        | 23,852                            |       |
|                                                                                                                              |       |                              |        |                              |       |
|                                                                                                                              |       | 34,646                            |        | 34,387                            |       |
| Less:  accumulated amortization                                                                                                   |       | (14,580                           | )           | (7,031                            | )     |
|                                                                                                                              |       |                              |        |                              |       |
| Total intangible  assets subject to amortization                                                                                  |       | 20,066                            |        | 27,356                            |       |
| Total  indefinite-lived trademarks                                                                                                |       | 122,688                           |        | 122,688                           |       |
|                                                                                                                              |       |                              |        |                              |       |
| **Total  identifiable intangible assets**                                                                                         | ** ** | **$**                             | **142,754** | ** **                        | **$**      | **150,044** |   |

 

Customerlist has an estimated life of 5 years, credit card customer relationshipshave an estimated life of 3 years and favorable leases have an averageestimated life of 8 years.  Forfiscal 2007, the period February 14, 2006 to December 30, 2006, theperiod January 1, 2006 to February 13, 2006 and fiscal 2005,amortization expense of approximately $7.5 million, $7.8 million, $0.02 millionand $0.2 million, respectively, and an impairment charge of approximately $0.1million and $3.1 million for fiscal 2007 and the period February 14, 2006to December 30, 2006, respectively, was recorded by the Company.

 

Thefollowing is a summary table representing the remaining amortization ofidentifiable intangible assets with definitive lives, by year (in thousands):

 
| **Fiscal Year** | ** ** | **Amortization** | ** ** |
|----------------------|------------|------------------|------------|
| ** **           | ** ** | ** **       | ** ** |
| 2008                 |       | $                | 6,546      |   |
| 2009                 |       | 3,145            |       |
| 2010                 |       | 2,419            |       |
| 2011                 |       | 2,044            |       |
| 2012                 |       | 1,708            |       |
| 2013 and  thereafter |       | 4,204            |       |
|                 |       |             |       |
| **Total**            |       | **$**            | **20,066** |   |

 

75

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**8. Accrued Expenses and Other Current Liabilities**

*** ***
| **Accrued expenses and other current liabilities   consisted of the following (in thousands):** | ** ** | **December 29,   2007** | ** **  | **December 30,   2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|-------------|-----------------------------------|------------|
|                                                                                                                                                   |       |                              |        |                              |       |
| Other taxes  payable                                                                                                                                   |       | $                                 | 43,894      |                              | $          | 41,062 |   |
| Income taxes  payable                                                                                                                                  |       | 9,822                             |        | 7,650                             |       |
| Amounts due  customers                                                                                                                                 |       | 62,856                            |        | 55,329                            |       |
| Accrued real  estate taxes                                                                                                                             |       | 24,558                            |        | 21,567                            |       |
| Accrued  advertising                                                                                                                                   |       | 21,495                            |        | 14,274                            |       |
| Salaries and  employee benefits                                                                                                                        |       | 11,505                            |        | 14,487                            |       |
| Accrued interest                                                                                                                                       |       | 16,774                            |        | 15,759                            |       |
| Reclassification  of outstanding checks                                                                                                                |       | 49,870                            |        | 48,020                            |       |
| Other                                                                                                                                                  |       | 26,779                            |        | 23,763                            |       |
|                                                                                                                                                   |       |                              |        |                              |       |
| ** **                                                                                                                                             | ** ** | **$**                             | **267,553** | ** **                        | **$**      | **241,911** | ** ** |

 

Amountsdue customers principally consists of obligations for gift cards, customerrebates and sales returns.  Income fromgift cards that are not expected to be redeemed is included in other income,net in the consolidated statements of operations.  Such amounts recognized for fiscal 2007, theperiod February 14, 2006 to December 30, 2006, the period January 1,2006 to February 13, 2006 and fiscal 2005 were approximately $4.7 million,$4.0 million, $0.5 million and $2.8 million, respectively, and isincluded in other income, net in the Company’s consolidated statements ofoperations.

 

Included in “other” ismiscellaneous store operating and corporate office accrued expenses.

 

Reclassification of outstandingchecks includes the reclassification of outstanding checks due to the Company’sutilization of zero balance disbursement accounts under its cash managementprogram (see Note 2 – *cash and cash equivalents*).

 

**9. Long-Term Debt**

 

***Senior Secured Notes and Other Long-Term Debt***

 
| **Senior secured notes and other long-term debt consisted of the   following (in thousands):** | ** ** | **December 29,   2007** | ** **  | **December 30,   2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|-------------|-----------------------------------|------------|
| ** **                                                                                                                                                 | ** ** | ** **                        | ** **  | ** **                        | ** ** |
| Senior secured  floating rate notes due 2014                                                                                                               |       | $                                 | 650,000     |                              | $          | 650,000 |   |
| Mortgage note  payable (1)                                                                                                                                 |       | —                            |        | 2,076                             |       |
|                                                                                                                                                       |       |                              |        |                              |       |
| ** **                                                                                                                                                 | ** ** | **$**                             | **650,000** | ** **                        | **$**      | **652,076** | ** ** |

 

----

*(1) * Mortgage note payable represented an8.2% fixed-rate mortgage note on the land and building of one of the Company’sclosed stores.  In July 2007, theland and building were sold and the mortgage was repaid.

 

Seniorsecured floating rate notes due 2014 consist of $650.0 million aggregateprincipal amount of Senior Secured Floating Rate Notes due 2014 of Linens ’nThings, Inc. and Linens ’n Things Center, Inc.

 

TheNotes bear interest at a per annum rate equal to LIBOR plus 5.625%, which ispayable every three months on January 15, April 15, July 15 and October 15,commencing April 15, 2006.  Theinterest rate on the Notes is reset 

 

76

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quarterly.  The Notes mature on January 15,2014.  As of December 29, 2007, theinterest rate on the Notes was 10.9%, based on a LIBOR rate of 5.2%.

 

OnJuly 7, 2006, the Company entered into a zero cost interest rate collaragreement to hedge the cash flows associated with the LIBOR component of theinterest rate on the Notes.  On July 7,2006, the Company also purchased a one-year forward-starting interest rate capagreement which took effect on January 15, 2008 (see Note 11).

 

Deferredfinancing costs of approximately $31.4 million relating to the Notes arebeing amortized over eight years using the effective interest method and areincluded in interest expense on the consolidated statements of operations.

 

TheNotes are fully and unconditionally guaranteed jointly and severally on a seniorbasis by the Company and by certain of the Company’s domestic subsidiariesother than the Issuers (collectively, the “Note Guarantors”), and are securedby first-priority liens on all of the Company’s and Note Guarantors’ equipment,intellectual property rights and related general intangibles and the capitalstock of the Issuers and certain subsidiaries and by second-priority liens onthe Issuers’ and the Note Guarantors’ inventory, accounts receivable, cash,securities and other general intangibles. The lien on capital stock may be released under certaincircumstances.  As a result of the filingand effectiveness of an exchange offer registration statement with the SEC andthe issuance of registered Notes, the Issuers and the NoteGuarantors became subject to applicable SEC rules, including reportingrequirements.  To the extent that the securities of any Issueror Note Guarantor constitute collateral for the Notes and the value of thesecurities equals or exceeds 20% of the principal amount, or $130.0 million ofthe Notes, separate financial statements of the Issuer or NoteGuarantor would be required under these SEC rules to be included in theCompany’s SEC filings.  The indenture that governs the Notesprovides, however, with respect to any direct or indirect subsidiary of Linens ’nThings, Inc., that the securities of the subsidiary are released from thelien on capital stock on the date that the lien triggers this separatefinancial statement requirement.  Accordingly, for any subsidiarywith securities that equal or exceed the 20% threshold, the lien on the capitalstock securing the Notes has been released with respect to thosesecurities.  The lien on the capital stock of Linens ’n Things, Inc.remains in place.

 

If the Issuers sell certain assets or experience specifickinds of changes in control, the Issuers must offer to repurchase theNotes.  The Issuers may, at their option,redeem the Notes at any time on or after January 15, 2008 atpre-determined prices.

 

***Senior Secured Asset-based Revolving Credit Facility***

 

In February 2006, the Company entered into a $600.0million senior secured asset-based revolving credit facility agreement (the “OriginalCredit Facility”) with third-party institutional lenders, which had anexpiration date of February 14, 2011. In May 2007, the Company amended the Original Credit Facility byentering into a $700.0 million amended and restated credit agreement (the “OldCredit Facility”).  The provisions of theOld Credit Facility were substantially the same as in the Original CreditFacility with several modifications that were generally favorable to theCompany.  The provisions of the OldCredit Facility were modified for: (1) a $100.0 million increase in theOld Credit Facility maximum availability from $600.0 million to $700.0 million;(2) a decrease in the “Excess Availability” threshold for purposes ofmandatory compliance with certain financial ratio maintenance covenants from$75.0 million to $70.0 million; and (3) several other modifications thatwere all favorable to the Company.  TheOld Credit Facility required the Company to comply with financial ratiomaintenance covenants if the excess availability under the Old Credit Facility,at any time, did not exceed $70.0 million. The Company always maintained excess availability above$70.0 million during fiscal 2007 until October 2007.  In October 2007, all outstanding amountsunder the Old Credit Facility were paid off and the Old Credit Facility wasterminated when the Company entered into a new agreement.

 

On October 24, 2007, the Company entered into a new$700.0 million senior secured asset-based revolving credit facility agreement(the “New Credit Facility”) with third-party institutional lenders, whichexpires October 24, 2012.  The NewCredit Facility extends $700.0 million of revolving credit facilities to theCompany, comprised of (1) a $625.0 million Revolving Commitment and (2) a$75.0 million Tranche B Commitment, both of which are subject to a borrowingbase.  A portion of the New CreditFacility, not to exceed $40.0 million, is also available to a Canadiansubsidiary of the Company subject to the Canadian borrowing base.  The borrowing base is a formula based oncertain eligible inventory and receivables, minus certain reserves.  The New Credit Facility also eliminates allfinancial maintenance covenants.  Otherterms and conditions in the New Credit Facility are similar to those under theOld Credit Facility.

 

77

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Allobligations under the New Credit Facility are unconditionally guaranteed by theCompany and certain of its existing domestic subsidiaries.  All obligations under the New CreditFacility, and the guarantees of those obligations, are secured, subject to certainexceptions, by substantially all of the assets of the borrowers, consisting ofLinens ’n Things, Inc., Linens ’n Things Center, Inc. and Linens ’nThings Canada Corp. (collectively, the “Borrowers”), and the subsidiaryguarantors, including: (1) a first-priority security interest in inventory,accounts receivable, cash, securities and other general intangibles; and (2) asecond-priority security interest in equipment, intellectual property rightsand related general intangibles and all of the capital stock of Linens ’nThings, Inc. and the capital stock of certain subsidiaries.

 

Borrowingsunder the New Credit Facility bear interest at a rate equal to, at theBorrowers’ option, either (a) an alternate base rate determined byreference to the higher of (1) the base rate in effect on such day and (2) thefederal funds effective rate plus 0.50% or (b) a LIBOR rate, with respectto any Eurodollar borrowing, determined by reference to the costs of funds forU.S. dollar deposits for the interest period relevant to such borrowingadjusted for certain additional costs, in each case plus an applicablemargin.  The initial applicable marginfor borrowings under the $625.0 million Revolving Commitment is 0.25% withrespect to alternate base rate borrowings and 1.50% with respect to LIBORborrowings.  The applicable margin withrespect to the $75.0 million Tranche B Commitment (consisting of per annum ratemargins) shall be 2.75% in the case of Eurodollar borrowings and, in the eventthe adjusted LIBOR rate is not available, 1.25% in the case of alternate baserate borrowings.  The applicable marginfor borrowings under the New Credit Facility will be subject to adjustmentbased on the excess availability under the New Credit Facility.  In addition to paying interest on outstandingprincipal under the New Credit Facility, the Borrowers are required to pay acommitment fee, initially 0.375% per annum, in respect of the unutilizedcommitments thereunder and the commitment fee will be subject to adjustmentbased on the excess availability under the New Credit Facility.  The New Credit Facility contains certaincustomary affirmative and negative covenants and events of default, but allfinancial maintenance covenants were eliminated.  The Borrowers must also pay customary letterof credit fees and agency fees.  TheBorrowers initiated borrowings under the New Credit Facility on October 24,2007 to meet operational working capital needs. A portion of the proceeds of the New Credit Facility was used to pay offthe outstanding amounts under and terminate the Old Credit Facility.

 

TheCompany incurred total deferred financing costs of approximately $16.8 million,$2.1 million and $6.1 million related to the Original Credit Facility, theOld Credit Facility and the New Credit Facility, respectively.  The New Credit Facility required the Companyto accelerate the writeoff of approximately $7.0 million of deferred financingcosts related to the earlier asset-based credit facility arrangement, asamended and restated, which it replaced and is included in writeoff of deferredfinancing costs on the consolidated statements of operations.  The remaining amount is being amortized overfive years on a straight-line basis and is included in interest expense on theconsolidated statements of operations.

 

Asof December 29, 2007, the Issuers had (1) $205.9 million inborrowings outstanding under the New Credit Facility at an average interestrate of 7.0%, (2) $16.1 million of cash on hand, (3) $53.0 million ofletters of credit outstanding issued under the New Credit Facility, which includesstandby letters of credit and import letters of credit used for merchandisepurchases and (4) $302.9 million of excess availability under the NewCredit Facility.

 

Thefollowing is a summary table representing required principal repayments oflong-term debt over the next five years and thereafter as of December 29,2007 (in thousands):

 
| **Fiscal Year** | ** ** | **Amount** | ** **  |
|----------------------|------------|------------|-------------|
| ** **           | ** ** | ** ** | ** **  |
| 2008                 |       | $          | —      |   |
| 2009                 |       | —     |        |
| 2010                 |       | —     |        |
| 2011                 |       | —     |        |
| 2012                 |       | 205,859    |        |
| 2013 and  thereafter |       | 650,000    |        |
| ** **           | ** ** | ** ** | ** **  | ** ** |
| **Total**            | ** ** | **$**      | **855,859** | ** ** |

 

78

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**10. Other Long-Term Liabilities**

** **
| **Other long-term liabilities consisted of the following (in thousands):** | ** ** | **December 29,  2007** | ** ** | **December 30,  2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                                                                                                               |       |                        |       |                        |       |
| Deferred rent                                                                                                      |       | $                           | 21,246     |                        | $          | 11,751 |   |
| Deferred rent  credit                                                                                              |       | 13,597                      |       | 11,568                      |       |
| Intangible  liability for unfavorable retail leases                                                                |       | 15,701                      |       | 18,071                      |       |
| Other                                                                                                              |       | 12,397                      |       | 9,277                       |       |
| ** **                                                                                                         | ** ** | **$**                       | **62,941** | ** **                  | **$**      | **50,667** | ** ** |

 

Deferred rent represents the unamortized accrual forscheduled rent increases contained in the Company’s leases and deferred rentcredit represents the unamortized portion of landlord allowances.  The intangible liability for unfavorableretail leases represents the assignment of a portion of the purchase accountingallocation for leases valued at above market rents.

 

**11.****Derivative Financial Instruments**

 

The Company accounts for derivativeinstruments in accordance with SFAS No. 133, “*Accountingfor Derivative Instruments and Hedging Activities*” (“SFAS No. 133”),as amended.  In accordance with SFAS No. 133,the Company reports all derivative financial instruments on its balance sheetat fair value and has established criteria for designation and evaluation ofeffectiveness of transactions entered into for hedging purposes.

 

The Company employs derivative financialinstruments to manage its exposure to interest rate changes and to limit thevolatility and impact of interest rate changes on earnings and cash flows.

 

The Company does not enter into otherderivative financial instruments for trading or speculative purposes.  The Company faces credit risk if thecounterparties to these transactions are unable to perform theirobligations.  However, the Company seeksto minimize this risk by entering into transactions with counterparties that aremajor financial institutions with high credit ratings.

 

The Company records unrealized gains andlosses on derivative financial instruments qualifying as cash flow hedges inaccumulated other comprehensive income (loss) on the consolidated balancesheets, to the extent that hedges are effective.  For derivative financial instruments which donot qualify as cash flow hedges, any changes in fair value would be recorded inthe consolidated statements of operations.

 

The Company may at its discretion terminateor de-designate any such hedging instrument agreements prior to maturity.  At that time, any gains or losses previouslyreported in accumulated other comprehensive income (loss) on termination wouldamortize into interest expense or interest income to correspond to therecognition of interest expense or interest income on the hedged debt.  If such debt instrument was also terminated,the gain or loss associated with the terminated derivative included inaccumulated other comprehensive income (loss) at the time of termination of thedebt would be recognized in the consolidated statement of operations at thattime.

 

On July 7, 2006, the Company enteredinto a zero cost interest rate collar agreement (the “Collar Agreement”) tohedge the cash flows associated with the LIBOR component of the interest rateon the Notes.  The Collar Agreementprovided for payments to be made to or received from the counterparty when theLIBOR rate in effect for the Notes is below 4.45% or above 6.51% for a givenreset period.  Such payments representthe difference between the rates stated above in the Collar Agreement and thosein effect on the Notes for the given reset period.  Payment and reset dates under the CollarAgreement are matched exactly to those of the Notes.  The Collar Agreement matured on January 15,2008.  At December 29, 2007, thenotional amount of debt related to the Collar Agreement was $650.0 million andthe fair value of the Collar Agreement was zero.  At December 30, 2006, the notionalamount of debt related to the Collar Agreement was $650.0 million and the fairvalue of the Collar Agreement was approximately a $0.1 million liability.

 

79

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On July 7, 2006, the Company alsopurchased a one-year forward-starting interest rate cap agreement (the “Cap Agreement”)which took effect on January 15, 2008. The Cap Agreement provides for payments to be received from thecounterparty where the rate in effect on a LIBOR-based borrowing arrangement isabove 6.51% for a given reset period. Such payments represent the difference between the LIBOR rate statedabove in the Cap Agreement and those in effect on a LIBOR-based borrowingarrangement for the given reset period. Payment and reset dates under the Cap Agreement are matched exactly tothose of the LIBOR-based borrowing arrangement. The Cap Agreement has an ultimate maturity of January 15,2009.  The Issuers paid a premium of $0.7million to purchase the Cap Agreement. The Cap Agreement consists of two components, a forward contract and aninterest rate cap agreement.  The Company’sintent is to hedge the cash flow associated with the LIBOR component of theinterest rate on a LIBOR-based borrowing arrangement beyond 6.51% for theperiod January 15, 2008 through January 15, 2009.  The forward contract enabled the Company toachieve this objective.  Once the forwardcontract became an interest rate cap agreement, effectiveness was assessed anddocumented as a new relationship.  Theinterest rate cap agreement was perfectly effective at such time, and theCompany will continue to subsequently verify and document that the criticalterms of the interest rate cap agreement and the hedged item continue to matchexactly over the remaining life of the relationship.  At December 29, 2007, the notionalamount of debt related to the Cap Agreement was $650.0 million and the fairvalue of the instrument was a de minimis asset. At December 30, 2006, the notional amount of debt related to theCap Agreement was $650.0 million and the fair value of the instrument wasapproximately a $0.1 million asset.

 

The Company has determined that the CollarAgreement and the Cap Agreement have been appropriately designated anddocumented as cash flow hedges under SFAS No. 133.  As such, changes in the fair value of theCollar Agreement and the Cap Agreement have been recorded in accumulated othercomprehensive income (loss) on the consolidated balance sheets.  During fiscal 2007 and the period frominception of the derivative arrangement on July 7, 2006 to December 30,2006, the Company has recorded a de minimis gain and a loss of approximately$0.7 million ($0.4 million, net of tax), respectively, in accumulated othercomprehensive income (loss) related to these changes in fair value.  The Collar Agreement and the Cap Agreementhad no ineffectiveness and provided no amounts received or paid under thehedges that affected net loss during the periods.  Both agreements are expected to have noineffectiveness during their contractual lives.

 

**12. Leases**

 

TheCompany has non-cancelable operating leases, primarily for retail stores, whichexpire through 2029.  The leasesgenerally contain renewal options for periods ranging from five to20 years in total and require the Company to pay costs such as real estatetaxes and common area maintenance. Rental expense, net of landlord allowance amortization of $1.4 million,$0.9 million, $3.0 million and $21.6 million for fiscal 2007, theperiod February 14, 2006 to December 30, 2006, the period January 1,2006 to February 13, 2006 and fiscal 2005, respectively, and subleaserentals, for all operating leases was as follows (in thousands):

 
| ** **       | ** ** | **Fiscal Year   Ended   December 29,  2007** | ** **  | **February 14,  2006 to   December 30,  2006** | ** ** | **January 1,  2006 to   February 13,  2006** | ** ** | **Fiscal Year   Ended   December 31,  2005** | ** ** |
|------------------|------------|------------------------------------------------------------------|-------------|--------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **       | ** ** | **Successor**                                                    | ** **  | **Successor**                                                      | ** ** | **Predecessor**                                                  | ** ** | **Predecessor**                                                  | ** ** |
|             |       |                                                             |        |                                                               |       |                                                             |       |                                                             |       |
| Rental expense   |       | $                                                                | 305,736     |                                                               | $          | 260,195                                                          |       | $                                                                | 34,394     |   | $ | 249,210 |   |
| Less:            |       |                                                             |        |                                                               |       |                                                             |       |                                                             |       |
| Sublease rentals |       | 4,919                                                            |        | 4,099                                                              |       | 596                                                              |       | 4,489                                                            |       |
|             |       |                                                             |        |                                                               |       |                                                             |       |                                                             |       |
| ** **       | ** ** | **$**                                                            | **300,817** | ** **                                                         | **$**      | **256,096**                                                      | ** ** | **$**                                                            | **33,798** | ** ** | **$** | **244,721** | ** ** |
| ** **       | ** ** | ** **                                                       | ** **  | ** **                                                         | ** ** | ** **                                                       | ** ** | ** **                                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
|                  |            |                                                                  |             |                                                                    |            |                                                                  |            |                                                                  |            |  |  |  |  |  |  |  |  |

 

80

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AtDecember 29, 2007, the future minimum rental payments required underoperating leases and the future minimum sublease rentals excluding leaseobligations for closed stores resulting from the 2001 restructuring and assetimpairment charge were as follows (in thousands):

 
| **Fiscal Year**           | ** ** | **Amount** | ** ** |
|--------------------------------|------------|------------|------------|
| 2008                           |       | $          | 309,742    |   |
| 2009                           |       | 311,417    |       |
| 2010                           |       | 305,207    |       |
| 2011                           |       | 291,920    |       |
| 2012                           |       | 266,361    |       |
| Thereafter                     |       | 866,402    |       |
|                           |       |       |       |
|                           |       | $          | 2,351,049  |   |
|                           |       |       |       |
| Total future  minimum sublease |       | $          | 24,277     |   |

 

Asof December 29, 2007, the Company had fully executed leases for 23 storesplanned to open in fiscal years 2008 and 2009, for which aggregate minimumrental payments over the term of the leases is approximately $107.6 million.  The table above includes payments for storesthat had fully executed leases as of December 29, 2007.

 

TheCompany also has assigned property at a retail location in which the Companyguarantees the payment of rent over the specified lease term in the event ofnon-performance. As of December 29, 2007, the maximum potential amount offuture payments the Company could be required to make under such guarantee isapproximately $0.4 million.

 

**13. Stock Incentive Plans**

 

On January 1, 2006, theCompany adopted SFAS No. 123 (Revised 2004), “*Share-BasedPayment,*”**requiring therecognition of compensation cost for all equity classified awards granted,modified or settled after the effective date and for the unvested portion ofawards outstanding as of the effective date using the fair-value measurementmethod.  SFAS No. 123 (Revised 2004)revised SFAS No. 123, “*Accounting for Stock-BasedCompensation,*” (“SFAS No. 123”) and superseded AccountingPrinciples Board (“APB”) Opinion No. 25, “*Accountingfor Stock Issued to Employees.*”

 

The Company recognizes thecost of all time-based employee stock options on a straight-line attributionbasis and the cost of all performance-based employee stock options on anaccelerated basis in accordance with Financial Accounting Standards BoardInterpretation No. 28, “*Accounting for StockAppreciation Rights and Other Variable Stock Option or Award Plans*”over their respective vesting periods, net of estimated forfeitures.  The Companyselected the modified prospective method of transition; accordingly, fiscal2005 has not been restated.  Prior toadopting SFAS No. 123 (Revised 2004), the Company applied the recognitionand measurement principles of APB Opinion No. 25 and relatedinterpretations.  All employee stockoptions were granted at or above the grant date market price.  Accordingly, the Company did not recognizecompensation expense for stock option grants. Restricted stock units awarded at fair market value at the date of awardwere amortized over specified vesting periods in the consolidated financialstatements.

 

*Stock-based Compensation Plans—Predecessor Entity*

 

Prior to the completion ofthe Merger, the Predecessor granted stock options and awarded restricted stockunits for a fixed number of shares to employees and directors under twostock-based compensation plans, the 2004 Stock Award and Incentive Plan and theNew Hire Authorization.  The exerciseprices of the stock options were equal to the fair market value of theunderlying shares of the Predecessor’s common stock at the date of grant.  The right to exercise options generallycommenced one to five years after the grant date, and the options expiredbetween five to ten years after the grant date. Compensation expense for restricted stock unit awards was measured atfair value on the date of award based on the number of shares awarded and thequoted market price of the Predecessor’s common stock.  Such value was recognized as an expense overthe vesting period of the award adjusted for actual forfeitures.  Restrictions on restricted stock unit awardslapsed over vesting periods of up to five years.

 

81

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Upon completion of theMerger and in accordance with the terms of the stock plans, all of theoutstanding stock options became fully vested and immediately exercisable. Eachoption was valued at an amount equal to the excess of $28.00 over theunderlying stock option exercise price, less applicable withholding taxes. Eachrestricted stock unit award was exercised at $28.00 in cash less applicablewithholding taxes.

 

The following is a summary of activity under the stock option plansthat were in effect upon adoption of SFAS No. 123 (Revised 2004)through the effective date of the Merger, when all of the stock options andrestricted stock units were exercised:

 
| ** **                                                    | ** ** | **Predecessor Entity**                    | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------|------------|
| **Plan**                                                      | ** ** | **Outstanding  at January 1,  2006** | ** ** | **Exercised** | ** ** | **Outstanding  at February 13,  2006** | ** ** |
| ** **                                                    | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Stock options**                                             | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| 1996 Plan                                                     |       | 1,151,673                                 |       | 1,151,673 |   | — |   |
| Directors’ Plan                                          |       | 48,800                                    |       | 48,800 |   | — |   |
| 2000 Plan                                                     |       | 1,463,796                                 |       | 1,463,796 |   | — |   |
| Broad-based  Equity Plan                                      |       | 1,470,638                                 |       | 1,470,638 |   | — |   |
| 2004 Plan                                                     |       | 1,246,690                                 |       | 1,246,690 |   | — |   |
| New Hire Authorization                                        |       | 450,000                                   |       | 450,000 |   | — |   |
|                                                          |       |                                      |       |   |   |   |   |
| Total options outstanding                                     |       | 5,831,597                                 |       | 5,831,597 |   | — |   |
|                                                          |       |                                      |       |   |   |   |   |
| Weighted-average exercise price per option                    |       | $                                         | 25.20      |   | $ | 25.20 |   | $ |  — |   |
| Weighted-average remaining contractual term per  option       |       | 4.6 years                                 |       |   |   | — |   |
| ** **                                                    | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Options exercisable at period end:**                        | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Number of  options                                            |       |                                      |       |   |   | — |   |
| Weighted-average  exercise price                              |       |                                      |       |   |   | — |   |
| Weighted-average  remaining contractual term                  |       |                                      |       |   |   | — |   |
| ** **                                                    | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Restricted stock units**                                    | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| 2000 Plan                                                     |       | 7,500                                     |       | 7,500 |   | — |   |
| Broad-based  Equity Plan                                      |       | 9,850                                     |       | 9,850 |   | — |   |
| 2004 Plan                                                     |       | 118,066                                   |       | 118,066 |   | — |   |
| New Hire  Authorization                                       |       | 20,000                                    |       | 20,000 |   | — |   |
|                                                          |       |                                      |       |   |   |   |   |
| Total units outstanding                                       |       | 155,416                                   |       | 155,416 |   | — |   |
|                                                          |       |                                      |       |   |   |   |   |
| Weighted-average fair market value per unit at date  of award |       | $                                         | 25.71      |   | $ | 25.71 |   | $ |  — |   |
| Weighted-average remaining contractual term for  restrictions |       | 2.9 years                                 |       |   |   | — |   |

 

There were no stock-based option grants or restricted stockunit awards during the period January 1, 2006 to February 13, 2006. Theweighted-average grant date fair value of options granted during fiscal 2005was $8.28. The weighted-average award date fair value of restricted stock unitsawarded during fiscal 2005 was $25.49.

 

The total intrinsic value of stock options and restrictedstock units exercised due to the Merger was approximately $20.0 million and$4.4 million, respectively, for the period January 1, 2006 to February 13,2006. The total intrinsic value of stock options exercised during fiscal 2005was approximately $1.3 million. The total intrinsic value of restricted stockunits converted into common stock during fiscal 2005 was approximately $0.8million.

 

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The following is a summary of the activity for nonvested stock optiongrants and restricted stock unit awards as of February 13, 2006 and thechanges for the period January 1, 2006 to February 13, 2006:

 
| ** **                          | ** ** | **Predecessor Entity** | ** ** |
|-------------------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **Stock Options**      | ** ** | **Restricted Stock Units** | ** ** |
| ** **                          | ** ** | **Options**            | ** ** | **Fair  Value(1)** | ** ** | **Units** | ** ** | **Fair  Value(1)** | ** ** |
| Nonvested at January 1, 2006   |       | 1,064,620              |       | $ | 10.59 |   | 155,416 |   | $ | 25.71 |   |
| Grants                              |       | —                 |       | $ | — |   | — |   | $ | — |   |
| Vested(2)                           |       | (1,060,940             | )          | $ | 10.59 |   | (155,416 | ) | $ | 25.71 |   |
| Cancelled                           |       | (3,680                 | )          | $ | 11.12 |   | — |   | $ | — |   |
|                                |       |                   |       |   |   |   |   |   |   |
| Nonvested at February 13, 2006 |       | —                 |       | $ | — |   | — |   | $ | — |   |

 

----

*(1)**      *Represents theweighted-average grant date fair value per share-based unit, using theBlack-Scholes option-pricing model for stock options and the average high/lowmarket price of the Linens ’n Things, Inc. common stock for restrictedstock units.

 

*(2) *All of theshare-based units became immediately vested on the date of the Merger.

 

The total fair value of stock options and restricted stockunits vested during the period from January 1, 2006 to February 13,2006 was approximately $11.2 million and $4.0 million, respectively. The totalfair value of stock options vested during fiscal 2005 was approximately $8.0million. The total fair value of restricted stock units vested during fiscal2005 was approximately $0.8 million.

 

As of December 31, 2005, there was approximately $9.3million and $3.2 million of total unrecognized compensation cost related tostock option grants and restricted stock unit awards, respectively, under thestock-based compensation plans. The consummation of the Merger accelerated therecognition of compensation cost, and, accordingly, all of this cost wasincluded in selling, general and administrative expenses in the consolidatedstatements of operations in the period January 1, 2006 to February 13,2006.

 

The compensation cost that has been charged against incomefor restricted stock unit awards in fiscal 2005 was approximately $1.2 million.No compensation cost was recognized for stock option grants in fiscal 2005.

 

*Stock-based Compensation Plans—Successor Entity*

 

On February 14, 2006,the board of directors (the “Board”) and stockholders of Linens Holding Co.adopted the Linens Holding Co. Stock Option Plan (the “Plan”). The Planprovides employees or directors of the Company or its subsidiaries, who are ina position to contribute to the long-term success of these entities, withoptions to acquire shares in the Company to aid in attracting, retaining andmotivating persons of outstanding ability. The Plan was amended in March 2006to increase the number of shares of common stock, par value $0.01 per share, ofLinens Holding Co. (the “Common Stock”) available for issuance under the Planto 1,157,298 shares.

 

Asof December 29, 2007, a total of 964,696 stock options were outstanding.

 

Stock options granted underthe Plan to each optionee are equally divided between a “Time Option” and a “PerformanceOption,” as those terms are defined in the standard form of option grantletter. For each stock option granted the estimated fair market value of theunderlying shares at the date of grant was less than or equal to the stockoption’s exercise price of $50.00 per share, and expire seven years after thedate of grant. Time Options become vested and exercisable in four equalinstallments on either (1) each of February 14, 2007, February 14,2008, February 14, 2009, and February 14, 2010 with respect to optionsinitially granted March 27, 2006 or (2) on each of the first fouranniversaries of the date of grant for all other Time Options. With respect toPerformance Options and as provided for and defined in the standard form ofgrant letter, the stock options become vested and exercisable in two equalinstallments from a measurement date if, on such measurement date, the valueper share equals or exceeds a

 

83

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targetstock price.

 

The following is a summaryof stock-based option activity for the period February 14, 2006 to December 30,2006 and fiscal 2007:

 
| **Options**                               | ** ** | **Shares**  | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted-Average  Remaining  Contractual Term  (years)** | ** ** |
|-------------------------------------------|------------|-------------|------------|----------------------------------------|------------|------------------------------------------------------------|------------|
|                                      |       |        |       |                                   |       |                                                       |       |
| **Outstanding at February 14, 2006** | ** ** | **—**  | ** ** | **$**                                  | **—** | ** **                                                 | ** ** | ** ** |
| ** **                                | ** ** | ** **  | ** ** | ** **                             | ** ** | ** **                                                 | ** ** |
| Granted                                   |       | 963,946     |       | 50.00                                  | ** ** | ** **                                                 | ** ** |
| Exercised                                 |       | —      |       | —                                 | ** ** | ** **                                                 | ** ** |
| Canceled                                  | ** ** | (124,000    | )          | 50.00                                  | ** ** | ** **                                                 | ** ** |
| ** **                                | ** ** | ** **  | ** ** | ** **                             | ** ** | ** **                                                 | ** ** |
| **Outstanding at December 30, 2006** | ** ** | **839,946** | ** ** | **$**                                  | **50.00**  | ** **                                                 | **6.29**   | ** ** |
|                                      |       |        |       |                                   |       |                                                       |       |
| **Exercisable at December 30, 2006** | ** ** | **103,000** | ** ** | **$**                                  | **50.00**  | ** **                                                 | **6.32**   | ** ** |
|                                      |       |        |       |                                   |       |                                                       |       |
| Granted                                   |       | 242,250     |       | 50.00                                  |       |                                                       |       |
| Exercised                                 |       | —      |       | —                                 |       |                                                       |       |
| Canceled                                  |       | (117,500    | )          | 50.00                                  |       |                                                       |       |
|                                      |       |        |       |                                   |       |                                                       |       |
| **Outstanding at December 29, 2007** | ** ** | **964,696** | ** ** | **$**                                  | **50.00**  | ** **                                                 | **5.55**   | ** ** |
|                                      |       |        |       |                                   |       |                                                       |       |
| **Exercisable at December 29, 2007** | ** ** | **191,595** | ** ** | **$**                                  | **50.00**  | ** **                                                 | **5.38**   | ** ** |

 

There are no provisions in the Plan for the issuance of restrictedstock units.

 

The weighted-average grantdate fair value of options granted during fiscal 2007 and the period February 14,2006 to December 30, 2006 was $8.92 and $17.34, respectively.

 

The following is a summaryof the activity for nonvested stock option grants for the period February 14,2006 to December 30, 2006 and fiscal 2007:

 
| ** **                              | ** ** | **Options** | ** ** | **Fair Value(1)** | ** ** |
|-----------------------------------------|------------|-------------|------------|-------------------|------------|
| **Nonvested at February 14, 2006** | ** ** | **—**  | ** ** | **$**             | **—** | ** ** |
| ** **                              | ** ** | ** **  | ** ** | ** **        | ** ** |
| Grants                                  |       | 963,946     |       | 17.34             |       |
| Vested                                  | ** ** | (103,000    | )          | 16.68             |       |
| Canceled                                | ** ** | (124,000    | )          | 17.46             |       |
| ** **                              | ** ** | ** **  | ** ** | ** **        | ** ** |
| **Nonvested at December 30, 2006** | ** ** | **736,946** | ** ** | **$**             | **17.41**  | ** ** |
|                                    |       |        |       |              |       |
| Grants                                  |       | 242,250     |       | 8.92              |       |
| Vested                                  |       | (92,841     | )          | 16.60             |       |
| Canceled                                |       | (113,254    | )          | 16.62             |       |
|                                    |       |        |       |              |       |
| **Nonvested at December 29, 2007** | ** ** | **773,101** | ** ** | **$**             | **14.96**  | ** ** |

 

----

(1)   Represents theweighted-average grant date fair value per option, using the Monte Carlosimulation option-pricing model for Performance Options, and the Black-Scholesoption-pricing model for Time Options.

 

The total fair value ofstock options vested during fiscal 2007 and the period February 14, 2006to December 30, 2006 was approximately $1.5 million and $1.7 million,respectively.

 

As of December 29,2007, there was approximately $6.8 million of total unrecognizedcompensation cost related to stock option grants both under and outside thePlan. This cost is expected to be recognized over a remaining weighted-averageperiod of 2.1 years. The compensation cost that has been charged againstincome for stock option

 

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grantswas approximately $3.2 million and $4.3 million for fiscal 2007 and forthe period February 14, 2006 to December 30, 2006, respectively. Suchcompensation cost is included in selling, general and administrative expensesin the consolidated statements of operations.

 

Prior to the adoption ofSFAS 123 (Revised 2004) the Company used the Black-Scholes option-pricingmodel for estimating the fair value for all options granted. Beginning in thefirst quarter of 2006, the Company used the Monte Carlo simulationoption-pricing model for estimating the fair value of Performance Options andthe Black-Scholes option-pricing model for Time Options. This change was madein order to provide a better estimate of fair value. The Monte Carlooption-pricing model is particularly useful in the valuation of options with complicatedfeatures that make them difficult to value through a straight-forwardBlack-Scholes-style computation.

 

Presented below is acomparative summary of valuation assumptions for grants issued in each of theindicated periods:

 
| ** **                                     | ** ** | ** **                                                 | ** ** | ** **                                              | ** ** |
|------------------------------------------------|------------|------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                     | ** ** | **Successor  (Monte Carlo Simulation and  Black-Scholes)** | ** ** | **Predecessor  (Black-Scholes)**                        | ** ** |
| **Valuation Assumptions:**                     | ** ** | **Fiscal Year  Ended  December 29,  2007**            | ** ** | **February 14,  2006 to  December 30,  2006** | ** ** | **January 1,  2006 to  February 13,  2006** | ** ** | **Fiscal Year  Ended  December 31,  2005** | ** ** |
|                                           |       |                                                       |       |                                                    |       |   |   |   |   |   |   |   |
| Weighted-average fair value of options granted |       | $                                                          | 8.92       |                                                    | $          | 17.34 |   | No Grants |   | $ | 8.24 |   |
| Expected volatility (1)                        |       | N/A                                                        |       | N/A                                                     |       | No Grants |   | 28.4% - 41.1 | % |
| Weighted-average volatility (1)                |       | 33.6                                                       | %          | 37.9                                                    | %          | No Grants |   | 35.2 | % |
| Weighted-average expected term (in years)      |       | 3.4                                                        |       | 3.7                                                     |       | No Grants |   | 4.0 |   |
| Dividend yield                                 |       | —                                                     |       | —                                                  |       | No Grants |   | — |   |
| Risk-free interest rate                        |       | 2.9% - 5.1                                                 | %          | 4.6% - 5.2                                              | %          | No Grants |   | 3.8% - 4.4 | % |
| Weighted-average risk-free interest rate       |       | 4.6                                                        | %          | 4.8                                                     | %          | No Grants |   | 4.0 | % |
| Weighted-average expected annual forfeiture    |       | 1.9                                                        | %          | 3.8                                                     | %          | No Grants |   | 1.0 | % |
|                                                |            |                                                            |            |                                                         |            |  |  |  |  |  |  |  |  |  |  |

 

----

(1) The Company used the average of the historical volatility of each of thecomponent companies included in the Standard & Poor’s Specialty RetailIndex as a substitute for expected volatility.

 

The Company utilizedhistorical optionee behavioral data to estimate the option rates used in theBlack-Scholes option-pricing model prior to the adoption of SFAS No. 123(Revised 2004). The expected term of the options represents the period of timethe options were expected to be outstanding based on historical trends. Expectedvolatility was based on the historical volatility of the common stock of thePredecessor for a period approximating the expected life. The Predecessor hasnever paid dividends, and, accordingly, the dividend yield is zero. Therisk-free interest rate within the expected term was based on the U.S. Treasuryyield curve in effect at the time of grant.

 

For the period subsequent tothe adoption of SFAS No. 123 (Revised 2004), it is not possible for the Company,whose stock is not publicly traded, to use Company-specific volatility indetermining a reasonable estimate of fair value of options granted. Accordingly,the Company is required to use an alternative measurement method. Under thealternative measurement method, a nonpublic entity uses a calculatedvolatility, determined by applying the historical volatility of an appropriateindex of public entities, as an input to the valuation models. The Company usedthe Standard & Poor’s Specialty Retail Index for a periodapproximating the expected term as this index most closely approximates theCompany’s applicable operating industry. Expected term of share options grantedrepresents the period of time that the option grants are expected to beoutstanding. The Company is not expected to pay dividends and, accordingly, thedividend yield is zero. The risk-free interest rate within the expected termwas based on the U.S. Treasury yield curve in effect at the time of grant.

 

Set forth below for fiscal2005, the last fiscal year in which no compensation cost was recognized forstock option grants, is the Company’s net income presented “as reported” and asif the Company had applied the fair value method to its stock-basedcompensation under the disclosure provisions of SFAS No. 123 and amendeddisclosure provisions of SFAS No. 148:

 

85

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| **(In millions)**                                                                                                                                               | ** ** | **Fiscal Year  Ended  December 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                                                                                      | ** ** | **(Predecessor)**                               | ** ** |
| ** **                                                                                                                                                      | ** ** | ** **                                      | ** ** |
| **Net  income:**                                                                                                                                                | ** ** | ** **                                      | ** ** |
| As reported                                                                                                                                                     |       | $                                               | 36.0       |   |
| Add: stock-based employee compensation expense  included in net income as reported, net of related tax effects                                                  |       | 0.8                                             |       |
|                                                                                                                                                            |       |                                            |       |
|                                                                                                                                                            |       | 36.8                                            |       |
| Deduct: total stock-based employee compensation  expense determined under the fair value based method of accounting for all  awards, net of related tax effects |       | 7.3                                             |       |
|                                                                                                                                                            |       |                                            |       |
| Pro forma net income                                                                                                                                            |       | $                                               | 29.5       |   |

 

Stock-basedemployee compensation expense included in net loss in the consolidatedstatements of operations, net of related tax effects, is detailed as follows:

 
| **(In millions)**                                                          | ** ** | **Fiscal Year Ended  December 29, 2007** | ** ** | **February 14, 2006 to  December 30,  2006** | ** ** | **January 1, 2006 to  February 13,  2006** | ** ** | **Fiscal Year Ended  December 31, 2005** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                 | ** ** | **(Successor)**                               | ** ** | **(Successor)**                                        | ** ** | **(Predecessor)**                                    | ** ** | **(Predecessor)**                             | ** ** |
|                                                                       |       |                                          |       |                                                   |       |                                                 |       |                                          |       |
| **Compensation expense:**                                                  | ** ** | ** **                                    | ** ** | ** **                                             | ** ** | ** **                                           | ** ** | ** **                                    | ** ** |
| Stock option  grants                                                       |       | $                                             | 3.2        |                                                   | $          | 4.3                                                  |       | $                                             | 9.3        | ** ** | **$** | **—** | ** ** |
| Restricted stock  units                                                    |       | **—**                                    | ** ** | **—**                                             |       | 3.2                                                  |       | 1.2                                           |       |
|                                                                       |       | 3.2                                           |       | 4.3                                                    |       | 12.5                                                 |       | 1.2                                           |       |
| **Benefit for income taxes:**                                              | ** ** | ** **                                    | ** ** | ** **                                             | ** ** | ** **                                           | ** ** | ** **                                    | ** ** |
| Stock option  grants                                                       |       | (0.6                                          | )          | (1.7                                                   | )          | (2.8                                                 | )          | **—**                                    | ** ** |
| Restricted stock  units                                                    |       | **—**                                    | ** ** | **—**                                             |       | (1.0                                                 | )          | (0.4                                          | )          |
|                                                                       |       | (0.6                                          | )          | (1.7                                                   | )          | (3.8                                                 | )          | (0.4                                          | )          |
| **Stock-based  employee compensation expense, net of related tax effects** |       | **$**                                         | **2.6**    |                                                   | **$**      | **2.6**                                              |       | **$**                                         | **8.7**    |   | **$** | **0.8** |   |
| ** **                                                                 |       |                                          |       |                                                   |       |                                                 |       |                                          |       |   |   |   |   |

 

**14. Employee Benefit Plans**

 

The Company has a 401(k) plan for its US employees and an employeesavings plan for its Canadian employees. Company contributions to the two plansamounted to approximately $2.9 million, $3.4 million, $0.3 millionand $1.4 million for fiscal 2007, the period February 14, 2006 to December 30,2006, the period January 1, 2006 to February 13, 2006 and fiscal2005, respectively. The Company elected to make “safe harbor” matchingcontributions in accordance with statutory requirements to all eligibleparticipants in its 401(k) plan beginning January 1, 2006.

 

Effective July 1, 1999, the Company established a SupplementalExecutive Retirement Program (“SERP”). The SERP, which in part was funded withthe cash surrender values of certain life insurance policies owned by theCompany, provided eligible executives with supplemental pension benefits, inaddition to amounts received under the Company’s 401(k) benefit plan.

 

The former Chairman and Chief Executive Officer of the Predecessor wasthe only participant under the SERP, whose employment terminated on February 16,2006 following the consummation of the Merger. In accordance with

 

86

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his employment agreement, the Company was obligated to pay severanceand other entitlements. These entitlements included a payment of approximately$5.6 million representing the defined benefit portion of his SERP, $1.0 millionrepresenting the defined contribution portion of his SERP, and his then currentinterest under the frozen split dollar life insurance arrangement ofapproximately $0.3 million.

 

The Company recorded expenses related to the SERP of approximately $0.2million for fiscal 2005.

 

**15. Income Taxes**

 

The components of (loss) income before (benefit) provisionfor income taxes are comprised of the following:

 
| ** **         | ** ** | **Fiscal Year Ended** | ** **   | **February 14, 2006 to** | ** ** | ** **   | **January 1, 2006 to** | ** ** | **Fiscal Year Ended** | ** **  |
|--------------------|------------|-----------------------|--------------|-------------------------------|------------|--------------|-----------------------------|------------|-----------------------|-------------|
| ** **         | ** ** | **December 29,** | ** **   | **December 30,**         | ** ** | ** **   | **February 13,**       | ** ** | **December 31,** | ** **  |
| ** **         | ** ** | **2007**              | ** **   | **2006**                      | ** ** | ** **   | **2006**                    | ** ** | **2005**              | ** **  |
| **(in thousands)** | ** ** | **Successor**         | ** **   | **Successor**                 | ** ** | ** **   | **Predecessor**             | ** ** | **Predecessor**       | ** **  |
|               |       |                  |         |                          |       |         |                        |       |                  |        |
| Domestic           |       | $                     | (304,094     | )                             | $          | (191,747     | )                           |       | $                     | (68,014     | ) | $ | 49,356 |   |
| Foreign            |       | 11,372                |         | 18,362                        |       |         | (1,160                      | )          | 8,505                 |        |
|               |       |                  |         |                          |       |         |                        |       |                  |        |
| **Total**          | ** ** | **$**                 | **(292,722** | **)**                         | **$**      | **(173,385** | **)**                       | ** ** | **$**                 | **(69,174** | **)** | **$** | **57,861** | ** ** |

 

The (benefit) provision for income taxes is comprised of thefollowing:

 
| ** **         | ** ** | **Fiscal Year Ended** | ** **  | **February 14, 2006 to** | ** ** | ** **  | **January 1, 2006 to** | ** ** | **Fiscal Year Ended** | ** **  |
|--------------------|------------|-----------------------|-------------|-------------------------------|------------|-------------|-----------------------------|------------|-----------------------|-------------|
| ** **         | ** ** | **December 29,** | ** **  | **December 30,**         | ** ** | ** **  | **February 13,**       | ** ** | **December 31,** | ** **  |
| ** **         | ** ** | **2007**              | ** **  | **2006**                      | ** ** | ** **  | **2006**                    | ** ** | **2005**              | ** **  |
| **(in thousands)** | ** ** | **Successor**         | ** **  | **Successor**                 | ** ** | ** **  | **Predecessor**             | ** ** | **Predecessor**       | ** **  |
|               |       |                  |        |                          |       |        |                        |       |                  |        |
| **Current:**       | ** ** | ** **            | ** **  | ** **                    | ** ** | ** **  | ** **                  | ** ** | ** **            | ** **  |
| U.S. Federal       |       | $                     | (348        | )                             | $          | (1,990      | )                           |       | $                     | (14,545     | ) | $ | 21,516 |   |
| U.S. State         |       | 7,878                 |        | 187                           |       |        | 354                         |       | 8,526                 |        |
| Non-U.S.           |       | 8,357                 |        | 8,592                         |       |        | (354                        | )          | 3,102                 |        |
| ** **         | ** ** | **15,887**            | ** **  | **6,789**                     | ** ** | ** **  | **(14,545**                 | **)**      | **33,144**            | ** **  |
|               |       |                  |        |                          |       |        |                        |       |                  |        |
| **Deferred:**      | ** ** | ** **            | ** **  | ** **                    | ** ** | ** **  | ** **                  | ** ** | ** **            | ** **  |
| U.S. Federal       |       | $                     | (59,400     | )                             | $          | (62,568     | )                           |       | $                     | (3,239      | ) | $ | (6,578 | ) |
| U.S. State         |       | (4,916                | )           | (9,458                        | )          |        | (3,481                      | )          | (3,654                | )           |
| Non-U.S.           |       | (2,202                | )           | (1,615                        | )          |        | (5                          | )          | (1,033                | )           |
| ** **         | ** ** | **(66,518**           | **)**       | **(73,641**                   | **)**      | ** **  | **(6,725**                  | **)**      | **(11,265**           | **)**       |
|               |       |                  |        |                          |       |        |                        |       |                  |        |
| **Total**          | ** ** | **$**                 | **(50,631** | **)**                         | **$**      | **(66,852** | **)**                       | ** ** | **$**                 | **(21,270** | **)** | **$** | **21,879** | ** ** |

 

Undistributedearnings of the Company’s foreign subsidiaries of approximately $32.3 millionat December 29, 2007 are considered permanently reinvested outside theUnited States, and as a result, the Company has not provided federal incometaxes on the unremitted earnings. It is not practicable to determine the taxliability, if any, that would be payable if such earnings were not reinvestedindefinitely.

 

87

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Thefollowing is a reconciliation between the statutory Federal income tax rate andthe Company’s effective tax rate for:

 
| ** **                                 | ** ** | **Fiscal Year  Ended** | ** ** | **February 14,  2006 to** | ** ** | ** ** | **January 1,  2006 to** | ** ** | **Fiscal Year  Ended** | ** ** |
|--------------------------------------------|------------|------------------------|------------|--------------------------------|------------|------------|------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **December 29,**  | ** ** | **December 30,**          | ** ** | ** ** | **February 13,**        | ** ** | **December 31,**  | ** ** |
| ** **                                 | ** ** | **2007**               | ** ** | **2006**                       | ** ** | ** ** | **2006**                     | ** ** | **2005**               | ** ** |
| ** **                                 | ** ** | **Successor**          | ** ** | **Successor**                  | ** ** | ** ** | **Predecessor**              | ** ** | **Predecessor**        | ** ** |
| * *                                   | * *   | * *               | * *   | * *                       | * *   | * *   | * *                     | * *   | * *               | * *   |
| Statutory Federal income tax rate          |       | 35.0                   | %          | 35.0                           | %          |       | 35.0                         | %          | 35.0                   | %          |
| State income taxes, net of federal benefit |       | 3.1                    |       | 3.7                            |       |       | 4.5                          |       | 5.5                    |       |
| Transaction-related costs                  | ** ** | **—**             | ** ** | **—**                     |       |       | (7.9                         | )          | **—**             | ** ** |
| Foreign taxes                              |       | (1.8                   | )          | 0.2                            |       |       | (0.1                         | )          | (1.6                   | )          |
| Valuation allowances                       |       | (19.0                  | )          | **—**                     | ** ** | ** ** | **—**                   | ** ** | **—**             | ** ** |
| Other                                      | ** ** | **—**             |       | (0.3                           | )          |       | (0.8                         | )          | (1.1                   | )          |
|                                       | ** ** | ** **             |       |                           |       |       |                         |       |                   |       |
| Effective tax rate                         |       | 17.3                   | %          | 38.6                           | %          |       | 30.7                         | %          | 37.8                   | %          |

 

Forthe fiscal year ended December 29, 2007, the effective tax benefit rate of17.3% is lower than the statutory federal rate of 35% primarily due to $55.6million of valuation allowances recorded during 2007 which partially offset thetax benefit on the loss before taxes. The Successor Entity effective taxbenefit rate for the period February 14, 2006 to December 30, 2006was 38.6%. This exceeds the statutory federal tax rate of 35.0% primarily dueto expected deferred state tax benefits.

 

Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. Significant components of the Company’sdeferred tax assets and liabilities were as follows (in thousands):

 
| ** **                          | ** ** | **December 29,** | ** **  | **December 30,** | ** ** |
|-------------------------------------|------------|-----------------------|-------------|-----------------------|------------|
| ** **                          | ** ** | **2007**              | ** **  | **2006**              | ** ** |
| **Deferred tax assets:**            | ** ** | ** **            | ** **  | ** **            | ** ** |
| Employee  benefits                  |       | $                     | 2,905       |                  | $          | 1,640 |   |
| Inventories                         |       | **—**            |        | 693                   |       |
| Federal NOL                         |       | 83,868                |        | 21,560                |       |
| State NOL                           |       | 25,899                |        | 17,277                |       |
| Accrued expenses  and reserves      |       | 38,648                |        | 31,973                |       |
| Other                               |       | 7,039                 |        | 6,365                 |       |
|                                |       |                  |        |                  |       |
| **Total gross deferred tax assets** | ** ** | **158,359**           | ** **  | **79,508**            | ** ** |
| Valuation  allowances               |       | (68,645               | )           | (13,040               | )          |
| ** **                          | ** ** | ** **            | ** **  | ** **            | ** ** |
| **Total net deferred tax asset**    | ** ** | **$**                 | **89,714**  | ** **            | **$**      | **66,468** | ** ** |
| ** **                          | ** ** | ** **            | ** **  | ** **            | ** ** |
| **Deferred tax liabilities:**       | ** ** | ** **            | ** **  | ** **            | ** ** |
| Inventories                         |       | $                     | 963         | ** **            | **$**      | **—** | ** ** |
| Property and  equipment             |       | 84,981                |        | 120,922               |       |
| Intangible  assets                  |       | 51,118                |        | 51,047                |       |
| Other                               |       | 4,407                 |        | 3,661                 |       |
|                                |       |                  |        |                  |       |
| **Total deferred tax liabilities**  | ** ** | **$**                 | **141,469** | ** **            | **$**      | **175,630** | ** ** |
|                                |       |                  |        |                  |       |
| **Net deferred tax liability**      | ** ** | **$**                 | **51,755**  | ** **            | **$**      | **109,162** | ** ** |

 

At December 29, 2007, the Company has approximately$239.6 million of federal net operating loss carryforwards which expire in 2026and 2027. In assessing the realizability of deferred tax assets included in theconsolidated balance sheets, management considers whether it is more likelythan not that some portion or all of the tax assets will not be realized. Theultimate realization of deferred tax assets is dependent upon the generation offuture taxable income during the periods in which those temporary differencesbecome deductible. Management considers the scheduled reversal of deferred taxliabilities, projected future taxable income and tax planning strategies inmaking this assessment. In accordance with this policy and the requirements of SFASNo. 109, the valuation

 

88

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allowance of $55.6 million referred to above was recordedagainst United States net operating losses in the current year.

 

AtDecember 29, 2007 and December 30, 2006, the net deferred taxliability was included in the consolidated balance sheets as follows(in thousands):

 
| ** **                                | ** ** | ** **            | ** **  | ** **            | ** ** |
|-------------------------------------------|------------|-----------------------|-------------|-----------------------|------------|
| ** **                                | ** ** | **December 29,** | ** **  | **December 30,** | ** ** |
| ** **                                | ** ** | **2007**              | ** **  | **2006**              | ** ** |
|                                      |       |                  |        |                  |       |
| Current deferred asset                    |       | $                     | 469         |                  | $          | 16,815 |   |
| Current deferred liability                | ** ** | **—**            | ** **  | **—**            | ** ** |
| Non-current deferred income tax liability |       | (52,224               | )           | (125,977              | )          |
|                                      |       |                  |        |                  |       |
| **Net deferred tax liability**            | ** ** | **$**                 | **(51,755** | **)**                 | **$**      | **(109,162** | **)** |

 

During October 2006, the Company collected a predecessorcarryback tax receivable of $20.1 million.

 

***Adoption of Financial Accounting Standards Board Interpretation No. 48,“Accounting for Uncertainty in Income Taxes – an interpretation of FASBStatement No. 109”***

 

The Company is subject to tax in the United States and invarious states and foreign jurisdictions. The Company, joined by its domesticsubsidiaries, files a consolidated income tax return for Federal income taxpurposes. With few exceptions, the Company is no longer subject to U.S.Federal, state and local income tax or non-U.S. income tax examinations by taxauthorities for tax years before 2004. The Internal Revenue Service (“IRS”)commenced an examination of the Company’s U.S. consolidated income tax returnsfor the years 2004 and 2005 and the period January 1, 2006 to February 13,2006, inclusive, in the first quarter of 2007. Based on its work to date, theIRS has not proposed any adjustments to any of the Company’s tax positions.

 

Financial Accounting Standards Board (“FASB”) Interpretation No. 48,“*Accounting for Uncertainty in Income Taxes – anInterpretation of FASB Statement No. 109*” (“FIN No. 48”),was issued in June 2006 and interprets FASB SFAS No. 109, “*Accounting for Income Taxes*” (“SFAS No. 109”). FIN No. 48is effective for fiscal years beginning after December 15, 2006. TheCompany, in its opening balance sheet for 2007, is required to reflect, ascumulative adjustments to the Company’s retained earnings, the impact of FIN No. 48on its income tax accruals for all prior years subject to adjustment byfederal, state, local and foreign taxing authorities (open years). The Company hasundertaken an analysis of all material tax positions in its tax accruals forall open years and has identified all of its outstanding tax positions andestimated the transition amounts with respect to each item at the effectivedate. The Company has determined that no adjustment to shareholders’ equity isrequired as a result of applying FIN No. 48. The Company expects nomaterial change for the next twelve months as a result of adopting FIN No. 48.The Company will continue its policy of classifying interest on tax liabilitiesas part of the provision for income taxes. The Company does not anticipate anysignificant payments with respect to any tax assessments within the next twelvemonths.

 

89

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The Company adopted the provisions of FIN No. 48 on December 31,2006. As a result of the implementation of FIN No. 48, the Companyrecognized no change with respect to any unrealized tax benefits and thereforemade no change to the December 31, 2006 opening retained earnings balance.A reconciliation of the beginning and ending amount of unrecognized taxbenefits, excluding accrued interest and penalties, is as follows (inthousands):

 
| ** **                                                          | ** ** | **Amount** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|
| Beginning balance at December 31, 2006 (date of  adoption)     |       | $          | 7,802      |   |
| Additions for current year tax positions                            |       | 76         |       |
| Additions for prior year tax positions                              |       | 3,731      |       |
| Reductions for prior year tax positions                             |       | —     |       |
| Settlements                                                         |       | —     |       |
| Reductions due to a lapse of the applicable statute  of limitations |       | —     |       |
|                                                                |       |       |       |
| Ending balance at December 29, 2007                            |       | $          | 11,609     |   |

 

The entire balance of unrecognized tax benefits at December 29,2007 of $11.6 million would affect the Company’s effective tax rate ifrecognized.

 

The Company recognizes interest and penalties accrued relatedto unrecognized tax benefits as part of the provision for income taxes. At December 29,2007 and December 31, 2006 (the date of adoption), accrued interest andpenalties included in the FIN No. 48 reserve amounted to approximately$2.7 million and $0.9 million, respectively. The Company recorded approximately$1.9 million of FIN No. 48 expense during the fiscal year ended December 29,2007 which is included in benefit (provision) for income taxes in theconsolidated statements of operations.

 

**16. Commitments and Contingencies**

 

The Company is involved in various claims and legal actionsarising in the ordinary course of business. In the opinion of management theultimate disposition of these matters is not expected to have a materialadverse effect on the Company’s consolidated financial position, results ofoperations or liquidity.

 

**17. Related Party Transactions**

** **

***ManagementServices Agreement***

 

Upon consummation of the Merger, the Company entered into amanagement services agreement with Apollo Management V, L.P., NRDC Linens B LLCand Silver Point Capital Fund Investments LLC (each of whom is an affiliate ofthe Company). Under this management services agreement, the Sponsors agreed toprovide to the Company certain investment banking, management, consulting,financial planning and real estate advisory services on an ongoing basis for anaggregate fee of $2.0 million per year, which is payable on a monthly basis toApollo Management V, L.P. and to NRDC Linens B LLC. Effective with the January 2008payment, Apollo Management V, L.P. and NRDC Linens B LLC agreed with theCompany to allow the monthly services fee to accrue rather than be paid in casheach month. Apollo Management V, L.P. and NRDC Linens B LLC have the right towithdraw this accrual agreement at any time. Apollo Management V, L.P. alsoagreed to provide to the Company certain financial advisory and investmentbanking services from time to time in connection with major financialtransactions that may be undertaken by it or its subsidiaries in exchange forfees customary for such services after taking into account Apollo Management V,L.P.’s expertise and relationships within the business and financial community.In connection with the services being provided, the Company also agreed toprovide customary indemnification.

 

In addition, pursuant to the management services agreement,the Company paid a transaction fee of $15.0 million in the aggregate (plusreimbursement of expenses) to the Sponsors for financial advisory servicesrendered in connection with the Merger. Thirty percent of this fee, or $4.5million, was included as part of the purchase price and the remaining 70%, or$10.5 million, has been included in deferred financing costs. These servicesincluded assisting the Company in structuring the Merger, taking into accounttax considerations and optimal access to financing, and

 

90

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assisting in the negotiation of the Company’s materialagreements and financing arrangements in connection with the Merger.

 

*Stockholders’ Agreement*

 

The only stockholders of the Company are Linens Investors,LLC, a limited liability company owned by the Sponsors, two executives of theCompany, Robert J. DiNicola, Chairman and Chief Executive Officer, and F. DavidCoder, Executive Vice President, Store Operations, and one nonemployeedirector, George G. Golleher. Linens Investors, LLC has entered into astockholders’ agreement with the Company, and each of the other stockholdershave entered into joinder agreements to be bound by the stockholders’agreement. The stockholders’ agreement sets forth certain provisions relatingto the management of the Company. In addition, the stockholders’ agreementcontains customary drag along rights, tag along rights, registration rights,restrictions on the transfer of the Company’s common stock and an indemnity ofthe Sponsors.

 

**18. Supplemental Consolidating Financial Information**

 

OnFebruary 14, 2006, Linens ’n Things, Inc. and Linens ’n Things Center, Inc.(collectively, the “Issuers”), issued $650.0 million aggregate principalamount of Senior Secured Floating Rate Notes due 2014. The Notes are fully andunconditionally guaranteed, jointly and severally, on a senior basis by theCompany, and by each of the Company’s direct and indirect subsidiaries that guaranteethe Company’s New Credit Faciliy except for its Canadian subsidiaries. TheCompany’s Canadian subsidiaries (the “Non-Guarantors”) are not guarantors of the Notes.

 

Thefollowing tables present the supplemental consolidating financial information forthe Company (Parent), the Co-Issuers, the Guarantors (excluding the Companywhich is also a Guarantor but is separately presented) and the Non-Guarantors,together with eliminations, as of and for the periods indicated. The Companyhas not presented separate financial statements and other disclosuresconcerning the Co-Issuers, Guarantors and Non-Guarantors because management hasdetermined that such information is not meaningful to investors. The accountingpolicies for Parent, Co-Issuers, Guarantors, and Non-Guarantors are asdescribed for the Company under “*Summary of SignificantAccounting Policies*” (see Note 2). The financial information may notnecessarily be indicative of the financial position, results of operations orcash flows had the Parent, Co-Issuers, Guarantors and Non-Guarantors operatedas independent entities.

 

Theinformation (1) as of December 29, 2007 and December 30, 2006,and (2) for fiscal 2007 and the period February 14, 2006 to December 30,2006, presents the financial position and results of operations and cash flows,respectively, of the Successor Entity. The information for the periods January 1,2006 to February 13, 2006 and fiscal 2005 presents the results ofoperations and cash flows of the Predecessor Entity.

 

91

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**LINENSHOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

**(SuccessorEntity)**

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**For theFifty-two Week Period Ended December 29, 2007**
| **(In  Thousands)** |
|---------------------|

 
| ** **                                              | ** ** | **Parent** | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|--------------------|---------------|------------------|------------|------------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **         | ** **    | ** **       | ** ** | ** **       | ** ** |
| **Net  sales**                                          | ** ** | **$**      | **—** | ** **     | **$**      | **63,375**     | ** ** | **$**              | **2,476,026** | ** **       | **$**      | **255,375**      | ** ** | **$** | **—** | ** ** | **$** | **2,794,776** | ** ** |
| Cost of sales,  including buying and distribution costs |       | —     |       | 38,917         |       | 1,567,636      |       | 141,351            |          | —           |       | 1,747,904        |       |
|                                                    |       |       |       |           |       |           |       |               |          |             |       |             |       |
| **Gross  profit**                                       | ** ** | **—** | ** ** | **24,458**     | ** ** | **908,390**    | ** ** | **114,024**        | ** **    | **—**       | ** ** | **1,046,872**    | ** ** |
| ** **                                              | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **         | ** **    | ** **       | ** ** | ** **       | ** ** |
| Selling, general  and administrative expenses           |       | —     |       | 21,871         |       | 1,096,355      |       | 103,098            |          | —           |       | 1,221,324        |       |
| Impairment of  property and equipment                   |       | —     |       | —         |       | 16,779         |       | —             |          | —           |       | 16,779           |       |
| Impairment of  identifiable intangible asset            |       | —     |       | —         |       | 100            |       | —             |          | —           |       | 100              |       |
|                                                    |       |       |       |           |       |           |       |               |          |             |       |             |       |
| **Operating  profit (loss)**                            | ** ** | **—** | ** ** | **2,587**      | ** ** | **(204,844**   | **)**      | **10,926**         | ** **    | **—**       | ** ** | **(191,331**     | **)**      |
|                                                    |       |       |       |           |       |           |       |               |          |             |       |             |       |
| Interest income                                         |       | —     |       | (17            | )          | (9             | )          | (360               | )             | —           |       | (386             | )          |
| Interest expense                                        |       | —     |       | 15,918         |       | 83,479         |       | 1,645              |          | —           |       | 101,042          |       |
| Writeoff of  deferred financing costs                   |       | —     |       | 6,986          |       | —         |       | —             |          | —           |       | 6,986            |       |
|                                                    |       |       |       |           |       |           |       |               |          |             |       |             |       |
| Interest  expense, net                                  |       | —     |       | 22,887         |       | 83,470         |       | 1,285              |          | —           |       | 107,642          |       |
|                                                    |       |       |       |           |       |           |       |               |          |             |       |             |       |
| Other income,  net                                      |       | —     |       | (119           | )          | (4,401         | )          | (1,731             | )             | —           |       | (6,251           | )          |
|                                                    |       |       |       |           |       |           |       |               |          |             |       |             |       |
| **(Loss)  income before income taxes**                  | ** ** | **—** | ** ** | **(20,181**    | **)**      | **(283,913**   | **)**      | **11,372**         | ** **    | **—**       | ** ** | **(292,722**     | **)**      |
|                                                    |       |       |       |           |       |           |       |               |          |             |       |             |       |
| (Benefit)  provision for income taxes                   |       | —     |       | (4,113         | )          | (50,616        | )          | 4,098              |          | —           |       | (50,631          | )          |
|                                                    |       |       |       |           |       |           |       |               |          |             |       |             |       |
| **Net  (loss) income**                                  | ** ** | **$**      | **—** | ** **     | **$**      | **(16,068**    | **)**      | **$**              | **(233,297**  | **)**            | **$**      | **7,274**        | ** ** | **$** | **—** | ** ** | **$** | **(242,091** | **)** |

 

92

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**LINENSHOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

**(SuccessorEntity)**

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**For thePeriod February 14, 2006 - December 30, 2006**
| **(In  Thousands)** |
|---------------------|

 
| ** **                                              | ** ** | **Parent** | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-Guarantors** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|--------------------|---------------|------------------|------------|------------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **         | ** **    | ** **       | ** ** | ** **       | ** ** |
| **Net  sales**                                          | ** ** | **$**      | **—** | ** **     | **$**      | **63,019**     | ** ** | **$**              | **2,283,151** | ** **       | **$**      | **188,195**      | ** ** | **$** | **—** | ** ** | **$** | **2,534,365** | ** ** |
| Cost of sales,  including buying and distribution costs |       | —     |       | 38,092         |       | 1,422,088      |       | 96,831             |          | —           |       | 1,557,011        |       |
|                                                    |       |       |       |           |       |           |       |               |          |             |       |             |       |
| **Gross  profit**                                       | ** ** | **—** | ** ** | **24,927**     | ** ** | **861,063**    | ** ** | **91,364**         | ** **    | **—**       | ** ** | **977,354**      | ** ** |
| ** **                                              | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **         | ** **    | ** **       | ** ** | ** **       | ** ** |
| Selling, general  and administrative expenses           |       | —     |       | 18,779         |       | 950,811        |       | 71,090             |          | —           |       | 1,040,680        |       |
| Impairment of  property and equipment                   |       | —     |       | —         |       | 27,992         |       | —             |          | —           |       | 27,992           |       |
| Impairment of  identifiable intangible asset            |       | —     |       | —         |       | 3,119          |       | —             |          | —           |       | 3,119            |       |
|                                                    |       |       |       |           |       |           |       |               |          |             |       |             |       |
| **Operating  profit (loss)**                            | ** ** | **—** | ** ** | **6,148**      | ** ** | **(120,859**   | **)**      | **20,274**         | ** **    | **—**       | ** ** | **(94,437**      | **)**      |
|                                                    |       |       |       |           |       |           |       |               |          |             |       |             |       |
| Interest income                                         |       | —     |       | (91,609        | )          | (142           | )          | (99                | )             | 91,660           |       | (190             | )          |
| Interest expense                                        |       | —     |       | 79,610         |       | 90,652         |       | 1,193              |          | (91,660          | )          | 79,795           |       |
|                                                    |       |       |       |           |       |           |       |               |          |             |       |             |       |
| Interest  (income) expense, net                         |       | —     |       | (11,999        | )          | 90,510         |       | 1,094              |          | —           |       | 79,605           |       |
|                                                    |       |       |       |           |       |           |       |               |          |             |       |             |       |
| Other expense  (income), net                            |       | —     |       | 330            |       | (1,804         | )          | 817                |          | —           |       | (657             | )          |
|                                                    |       |       |       |           |       |           |       |               |          |             |       |             |       |
| **Income  (loss) before income taxes**                  | ** ** | **—** | ** ** | **17,817**     | ** ** | **(209,565**   | **)**      | **18,363**         | ** **    | **—**       | ** ** | **(173,385**     | **)**      |
|                                                    |       |       |       |           |       |           |       |               |          |             |       |             |       |
| Provision  (benefit) for income taxes                   |       | —     |       | 6,774          |       | (79,658        | )          | 6,032              |          | —           |       | (66,852          | )          |
|                                                    |       |       |       |           |       |           |       |               |          |             |       |             |       |
| **Net  income (loss)**                                  | ** ** | **$**      | **—** | ** **     | **$**      | **11,043**     | ** ** | **$**              | **(129,907**  | **)**            | **$**      | **12,331**       | ** ** | **$** | **—** | ** ** | **$** | **(106,533** | **)** |

 

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**LINENSHOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

**(PredecessorEntity)**

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**For thePeriod January 1, 2006 - February 13, 2006**
| **(In  Thousands)** |
|---------------------|

 
| ** **                                              | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------|------------|----------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
| ** **                                              | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Net  sales**                                          | ** ** | **$**          | **7,684**  | ** **     | **$**      | **259,826**          | ** ** | **$**            | **17,461** | ** **       | **$**      | **—** | ** ** | **$** | **284,971** | ** ** |
| Cost of sales,  including buying and distribution costs |       | 4,749          |       | 165,927        |       | 9,999                |       | —           |       | 180,675          |       |
|                                                    |       |           |       |           |       |                 |       |             |       |             |       |
| **Gross  profit**                                       | ** ** | **2,935**      | ** ** | **93,899**     | ** ** | **7,462**            | ** ** | **—**       | ** ** | **104,296**      | ** ** |
| ** **                                              | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Selling, general  and administrative expenses           |       | 2,571          |       | 164,013        |       | 8,840                |       | —           |       | 175,424          |       |
|                                                    |       |           |       |           |       |                 |       |             |       |             |       |
| **Operating  profit (loss)**                            | ** ** | **364**        | ** ** | **(70,114**    | **)**      | **(1,378**           | **)**      | **—**       | ** ** | **(71,128**      | **)**      |
|                                                    |       |           |       |           |       |                 |       |             |       |             |       |
| Interest income                                         |       | (2,374         | )          | (139           | )          | (14                  | )          | 1,859            |       | (668             | )          |
| Interest expense                                        |       | —         |       | 1,730          |       | 129                  |       | (1,859           | )          | —           |       |
|                                                    |       |           |       |           |       |                 |       |             |       |             |       |
| Interest  (income) expense, net                         |       | (2,374         | )          | 1,591          |       | 115                  |       | —           |       | (668             | )          |
|                                                    |       |           |       |           |       |                 |       |             |       |             |       |
| Other income,  net                                      |       | (452           | )          | (502           | )          | (332                 | )          | —           |       | (1,286           | )          |
|                                                    |       |           |       |           |       |                 |       |             |       |             |       |
| **Income  (loss) before income taxes**                  | ** ** | **3,190**      | ** ** | **(71,203**    | **)**      | **(1,161**           | **)**      | **—**       | ** ** | **(69,174**      | **)**      |
|                                                    |       |           |       |           |       |                 |       |             |       |             |       |
| Provision  (benefit) for income taxes                   |       | 976            |       | (21,822        | )          | (424                 | )          | —           |       | (21,270          | )          |
|                                                    |       |           |       |           |       |                 |       |             |       |             |       |
| **Net  income (loss)**                                  | ** ** | **$**          | **2,214**  | ** **     | **$**      | **(49,381**          | **)**      | **$**            | **(737**   | **)**            | **$**      | **—** | ** ** | **$** | **(47,904** | **)** |

 

94

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**LINENSHOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

**(PredecessorEntity)**

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**For theFifty-two Week Period Ended December 31, 2005**
| **(In  Thousands)** |
|---------------------|

 
| ** **                                              | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** **  | **Consolidated** | ** ** |
|---------------------------------------------------------|------------|----------------|------------|----------------|------------|----------------------|------------|------------------|-------------|------------------|------------|
| ** **                                              | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** **  | ** **       | ** ** |
| **Net  sales**                                          | ** ** | **$**          | **73,754** | ** **     | **$**      | **2,461,747**        | ** ** | **$**            | **159,241** | ** **       | **$**      | **—** | ** ** | **$** | **2,694,742** | ** ** |
| Cost of sales,  including buying and distribution costs |       | 42,647         |       | 1,467,510      |       | 85,237               |       | —           |        | 1,595,394        |       |
|                                                    |       |           |       |           |       |                 |       |             |        |             |       |
| **Gross  profit**                                       | ** ** | **31,107**     | ** ** | **994,237**    | ** ** | **74,004**           | ** ** | **—**       | ** **  | **1,099,348**    | ** ** |
| ** **                                              | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** **  | ** **       | ** ** |
| Selling, general  and administrative expenses           |       | 19,754         |       | 951,115        |       | 65,730               |       | —           |        | 1,036,599        |       |
| Impairment of  property and equipment                   |       | —         |       | 4,059          |       | —               |       | —           |        | 4,059            |       |
|                                                    |       |           |       |           |       |                 |       |             |        |             |       |
| **Operating  profit**                                   | ** ** | **11,353**     | ** ** | **39,063**     | ** ** | **8,274**            | ** ** | **—**       | ** **  | **58,690**       | ** ** |
|                                                    |       |           |       |           |       |                 |       |             |        |             |       |
| Interest income                                         |       | (14,301        | )          | (11            | )          | (157                 | )          | 13,575           |        | (894             | )          |
| Interest expense                                        |       | 1,944          |       | 15,282         |       | 1,209                |       | (13,575          | )           | 4,860            |       |
|                                                    |       |           |       |           |       |                 |       |             |        |             |       |
| Interest  (income) expense, net                         |       | (12,357        | )          | 15,271         |       | 1,052                |       | —           |        | 3,966            |       |
|                                                    |       |           |       |           |       |                 |       |             |        |             |       |
| Other income,  net                                      |       | (791           | )          | (1,063         | )          | (1,283               | )          | —           |        | (3,137           | )          |
|                                                    |       |           |       |           |       |                 |       |             |        |             |       |
| **Income  before income taxes**                         | ** ** | **24,501**     | ** ** | **24,855**     | ** ** | **8,505**            | ** ** | **—**       | ** **  | **57,861**       | ** ** |
|                                                    |       |           |       |           |       |                 |       |             |        |             |       |
| Provision for  income taxes                             |       | 9,834          |       | 9,977          |       | 2,068                |       | —           |        | 21,879           |       |
|                                                    |       |           |       |           |       |                 |       |             |        |             |       |
| **Net  income**                                         | ** ** | **$**          | **14,667** | ** **     | **$**      | **14,878**           | ** ** | **$**            | **6,437**   | ** **       | **$**      | **—** | ** ** | **$** | **35,982** | ** ** |

 

95

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**LINENSHOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

** **

**SUPPLEMENTALCONDENSED CONSOLIDATING BALANCE SHEET**

**December 29,2007**
| **(In  Thousands)** |
|---------------------|

 
| ** **                                                 | ** ** | **Parent**  | ** **  | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|-------------|-------------|----------------|------------|----------------|------------|----------------------|---------------|------------------|------------|------------------|------------|
| **Assets**                                                 | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| Current assets:                                            | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| Cash and cash  equivalents                                 |       | $           | —      |           | $          | (954           | )          | $                    | 13,009        |             | $          | 4,016            |       | $ | — |   | $ | 16,071 |   |
| Accounts  receivable                                       |       | —      |        | 556            |       | 29,647         |       | 3,986                |          | —           |       | 34,189           |       |
| Inventories                                                |       | —      |        | 12,770         |       | 713,946        |       | 68,655               |          | —           |       | 795,371          |       |
| Prepaid expenses  and other current assets                 |       | —      |        | 260            |       | 13,917         |       | 692                  |          | —           |       | 14,869           |       |
| Current deferred  income taxes                             |       | —      |        | —         |       | —         |       | 469                  |          | —           |       | 469              |       |
| **Total  current assets**                                  | ** ** | **—**  | ** **  | **12,632**     | ** ** | **770,519**    | ** ** | **77,818**           | ** **    | **—**       | ** ** | **860,969**      | ** ** |
|                                                       |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| Property and  equipment, net                               |       | —      |        | 5,336          |       | 373,441        |       | 46,759               |          | —           |       | 425,536          |       |
| Identifiable  intangible assets, net                       |       | —      |        | 586            |       | 140,671        |       | 1,497                |          | —           |       | 142,754          |       |
| Goodwill                                                   |       | —      |        | 11,254         |       | 241,906        |       | 19,260               |          | —           |       | 272,420          |       |
| Intercompany  receivables                                  |       | —      |        | —         |       | 576,372        |       | 38,078               |          | (614,450         | )          | —           |       |
| Intercompany  notes receivable                             |       | —      |        | 1,181,428      |       | —         |       | 27,765               |          | (1,209,193       | )          | —           |       |
| Investment in  subsidiaries                                |       | 322,784     |        | 588,866        |       | —         |       | —               |          | (911,650         | )          | —           |       |
| Deferred  financing costs and other noncurrent assets, net |       | —      |        | 38,002         |       | 650            |       | 56                   |          | —           |       | 38,708           |       |
|                                                       |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| **Total  assets**                                          | ** ** | **$**       | **322,784** | ** **     | **$**      | **1,838,104**  | ** ** | **$**                | **2,103,559** | ** **       | **$**      | **211,233**      | ** ** | **$** | **(2,735,293** | **)** | **$** | **1,740,387** | ** ** |
|                                                       |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| **Liabilities  and Shareholders’ Equity**             |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| ** **                                                 |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| Current  liabilities:                                      |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| Accounts payable                                           |       | $           | —      |           | $          | —         |       | $                    | 135,754       |             | $          | 43,272           |       | $ | — |   | $ | 179,026 |   |
| Accrued expenses  and other current liabilities            |       | —      |        | 44,183         |       | 208,189        |       | 15,181               |          | —           |       | 267,553          |       |
| **Total  current liabilities**                             | ** ** | **—**  | ** **  | **44,183**     | ** ** | **343,943**    | ** ** | **58,453**           | ** **    | **—**       | ** ** | **446,579**      | ** ** |
|                                                       |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| Intercompany  payable                                      |       | —      |        | 614,450        |       | —         |       | —               |          | (614,450         | )          | —           |       |
| Intercompany  notes payable                                |       | —      |        | —         |       | 1,153,800      |       | 55,393               |          | (1,209,193       | )          | —           |       |
| Senior secured  notes                                      |       | —      |        | 650,000        |       | —         |       | —               |          | —           |       | 650,000          |       |
| Asset-based  credit facility                               |       | —      |        | 205,859        |       | —         |       | —               |          | —           |       | 205,859          |       |
| Noncurrent  deferred income taxes                          |       | —      |        | —         |       | 47,838         |       | 4,386                |          | —           |       | 52,224           |       |
| Other long-term  liabilities                               |       | —      |        | 828            |       | 56,687         |       | 5,426                |          | —           |       | 62,941           |       |
|                                                       |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| **Total  liabilities**                                     | ** ** | **—**  | ** **  | **1,515,320**  | ** ** | **1,602,268**  | ** ** | **123,658**          | ** **    | **(1,823,643**   | **)**      | **1,417,603**    | ** ** |
|                                                       |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| **Total  shareholders’ equity**                       | ** ** | **322,784** | ** **  | **322,784**    | ** ** | **501,291**    | ** ** | **87,575**           | ** **    | **(911,650**     | **)**      | **322,784**      | ** ** |
|                                                       |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| **Total  liabilities and shareholders’ equity**       | ** ** | **$**       | **322,784** | ** **     | **$**      | **1,838,104**  | ** ** | **$**                | **2,103,559** | ** **       | **$**      | **211,233**      | ** ** | **$** | **(2,735,293** | **)** | **$** | **1,740,387** | ** ** |

 

96

----

 

**LINENSHOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

** **

**SUPPLEMENTALCONDENSED CONSOLIDATING BALANCE SHEET**

**December 30,2006**
| **(In  Thousands)** |
|---------------------|

 
| ** **                                                 | ** ** | **Parent**  | ** **  | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|-------------|-------------|----------------|------------|----------------|------------|----------------------|---------------|------------------|------------|------------------|------------|
| **Assets**                                                 | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| Current assets:                                            | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| Cash and cash  equivalents                                 |       | $           | —      |           | $          | 1,087          |       | $                    | 10,218        |             | $          | 1,221            |       | $ | — |   | $ | 12,526 |   |
| Accounts  receivable                                       |       | —      |        | 435            |       | 33,083         |       | 3,545                |          | —           |       | 37,063           |       |
| Inventories                                                |       | —      |        | 14,822         |       | 728,503        |       | 49,677               |          | —           |       | 793,002          |       |
| Prepaid expenses  and other current assets                 |       | —      |        | 141            |       | 14,662         |       | 505                  |          | —           |       | 15,308           |       |
| Current deferred  income taxes                             |       | —      |        | 16,561         |       | —         |       | 254                  |          | —           |       | 16,815           |       |
| **Total  current assets**                                  | ** ** | **—**  | ** **  | **33,046**     | ** ** | **786,466**    | ** ** | **55,202**           | ** **    | **—**       | ** ** | **874,714**      | ** ** |
|                                                       |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| Property and  equipment, net                               |       | —      |        | 10,154         |       | 477,390        |       | 43,285               |          | —           |       | 530,829          |       |
| Identifiable  intangible assets, net                       |       | —      |        | 731            |       | 147,650        |       | 1,663                |          | —           |       | 150,044          |       |
| Goodwill                                                   |       | —      |        | 7,357          |       | 244,485        |       | 15,988               |          | —           |       | 267,830          |       |
| Intercompany  receivables                                  |       | —      |        | —         |       | 774,784        |       | 22,986               |          | (797,770         | )          | —           |       |
| Intercompany  notes receivable                             |       | —      |        | 1,176,998      |       | —         |       | 23,314               |          | (1,200,312       | )          | —           |       |
| Investment in  subsidiaries                                |       | 544,742     |        | 802,241        |       | —         |       | —               |          | (1,346,983       | )          | —           |       |
| Deferred  financing costs and other noncurrent assets, net |       | —      |        | 33,813         |       | 687            |       | 17                   |          | —           |       | 34,517           |       |
|                                                       |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| **Total  assets**                                          | ** ** | **$**       | **544,742** | ** **     | **$**      | **2,064,340**  | ** ** | **$**                | **2,431,462** | ** **       | **$**      | **162,455**      | ** ** | **$** | **(3,345,065** | **)** | **$** | **1,857,934** | ** ** |
|                                                       |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| **Liabilities  and Shareholders’ Equity**             |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| ** **                                                 |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| Current  liabilities:                                      |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| Accounts payable                                           |       | $           | —      |           | $          | —         |       | $                    | 181,159       |             | $          | 23,601           |       | $ | — |   | $ | 204,760 |   |
| Accrued expenses  and other current liabilities            |       | —      |        | 38,466         |       | 186,994        |       | 16,451               |          | —           |       | 241,911          |       |
| **Total  current liabilities**                             | ** ** | **—**  | ** **  | **38,466**     | ** ** | **368,153**    | ** ** | **40,052**           | ** **    | **—**       | ** ** | **446,671**      | ** ** |
|                                                       |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| Intercompany  payable                                      |       | —      |        | 797,770        |       | —         |       | —               |          | (797,770         | )          | —           |       |
| Intercompany  notes payable                                |       | —      |        | —         |       | 1,153,800      |       | 46,513               |          | (1,200,313       | )          | —           |       |
| Senior secured  notes and other long-term debt             |       | —      |        | 650,000        |       | 2,076          |       | —               |          | —           |       | 652,076          |       |
| Asset-based  credit facility                               |       | —      |        | 37,800         |       | —         |       | —               |          | —           |       | 37,800           |       |
| Noncurrent  deferred income taxes                          |       | —      |        | (5,343         | )          | 125,894        |       | 5,426                |          | —           |       | 125,977          |       |
| Other long-term  liabilities                               |       | —      |        | 905            |       | 46,953         |       | 2,809                |          | —           |       | 50,667           |       |
|                                                       |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| **Total  liabilities**                                     | ** ** | **—**  | ** **  | **1,519,598**  | ** ** | **1,696,876**  | ** ** | **94,800**           | ** **    | **(1,998,083**   | **)**      | **1,313,191**    | ** ** |
|                                                       |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| **Total  shareholders’ equity**                       | ** ** | **544,742** | ** **  | **544,742**    | ** ** | **734,586**    | ** ** | **67,655**           | ** **    | **(1,346,982**   | **)**      | **544,743**      | ** ** |
|                                                       |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| **Total  liabilities and shareholders’ equity**       | ** ** | **$**       | **544,742** | ** **     | **$**      | **2,064,340**  | ** ** | **$**                | **2,431,462** | ** **       | **$**      | **162,455**      | ** ** | **$** | **(3,345,065** | **)** | **$** | **1,857,934** | ** ** |

 

97

----

 

**LINENSHOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

**(SuccessorEntity)**

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**For theFifty-two Week Period Ended December 29, 2007**

**(In Thousands)**

 

| ** **                                                                                           | ** ** | **Parent** | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                           | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Cash  inflows (outflows) from operating activities:**                                              | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net (loss) income                                                                                    |       | $          | —     |           | $          | (16,068        | )          | $                    | (233,297   | )                | $          | 7,274            |       | $ | — |   | $ | (242,091 | ) |
| Adjustments to  reconcile net (loss) income to net cash provided by (used in) operating  activities: |       |       |       |           |       |           |       |                 |       |             |       |             |       |
| Depreciation and amortization                                                                        |       | —     |       | 2,525          |       | 117,890        |       | 9,886                |       | —           |       | 130,301          |       |
| Deferred income taxes                                                                                |       | —     |       | 17,778         |       | (82,173        | )          | (2,123               | )          | —           |       | (66,518          | )          |
| Stock-based compensation                                                                             |       | —     |       | 3,186          |       | 3              |       | —               |       | —           |       | 3,189            |       |
| Writeoff of deferred financing costs                                                                 |       | —     |       | 6,986          |       | —         |       | —               |       | —           |       | 6,986            |       |
| Amortization of  deferred financing charges                                                          |       | —     |       | 7,441          |       | —         |       | —               |       | —           |       | 7,441            |       |
| Loss on sales  and disposals of property and equipment                                               |       | —     |       | 291            |       | 247            |       | 1                    |       | —           |       | 539              |       |
| Impairment of property and equipment                                                                 |       | —     |       | —         |       | 16,779         |       | —               |       | —           |       | 16,779           |       |
| Impairment of  identifiable intangible asset                                                         |       | —     |       | —         |       | 100            |       | —               |       | —           |       | 100              |       |
| (Increase) decrease in assets:                                                                       |       |       |       |           |       |           |       |                 |       |             |       |             |       |
| Accounts receivable                                                                                  |       | —     |       | (121           | )          | 3,437          |       | 223                  |       | —           |       | 3,539            |       |
| Inventories                                                                                          |       | —     |       | 2,052          |       | 14,556         |       | (8,993               | )          | —           |       | 7,615            |       |
| Prepaid expenses and other current assets                                                            |       | —     |       | (119           | )          | 744            |       | 4,865                |       | —           |       | 5,490            |       |
| Identifiable  intangible assets and other noncurrent assets                                          |       | —     |       | —         |       | 37             |       | (17                  | )          | —           |       | 20               |       |
| Increase (decrease) in liabilities:                                                                  |       |       |       |           |       |           |       |                 |       |             |       |             |       |
| Accounts payable                                                                                     |       | —     |       | —         |       | (45,405        | )          | 14,370               |       | —           |       | (31,035          | )          |
| Accrued expenses and other liabilities                                                               |       | —     |       | 2,937          |       | 35,593         |       | (4,239               | )          | —           |       | 34,291           |       |
| **Net  cash provided by (used in) operating activities**                                             | ** ** | **—** | ** ** | **26,888**     | ** ** | **(171,489**   | **)**      | **21,247**           | ** ** | **—**       | ** ** | **(123,354**     | **)**      |
| **Cash  inflows (outflows) from investing activities:**                                              | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Additions to property and equipment                                                                  |       | —     |       | (1,984         | )          | (30,139        | )          | (4,899               | )          | —           |       | (37,022          | )          |
| Proceeds from  sales of property and equipment                                                       |       | —     |       | 3,300          |       | 2,100          |       | —               |       | —           |       | 5,400            |       |
| **Net  cash provided by (used in) investing activities**                                             | ** ** | **—** | ** ** | **1,316**      | ** ** | **(28,039**    | **)**      | **(4,899**           | **)**      | **—**       | ** ** | **(31,622**      | **)**      |
|                                                                                                      |            |            |            |                |            |                |            |                      |            |                  |            |                  |            |  |  |  |  |  |  |

 

98

----

 

**LINENSHOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

**(SuccessorEntity)**

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**For theFifty-two Week Period Ended December 29, 2007**

**(In Thousands)**

 
| ** **                                                         | ** ** | **Parent** | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
| ** **                                                         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Cash  inflows (outflows) from financing activities:**            | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Financing and  direct acquisition costs                            |       | —     |       | (18,455        | )          | 9,591          |       | 694                  |       | —           |       | (8,170           | )          |
| Intercompany  movements                                            |       | —     |       | (179,849       | )          | 194,804        |       | (14,955              | )          | —           |       | —           |       |
| Change in  borrowings under asset-based revolving credit facility: |       |       |       |           |       |           |       |                 |       |             |       |             |       |
| Proceeds from  borrowings                                          |       | —     |       | 1,422,558      |       | —         |       | —               |       | —           |       | 1,422,558        |       |
| Repayments                                                         |       | —     |       | (1,254,499     | )          | —         |       | —               |       | —           |       | (1,254,499       | )          |
| Payments on  mortgage note                                         |       | —     |       | —         |       | (2,076         | )          | —               |       | —           |       | (2,076           | )          |
| **Net  cash (used in) provided by financing activities**           | ** ** | **—** | ** ** | **(30,245**    | **)**      | **202,319**    | ** ** | **(14,261**          | **)**      | **—**       | ** ** | **157,813**      | ** ** |
| **Effect  of exchange rate changes on cash and cash equivalents**  | ** ** | **—** | ** ** | **—**     | ** ** | **—**     | ** ** | **708**              | ** ** | **—**       | ** ** | **708**          | ** ** |
| Net (decrease)  increase in cash and cash equivalents              |       | —     |       | (2,041         | )          | 2,791          |       | 2,795                |       | —           |       | 3,545            |       |
| Cash and cash  equivalents at beginning of period                  |       | —     |       | 1,087          |       | 10,218         |       | 1,221                |       | —           |       | 12,526           |       |
| **Cash  and cash equivalents at end of period**                    | ** ** | **$**      | **—** | ** **     | **$**      | **(954**       | **)**      | **$**                | **13,009** | ** **       | **$**      | **4,016**        | ** ** | **$** | **—** | ** ** | **$** | **16,071** | ** ** |
|                                                                    |            |            |            |                |            |                |            |                      |            |                  |            |                  |            |  |  |  |  |  |  |

 

99

----

 

**LINENSHOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

**(SuccessorEntity)**

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**For thePeriod February 14, 2006 - December 30, 2006**

**(In Thousands)**

 
| ** **                                                                                           | ** ** | **Parent**   | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------|------------|----------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                           | ** ** | ** **   | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Cash  inflows (outflows) from operating activities:**                                              | ** ** | ** **   | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net income  (loss)                                                                                   |       | $            | —     |           | $          | 11,043         |       | $                    | (129,907   | )                | $          | 12,331           |       | $ | — |   | $ | (106,533 | ) |
| Adjustments to  reconcile net income (loss) to net cash (used in) provided by operating  activities: |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| Depreciation and  amortization                                                                       |       | —       |       | 1,985          |       | 105,406        |       | 7,118                |       | —           |       | 114,509          |       |
| Deferred income  taxes                                                                               |       | —       |       | (28,623        | )          | (43,094        | )          | (1,924               | )          | —           |       | (73,641          | )          |
| Stock-based  compensation                                                                            |       | —       |       | 4,263          |       | —         |       | —               |       | —           |       | 4,263            |       |
| Amortization of  deferred financing charges                                                          |       | —       |       | 3,930          |       | —         |       | —               |       | —           |       | 3,930            |       |
| Loss on sale and  disposals of property and equipment                                                |       | —       |       | —         |       | 671            |       | —               |       | —           |       | 671              |       |
| Impairment of  property and equipment                                                                |       | —       |       | —         |       | 27,992         |       | —               |       | —           |       | 27,992           |       |
| Impairment of  identifiable intangible asset                                                         |       | —       |       | —         |       | 3,119          |       | —               |       | —           |       | 3,119            |       |
| (Increase)  decrease in assets, net of effect of acquisition:                                        |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| Accounts  receivable                                                                                 |       | —       |       | 213            |       | 9,257          |       | (743                 | )          | —           |       | 8,727            |       |
| Inventories                                                                                          |       | —       |       | (403           | )          | 27,833         |       | (1,297               | )          | —           |       | 26,133           |       |
| Prepaid expenses  and other current assets                                                           |       | —       |       | 193            |       | 13,302         |       | (13                  | )          | —           |       | 13,482           |       |
| Identifiable  intangible assets and other noncurrent assets                                          |       | —       |       | (9             | )          | 150            |       | (17                  | )          | —           |       | 124              |       |
| Increase  (decrease) in liabilities, net of effect of acquisition:                                   |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| Accounts payable                                                                                     |       | —       |       | —         |       | (36,523        | )          | 9,602                |       | —           |       | (26,921          | )          |
| Accrued expenses  and other liabilities                                                              |       | —       |       | (57,046        | )          | 54,951         |       | 8,442                |       | —           |       | 6,347            |       |
| **Net  cash (used in) provided by operating activities**                                             | ** ** | **—**   | ** ** | **(64,454**    | **)**      | **33,157**     | ** ** | **33,499**           | ** ** | **—**       | ** ** | **2,202**        | ** ** |
| **Cash  inflows (outflows) from investing activities:**                                              | ** ** | ** **   | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Acquisition of  the Predecessor Entity, net of cash acquired                                         |       | —       |       | (1,220,465     | )          | 7,632          |       | 7,331                |       | —           |       | (1,205,502       | )          |
| Investment in  Linens ‘n Things, Inc.                                                      |       | (764,136     | )          | —         |       | —         |       | —               |       | 764,136          |       | —           |       |
| Additions to  property and equipment                                                                 |       | —       |       | (3,138         | )          | (55,342        | )          | (7,800               | )          | —           |       | (66,280          | )          |
| Proceeds from  sale of property and equipment                                                        |       | —       |       | —         |       | 3,100          |       | —               |       | —           |       | 3,100            |       |
| Proceeds from  return of building purchase option deposit                                            |       | —       |       | —         |       | 1,817          |       | —               |       | —           |       | 1,817            |       |
| Decrease  (increase) to investment in subsidiary                                                     |       | 113,486      |       | (1,055         | )          | —         |       | —               |       | (112,431         | )          | —           |       |
|                                                                                                 |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| **Net  cash used in investing activities**                                                           | ** ** | **(650,650** | **)**      | **(1,224,658** | **)**      | **(42,793**    | **)**      | **(469**             | **)**      | **651,705**      | ** ** | **(1,266,865**   | **)**      |
|                                                                                                      |            |              |            |                |            |                |            |                      |            |                  |            |                  |            |  |  |  |  |  |  |

 

100

----

 

**LINENSHOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

**(SuccessorEntity)**

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**For thePeriod February 14, 2006 - December 30, 2006**

**(In Thousands)**

 
| ** **                                                         | ** ** | **Parent**  | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|-------------|------------|----------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
| ** **                                                         | ** ** | ** **  | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Cash  inflows (outflows) from financing activities:**            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Issuance of  common stock to Linens Investors LLC and others       |       | 650,650     |       | —         |       | —         |       | 1,055                |       | (1,055           | )          | 650,650          |       |
| Investment from  Parent                                            |       | —      |       | 650,650        |       | —         |       | —               |       | (650,650         | )          | —           |       |
| Issuance of  floating rate notes                                   |       | —      |       | 650,000        |       | —         |       | —               |       | —           |       | 650,000          |       |
| Financing and  direct acquisition costs                            |       | —      |       | (60,447        | )          | —         |       | —               |       | —           |       | (60,447          | )          |
| Premium paid for  derivative financial instrument                  |       | —      |       | (700           | )          | —         |       | —               |       | —           |       | (700             | )          |
| Intercompany  movements                                            |       | —      |       | 12,896         |       | 19,908         |       | (32,804              | )          | —           |       | —           |       |
| Change in  borrowings under asset-based revolving credit facility: |       |        |       |           |       |           |       |                 |       |             |       |             |       |
| Proceeds from  borrowings                                          |       | —      |       | 940,271        |       | —         |       | 25,057               |       | —           |       | 965,328          |       |
| Repayments                                                         |       | —      |       | (902,471       | )          | —         |       | (25,057              | )          | —           |       | (927,528         | )          |
| Payments on  mortgage note                                         |       | —      |       | —         |       | (54            | )          | —               |       | —           |       | (54              | )          |
| **Net  cash provided by (used in) financing activities**           | ** ** | **650,650** | ** ** | **1,290,199**  | ** ** | **19,854**     | ** ** | **(31,749**          | **)**      | **(651,705**     | **)**      | **1,277,249**    | ** ** |
| **Effect  of exchange rate changes on cash and cash equivalents**  | ** ** | **—**  | ** ** | **—**     | ** ** | **—**     | ** ** | **(60**              | **)**      | **—**       | ** ** | **(60**          | **)**      |
|                                                               |       |        |       |           |       |           |       |                 |       |             |       |             |       |
| Net increase in  cash and cash equivalents                         |       | —      |       | 1,087          |       | 10,218         |       | 1,221                |       | —           |       | 12,526           |       |
| Cash and cash  equivalents at beginning of period                  |       | —      |       | —         |       | —         |       | —               |       | —           |       | —           |       |
| **Cash  and cash equivalents at end of period**                    | ** ** | **$**       | **—** | ** **     | **$**      | **1,087**      | ** ** | **$**                | **10,218** | ** **       | **$**      | **1,221**        | ** ** | **$** | **—** | ** ** | **$** | **12,526** | ** ** |
|                                                                    |            |             |            |                |            |                |            |                      |            |                  |            |                  |            |  |  |  |  |  |  |

 

101

----

 

**LINENSHOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

**(PredecessorEntity)**

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**For thePeriod January 1, 2006 - February 13, 2006**

**(In Thousands)**

 
| ** **                                                                            | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
|                                                                                  |       |           |       |           |       |                 |       |             |       |             |       |
| **Cash  inflows (outflows) from operating activities:**                               | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net income  (loss)                                                                    |       | $              | 2,214      |           | $          | (49,381              | )          | $                | (737       | )                | $          | — |   | $ | (47,904 | ) |
| Adjustments to  reconcile net income (loss) to net cash used in operating activities: |       |           |       |           |       |                 |       |             |       |             |       |
| Depreciation and  amortization                                                        |       | 203            |       | 11,662         |       | 777                  |       | —           |       | 12,642           |       |
| Deferred income  taxes                                                                |       | (730           | )          | (6,108         | )          | 113                  |       | —           |       | (6,725           | )          |
| Stock-based  compensation                                                             |       | 12,484         |       | —         |       | —               |       | —           |       | 12,484           |       |
| Amortization of  deferred financing charges                                           |       | —         |       | 43             |       | —               |       | —           |       | 43               |       |
| (Increase)  decrease in assets:                                                       |       |           |       |           |       |                 |       |             |       |             |       |
| Accounts  receivable                                                                  |       | (288           | )          | (2,582         | )          | 630                  |       | —           |       | (2,240           | )          |
| Inventories                                                                           |       | 687            |       | (30,481        | )          | (2,092               | )          | —           |       | (31,886          | )          |
| Prepaid expenses  and other current assets                                            |       | (250           | )          | (12,595        | )          | 692                  |       | —           |       | (12,153          | )          |
| Identifiable  intangible assets and other noncurrent assets                           |       | 11             |       | 9,515          |       | 54                   |       | —           |       | 9,580            |       |
| Increase  (decrease) in liabilities:                                                  |       |           |       |           |       |                 |       |             |       |             |       |
| Accounts payable                                                                      |       | —         |       | 13,064         |       | (1,054               | )          | —           |       | 12,010           |       |
| Accrued expenses  and other liabilities                                               |       | (27,564        | )          | 24,083         |       | (4,326               | )          | —           |       | (7,807           | )          |
|                                                                                  |       |           |       |           |       |                 |       |             |       |             |       |
| **Net  cash used in operating activities**                                            | ** ** | **(13,233**    | **)**      | **(42,780**    | **)**      | **(5,943**           | **)**      | **—**       | ** ** | **(61,956**      | **)**      |
| ** **                                                                            | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Cash  outflows from investing activities:**                                         | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Additions to  property and equipment                                                  |       | (107           | )          | (8,533         | )          | (2,316               | )          | —           |       | (10,956          | )          |
|                                                                                  |       |           |       |           |       |                 |       |             |       |             |       |
| **Net  cash used in investing activities**                                            | ** ** | **(107**       | **)**      | **(8,533**     | **)**      | **(2,316**           | **)**      | **—**       | ** ** | **(10,956**      | **)**      |
|                                                                                       |            |                |            |                |            |                      |            |                  |            |                  |            |  |  |  |  |  |

 

102

----

 

**LINENSHOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

**(PredecessorEntity)**

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**For thePeriod January 1, 2006 - February 13, 2006**

**(In Thousands)**

 
| ** **                                                                | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Cash  inflows (outflows) from financing activities:**                   | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Intercompany  movements                                                   |       | (52,158        | )          | 49,564         |       | 2,594                |       | —           |       | —           |       |
| Federal tax  benefit from common stock issued under stock incentive plans |       | 4,298          |       | —         |       | —               |       | —           |       | 4,298            |       |
| Payments on  mortgage note                                                |       | —         |       | (10            | )          | —               |       | —           |       | (10              | )          |
| Decrease in  treasury stock                                               |       | —         |       | 674            |       | —               |       | —           |       | 674              |       |
|                                                                      |       |           |       |           |       |                 |       |             |       |             |       |
| **Net  cash (used in) provided by financing activities**                  | ** ** | **(47,860**    | **)**      | **50,228**     | ** ** | **2,594**            | ** ** | **—**       | ** ** | **4,962**        | ** ** |
| ** **                                                                | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Effect  of exchange rate changes on cash and cash equivalents**         | ** ** | **—**     | ** ** | **—**     | ** ** | **125**              | ** ** | **—**       | ** ** | **125**          | ** ** |
|                                                                      |       |           |       |           |       |                 |       |             |       |             |       |
| Net decrease in  cash and cash equivalents                                |       | (61,200        | )          | (1,085         | )          | (5,540               | )          | —           |       | (67,825          | )          |
| Cash and cash  equivalents at beginning of period                         |       | 136,569        |       | 8,718          |       | 12,871               |       | —           |       | 158,158          |       |
|                                                                      |       |           |       |           |       |                 |       |             |       |             |       |
| **Cash  and cash equivalents at end of period**                           | ** ** | **$**          | **75,369** | ** **     | **$**      | **7,633**            | ** ** | **$**            | **7,331**  | ** **       | **$**      | **—** | ** ** | **$** | **90,333** | ** ** |
|                                                                           |            |                |            |                |            |                      |            |                  |            |                  |            |  |  |  |  |  |

 

103

----

 

**LINENSHOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

**(PredecessorEntity)**

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**For theFifty-two Week Period Ended December 31, 2005**

**(In Thousands)**

 
| ** **                                                                         | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
|                                                                               |       |           |       |           |       |                 |       |             |       |             |       |
| **Cash  inflows (outflows) from operating activities:**                            | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net income                                                                         |       | $              | 14,667     |           | $          | 14,878               |       | $                | 6,437      |             | $          | — |   | $ | 35,982 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |           |       |           |       |                 |       |             |       |             |       |
| Depreciation and  amortization                                                     |       | 1,453          |       | 83,749         |       | 5,068                |       | —           |       | 90,270           |       |
| Deferred income  taxes                                                             |       | 2,162          |       | (12,810        | )          | (617                 | )          | —           |       | (11,265          | )          |
| Stock-based  compensation                                                          |       | 185            |       | 1,058          |       | —               |       | —           |       | 1,243            |       |
| Amortization of  deferred financing charges                                        |       | —         |       | 154            |       | —               |       | —           |       | 154              |       |
| Loss on  disposals of property and equipment                                       |       | 35             |       | 1,360          |       | 38                   |       | —           |       | 1,433            |       |
| Impairment of  property and equipment                                              |       | —         |       | 4,059          |       | —               |       | —           |       | 4,059            |       |
| (Increase)  decrease in assets:                                                    |       |           |       |           |       |                 |       |             |       |             |       |
| Accounts  receivable                                                               |       | 396            |       | (16,268        | )          | (1,832               | )          | —           |       | (17,704          | )          |
| Inventories                                                                        |       | (605           | )          | (68,851        | )          | (1,201               | )          | —           |       | (70,657          | )          |
| Prepaid expenses  and other current assets                                         |       | 1              |       | 21,461         |       | (918                 | )          | —           |       | 20,544           |       |
| Identifiable  intangible assets and other noncurrent assets                        |       | 25             |       | (1,251         | )          | (134                 | )          | —           |       | (1,360           | )          |
| Increase  (decrease) in liabilities:                                               |       |           |       |           |       |                 |       |             |       |             |       |
| Accounts payable                                                                   |       | (2             | )          | 17,563         |       | (2,040               | )          | (834             | )          | 14,687           |       |
| Accrued expenses  and other liabilities                                            |       | 11,964         |       | (11,046        | )          | 9,959                |       | 834              |       | 11,711           |       |
|                                                                               |       |           |       |           |       |                 |       |             |       |             |       |
| **Net  cash provided by operating activities**                                     | ** ** | **30,281**     | ** ** | **34,056**     | ** ** | **14,760**           | ** ** | **—**       | ** ** | **79,097**       | ** ** |
| ** **                                                                         | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Cash  outflows from investing activities:**                                      | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Additions to  property and equipment                                               |       | (9,663         | )          | (107,860       | )          | (11,389              | )          | —           |       | (128,912         | )          |
| Increase to  investment in subsidiary                                              |       | (919           | )          | —         |       | —               |       | 919              |       | —           |       |
|                                                                               |       |           |       |           |       |                 |       |             |       |             |       |
| **Net  cash used in investing activities**                                         | ** ** | **(10,582**    | **)**      | **(107,860**   | **)**      | **(11,389**          | **)**      | **919**          | ** ** | **(128,912**     | **)**      |
|                                                                                    |            |                |            |                |            |                      |            |                  |            |                  |            |  |  |  |  |  |

 

104

----

 

**LINENSHOLDING CO. AND SUBSIDIARIES (AND PREDECESSOR)**

**(PredecessorEntity)**

**SUPPLEMENTALCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**For theFifty-two Week Period Ended December 31, 2005**

**(In Thousands)**

 
| ** **                                                                | ** ** | **Co-Issuers** | ** **  | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------------|------------|----------------|-------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                | ** ** | ** **     | ** **  | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Cash  inflows (outflows) from financing activities:**                   | ** ** | ** **     | ** **  | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Intercompany movements                                                    |       | (62,042        | )           | 69,536         |       | (7,494               | )          | —           |       | —           |       |
| Issuance of  common stock under stock incentive plans                     |       | 3,614          |        | —         |       | 919                  |       | (919             | )          | 3,614            |       |
| Federal tax  benefit from common stock issued under stock incentive plans |       | 492            |        | —         |       | —               |       | —           |       | 492              |       |
| Change in  borrowings under senior revolving credit facility:             |       |           |        |           |       |                 |       |             |       |             |       |
| Proceeds from  borrowings                                                 |       | 435,049        |        | —         |       | —               |       | —           |       | 435,049          |       |
| Repayments                                                                |       | (435,049       | )           | —         |       | —               |       | —           |       | (435,049         | )          |
| Payments on  mortgage note                                                |       | —         |        | (58            | )          | —               |       | —           |       | (58              | )          |
| Increase in  treasury stock                                               |       | (167           | )           | (78            | )          | —               |       | —           |       | (245             | )          |
|                                                                      |       |           |        |           |       |                 |       |             |       |             |       |
| **Net  cash (used in) provided by financing activities**                  | ** ** | **(58,103**    | **)**       | **69,400**     | ** ** | **(6,575**           | **)**      | **(919**         | **)**      | **3,803**        | ** ** |
| ** **                                                                | ** ** | ** **     | ** **  | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Effect  of exchange rate changes on cash and cash equivalents**         | ** ** | **—**     | ** **  | **—**     | ** ** | **161**              | ** ** | **—**       | ** ** | **161**          | ** ** |
|                                                                      |       |           |        |           |       |                 |       |             |       |             |       |
| Net decrease in  cash and cash equivalents                                |       | (38,404        | )           | (4,404         | )          | (3,043               | )          | —           |       | (45,851          | )          |
| Cash and cash  equivalents at beginning of period                         |       | 174,973        |        | 13,122         |       | 15,914               |       | —           |       | 204,009          |       |
| ** **                                                                | ** ** | ** **     | ** **  | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Cash  and cash equivalents at end of period**                           | ** ** | **$**          | **136,569** | ** **     | **$**      | **8,718**            | ** ** | **$**            | **12,871** | ** **       | **$**      | **—** | ** ** | **$** | **158,158** | ** ** |
|                                                                           |            |                |             |                |            |                      |            |                  |            |                  |            |  |  |  |  |  |

 

105

----

 

**Item9.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure**

** **

On April 12, 2007the Company’s previous Independent Registered Public Accounting Firm, KPMG LLP,was dismissed as its principal accountant. Concurrently, the Company’s current Independent Registered PublicAccounting Firm, Ernst & Young LLP, was engaged as its principalaccountant to audit the Company’s financial statements.

 

The information requiredby this Item is further set forth in a Current Report on Form 8-K filedwith the SEC by the Company on April 18, 2007.

 

**Item9A.  Controls and Procedures**

** **

***Evaluation ofDisclosure Controls and Procedures***

** **

The Company’s management,including its Chief Executive Officer and its Chief Financial Officer,performed an evaluation of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended) as of December 29,2007.  Disclosure controls and proceduresare designed to provide reasonable assurance that the information required tobe disclosed by the Company in the reports that it files or submits under theSecurities Exchange Act has been appropriately recorded, processed, summarizedand reported on a timely basis and are effective in ensuring that suchinformation is accumulated and communicated to the Company’s management,including the Company’s Chief Executive Officer and Chief Financial Officer, asappropriate to allow timely decisions regarding required disclosure.  Based upon that evaluation, the Company’smanagement, including the Chief Executive Officer and the Chief FinancialOfficer, concluded that the Company’s disclosure controls and procedures wereeffective as of December 29, 2007.

 

***InherentLimitations over Internal Controls***

** **

**The Company’s management is responsible for establishing andmaintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act.  The Company’s internal control over financialreporting is designed to provide reasonable assurance regarding the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles.  Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Therefore, even those systems determined to beeffective can provide only reasonable assurance with respect to financialstatement preparation and presentation. Also, projections of any evaluation of effectiveness to future periodsare subject to the risk that controls may become inadequate because of changesin conditions, or that the degree of compliance with the policies or proceduresmay deteriorate.**

** **

***Changes inInternal Control over Financial Reporting***

** **

**There have been no significant changes to the Company’sinternal control over financial reporting during the most recent fiscal quarterthat have materially affected, or are reasonably likely to materially affect,the Company’s internal control over financial reporting.**

** **

***Management’sAnnual Report on Internal Control over Financial Reporting***

 

The Company’s managementis responsible for establishing and maintaining adequate internal control overfinancial reporting (as defined in Rule 13a-15(f) under theSecurities Exchange Act of 1934, as amended). Management conducted anevaluation of the effectiveness of the Company’s internal control overfinancial reporting based on the criteria set forth in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (“COSO”). Based on this evaluation,management has concluded that the Company’s internal control over financialreporting was effective as of December 29, 2007.

 

**Item 9B. Other Information**

 

None

 

106

----

 

**PART III**

 

**Item 10. Directors, Executive Officers and Corporate Governance**

 

**Directors and Executive Officers**

 

TheCompany’s executive officers and directors, and their ages and positions, areas follows:

 
| **Name**              | ** ** | **Age**    | ** ** | **Position(1)**                                                            |
|-----------------------|------------|------------|------------|----------------------------------------------------------------------------|
| ** **            | ** ** | ** ** | ** ** | ** **                                                                 |
| Robert J. DiNicola    |       | 60         |       | Chairman of the Board  of Directors, President and Chief Executive Officer |
| Francis M. Rowan      |       | 45         |       | Senior Vice President  and Chief Financial Officer                         |
| F. David Coder        |       | 50         |       | Executive Vice  President, Store Operations                                |
| Robert Homler         |       | 62         |       | Executive Vice  President, Merchandising                                   |
| Scott Silver          |       | 47         |       | Executive Vice  President, Merchandising                                   |
| Joyce F. Brown        |       | 61         |       | Director                                                                   |
| Peter P. Copses       |       | 49         |       | Director                                                                   |
| George G. Golleher    |       | 60         |       | Director                                                                   |
| Damian J. Giangiacomo |       | 31         |       | Director                                                                   |
| Andrew S. Jhawar      |       | 36         |       | Director                                                                   |
| Ron Marshall          |       | 54         |       | Director                                                                   |
| Lee S. Neibart        |       | 57         |       | Director                                                                   |
| Brian H. Pall         |       | 48         |       | Director                                                                   |
| Pamela J. Romano      |       | 50         |       | Director                                                                   |

 

----

(1)   Each director is a member of the board ofdirectors of each of Linens Holding Co. and Linens ’n Things, Inc.

 

***RobertJ. DiNicola***became Chairman of the Company’s Board of Directors and its President and ChiefExecutive Officer in February 2006 upon the consummation of the Merger. Mr. DiNicolahas operated in the retail industry for 35 years. He previously served asthe Executive Chairman of GNC Corporation and General Nutrition Centers, Inc.(collectively, “GNC”) from October 2004 to March 2007 and as adirector from December 2003 to March 2007. He also served as GNC’sinterim Chief Executive Officer from December 2004 to May 2005. Mr. DiNicolais the former Chairman of the Board of Directors of Zale Corporation. Mr. DiNicolajoined Zale Corporation as its Chairman and Chief Executive Officer in April 1994.In July 1999, Mr. DiNicola relinquished his position as ChiefExecutive Officer of Zale Corporation and as an officer of the company thefollowing year, but remained a member of the board. At the request of theboard, he rejoined Zale Corporation in February 2001 as Chairman and ChiefExecutive Officer. Mr. DiNicola subsequently relinquished his position asChief Executive Officer of Zale Corporation in August 2002 but retainedhis position as Chairman of the Board until March 2004. Prior to joiningZale Corporation, Mr. DiNicola served as the Chairman and Chief ExecutiveOfficer of the Bon Marché, a division of Federated Department Stores, locatedin Seattle, Washington. Mr. DiNicola also serves as the Senior RetailAdvisor for Apollo Management, L.P. Beginning his retail career in 1972, Mr. DiNicolahas also worked for Macy’s, May Company and Federated Department Stores.He has held numerous executive positions in buying, merchandising and storeoperations across the country during his retail career. Mr. DiNicola is agraduate of St. Peter’s College in New Jersey and a veteran of the U.S. Army.

*** ***

***FrancisM. Rowan***became the Company’s Senior Vice President and Chief Financial Officer in April 2006.Mr. Rowan joined Linens ’n Things, Inc. in 1989 as the Budget Manager. Hewas promoted in April 1993 to Director of Inventory Control and promotedto Assistant Controller in November 1995, Executive Director in August 1999and Vice President in August 2000. Most recently, Mr. Rowan served asDivisional Vice President. Mr. Rowan has a Bachelor of Science degree inAccounting from St. Peter’s College and a Master of Business Administrationdegree from Montclair State University.

*** ***

***F.David Coder***became the Company’s Executive Vice President of Stores in 2005. Mr. Coderjoined Linens ’nThings, Inc. in 1989 as Regional Manager—Mid-Atlantic Region. He waspromoted to Vice President in 1994, was promoted to Vice President ofStores—Eastern Zone in 1995 and was promoted to Senior Vice President, Store Operationsin 2001. Prior to joining Linens ’n Things, Inc. Mr. Coder held various storemanagement positions including Market Manager at Branden’s, a Division of

 

107

----

 

 

Dayton-Hudson, andRegional Merchandise Manager at Montgomery Wards. Mr. Coder studiedBusiness Management and Psychology at Anderson College.

 

***RobertHomler*** becamean Executive Vice President, Merchandising in May 2006. Mr. Homlerjoined Linens ’nThings, Inc. in April 2006 as Senior Vice President of Marketing.Prior to that, he was Executive Vice President and Chief Operating Officer ofGNC, after having served as Chief Merchandising Officer of GNC from February toDecember 2005. From March 2001 until January 2005, Mr. Homlerowned a Coffee Beanery (a gourmet coffee retailer) franchise operation in EastBrunswick, New Jersey. From July 1998 to January 2000, Mr. Homlerwas President of Merchandising and Marketing of Levitz Furniture Corporation.Prior to joining Levitz Furniture Corporation, Mr. Homler was, from January 1994to June 1998, Executive Vice President of Home Store Operations at Macy’sEast Division of Federated Department Stores. From 1984 through 1994, Mr. Homlerwas a General Merchandise Manager of Home Store Operations at various FederatedDepartment Store divisions: A & S/Jordan Marsh from 1992 until 1994;Rich’s Department Stores from 1991 until 1992; and the Bon Marché from 1988until 1992. From 1984 until 1988, Mr. Homler was Senior VicePresident—Director of Merchandising for R.H. Macy Corporation where he beganhis retail career in 1968 as a buyer and merchandiser.

*** ***

***ScottSilver*** becamean Executive Vice President, Merchandising in August 2007.  Mr. Silver joined Linens ’n Things, Inc. in April 2000 asa District Merchandising Manager.  He waspromoted to Senior Vice President, Merchandising in April 2006 and waspromoted to Senior Vice President and General Merchandising Manager in January 2007.  Prior to joining Linens ’n Things, Inc., Mr. Silver heldvarious store management positions at Macy’s, Bloomingdales and Le GourmetChef.  Mr. Silver has a Bachelor ofArts degree in Economics from the State University of New York at Buffalo.

*** ***

***Dr. JoyceF. Brown***became a member of the board of directors in June 2006. Dr. Brown ispresident of the Fashion Institute of Technology (“FIT”), a specialized collegeof art and design, business, and technology of the State University of NewYork. Prior to her appointment at FIT in 1998, Dr. Brown was Professor ofClinical Psychology at the Graduate School and University Center of the CityUniversity of New York (“CUNY”), where she is currently Professor Emerita. From1983 to 1992, Dr. Brown served CUNY in a variety of capacities, includingacting President of Bernard Baruch College and Vice Chancellor for UrbanAffairs and Development. From 1993 to 1994, Dr. Brown served as DeputyMayor for Public and Community Affairs in the Office of the Mayor of the Cityof New York. In addition to her position at FIT, Dr. Brown serves as ChiefExecutive Officer of the Educational Foundation for the Fashion Industries, anadvisory and support body to FIT. She is also a director of Polo Ralph LaurenCorporation, an apparel, accessories and home furnishings designer anddistributor, and USEC Inc., a global energy company.  Dr. Brown earned her doctorate andmaster’s degrees in Counseling Psychology from New York University and herbachelor’s degree from Marymount College in Tarrytown, New York. She alsoreceived a certificate from the Institute for Educational Management at HarvardUniversity.

*** ***

***PeterP. Copses***became a member of the board of directors in February 2006 upon theconsummation of the Merger. Mr. Copses co-founded Apollo Management, L.P.,one of the Sponsors, in 1990. Mr. Copses was initially an investmentbanker at Drexel Burnham Lambert Incorporated and subsequently at Donaldson,Lufkin & Jenrette Securities Corporation, concentrating on thestructuring, financing and negotiation of mergers and acquisitions.  Mr. Copses is also a director of Claire’sStores, Inc., a specialty retailer of jewelry and accessories, where healso serves as Chairman of the Board, and RBS Global, Inc., a diversified,multi-platform industrial company.  Mr. Copsesreceived his Master of Business Administration degree from the StanfordUniversity Graduate School of Business and his Bachelor of Commerce degree fromthe University of Toronto.

*** ***

***DamianJ. Giangiacomo*** became a member of the board of directorsin March 2006. Mr. Giangiacomo is a principal at Apollo Management,L.P., where he has been employed since July 2000. Prior to joining Apollo,Mr. Giangiacomo was an investment banker at Morgan Stanley & Co. Mr. Giangiacomoreceived a Bachelor of Business degree in Finance from the University of NotreDame.

 

***GeorgeG. Golleher***became a member of the board of directors in March 2006.  Since March 2007, Mr. Golleher hasserved as the Chairman of the Board and Chief Executive Officer of Smart &Final, Inc., a wholesale and retail food distributor operating on the WestCoast. Mr. Golleher was a director of Simon Worldwide, Inc., apromotional marketing company, from September 1999 to April 2006 andwas also its Chief Executive Officer from March 2003 to April 2006.From March 1998 to May 1999, Mr. Golleher

 

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served asPresident, Chief Operating Officer and director of Fred Meyer, Inc. a foodand drug retailer. Prior to joining Fred Meyer, Inc., Mr. Golleherserved for 15 years with RalphsGrocery Company until March 1998, ultimately as the Chief ExecutiveOfficer and Vice Chairman of the Board. Mr. Golleher is also a director ofClaire’s Stores, Inc. and Rite Aid Corporation.

*** ***

***AndrewS. Jhawar***became a member of the board of directors in February 2006 upon theconsummation of the Merger. Mr. Jhawar is a partner of Apollo Management,L.P., where he has been employed since February 2000. Prior to joiningApollo, Mr. Jhawar was an investment banker at Donaldson, Lufkin &Jenrette Securities Corporation and, prior to that, at Jefferies & Company, Inc.where he specialized in leveraged finance. Mr. Jhawar received his Masterof Business Administration degree from Harvard University’s Graduate School ofBusiness and his Bachelor of Science degree in Economics with a concentrationin Finance from the Wharton School of the University of Pennsylvania.

*** ***

***RonMarshall***became a member of the board of directors in August 2007.  Mr. Marshall has been a principal ofWildridge Capital Management since 2006. From 1998 to 2006, he served as Chief Executive Officer of Nash FinchCompany and was a member of its board of directors.  Prior to joining Nash Finch, Mr. Marshallserved as Chief Financial Officer of Pathmark Stores, Inc., Dart GroupCorporation, Barnes & Noble Bookstores, Inc., NBI’s The OfficePlace, and Jack Eckerd Corporation.  Mr. Marshallis a certified public accountant.

*** ***

***LeeS. Neibart***became a member of the board of directors in February 2006 upon theconsummation of the Merger. Mr. Neibart has been a Senior Partner ofApollo Real Estate Advisors since 1993 and is a founder of NRDC Real EstateAdvisors (“NRDC”). From 1989 to 1993, Mr. Neibart was with the RobertMartin Company, most recently as Executive Vice President and Chief OperatingOfficer. Robert Martin was a real estate development and management firm with aportfolio of approximately seven million square feet of commercial real estate.Mr. Neibart serves on the Advisory Boards of both The EnterpriseFoundation and The Real Estate Institute of New York University. He is also apast President of the New York Chapter of the National Association ofIndustrial and Office Parks. Mr. Neibart graduated with a Bachelor of Artsdegree from the University of Wisconsin and a Master of Business Administrationdegree from New York University.

*** ***

***BrianPall*** became amember of the board of directors on October 20, 2006.  Mr. Pall is Managing Director of NRDC,where he has been employed since 2004.  Prior to joining NRDC, Mr. Pallspent 17 years with The Great Atlantic and Pacific Tea Company, Inc.,where he most recently served as Senior Vice President and Chief DevelopmentOfficer.

*** ***

***PamelaJ. Romano***becamea member of the board of directors in August 2007.  Ms. Romano served as the President andChief Operating Officer of Friedman’s Inc. from 2005 until February 2008. From 1997 to 2005, she served as Group Senior Vice President of ZaleCorporation and President of Zales Jewelers, and also ran *Zales.com*,the company’s Internet site.  Prior to joining Zales, Ms. Romano heldvarious merchandising positions with Macy’s, serving most recently as VicePresident of Merchandising for Macy’s East Fine and Fashion Jewelry.

 

**Board Composition**

 

The board of directors iscomposed of ten directors. Each director serves for annual terms and until hisor her successor is elected and qualified. Apollo Management V, L.P. indirectlycontrols a majority of the common stock of the Company. Pursuant to thestockholders’ agreement governing ownership of the Company, the Sponsors havethe right to appoint all of the members of the Company’s board of directors.

 

**Board Committees**

 

The board of directorshas the authority to appoint committees to perform certain management andadministration functions. The board of directors has provided for an auditcommittee and a compensation committee.

 

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**Audit Committee**

 

The audit committee iscurrently comprised of Messrs. Copses (chairman), Giangiacomo and Marshall.  The audit committee is responsible forreviewing and monitoring the Company’s accounting controls and internal auditfunctions and recommending to the board of directors the engagement of itsoutside auditors. The audit committee meets regularly with management, withoutthe Company’s independent registered public accounting firm present, to discussmanagement’s evaluations of the performance of the independent auditors.  The audit committee also meets regularly withinternal audit personnel to discuss the Company’s internal audit process andthe results of ongoing or recently completed internal audits.

 

The board of directorshas determined that Mr. Copses is an “audit committee financial expert”within the meaning of SEC regulations. Of the three members of the audit committee, only Mr. Marshall isan independent director; Messrs. Copses and Giangiacomo are notindependent directors because of their affiliations with the Sponsors.

 

**Compensation Committee**

 

The members of thecompensation committee are Messrs. Jhawar (chairman), Pall andGolleher.  The compensation committeereviews and either approves, on behalf of the board of directors, or recommendsto the board of directors for approval the annual salaries and othercompensation of its executive officers and individual stock and stock optiongrants.  The compensation committee alsoprovides assistance and recommendations with respect to the Company’scompensation policies and practices and assists with the administration of itscompensation plans.

 

**Code of Ethics**

 

The board of directorshas adopted a code of ethics that applies to the Company’s chief executiveofficer and senior financial officers. A waiver from any provision of the codeof ethics may only be granted by the audit committee.  In addition, Linens ’n Things, Inc. hasadopted a Code of Business Conduct and Ethics applicable to all employees,officers and directors.

 

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**Item 11. Executive Compensation**

** **

**Compensation Discussionand Analysis**

* *

*Overview*

 

The compensationcommittee of the Company’s board of directors is empowered to review andapprove the annual compensation and compensation structure for the Company’sexecutive officers and management compensation generally.  The Company’s executive officers are theChairman and Chief Executive Officer, the Senior Vice President and ChiefFinancial Officer, the Executive Vice President of Store Operations and the twoExecutive Vice Presidents, Merchandising. Each of the executive officers is employed by the Company’s wholly ownedsubsidiary, Linens ’n Things, Inc. (“LNT”).  The board of directors and compensationcommittee of each of the Company and LNT have the same composition.

 

The primaryobjective of the Company’s compensation program, including compensation ofexecutives, is to attract and retain qualified, energetic associates who areenthusiastic about the Company’s mission and culture. A further objective ofthe Company’s compensation program is to provide incentives and to reward eachassociate for their contribution to the Company.  In addition, the Company strives to promotean ownership mentality among key leadership and the Company’s board ofdirectors.  Finally, the Company intendsfor its compensation structure to be perceived as fair to associates,stockholders and noteholders.

 

The Company’scompensation program is designed to reward each associate’s individualcontribution to the Company, incentivize each associate’s future performanceand recognize the Company’s growth and financial performance.  The Company’s compensation structure,including executive compensation, was reviewed and restructured in 2006following the Company’s acquisition of LNT in February 2006.  Executive compensation is then reviewed on atleast an annual basis.  The compensationcommittee considers numerous factors, including the associates’ experience inconjunction with the level and complexity of the position.  Regarding the compensation program andstructure generally and all aspects of executive compensation, managementprovides recommendations to the compensation committee; however, thecompensation committee does not delegate any of its functions to others insetting executive compensation. The compensation committee is also responsiblefor reviewing and making recommendations to the board of directors regardingdirector compensation.  The Company doesnot currently engage any consultant related to executive or directorcompensation matters.

* *

*Elements of theCompany’s Executive Compensation*

 

Annual executiveofficer compensation consists of the following components: base salary; annualperformance bonus; stock options; and certain benefits.  The compensation committee intends to setexecutive cash compensation at a level to attract and retain a strong motivatedleadership team, but not so high that it creates a negative perception with theCompany’s associates generally, noteholders or stockholders.  Annual incentive compensation is included toreward executives for the Company’s growth and financial performance based onachievement of criteria established by the Chairman and approved by thecompensation committee.

 

Each of theCompany’s executive officers receives stock option grants under the LinensHolding Co. Stock Option Plan.  All ofthe Company’s associates are eligible for stock option grants, which recognizeand incentivize performance.  The stockoption plan was established in 2006 following the acquisition and grants weremade to associates at the position of buyer and above.  The compensation committee considersmanagement’s recommendation for annual stock option grants to the executiveofficers and other associates and for grants related to promotions and newhires.  Since the inception of the stockoption plan, approximately 52% of thestock options granted under the stock option plan have been granted toassociates who are not executive officers (as adjusted to take into accountforfeited options).  With respect togrants in the year ended December 29, 2007, that percentage was 82%.  The Company

 

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believes that through its broad-based plan, the economic interests ofthe Company’s associates, including its executives, are more closely aligned toownership interests.

 

The Companyprovides only limited benefits to its executive officers and senior vicepresidents, including medical and dental insurance (expense shared by theCompany and the executive), long-term disability insurance (executive’sexpense), life insurance (basic policy at Company expense and additionalcoverage available at executive’s expense), cellular telephone and serviceneeded with the performance of the executive’s responsibilities (Companyexpense), specified financial planning services (Company expense) and 401(k) Planmatching contributions (Company expense). The Company’s more highly compensated associates are also eligible toparticipate in the Company’s deferred compensation plan, although none of theexecutive officers are currently participating in the plan.  Under certain circumstances, management mayrecommend and the compensation committee may approve more limited benefits oradditional benefits, such as relocation expenses for new executives.

* *

*Stock Option Grants*

 

The compensationcommittee intends for stock option grants generally to be considered on anannual basis, except for new hires, promotions and special performancerecognition.  The compensation committeeadopted a formal stock option administration policy in February 2008 thatprovides, among other things, that grants other than annual grants will beconsidered on a quarterly basis by the compensation committee.  Stock option grants are recommended to thecompensation committee by management, but all grants must be approved by thecompensation committee.  Stock optiongrants may be approved by the compensation committee at in-person or telephonicmeetings or by unanimous written consents. The date of grant is established based on the date of the meeting or,with respect to written consents, the date the last signature of thecompensation committee members is obtained.

 

The compensationcommittee sets the exercise price per share for stock option grants at anamount greater than or equal to the fair market value per share of the Company’scommon stock.  Since the Company’s commonstock is not publicly traded, the compensation committee’s determination isbased on information provided by management and reviewed and approved by thecompensation committee.  In 2006, theexercise price for stock option grants was determined by reference to thepurchase price paid by the Company for the February 2006 acquisition ofLNT, which was calculated as $50 per share of common stock.  The compensation committee has continued touse $50 per share as the option exercise price and believes, based uponinformation provided by management, that $50 per share is greater than or equalto the fair market value per share of the common stock.

 

The compensationcommittee does not delegate any function of the stock option grants, andexecutives are not treated differently from other associates.

* *

*How the CompanyChooses Amounts and/or Formulas for Each Element*

 

Each executive’scurrent and prior compensation is considered in setting future compensation. Inaddition, the Company reviews the compensation practices of other companies.Base salary amounts are determined by complexity and level of position as wellas market comparisons.  Base salaries forexecutive officers and other senior management are reviewed by management andthe compensation committee on at least an annual basis, and the compensationcommittee may approve increases in base salary. Each year, the compensation committee completes and approves an annualcompensation review based on the prior year’s performance.  The table below reflects base salaryincreases approved for the Company’s executive officers in May 2007 and March 2008:

 

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**Amount ofBase Salary Increase**

 
| **Executive Officer** | ** ** | **May 2007** | ** ** | **March 2008** | ** ** | **Current Base Salary** | ** ** |
|-----------------------|------------|-------------------|------------|---------------------|------------|-------------------------|------------|
| ** **            | ** ** | ** **        | ** ** | ** **          | ** ** | ** **              | ** ** |
| DiNicola              |       | $                 | —     |                | $          | —                  |       | $ | 1,350,000 |   |
|                  |       |              |       |                |       |                    |       |
| Rowan                 |       | $                 | 25,000     |                | $          | 25,000                  |       | $ | 300,000 |   |
|                  |       |              |       |                |       |                    |       |
| Coder                 |       | $                 | 25,000     |                | $          | 15,000                  |       | $ | 440,000 |   |
|                  |       |              |       |                |       |                    |       |
| Homler                |       | $                 | 25,000     |                | $          | —                  |       | $ | 425,000 |   |
|                  |       |              |       |                |       |                    |       |
| Silver(1)             |       | $                 | 15,000     |                | $          | 10,000                  |       | $ | 410,000 |   |

 

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(1) The May 2007increase for Mr. Silver was before his appointment to an executive officerposition.  Mr. Silver’s base salarywas subsequently increased to $400,000 in connection with his appointment as anExecutive Vice President, Merchandising in August 2007.  Mr. Silver’s initial base salary as anexecutive officer was based on the initial base compensation level for theCompany’s other executive vice presidents.

 

The base salaryincreases were based on a review of the executives’ skills and experience andfor competitive reasons in order to retain the executives.  Based on their base salary level, managementdid not recommend increases for Mr. DiNicola in May 2007 or March 2008or for Mr. Homler in March 2008.

 

The executiveofficers are entitled to certain annual performance bonuses pursuant to theterms of their employment agreements. See “—Summary Compensation Table—Employment Agreements” below.  Each executive officer has a target annualbonus expressed as a percentage of his annual base salary.  The respective percentages are determined byposition and level of responsibility. The Company’s Chairman of the Board and Chief Executive Officer has atarget annual bonus of 100% of his annual base salary if LNT exceeds sales,EBITDA and cash generation goals based on levels to be determined by the LNTboard of directors or compensation committee for the applicable year.  Based on their employment agreements, theother executive officers have target annual bonuses of 40% (for the Company’sChief Financial Officer) or 50% of annual base salary; however, the bonusamount is to be determined by the LNT board or compensation committee in itssole discretion.

 

No annualperformance bonuses were paid with respect to the year ended December 30,2006.

 

In May 2007,the compensation committee approved a 2007 Bonus Plan recommended bymanagement, which included incentive compensation potential for the namedexecutive officers at the following levels:

 

·                  First threshold – 25% of target basedon achieving 83% of budgeted EBITDA.

·                  Second threshold – 50% of targetbased on achieving 90% of budgeted EBITDA.

·                  Third threshold – 75% of target basedon achieving 97% of budgeted EBITDA.

·                  Target – 100% of target based onachieving 100% of budgeted EBITDA.

·                  Maximum – 150% of target based onachieving 103% of budgeted EBITDA.

 

In connection withthe 2007 Bonus Plan and its 2007 annual compensation review, the compensationcommittee increased the target annual bonus for the Chief Financial Officer to50% to match the other named executive officers, excluding the Chairman of theBoard and Chief Executive Officer.

 

No annual performancebonuses were paid with respect to the year ended December 29, 2007,because the Company did not achieve the first threshold level of 83% ofbudgeted EBITDA.

 

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In February 2008,the compensation committee approved a 2008 Bonus Plan recommended bymanagement, which includes incentive compensation potential for the namedexecutive officers at the following levels:

 

·                  First threshold – 25% of target basedon achieving 67% of budgeted EBITDA.

·                  Second threshold – 50% of targetbased on achieving 73% of budgeted EBITDA.

·                  Third threshold – 75% of target basedon achieving 87% of budgeted EBITDA.

·                  Target – 100% of target based onachieving 100% of budgeted EBITDA.

 

The Company’sbonus plans have been based on achieving 100% of budgeted EBITDA, andmanagement and the compensation committee believe that achieving budgetedEBITDA is the appropriate level for paying 100% of the target bonus.  They also believe, however, that there is aneed for appropriate incentive compensation at thresholds below budgetedEBITDA.  In connection with the 2007Bonus Plan, management and the compensation committee believed that whileachieving 100% of budgeted EBITDA in fiscal year 2007 was possible, itpresented a significant challenge for the named executive officers and theCompany.  Ultimately, it was notachieved.  Similarly, with the 2008 BonusPlan, management and the compensation believe that achieving 100% of budgetedEBITDA again presents a significant challenge. Recognizing that incentive compensation was not paid in fiscal 2006 orfiscal 2007 and based upon a desire to have incentive compensation be perceivedas more achievable, the 2008 Bonus Plan reflects lower percentages of budgetedEBITDA for the first, second and third thresholds.

 

The Company doesnot disclose its internal budget for results of operations, including budgetedEBITDA.  Budgeted EBITDA is confidentialfinancial information of the Company, and the Company believes that its disclosurewould cause the Company competitive harm by disclosing to competitors a keyelement of its internal projections.

 

Stock option grantawards are determined in accordance with performance and level of positionbased on management’s recommendations to the compensation committee.  Executive officers and other associates areeligible to be considered for stock option grants at the time of hiring, inconnection with promotions, and as part of an annual compensation review.

 

Each of the stockoption grants are granted under the Linens Holding Co. Stock Option Plan andare divided equally between a time option and a performance option.  The stock options expire seven years afterthe date of grant.  The time optionsbecome vested and exercisable in four equal installments based on theanniversary of the date of grant or the anniversary of a designated date.  The performance option provides that if onany “Measurement Date,” the “Value Per Share” equals or exceeds the “TargetStock Price” (as such terms are defined in the option grant letter), then theperformance option will vest and become exercisable in two equal annualinstallments on each of the first two anniversaries of the Measurement Date,subject to acceleration in the event of a change in control or a specifiedliquidity event, as set forth in the option grant letter.  Prior to a qualified initial public offering,with gross proceeds to the Company of not less than $150.0 million, aMeasurement Date is the end of a fiscal quarter beginning with or following December 31,2007.  Prior to a qualified initialpublic offering, Value Per Share is the Company’s “Net Equity Value” divided bythe number of fully diluted shares.  NetEquity Value is calculated as the sum of (1) 7.5 times the Company’sEBITDA for the four fiscal quarters ending on the Measurement Date, (2) thesum of all cash and cash equivalents and the aggregate exercise price of alloutstanding options or warrants to purchase shares of the Company’s commonstock, less (3) the Company’s debt as of the Measurement Date.  Upon a defined liquidity event, Value PerShare is the price per share realized by the Company’s principalstockholder.  The Target Stock Pricemeans $50.00 compounded at an annual rate of 25% from February 14, 2006 tothe Measurement Date.

* *

*Accounting and Tax Considerations*

 

The Company’sstock option grant policies have been impacted by the implementation of SFAS No. 123(Revised 2004), which it adopted on January 1, 2006. The Company isrequired to recognize compensation expense in its consolidated statements ofoperations related to the fair value of its employee

 

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stock-based options.  The Companyuses the Monte Carlo simulation option-pricing model for estimating the fairvalue of performance-based options and the Black-Scholes option pricing modelfor time-based options issued under its stock option plan.  Both models include various assumptions,including the expected life of stock options, the expected volatility and theexpected risk-free interest rate.  Theseassumptions reflect the Company’s best estimates, but they involve inherentuncertainties based on certain conditions generally outside the control of theCompany.  As a result, if otherassumptions had been used, total stock-based compensation cost, as determinedin accordance with SFAS No. 123 (Revised 2004) could have been materiallyimpacted.  Furthermore, if the Companyuses different assumptions for future grants, stock-based compensation costcould be materially impacted in future periods.

 

Under SFAS No. 123(Revised 2004), the Company is also required to record stock-based compensationexpense, net of estimated forfeitures. The Company’s forfeiture rate assumption used in determining itsstock-based compensation expense is estimated primarily based upon historicaldata.  The actual forfeiture rate coulddiffer from these estimates.

 

The Company hasstructured its compensation program to comply with Internal Revenue CodeSections 162(m) and 409A. Under Section 162(m) of the InternalRevenue Code, a limitation was placed on tax deductions of any publicly-heldcorporation for individual compensation to certain executives of suchcorporation exceeding $1,000,000 in any taxable year, unless the compensationis performance-based. The Company has no individuals with non-performance basedcompensation paid in excess of the Internal Revenue Code Section 162(m) taxdeduction limit.  If an executive isentitled to nonqualified deferred compensation benefits that are subject to Section 409A,and such benefits do not comply with Section 409A, then the benefits aretaxable in the first year they are not subject to a substantial risk offorfeiture. In such case, the executive is subject to regular federal incometax, interest and an additional federal income tax of 20% of the benefitincludible in income.

** **

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** **

**SummaryCompensation Table**

** **

The following table sets forth information with respect to compensationfor the fiscal years ended December 30, 2006 and December 29,2007 with respect to each of the Company’s executive officers, including theCompany’s principal executive officer and principal financial officer.  The listed persons are referred to in thisItem 11 as the “named executive officers.”

 
| ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** **  | ** ** | ** **    | ** ** | **Change in  Pension** | ** ** | ** **       | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------|------------|-------------|------------|------------|------------|-------------|------------|---------------|------------|-----------------------------|------------|------------------|------------|------------|------------|
| ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** **  | ** ** | ** **    | ** ** | **Value and**          | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** **  | ** ** | **Non-**      | ** ** | **Non-**                    | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** **  | ** ** | **Equity**    | ** ** | **qualified**               | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** **  | ** ** | **Incentive** | ** ** | **Deferred**                | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** **  | ** ** | **Plan**      | ** ** | **Compen-**                 | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** | **Stock**  | ** ** | **Option**  | ** ** | **Compen-**   | ** ** | **sation**                  | ** ** | **All  Other**   | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | ** ** | ** ** | **Salary** | ** ** | **Bonus**   | ** ** | **Awards** | ** ** | **Awards**  | ** ** | **sation**    | ** ** | **Earnings**                | ** ** | **Compensation** | ** ** | **Total**  | ** ** |
| **Name and  Principal Position**                       | ** ** | **Year**   | ** ** | **($)**    | ** ** | **($) (1)** | ** ** | **($)**    | ** ** | **($) (2)** | ** ** | **($)**       | ** ** | **($)**                     | ** ** | **($) (3)**      | ** ** | **($)**    | ** ** |
|                                                   |       |       |       |       |       |        |       |       |       |        |       |          |       |                        |       |             |       |       |       |
| Robert J.  DiNicola                                    |       | 2007       |       | $          | 1,400,500  |        | $          | —     |       | $           | —     |          | $          | 1,412,549                   |       | $                | —     |       | $          | — |   | $ | 86,618 |   | $ | 2,899,667 |   |
| Chairman of the Board and  Chief Executive Officer (4) |       | 2006       |       | $          | 1,189,885  |        | $          | —     |       | $           | —     |          | $          | 1,824,777                   |       | $                | —     |       | $          | — |   | $ | 1,294,111 |   | $ | 4,308,773 |   |
|                                                   |       |       |       |       |       |        |       |       |       |        |       |          |       |                        |       |             |       |       |       |
| Francis M. Rowan                                       |       | 2007       |       | $          | 274,038    |        | $          | 15,000     |       | $           | —     |          | $          | 84,947                      |       | $                | —     |       | $          | — |   | $ | 33,405 |   | $ | 407,390 |   |
| Senior Vice President and  Chief Financial Officer (5) |       | 2006       |       | $          | 228,838    |        | $          | 35,000     |       | $           | —     |          | $          | 52,696                      |       | $                | —     |       | $          | — |   | $ | 100,111 |   | $ | 416,645 |   |
|                                                   |       |       |       |       |       |        |       |       |       |        |       |          |       |                        |       |             |       |       |       |
| F. David Coder                                         |       | 2007       |       | $          | 418,269    |        | $          | —     |       | $           | —     |          | $          | 145,475                     |       | $                | —     |       | $          | — |   | $ | 23,193 |   | $ | 586,937 |   |
| Executive Vice President  of Store Operations          |       | 2006       |       | $          | 382,692    |        | $          | 100,000    |       | $           | —     |          | $          | 145,757                     |       | $                | —     |       | $          | — |   | $ | 515,314 |   | $ | 1,143,763 |   |
|                                                   |       |       |       |       |       |        |       |       |       |        |       |          |       |                        |       |             |       |       |       |
| Robert Homler                                          |       | 2007       |       | $          | 418,269    |        | $          | —     |       | $           | —     |          | $          | 145,489                     |       | $                | —     |       | $          | — |   | $ | 32,607 |   | $ | 596,365 |   |
| Executive Vice President,  Merchandising (6)           |       | 2006       |       | $          | 274,039    |        | $          | —     |       | $           | —     |          | $          | 88,446                      |       | $                | —     |       | $          | — |   | $ | 271,062 |   | $ | 633,547 |   |
|                                                   |       |       |       |       |       |        |       |       |       |        |       |          |       |                        |       |             |       |       |       |
| Scott Silver                                           |       | 2007       |       | $          | 384,327    |        | $          | 50,000     |       | $           | —     |          | $          | 124,966                     |       | $                | —     |       | $          | — |   | $ | 16,173 |   | $ | 575,466 |   |
| Executive Vice President,  Merchandising (7)           |       |       |       |       |       |        |       |       |       |        |       |          |       |                        |       |             |       |       |       |

 

----

(1)          The 2007 Bonus amounts reflect discretionary retention bonuses paid to Mr. Rowanand Mr. Silver in January 2007 pursuant to March 2006 letteragreements with LNT.  The retentionbonuses were payable on January 1, 2007 contingent upon the namedexecutive officer remaining active with LNT until January 1, 2007.  The 2006 Bonus amounts reflect transactionincentive bonuses paid upon consummation of the acquisition of LNT in February 2006.

 

(2)          Reflects portion of grant date fair value reported in the Company’sconsolidated financial statements for the year ended December 29, 2007, inaccordance with SFAS 123R, with respect to 2007 stock option grants to thenamed executive officers and the additional grant date fair value recognized infiscal 2007 with respect to 2006 stock option grants.  See Note (13) to the Company’s consolidatedfinancial statements included in this report regarding the related valuationassumptions.

 

(3)          Includes perquisites, tax reimbursements and equity distributionsreceived by the named executive officers and employer 40l(k) Plancontributions and the imputed value of life insurance premiums paid on behalfof the named executive officers, in each case in the fiscal year indicated, asfollows:

 

116

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| **Item**                               | ** ** | **DiNicola** | ** ** | **Rowan** | ** ** | **Coder** | ** ** | **Homler** | ** ** | **Silver** | ** ** |
|----------------------------------------|------------|--------------|------------|-----------|------------|-----------|------------|------------|------------|------------|------------|
|                                   |       |         |       |      |       |      |       |       |       |       |       |
| Car allowance  (perquisite) (a)        |       |         |       |      |       |      |       |       |       |       |       |
| 2007                                   |       | $            | 51,152     |      | $          | —    |       | $          | —     |       | $          | — |   | $ | — |   |
| 2006                                   |       | $            | 33,431     |      | $          | —    |       | $          | —     |       | $          | — |   |   |   |
| Financial  planning (perquisite)       |       |         |       |      |       |      |       |       |       |       |       |
| 2007                                   |       | $            | —     |      | $          | 14,550    | (b)        | $          | 8,000      |       | $          | 4,226 |   | $ | — |   |
| 2006                                   |       | $            | —     |      | $          | —    |       | $          | 8,000      |       | $          | — |   |   |   |
| Executive  relocation (perquisite) (c) |       |         |       |      |       |      |       |       |       |       |       |
| 2007                                   |       | $            | 5,059      |      | $          | —    |       | $          | —     |       | $          | 16,800 |   | $ | — |   |
| 2006                                   |       | $            | 688,479    |      | $          | —    |       | $          | —     |       | $          | 176,211 |   |   |   |
| Tax  reimbursement (d)                 |       |         |       |      |       |      |       |       |       |       |       |
| 2007                                   |       | $            | 3,422      |      | $          | 7,313     |       | $          | 4,021      |       | $          | 8,664 |   | $ | — |   |
| 2006                                   |       | $            | 566,303    |      | $          | —    |       | $          | 4,021      |       | $          | 92,947 |   |   |   |
| Insurance  premiums                    |       |         |       |      |       |      |       |       |       |       |       |
| 2007                                   |       | $            | 11,485     |      | $          | 403       |       | $          | 663        |       | $          | 2,917 |   | $ | 603 |   |
| 2006                                   |       | $            | 5,898      |      | $          | 102       |       | $          | 267        |       | $          | 1,904 |   |   |   |
| Employer 401(k) contribution      |       |         |       |      |       |      |       |       |       |       |       |
| 2007                                   |       | $            | 15,500     |      | $          | 11,139    |       | $          | 10,510     |       | $          | — |   | $ | 15,570 |   |
| 2006                                   |       | $            | —     |      | $          | 7,784     |       | $          | 10,077     |       | $          | — |   |   |   |
| Equity  distribution (e)               |       |         |       |      |       |      |       |       |       |       |       |
| 2007                                   |       | $            | —     |      | $          | —    |       | $          | —     |       | $          | — |   | $ | — |   |
| 2006                                   |       | $            | —     |      | $          | 92,225    |       | $          | 492,949    |       | $          | — |   |   |   |

 

----

(a)                      The total perquisites for each named executiveofficer are reflected in the following table:

 
| ** ** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |
| DiNicola   |       | $        | 56,211     |     | $          | 721,910 |   |
| Rowan      |       | $        | 14,550     |     | $          | — |   |
| Coder      |       | $        | 8,000      |     | $          | 8,000 |   |
| Homler     |       | $        | 21,026     |     | $          | 176,211 |   |
| Silver     |       | $        | —     |     |       |   |

 

(b)                     This amount includes a $4,050 reimbursementreceived in January 2007 for financial planning services in fiscal 2006,which was previously reported as received in fiscal 2006.

 

(c)                      Reflects relocation reimbursement related tosale and purchase of home and moving expenses.

 

(d)                     For Mr. DiNicola, reflects reimbursementof taxes on relocation reimbursement. For Mr. Rowan and Mr. Coder, reflects reimbursement of taxeson financial planning services reimbursement. For Mr. Homler, reflects reimbursement of taxes (1) onrelocation reimbursement of $6,540 in fiscal 2007 and $92,947 in fiscal 2006and (2) on financial planning services reimbursement of $2,124 in fiscal2007.

 

(e)                      Reflects equity distribution in connectionwith the acquisition of LNT in February 2006.

 

(4)          Mr. DiNicola became the Company’s Chairman of the Board and ChiefExecutive Officer on February 14, 2006. Salary amount includes director fees in 2007 of $50,500 and in 2006 of$32,000.  Also, Option Awards amountincludes value of director options granted on June 13, 2006.  See “—Director Compensation” below.

 

(5)          Mr. Rowan became the Company’s Senior Vice President and ChiefFinancial Officer on April 28, 2006 and was an employee of LNT throughout2006.

 

(6)          Mr. Homler became an Executive Vice President, Merchandising of theCompany on May 5, 2006.

 

(7)          Mr. Silver became an Executive Vice President, Merchandising of theCompany on August 2, 2007 and previously served as Senior Vice President,Merchandising since April 2006.

* *

*Employment Agreements*

 

LNT entered into an employment agreement with each of the currentexecutive officers in the fiscal year ended December 30, 2006.  LNT entered into an amended and restatedemployment agreement with Mr. Silver effective January 1, 2007 and afurther amended and restated employment agreement effective August 2, 2007when he was promoted to Executive Vice President, Merchandising.  Thefollowing summarizes the principal terms of the current employment agreements.

 

117

----

 

The initial term of employmentfor Mr. DiNicola and Mr. Silver continues until December 31,2008. The initial employment term for each of Mr. Rowan, Mr. Coderand Mr. Homler continues until December 31, 2007.  Each of the employment terms is subject toautomatic one-year renewals unless LNT or the executive provides one-yearadvance notice of an election not to renew the term.  The employment terms for Mr. Rowan, Mr. Coderand Mr. Homler were automatically extended to December 31, 2008,effective as of January 1, 2007.  Inaddition, notice of non-renewal was not given to any of the named executiveofficers on or before December 31, 2007. The employment term for each officer was, therefore, automaticallyextended for one additional year, to December 31, 2009, effective as of January 1,2008.

 

The employment agreements provide for payment ofan annual base salary that will be reviewed on an annual basis by LNT’scompensation committee.  The currentannual base salaries are $1,350,000 for Mr. DiNicola, $300,000 for Mr. Rowan,$440,000 for Mr. Coder, $425,000 for Mr. Homler and $410,000 for Mr. Silver.

 

The executives are entitled to certain annual performance bonusespursuant to the terms of their employment agreements.  Mr. DiNicola has a target annual bonusof 100% of his annual base salary if LNT exceeds sales, EBITDA and cashgeneration goals based on levels to be determined by the LNT compensationcommittee for the applicable year.  Mr. Rowan,Mr. Coder, Mr. Homler and Mr. Silver are eligible for annualperformance bonuses in an amount to be determined by the LNT compensationcommittee in its sole discretion for the applicable year.  Pursuant to the respective employmentagreements, the target annual bonus is 40% of annual base salary for Mr. Rowanand 50% of annual base salary for each of Mr. Coder, Mr. Homler and Mr. Silver.  In connection with the adoption of the 2007Bonus Plan, the target annual bonus for Mr. Rowan was increased to 50% ofannual base salary.

 

The employment agreements generally provide forthe executives to participate in and receive benefits under any benefit plans,arrangements or policies made available by LNT to its employees generally andcertain specified benefits, including health insurance, prescription drug coverage,dental insurance, long-term disability insurance, life insurance, cellulartelephone and service and annual financial planning services.  In addition, Mr. DiNicola and Mr. Homlerwere each entitled to relocation expenses, including moving expenses andcertain expenses in connection with the sale of an existing home and purchaseof a new home, as well as reimbursement for income taxes incurred as result ofsuch payments.  Mr. DiNicola is alsoentitled to transportation between the Company’s headquarters and his permanentor temporary residence in the New York City area or a New York City areaairport.  If he does not utilize thisbenefit, he is entitled to equivalent cash compensation.

 

Each of the employment agreements also includescustomary covenants including noncompetition, confidentiality and nondisclosureand nonsolicitation of employees.

** **

**Inaddition to employment agreements, Mr. Rowan and Mr. Silver were eachparty to a March 2006 letter agreement with LNT prior to becoming anexecutive officer.  The letter agreementsprovided for the payment of discretionary retention bonuses of $15,000 to Mr. Rowanand $50,000 to Mr. Silver contingent upon the officers remaining activewith LNT until January 1, 2007.  Theretention bonuses were paid in January 2007.**

** **

**118**

----

** **

**Grantsof Plan-Based Awards**

 

**The following table sets forth certain information withrespect to stock options granted during the fiscal year ended December 29,2007 to each of the named executive officers.**

 
| ** **       | ** ** | ** ** | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** **         | ** ** | ** **         | ** ** | ** **           | ** ** | ** **          | ** ** | **All Other** | ** ** | **All Other** | ** ** | ** **     | ** ** | ** **          | ** ** |
|------------------|------------|------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|--------------------|------------|--------------------|------------|----------------------|------------|---------------------|------------|--------------------|------------|--------------------|------------|----------------|------------|---------------------|------------|
| ** **       | ** ** | ** ** | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** **         | ** ** | ** **         | ** ** | ** **           | ** ** | ** **          | ** ** | **Stock**          | ** ** | **Option**         | ** ** | ** **     | ** ** | ** **          | ** ** |
| ** **       | ** ** | ** ** | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** **         | ** ** | ** **         | ** ** | ** **           | ** ** | ** **          | ** ** | **Awards:**        | ** ** | **Awards:**        | ** ** | ** **     | ** ** | ** **          | ** ** |
| ** **       | ** ** | ** ** | ** ** | **Estimated Future Payouts Under**   | ** ** | **Estimated Future Payouts Under** | ** ** | **Number of** | ** ** | **Number of** | ** ** | **Exercise or** | ** ** | **Grant Date** | ** ** |
| ** **       | ** ** | ** ** | ** ** | **Non-Equity Incentive Plan Awards** | ** ** | **Equity Incentive Plan Awards**   | ** ** | **Shares of** | ** ** | **Securities**     | ** ** | **Base Price**  | ** ** | **Fair**            | ** ** |
| ** **       | ** ** | ** ** | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | **Maxi-**          | ** ** | ** **         | ** ** | ** **           | ** ** | **Maxi-**           | ** ** | **Stock or**       | ** ** | **Underlying**     | ** ** | **of  Option** | ** ** | **Value of  Stock** | ** ** |
| ** **       | ** ** | **Grant**  | ** ** | **Threshold**                                       | ** ** | **Target**                                        | ** ** | **mum**            | ** ** | **Threshold**      | ** ** | **Target**           | ** ** | **mum**             | ** ** | **Units**          | ** ** | **Options**        | ** ** | **Awards**     | ** ** | **and  Option**     | ** ** |
| **Name**         | ** ** | **Date**   | ** ** | **($)**                                             | ** ** | **($)**                                           | ** ** | **($)**            | ** ** | **(#)**            | ** ** | **(#)**              | ** ** | **(#)**             | ** ** | **(#)**            | ** ** | **(#) (1)**        | ** ** | **($/ Sh)**    | ** ** | **Awards  ($)**     | ** ** |
| Francis M. Rowan |       | 4/11/2007  |       | $                                                   | —     |                                              | $          | —             |       | $                  | —     |                 | —     |                | —     |               | —     |               | —     |           | 5,000      |                | $          | 50.00 |   | $ | 45,850 |   |
|             |       |       |       |                                                |       |                                              |       |               |       |               |       |                 |       |                |       |               |       |               |       |           |       |                |       |
| F. David Coder   |       | 4/11/2007  |       | $                                                   | —     |                                              | $          | —             |       | $                  | —     |                 | —     |                | —     |               | —     |               | —     |           | 10,000     |                | $          | 50.00 |   | $ | 91,700 |   |
|             |       |       |       |                                                |       |                                              |       |               |       |               |       |                 |       |                |       |               |       |               |       |           |       |                |       |
| Robert Homler    |       | 4/11/2007  |       | $                                                   | —     |                                              | $          | —             |       | $                  | —     |                 | —     |                | —     |               | —     |               | —     |           | 10,000     |                | $          | 50.00 |   | $ | 91,700 |   |
|             |       |       |       |                                                |       |                                              |       |               |       |               |       |                 |       |                |       |               |       |               |       |           |       |                |       |
| Scott Silver     |       | 1/24/2007  |       | $                                                   | —     |                                              | $          | —             |       | $                  | —     |                 | —     |                | —     |               | —     |               | —     |           | 5,000      |                | $          | 50.00 |   | $ | 50,550 |   |
|             |       | 8/7/2007   |       | $                                                   | —     |                                              | $          | —             |       | $                  | —     |                 | —     |                | —     |               | —     |               | —     |           | 10,000     |                | $          | 50.00 |   | $ | 84,150 |   |

 

----

(1)          The stock options were granted under the Linens Holding Co. Stock OptionPlan and are equally divided between a time option and a performanceoption.  The stock options expire sevenyears after the date of grant.  Each timeoption becomes vested and exercisable in four equal installments based on theanniversary of the date of grant.  Eachperformance option provides that if on any Measurement Date, the Value PerShare equals or exceeds the Target Stock Price (as such terms are defined inthe option grant letter), then the performance option will vest and becomeexercisable in two equal annual installments on each of the first twoanniversaries of the Measurement Date, subject to acceleration in the event ofa change in control or a specified liquidity event.  Prior to a qualified initial public offering,a Measurement Date is the end of a fiscal quarter beginning with or following December 31,2007.  The Target Stock Price means $50,compounded at an annual rate of 25% from February 14, 2006 to theMeasurement Date.  None of theperformance options vested in the year ended December 29, 2007.

 

**Outstanding Equity Awards at Fiscal Year-End**

** **

The following table sets forth certain information regardingexercisable and unexercisable stock options granted to the named executiveofficers and held as of December 29, 2007, the end of the fiscalyear.  No stock options were exercised inthe 2007 fiscal year.

 
| ** **          | ** ** | **Option  Awards** | ** ** | **Stock Awards**  | ** ** |
|---------------------|------------|--------------------|------------|-------------------|------------|
| ** **          | ** ** | ** **         | ** ** | ** **        | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Equity** | ** ** |
| ** **          | ** ** |               | ** ** |              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | **Equity** | ** ** | **Incentive** | ** ** |
| ** **          | ** ** | ** **         | ** ** | ** **        | ** ** | **Equity** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | ** ** | ** ** | **Incentive** | ** ** | **Plan Awards:** | ** ** |
| ** **          | ** ** |               | ** ** |              | ** ** | **Incentive** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | **Plan Awards:** | ** ** | **Market or** | ** ** |
| ** **          | ** ** |               | ** ** |              | ** ** | **Plan Awards:** | ** ** | ** ** | ** ** | ** ** | ** ** |   | ** ** | **Market** | ** ** | **Number of** | ** ** | **Payout Value** | ** ** |
| ** **          | ** ** | **Number of**      | ** ** | **Number of**     | ** ** | **Number of** | ** ** | ** ** | ** ** | ** ** | ** ** | **Number of** | ** ** | **Value of** | ** ** | **Unearned** | ** ** | **of Unearned** | ** ** |
| ** **          | ** ** | **Securities**     | ** ** | **Securities**    | ** ** | **Securities** | ** ** | ** ** | ** ** | ** ** | ** ** | **Shares or** | ** ** | **Shares or** | ** ** | **Shares, Units** | ** ** | **Shares, Units** | ** ** |
| ** **          | ** ** | **Underlying**     | ** ** | **Underlying**    | ** ** | **Underlying** | ** ** | ** ** | ** ** | ** ** | ** ** | **Units of** | ** ** | **Units of** | ** ** | **or Other** | ** ** | **or Other** | ** ** |
| ** **          | ** ** | **Unexercised**    | ** ** | **Unexercised**   | ** ** | **Unexercised** | ** ** | **Option** | ** ** | ** ** | ** ** | **Stock That** | ** ** | **Stock That** | ** ** | **Rights That** | ** ** | **Rights That** | ** ** |
| ** **          | ** ** | **Options**        | ** ** | **Options**       | ** ** | **Unearned** | ** ** | **Exercise** | ** ** | **Option** | ** ** | **Have Not** | ** ** | **Have Not** | ** ** | **Have Not** | ** ** | **Have Not** | ** ** |
| ** **          | ** ** | **(#)**            | ** ** | **(#)**           | ** ** | **Options** | ** ** | **Price** | ** ** | **Expiration** | ** ** | **Vested** | ** ** | **Vested** | ** ** | **Vested** | ** ** | **Vested** | ** ** |
| **Name**            | ** ** | **Exercisable**    | ** ** | **Unexercisable** | ** ** | **(#)** | ** ** | **($)** | ** ** | **Date** | ** ** | **(#)** | ** ** | **($)** | ** ** | **(#)** | ** ** | **($)** | ** ** |
| Robert J.  DiNicola |       | 35,243             |       | 246,703           |       | — |   | $ | 50.00 |   | 3/27/2013 |   | — |   | $ | — |   | — |   | $ | — |   |
|                |       | 40,000             |       | —            |       |   |   | $ | 50.00 |   | 3/27/2013 |   |   |   |   |   |   |   |   |   |
|                |       | 5,000              |       | —            |       |   |   | $ | 50.00 |   | 6/13/2013 |   |   |   |   |   |   |   |   |   |
|                |       |               |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Francis M. Rowan    |       | 625                |       | 4,375             |       | — |   | $ | 50.00 |   | 3/27/2013 |   | — |   | $ | — |   | — |   | $ | — |   |
|                |       | 1,250              |       | 8,750             |       |   |   | $ | 50.00 |   | 4/28/2013 |   |   |   |   |   |   |   |   |   |
|                |       | —             |       | 5,000             |       |   |   | $ | 50.00 |   | 4/11/2014 |   |   |   |   |   |   |   |   |   |
|                |       |               |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| F. David Coder      |       | 3,125              |       | 21,875            |       | — |   | $ | 50.00 |   | 3/27/2013 |   | — |   | $ | — |   | — |   | $ | — |   |
|                |       | 3,000              |       | —            |       |   |   | $ | 50.00 |   | 5/11/2013 |   |   |   |   |   |   |   |   |   |
|                |       | —             |       | 10,000            |       |   |   | $ | 50.00 |   | 4/11/2014 |   |   |   |   |   |   |   |   |   |
|                |       |               |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Robert Homler       |       | 3,125              |       | 21,875            |       | — |   | $ | 50.00 |   | 4/17/2013 |   | — |   | $ | — |   | — |   | $ | — |   |
|                |       | —             |       | 10,000            |       |   |   | $ | 50.00 |   | 4/11/2014 |   |   |   |   |   |   |   |   |   |
|                |       |               |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Scott Silver        |       | 2,500              |       | 17,500            |       | — |   | $ | 50.00 |   | 3/27/2013 |   | — |   | $ | — |   | — |   | $ | — |   |
|                |       | —             |       | 5,000             |       |   |   | $ | 50.00 |   | 1/24/2014 |   |   |   |   |   |   |   |   |   |
|                |       | —             |       | 10,000            |       |   |   | $ | 50.00 |   | 8/7/2014 |   |   |   |   |   |   |   |   |   |

 

119

----

** **

**Director Compensation**

** **

**The following table sets forth information with respect tocompensation for each of the Company’s directors for the fiscal year endedDecember 29, 2007.**

** **
| ** **               | ** ** | ** **          | ** ** | ** **        | ** ** | ** **  | ** ** | ** **          | ** ** | **Change**          | ** ** | ** **       | ** ** | ** ** | ** ** |
|--------------------------|------------|---------------------|------------|-------------------|------------|-------------|------------|---------------------|------------|---------------------|------------|------------------|------------|------------|------------|
| ** **               | ** ** | ** **          | ** ** | ** **        | ** ** | ** **  | ** ** | ** **          | ** ** | **in Pension** | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **               | ** ** | ** **          | ** ** | ** **        | ** ** | ** **  | ** ** | ** **          | ** ** | **Value and**  | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **               | ** ** | ** **          | ** ** | ** **        | ** ** | ** **  | ** ** | ** **          | ** ** | **Nonqualified**    | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **               | ** ** | ** **          | ** ** | ** **        | ** ** | ** **  | ** ** | **Non-Equity**      | ** ** | **Deferred**        | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **               | ** ** | **Fees  Earned or** | ** ** | ** **        | ** ** | **Option**  | ** ** | **Incentive  Plan** | ** ** | **Compensation**    | ** ** | **All  Other**   |       |       |       |
| ** **               | ** ** | **Paid in  Cash**   | ** ** | **Stock  Awards** | ** ** | **Awards**  | ** ** | **Compensation**    | ** ** | **Earnings**        | ** ** | **Compensation** | ** ** | **Total**  | ** ** |
| **Name**                 | ** ** | **($)**             | ** ** | **($)**           | ** ** | **($) (1)** | ** ** | **($)**             | ** ** | **($)**             | ** ** | **($)**          | ** ** | **($)**    | ** ** |
|                     |       |                |       |              |       |        |       |                |       |                |       |             |       |       |       |
| Dr. Joyce F.  Brown |       | $                   | 50,500     | ** **        | $          | **—**  | ** ** | $                   | **—** | ** **          | $          | **—**       | ** ** | $          | **—** | ** ** | $ | **—** |   | $ | 50,500 |   |
|                     |       |                |       |              |       |        |       |                |       |                |       |             |       |       |       |
| Peter P. Copses          |       | $                   | 51,500     | ** **        | $          | **—**  | ** ** | $                   | **—** | ** **          | $          | **—**       | ** ** | $          | **—** | ** ** | $ | **—** |   | $ | 51,500 |   |
|                     |       |                |       |              |       |        |       |                |       |                |       |             |       |       |       |
| Robert J.  DiNicola (2)  |       | $                   | 50,500     | ** **        | $          | **—**  | ** ** | $                   | **—** | ** **          | $          | **—**       | ** ** | $          | **—** | ** ** | $ | **—** |   | $ | 50,500 |   |
|                     |       |                |       |              |       |        |       |                |       |                |       |             |       |       |       |
| Michael A. Gatto  (3)    |       | $                   | 37,500     | ** **        | $          | **—**  | ** ** | $                   | **—** | ** **          | $          | **—**       | ** ** | $     | **—** | ** ** | $ | **—** |   | $ | 37,500 |   |
|                     |       |                |       |              |       |        |       |                |       |                |       |             |       |       |       |
| Damian J.  Giangiacomo   |       | $                   | 54,000     | ** **        | $          | **—**  | ** ** | $                   | **—** | ** **          | $          | **—**       | ** ** | $          | **—** | ** ** | $ | **—** |   | $ | 54,000 |   |
|                     |       |                |       |              |       |        |       |                |       |                |       |             |       |       |       |
| George Golleher          |       | $                   | 50,000     | ** **        | $          | **—**  | ** ** | $                   | **—** | ** **          | $          | **—**       | ** ** | $          | **—** | ** ** | $ | **—** |   | $ | 50,000 |   |
|                     |       |                |       |              |       |        |       |                |       |                |       |             |       |       |       |
| Andrew Jhawar            |       | $                   | 48,000     | ** **        | $          | **—**  | ** ** | $                   | **—** | ** **          | $          | **—**       | ** ** | $          | **—** | ** ** | $ | **—** |   | $ | 48,000 |   |
|                     |       |                |       |              |       |        |       |                |       |                |       |             |       |       |       |
| Ron Marshall (4)         |       | $                   | 17,615     | ** **        | $          | **—**  |       | **$**               | 49,700     | ** **          | $          | **—**       | ** ** | $          | **—** | ** ** | $ | **—** |   | $ | 67,315 |   |
|                     |       |                |       |              |       |        |       |                |       |                |       |             |       |       |       |
| Lee Neibart              |       | $                   | 47,500     | ** **        | $          | **—**  |       | $                   | —     | ** **          | $          | **—**       | ** ** | $          | **—** | ** ** | $ | **—** |   | $ | 47,500 |   |
|                     |       |                |       |              |       |        |       |                |       |                |       |             |       |       |       |
| Brian H. Pall            |       | $                   | 49,000     | ** **        | $          | **—**  |       | $                   | —     | ** **          | $          | **—**       | ** ** | $          | **—** | ** ** | $ | **—** |   | $ | 49,000 |   |
|                     |       |                |       |              |       |        |       |                |       |                |       |             |       |       |       |
| Pamela J. Romano  (4)    |       | $                   | 16,615     | ** **        | $          | **—**  |       | **$**               | 49,700     | ** **          | $          | **—**       | ** ** | $          | **—** | ** ** | $ | **—** |   | $ | 66,315 |   |

 

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**(1)**          Reflects grant date fair value reported in theCompany’s consolidated financial statements for the year ended December 29,2007, in accordance with SFAS 123R, with respect to 2007 stock option grants tothe listed directors.  Since the stockoptions are fully exercisable upon grant, these amounts represent the totalgrant date fair value.  See Note (13) tothe Company’s consolidated financial statements included in this reportregarding the valuation assumptions with respect to the amounts shown.  None of the options granted to current orformer directors were exercised in the fiscal year ended December 29, 2007and were held by the listed current or former directors as of December 29,2007.

** **

**(2)**          The amounts reflected in the table above for Mr. DiNicolaare also included in the Summary Compensation Table under Salary.  See “—Summary Compensation Table” above.

** **

**(3)**          Resigned as a director ofthe Company effective August 17, 2007.

** **

**(4)**          Appointed as a director ofthe Company effective August 20, 2007.

** **

**120**

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** **

**PostTermination Payments and Benefits**

** **

Pursuant to their respective employment agreements with LNT, each ofthe executive officers is entitled to specified severance compensation in the event of a termination of employment by LNTwithout cause or by the executive officer for good reason.  In either case, the executive officeris entitled to continued payments of basesalary and benefits for the remainder of the term, but no less than two yearsif the termination occurs during the six-month period following a change incontrol (as defined in the employment agreement).  In addition, the executive officer will beentitled to payment of a prorated share of the annual performance bonus basedon the period of actual employment during the year.  With respect to Mr. DiNicola, theprorated bonus payment will be made provided that bonus targets are met for theyear of such termination.  With respectto the other executive officers, the prorated bonus payments are subject to thediscretion of LNT’s board of directors or compensation committee.  Upon sucha termination, all unvested stock options will terminate and the executive willbe entitled to exercise vested options for a specified period following thetermination.  For Mr. DiNicola, theperiod is 180 days; for the other executive officers, it is 90 days.  In addition to any other severance, Mr. Homleris entitled to the continuation of the fringe benefits available to himimmediately prior to the termination for as long as he continues to receivepayments of base salary post-termination.

 

Pursuant to his employment agreement, upon the occurrence of a changeof control, all of Mr. DiNicola’s outstanding options will become fullyexercisable, provided that any performance option shall not vest solely becauseof a change of control.  In addition, theoption grant letters for each of the executive officers provide that their timeoptions will become fully exercisable immediately prior to a change of control,but that vesting will not be accelerated for any performance option unless thechange of controls occurs after a measurement date (as defined in the grantletter).

 

The employment agreements further provide that if any payment to theexecutive would be subject to or result in the imposition of the excise taximposed by Section 4999 of the Internal Revenue Code of 1986, then theamount of such payments shall be reduced to the highest amount that may be paidby LNT without subjecting such payment to the excise tax.  The executive will have the right todesignate those payments or benefits that will be reduced or eliminated.  Notwithstanding the foregoing, in theemployment agreements for Mr. DiNicola and Mr. Homler, the reductionwill not apply if the executive would, on a net after-tax basis, receive lesscompensation than if the payment were not so reduced. All determinations withregard to such excise tax and any reduction in connection with payments to theexecutive shall be made by a nationally recognized accounting firm that acts asLNT’s outside auditors at the time of such determination.

 

Upon termination of employment because of death or disability, theexecutive (or his estate) will be entitled to the executive’s current basesalary (less any payments made under Company-sponsored disability benefitplans) for the remainder of the employment period, plus payment of a proratedshare of the annual performance bonus based on the period of actual employment during the year.  With respect to Mr. DiNicola, theprorated bonus payment will be made provided that bonus targets are met for theyear of such termination.  With respectto the other executive officers, the prorated bonus payments are subject to thediscretion of LNT’s board of directors or compensation committee.  Stock options that are not exercisable as ofthe date of termination because of death or disability will expire, and optionswhich are exercisable as of such date will remain exercisable for a 180-dayperiod.  In the event of Mr. DiNicola’stermination because of death or disability, all of his outstanding options willbecome fully exercisable.

 

Upon a termination of employment, if any of thenamed executive officers other than Mr. DiNicola own shares of commonstock of the Company, the shares are subject to repurchase by LNT or itsdesignee for a period of 180 days (270 days upon termination because of deathor disability) following the termination based on fair value as determined bythe LNT board of directors.

 

121

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The following tables summarize the value of the compensation that theexecutive officers would receive if they had terminated employment on December 29,2007 under the circumstances shown. The tables exclude (1) amounts accruedthrough December 29, 2007 that would be paid in the normal course ofcontinued employment, such as accrued but unpaid salary, and (2) vestedaccount balances under the LNT 401(k) Plan that are generally available toall of LNT’s salaried employees.  Noannual performance bonuses were paid with respect to the year ended December 29, 2007.

 
| ** **          | ** ** | ** **                               | ** ** | **Before Change in**      | ** ** | **After Change in** | ** ** | ** **      | ** ** | ** **         | ** ** | ** **              | ** ** | ** **         | ** ** |
|---------------------|------------|------------------------------------------|------------|-------------------------------------|------------|-------------------------------|------------|-----------------|------------|--------------------|------------|-------------------------|------------|--------------------|------------|
| ** **          | ** ** | ** **                               | ** ** | **Control**                         | ** ** | **Control**                   | ** ** | ** **      | ** ** | ** **         | ** ** | ** **              | ** ** | ** **         | ** ** |
| ** **          | ** ** | ** **                               | ** ** | **Termination**                     | ** ** | **Termination**               | ** ** | ** **      | ** ** | ** **         | ** ** | ** **              | ** ** | ** **         | ** ** |
| ** **          | ** ** | ** **                               | ** ** | **w/o Cause or for** | ** ** | **w/o Cause or**    | ** ** | **Voluntary**   | ** ** | ** **         | ** ** | ** **              | ** ** | **Change in** | ** ** |
| **Name**            | ** ** | **Benefit**                              | ** ** | **Good Reason (1)**       | ** ** | **for Good Reason** | ** ** | **Termination** | ** ** | **Death (1)** | ** ** | **Disability (1)** | ** ** | **Control**        | ** ** |
| Robert J.  DiNicola |       | Continued base salary                    |       | $                                   | 1,350,000  |                          | $          | 2,700,000       |       | $                  | —     |                    | $          | 1,350,000          |       | $ | 1,350,000 |   | $ | — |   |
|                |       |                                     |       |                                |       |                          |       |            |       |               |       |                    |       |               |       |
|                |       | Continued fringe  benefits               |       | $                                   | —     |                          | $          | —          |       | $                  | —     |                    | $          | —             |       | $ | — |   | $ | — |   |
|                |       |                                     |       |                                |       |                          |       |            |       |               |       |                    |       |               |       |
|                |       | Acceleraton of  vesting of stock options |       | $                                   | —     |                          | $          | 1,371           |       | $                  | —     |                    | $          | 1,371              |       | $ | 1,371 |   | $ | 1,371 |   |
|                |       |                                     |       |                                |       |                          |       |            |       |               |       |                    |       |               |       |
| Francis M. Rowan    |       | Continued base salary                    |       | $                                   | 275,000    |                          | $          | 550,000         |       | $                  | —     |                    | $          | 275,000            |       | $ | 275,000 |   | $ | — |   |
|                |       |                                     |       |                                |       |                          |       |            |       |               |       |                    |       |               |       |
|                |       | Continued fringe  benefits               |       | $                                   | —     |                          | $          | —          |       | $                  | —     |                    | $          | —             |       | $ | — |   | $ | — |   |
|                |       |                                     |       |                                |       |                          |       |            |       |               |       |                    |       |               |       |
|                |       | Acceleraton of  vesting of stock options |       | $                                   | —     |                          | $          | 2               |       | $                  | —     |                    | $          | —             |       | $ | — |   | $ | 2 |   |
|                |       |                                     |       |                                |       |                          |       |            |       |               |       |                    |       |               |       |
| F. David Coder      |       | Continued base salary                    |       | $                                   | 425,000    |                          | $          | 850,000         |       | $                  | —     |                    | $          | 425,000            |       | $ | 425,000 |   | $ | — |   |
|                |       |                                     |       |                                |       |                          |       |            |       |               |       |                    |       |               |       |
|                |       | Continued fringe  benefits               |       | $                                   | —     |                          | $          | —          |       | $                  | —     |                    | $          | —             |       | $ | — |   | $ | — |   |
|                |       |                                     |       |                                |       |                          |       |            |       |               |       |                    |       |               |       |
|                |       | Acceleraton of  vesting of stock options |       | $                                   | —     |                          | $          | 6               |       | $                  | —     |                    | $          | —             |       | $ | — |   | $ | 6 |   |
|                |       |                                     |       |                                |       |                          |       |            |       |               |       |                    |       |               |       |
| Robert Homler       |       | Continued base salary                    |       | $                                   | 425,000    |                          | $          | 850,000         |       | $                  | —     |                    | $          | 425,000            |       | $ | 425,000 |   | $ | — |   |
|                |       |                                     |       |                                |       |                          |       |            |       |               |       |                    |       |               |       |
|                |       | Continued fringe  benefits               |       | $                                   | 9,796      |                          | $          | 9,796           |       | $                  | —     |                    | $          | —             |       | $ | — |   | $ | — |   |
|                |       |                                     |       |                                |       |                          |       |            |       |               |       |                    |       |               |       |
|                |       | Acceleraton of  vesting of stock options |       | $                                   | —     |                          | $          | 6               |       | $                  | —     |                    | $          | —             |       | $ | — |   | $ | 6 |   |
|                |       |                                     |       |                                |       |                          |       |            |       |               |       |                    |       |               |       |
| Scott Silver        |       | Continued base salary                    |       | $                                   | 400,000    |                          | $          | 800,000         |       | $                  | —     |                    | $          | 400,000            |       | $ | 400,000 |   | $ | — |   |
|                |       |                                     |       |                                |       |                          |       |            |       |               |       |                    |       |               |       |
|                |       | Continued fringe  benefits               |       | $                                   | —     |                          | $          | —          |       | $                  | —     |                    | $          | —             |       | $ | — |   | $ | — |   |
|                |       |                                     |       |                                |       |                          |       |            |       |               |       |                    |       |               |       |
|                |       | Acceleraton of  vesting of stock options |       | $                                   | —     |                          | $          | 9               |       | $                  | —     |                    | $          | —             |       | $ | — |   | $ | 9 |   |

 

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**(1)**          As of December 29, 2007, the remainingemployment term for each named executive officer was approximately one year,until December 31, 2008, and the continued base salary amounts shown inthese columns reflect one year of continued base salary.  As discussed above under “—SummaryCompensation Table—Employment Agreements,” the employment agreement for eachnamed executive officer provides for automaticone-year renewals unless LNT or the executive provides one-year advance noticeof an election not to renew the term. Notice of non-renewal was not given to any of the named executiveofficers on or before December 31, 2007. The employment term for each officer was, therefore, automaticallyextended for one additional year, to December 31, 2009, effective as of January 1,2008.  If the information in the tableabove had been provided as of January 1, 2008, the continued base salaryamounts in these columns would have reflected two years of continued basesalary because of the one-year extension of the employment term.

 

122

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** **

**Compensation CommitteeReport**

** **

The compensation committee of the board of directors of the Companyoversees the compensation program of the Company on behalf of the board of directors.  In fulfilling its oversight responsibilities,the compensation committee reviewed and discussed with management of theCompany the “Compensation Discussion and Analysis” included in this report.

 

In reliance on this review and discussion, the compensation committeerecommended to the board of directors that the “Compensation Discussion andAnalysis” be included in this report to be filed with the SEC.

 

Members of the Compensation Committee:

Andrew S. Jhawar, Chairman

George Golleher

Brian H. Pall

* *

*This Compensation CommitteeReport shall not be deemed to be incorporated by reference by any generalstatement incorporating by reference this annual report into any filing underthe Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,as amended, and shall not otherwise be deemed filed under such acts.*

 

123

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** **

**Item 12.  Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters**

** **

Thefollowing table sets forth, as of March 1, 2008 (the “Ownership Date”),the number of shares of the Company’s common stock beneficially owned by (1) eachperson or group known by the Company to own beneficially more than 5% of theoutstanding shares of common stock, (2) each director, (3) each ofthe named executive officers and (4) all directors and executive officersas a group.

 

Unlessotherwise indicated in the footnotes to the table, and subject to communityproperty laws where applicable, the following persons have sole voting andinvestment control with respect to the shares beneficially owned by them. Inaccordance with SEC rules, if a person has a right to acquire beneficialownership of any shares of Common Stock, on or within 60 days of the OwnershipDate, upon exercise of outstanding options or otherwise, the shares are deemedbeneficially owned by that person and are deemed to be outstanding solely forthe purpose of determining the percentage of the Company’s shares that personbeneficially owns. These shares are not included in the computations ofpercentage ownership for any other person.

 
| **Name of Beneficial Owner(1)**               | ** ** | **Number of  Shares** | ** ** | **Percentage** | ** ** |
|--------------------------------------------------------------|------------|----------------------------|------------|----------------|------------|
| ** **                                                   | ** ** | ** **                 | ** ** | ** **     | ** ** |
| Linens  Investors, LLC(2)                                    |       | 12,960,000                 |       | 99.6           | %          |
| Robert J.  DiNicola(3)(4)                                    |       | 155,486                    |       | 1.2            | %          |
| Francis M.  Rowan(5)                                         |       | 4,375                      |       | *              |       |
| F. David  Coder(3)(6)                                        |       | 13,500                     |       | *              |       |
| Robert Homler(7)                                             |       | 7,500                      |       | *              |       |
| Joyce F.  Brown(8)                                           |       | 5,000                      |       | *              |       |
| Peter P.  Copses(9)                                          |       | 12,965,000                 |       | 99.6           | %          |
| Damian J.  Giangiacomo(8)                                    |       | 5,000                      |       | *              |       |
| George G.  Golleher(3)(10)                                   |       | 25,000                     |       | *              |       |
| Andrew S.  Jhawar(9)                                         |       | 12,965,000                 |       | 99.6           | %          |
| Ron Marshall(8)                                              |       | 5,000                      |       | *              |       |
| Lee S.  Neibart(8)(11)                                       |       | 5,000                      |       | *              |       |
| Brian H.  Pall(8)(11)                                        |       | 5,000                      |       | *              |       |
| Pamela J.  Romano(8)                                         |       | 5,000                      |       | *              |       |
| Scott Silver  (12)                                           |       | 5,625                      |       | *              |       |
|                                                         |       |                       |       |           |       |
| All officers and  directors as a group (14 persons)(13) |       | 13,211,486                 |       | 100.0          | %          |

 

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| ***    | Less  than 1% of the outstanding shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (1)    | The  address of Linens Investors, LLC (“Linens Investors”) is c/o Apollo  Management V, L.P., 10250 Constellation Boulevard, Los Angeles, California  90067. The address of each named executive officer, Dr. Brown,  Mr. Golleher, Mr. Marshall and Ms. Romano is c/o Linens ’n  Things, Inc., 6 Brighton Road, Clifton, New Jersey 07015. The address  for each of Messrs. Copses, Jhawar and Giangiacomo is c/o Apollo  Management V, L.P., 10250 Constellation Boulevard, Los Angeles, California  90067. The address for each of Messrs. Neibart and Pall is c/o NRDC Real  Estate Advisors I LLC, 3 Manhattanville Road, Purchase, New York 10577.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (2)    | Linens  Investors is the Company’s principal stockholder. Linens Investors is a  special purpose entity that was created in connection with the Merger and is  controlled by Apollo Linens Investors, LLC and its affiliates (“Apollo Linens  Investors”) which, together with NRDC Real Estate Advisors I LLC and Silver  Point Capital Fund Investments LLC, and their respective affiliates, own all  of the membership interests of Linens Investors. Apollo Management V, L.P.  (“Apollo Management V”) is the manager of Linens Investors and has sole  voting and investment and control with respect to the shares. Pursuant to a  stockholders’ agreement, Linens Investors has shares dispositive power with  respect to all of the outstanding shares of common stock. Linens Investors  also has sole voting power over all of the outstanding shares of common stock  pursuant to the stockholders’ agreement. Linens Investors expressly disclaims  beneficial ownership of such shares of common stock held by each of the  parties to the stockholders’ agreement, except to the extent of its pecuniary  interest in the Company. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (3)    | On  February 14, 2006, the Company entered into a stockholders’ agreement  with each of its stockholders. Each stockholder who purchased shares after  that time has also agreed to be bound by the stockholders’ agreement.  Pursuant to the stockholders’ agreement, each stockholder agreed to give  Linens Investors a voting proxy to vote with respect to certain matters as  set forth in the stockholders’ agreement. As a result, Linens Investors may  be deemed to be the beneficial owner of the shares of common stock held by  the parties to the stockholders’ agreement. Linens Investors expressly  disclaims beneficial ownership of such shares of common stock held by each of  the parties to the stockholders’ agreement, except to the extent of its  pecuniary interest.                                                                                                                                                                                                                                                                                                                                                        |

 

124

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| (4)      | Includes 40,000 shares of common stock purchased  on February 14, 2006 and options to purchase 115,486 shares of common  stock that are currently exercisable or exercisable within 60 days of the  Ownership Date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (5)      | Includes options to purchase 4,375 shares of  common stock that are currently exercisable or exercisable within 60 days of  the Ownership Date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (6)      | Includes 3,000 shares of common stock purchased  in May 2006 and options to purchase 10,500 shares of common stock that  are currently exercisable or exercisable within 60 days of the Ownership  Date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (7)      | Includes options to purchase 7,500 shares of  common stock that are currently exercisable or exercisable within 60 days of  the Ownership Date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (8)      | Includes  options to purchase 5,000 shares of common stock that are currently  exercisable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (9)      | Includes  options to purchase 5,000 shares of common stock that are currently  exercisable and 12,960,000 shares of common stock beneficially owned by Linens  Investors. Linens Investors is controlled by its manager, Apollo Management  V. Peter P. Copses and Andrew S. Jhawar, two of the Company’s directors, are  affiliates of Apollo Management V and, therefore, may be deemed to be  beneficial owners of the membership interests of Linens Investors and the  shares of the Company’s common stock owned by Linens Investors. Each of  Messrs. Copses and Jhawar disclaim beneficial ownership of any such  interests in which he does not have a pecuniary interest. |
| * * | * *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (10)     | Includes 10,000 shares of common stock purchased  in August 2006 and options to purchase 15,000 shares of common stock  that are currently exercisable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (11)     | Lee  S. Neibart and Brian Pall, two of the Company’s directors, are affiliates of  NRDC Real Estate Advisors I LLC, and therefore, may be deemed to be  beneficial owners of the membership interests of NRDC Real Estate Advisors I  LLC. Each of Messrs. Neibart and Pall disclaim beneficial ownership of  any such interests in which he does not have a pecuniary interest.                                                                                                                                                                                                                                                                                                         |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (12)     | Includes  options to purchase 5,625 shares of common stock that are currently  exercisable or exercisable within 60 days of the Ownership Date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (13)     | Includes  (a) options to purchase an aggregate of 198,486 shares of common stock  that are currently exercisable or exercisable within 60 days of the Ownership  Date and (b) 12,960,000 shares owned by Linens Investors.                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

**Item 13.  Certain Relationshipsand Related Transactions, and Director Independence**

 

**Management Services Agreement**

 

Upon consummation of the Merger, the Company entered into a managementservices agreement with Apollo Management V, L.P., NRDC Linens B LLC and SilverPoint Capital Fund Investments LLC (each of whom is an affiliate of theCompany).  Under this management servicesagreement, the Sponsors agreed to provide to the Company certain investmentbanking, management, consulting, financial planning and real estate advisoryservices on an ongoing basis for an aggregate fee of $2.0 million per year, which is payable on a monthly basis to ApolloManagement V, L.P. and to NRDC Linens B LLC. Effective with the January 2008 payment, Apollo Management V, L.P.and NRDC Linens B LLC agreed with the Company to allow the monthly services feeto accrue rather than be paid in cash each month.  Apollo Management V, L.P. and NRDC Linens BLLC have the right to withdraw this accrual agreement at any time.  Apollo Management V, L.P. also agreedto provide to the Company certain financial advisory and investment bankingservices from time to time in connection with major financial transactions thatmay be undertaken by it or its subsidiaries in exchange for fees customary forsuch services after taking into account Apollo Management V, L.P.’s expertiseand relationships within the business and financial community.  In connection with the services beingprovided, the Company also agreed to provide customary indemnification.

 

In addition, pursuant to the management services agreement, the Companypaid a transaction fee of $15.0 million in the aggregate (plus reimbursement ofexpenses) to the Sponsors for financial advisory services rendered inconnection with the Merger.  Thirtypercent of this fee, or $4.5 million, was included as part of the purchaseprice and the remaining 70%, or $10.5 million, has been included in deferredfinancing costs.  These services includedassisting the Company in structuring the Merger, taking into account taxconsiderations and optimal access to financing, and assisting in the negotiationof the Company’s material agreements and financing arrangements in connectionwith the Merger.

 

125

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** **

**Stockholders’ Agreement**

 

The only stockholders of the Company are Linens Investors, LLC, alimited liability company owned by the Sponsors, two executives of the Company,Robert J. DiNicola, Chairman and Chief Executive Officer, and F. David Coder,Executive Vice President, Store Operations, and one nonemployee director,George G. Golleher.  In connectiontherewith, Linens Investors, LLC has entered into a stockholders’ agreementwith the Company, and each of the other stockholders have entered into joinderagreements to be bound by the stockholders’ agreement.  The stockholders’ agreement sets forthcertain provisions relating to the management of the Company.  In addition, the stockholders’ agreementcontains customary drag along rights, tag along rights, registration rights,restrictions on the transfer of the Company’s common stock and an indemnity ofthe Sponsors.

 

**DirectorIndependence**

** **

Pursuantto the stockholders’ agreement, the Sponsors have the right to appoint all ofthe members of the Company’s board of directors.  Only four of the ten members of the board ofdirectors, Dr. Joyce F. Brown, George Golleher, Ron Marshall and Pamela J.Romano are not affiliates of the Sponsors. Mr. Golleher purchased 10,000 shares of the Company in August 2006.  Dr. Brown, Mr. Marshall and Ms. Romanodo not currently own any common stock of the Company.  Although the Company is not a listed issuer,if the New York Stock Exchange’s director independence rules wereapplicable, only Dr. Brown, Mr. Golleher, Mr. Marshall and Ms. Romanowould be considered independent directors.

 

Theboard of directors has provided for an audit committee and a compensation committee.The members of the Compensation Committee are Messrs. Jhawar (chair),Golleher and Pall.  The Audit Committeeis currently comprised of Messrs. Copses (chair), Giangiacomo andMarshall.  Of the six named committeemembers Messrs. Copses, Giangiacomo, Jhawar and Pall are affiliates of theSponsors and would not be considered independent committee members under theNew York Stock Exchange rules.  Mr. Golleherwould be considered an independent member of the compensation committee and Mr. Marshallwould be considered an independent member of the audit committee.

 

126

----

 

**Item 14. Principal Accountant Fees and Services**

 

Theinformation regarding principal accountant fees and services and the Company’spre-approval policies and procedures for audit and non-audit services providedby the Company’s independent accountants is summarized as follows:

 

Theaudit committee of the board of directors appointed Ernst & Young LLPand KPMG LLP as the Company’s independent registered public accounting firm toexamine the Company’s consolidated financial statements for fiscal 2007 and fiscal2006, respectively, and to render other professional services as required.  The audit committee has not yet formallyadopted a resolution appointing the Company’s independent registered publicaccounting firm for fiscal 2008.

 

Aggregate fees paid and payableto Ernst & Young LLP and KPMG LLP for audit services related to fiscal2007 and fiscal 2006, respectively, andfor other professional services billed in fiscal 2007 and fiscal 2006,respectively, were as follows:

 
| **Type of Service**                      | ** ** | **Fiscal 2007** | ** ** | **Fiscal 2006** | ** ** |
|----------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| Audit Fees:                                        |       |                 |       |                 |       |
| Annual Audit and  Quarterly Reviews(1)             |       | $                    | 1,238,000  |                 | $          | 1,450,000 |   |
| Registration  Statement and Purchase Accounting(2) |       | —               |       | 995,000              |       |
|                                               |       |                 |       |                 |       |
|                                               |       | 1,238,000            |       | 2,445,000            |       |
| Tax Fees                                           |       | 13,000               |       | 273,000              |       |
|                                               |       |                 |       |                 |       |
| Total                                              |       | $                    | 1,251,000  |                 | $          | 2,718,000 |   |

 

----

(1)          Annual audit and quarterly reviewfees consisted of the audit of the Company’s annual financial statements andreviews of the Company’s quarterly financial statements, as well as consents toSEC filings.

 

(2)          Registration statement andpurchase accounting fees consisted of services related to the Merger andrelated purchase accounting and the preparation of the comfort letter.

 

Duringfiscal 2007, the audit committee conformed with a formal policy it adoptedconcerning the pre-approval of audit and non-audit services to be provided bythe independent registered public accounting firm to the Company.  The policy required that all services to beperformed by Ernst & Young LLP, the Company’s independent registeredpublic accounting firm, including audit services, audit-related services andpermitted non-audit services, be pre-approved by the audit committee.  The policy permitted the audit committee todelegate pre-approval authority to one or more members, provided that anypre-approval decisions are reported to the audit committee at its nextmeeting.  Specific services beingprovided by the independent registered public accounting firm were regularlyreviewed in accordance with the pre-approval policy.  At subsequent audit committee meetings, theaudit committee received updates on services being provided by the independentregistered public accounting firm, and management presented additional servicesfor approval.  For 2007, all audit andnon-audit services provided by Ernst & Young LLP were approved inadvance by the audit committee.

 

127

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**PART IV**

 
| **Item  15.** | **Exhibits, Financial Statement Schedules** |
|---------------|---------------------------------------------|

 

(a)  Thefollowing documents are filed as part of this report.

 
| **1.** | ** ** | **Financial Statements** |
|--------|------------|--------------------------|

 

Thefollowing Consolidated Financial Statements for the 52 weeks ended December 29,2007 are included in this report as follows:

 
|                                                                                                                                                                                                                                                                                                                                                                                                |   | **Pages**     |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|
|                                                                                                                                                                                                                                                                                                                                                                                                |   |          |
| Reports of  Independent Registered Public Accounting Firms on the Consolidated Financial  Statements                                                                                                                                                                                                                                                                                                |   | 54 – 55  |
|                                                                                                                                                                                                                                                                                                                                                                                                |   |          |
| Consolidated  Statements of Operations for the fiscal year ended December 29, 2007  (Successor Entity), the period February 14, 2006 to December 30,  2006 (Successor Entity), the period January 1, 2006 to February 13,  2006 (Predecessor Entity) and the fiscal year ended December 31, 2005  (Predecessor Entity)                                                |   | 56            |
|                                                                                                                                                                                                                                                                                                                                                                                                |   |          |
| Consolidated Balance  Sheets as of December 29, 2007 and December 30, 2006                                                                                                                                                                                                                                                                                                                |   | 57            |
|                                                                                                                                                                                                                                                                                                                                                                                                |   |          |
| Consolidated  Statements of Shareholders’ Equity and Comprehensive Income (Loss) for the  fiscal year ended December 29, 2007 (Successor Entity), the period  February 14, 2006 to December 30, 2006 (Successor Entity), the  period January 1, 2006 to February 13, 2006 (Predecessor Entity)  and the fiscal year ended December 31, 2005 (Predecessor Entity) |   | 58            |
|                                                                                                                                                                                                                                                                                                                                                                                                |   |          |
| Consolidated  Statements of Cash Flows for the fiscal year ended December 29, 2007  (Successor Entity), the period February 14, 2006 to December 30,  2006 (Successor Entity), the period January 1, 2006 to February 13,  2006 (Predecessor Entity) and the fiscal year ended December 31, 2005  (Predecessor Entity)                                                |   | 59 – 60  |
|                                                                                                                                                                                                                                                                                                                                                                                                |   |          |
| Notes to Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                                          |   | 61 – 105 |

 
| **2.** | ** ** | **Schedules** |
|--------|------------|---------------|

 

ScheduleII, Valuation and Qualifying Accounts, is omitted because the information isincluded in the consolidated financial statements and notes.

 
| **3.** | ** ** | **Exhibits** |
|--------|------------|--------------|

 

Theexhibits on the accompanying exhibit index are filed as part of, andincorporated by reference into, this report.

 

128

----

 

**Exhibits**

 
| **Exhibit****Number** |   | **Description  of Exhibits**                                                                                                                                                                                                                                                  |
|-----------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **            |   | ** **                                                                                                                                                                                                                                                                    |
| 3.1(2)                |   | Certificate  of Merger merging Linens Merger Sub Co. with and into Linens ’n  Things, Inc.                                                                                                                                                                          |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.2(2)                |   | Amended  and Restated Certificate of Incorporation of Linens ’n Things, Inc.                                                                                                                                                                                        |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.3(2)                |   | Amended  and Restated By-laws of Linens ’n Things, Inc.                                                                                                                                                                                                             |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.4(2)                |   | Articles  of Incorporation of Linens ’n Things Center, Inc.                                                                                                                                                                                                         |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.5(2)                |   | By-laws  of Linens ’n Things Center, Inc.                                                                                                                                                                                                                           |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.6(2)                |   | Amended  and Restated Certificate of Incorporation of Linens Holding Co.                                                                                                                                                                                                      |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.7(2)                |   | Amended  and Restated By-laws of Linens Holding Co.                                                                                                                                                                                                                           |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.8(2)                |   | Articles  of Incorporation of Bloomington, MN., L.T., Inc.                                                                                                                                                                                                               |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.9(2)                |   | By-laws  of Bloomington, MN., L.T., Inc.                                                                                                                                                                                                                                 |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.10(2)               |   | Certificate  of Formation of Vendor Finance, LLC                                                                                                                                                                                                                              |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.11(2)               |   | Amended  and Restated Operating Agreement of Vendor Finance, LLC                                                                                                                                                                                                              |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.12(2)               |   | Certificate  of Incorporation of E W Kalkin, Inc. (n/k/a) LNT, Inc.                                                                                                                                                                                                 |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.13(2)               |   | Certificate  of Amendment to the Certificate of Incorporation of E W Kalkin, Inc.  (changing name to Linens ’n Things, Inc.)                                                                                                                                   |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.14(2)               |   | Certificate  of Amendment to the Certificate of Incorporation of Linens ’n  Things, Inc. (changing name to LNT, Inc.)                                                                                                                                          |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.15(2)               |   | By-laws  of LNT, Inc.                                                                                                                                                                                                                                                    |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.16(2)               |   | Certificate  of Incorporation of LNT Services, Inc.                                                                                                                                                                                                                      |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.17(2)               |   | By-laws  of LNT Services, Inc.                                                                                                                                                                                                                                           |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.18(2)               |   | Certificate  of Formation of LNT Leasing II, LLC                                                                                                                                                                                                                              |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.19(2)               |   | Amended  and Restated Operating Agreement of LNT Leasing II, LLC                                                                                                                                                                                                              |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.20(2)               |   | Certificate  of Incorporation of LNT West, Inc.                                                                                                                                                                                                                          |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.21(2)               |   | By-laws  of LNT West, Inc.                                                                                                                                                                                                                                               |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.22(2)               |   | Certificate  of Organization of LNT Virginia LLC                                                                                                                                                                                                                              |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.23(2)               |   | Amended  and Restated Operating Agreement of LNT Virginia LLC                                                                                                                                                                                                                 |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.24(2)               |   | Certificate  of Formation of LNT Merchandising Company LLC                                                                                                                                                                                                                    |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.25(2)               |   | Amended  and Restated Operating Agreement of LNT Merchandising Company LLC                                                                                                                                                                                                    |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.26(2)               |   | Certificate  of Formation of LNT Leasing III, LLC                                                                                                                                                                                                                             |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.27(2)               |   | Amended  and Restated Operating Agreement of LNT Leasing III, LLC                                                                                                                                                                                                             |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.28(2)               |   | Certificate  of Formation of Citadel LNT, LLC                                                                                                                                                                                                                                 |
|                  |   |                                                                                                                                                                                                                                                                          |
| 3.29(2)               |   | Amended  and Restated Operating Agreement of Citadel LNT, LLC                                                                                                                                                                                                                 |
|                  |   |                                                                                                                                                                                                                                                                          |
| 4.1(1)                |   | Indenture,  dated as of February 14, 2006, among Linens ’n Things, Inc., Linens  ’n Things Center, Inc., the Guarantors (as defined therein) and The Bank  of New York, as Trustee, with respect to the Senior Secured Floating Rate  Notes due 2014 |
|                  |   |                                                                                                                                                                                                                                                                          |
| 4.2(1)                |   | Form of  Senior Secured Floating Rate Notes due 2014 (included as “Exhibit A” to  Exhibit 4.1)                                                                                                                                                       |

 

129

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| 4.3(1)   |   | Registration  Rights Agreement, dated February 14, 2006, by and among Linens ’n  Things, Inc., Linens ’n Things Center, Inc., the Guarantors listed  on Schedule I thereto and Bear, Stearns & Co. Inc. and UBS  Securities LLC                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|----------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.1(1)  |   | Credit  Agreement, (the “Credit Agreement”) dated as of February 14, 2006, among  Linens ’n Things, Inc., Linens ’n Things Center, Inc., the  Subsidiary Guarantors (as defined therein), the parties named therein from  time to time as lenders, whether by execution of the Credit Agreement or an  Assignment and Acceptance, UBS Securities LLC, as Arranger and Bookmanager,  UBS AG, Stamford Branch, as Issuing Bank, US Administrative Agent and US  Co-Collateral Agent, UBS AG, Canada Branch, as Canadian Co-Collateral Agent,  Wachovia Bank, National Association, as US Co-Collateral Agent, Co-Documentation  Agent and an Issuing Bank, Wachovia Capital Finance Corporation (Canada), as  Canadian Administrative Agent, Canadian Co-Collateral Agent and Canadian  Swingline Lender, UBS Loan Finance LLC, as US Swingline Lender, UBS  Securities LLC and Bear, Stearns & Co. Inc., as Joint Book  Runners, Bear, Stearns & Co. Inc., as Co-Syndication Agent,  Wells Fargo, as Co-Documentation Agent and The CIT Group/Business  Credit, Inc., as Co-Syndication Agent            |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.2(4)  |   | $700,000,000  Amended and Restated Credit Agreement, dated as of May 24, 2007, among  Linens ’n Things, Inc. and Linens ‘n Things Center, Inc., as US  borrowers, Linens ’n Things Canada Corp., as Canadian borrower, Linens  Holding Co. and the other guarantors party thereto, as guarantors, the  lenders party thereto, UBS Securities LLC, as Arranger and Bookmanager, UBS  AG, Stamford Branch, as Issuing Bank, US Administrative Agent and US  Co-Collateral Agent, UBS AG Canada Branch, as Canadian Co-Collateral Agent,  Wachovia Bank, National Association, as US Co-Collateral Agent,  Co-Documentation Agent and an Issuing Bank, Wachovia Capital Finance  Corporation (Canada), as Canadian Administrative Agent, Canadian  Co-Collateral Agent and Canadian Swingline Lender, UBS Loan Finance LLC, as  US Swingline Lender, UBS Securities LLC and Bear, Stearns &  Co. Inc., as Joint Book-Runners, Bear, Stearns & Co. Inc.,  as Co-Syndication Agent, Wells Fargo Retail Finance, LLC, as Co-Documentation  Agent, and The CIT Group/Business Credit, Inc., as Co-Syndication Agent |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.3(5)  |   | Credit  Agreement, dated as of October 24, 2007, among Linens ’n  Things, Inc., Linens ’n Things Center, Inc., as U.S. borrowers,  Linens ’n Things Canada Corp., as Canadian borrower, Linens Holding Co., as  guarantor, the subsidiary guarantors party thereto, the lenders party  thereto, GE Capital Markets, Inc., as lead arranger, General Electric  Capital Corporation, as U.S. swingline lender, U.S. administrative agent, and  U.S. collateral agent, GE Canada Finance Holding Company, as Canadian  swingline lender, Canadian administrative agent, and Canadian collateral  agent.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.4(2)  |   | Stockholders’Agreement,  dated as of February 14, 2006, between Linens Holding Co. and its  stockholders                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.5(2)  |   | Security  Agreement, dated as of February 14, 2006, by Linens ’n Things, Inc.,  Linens ’n Things Center, Inc., the Guarantors party thereto and The Bank  of New York                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.6(2)  |   | Security  Agreement, dated as of February 14, 2006, by Linens ’n  Things, Inc., Linens ’n Things Center, Inc., the Guarantors party  thereto, UBS AG, Stamford Branch and Wachovia Bank, National Association                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.7(2)  |   | Management  Services Agreement, dated as of February 14, 2006, among Linens ’n  Things, Inc., Linens Holding Co., Apollo Management V, L.P., NRDC Linens  B LLC and Silver Point Capital Fund Investments LLC                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.8(2)  |   | Intercreditor  Agreement, dated as of February 14, 2006, by and among Linens ’n  Things, Inc., Linens Holding Co., Linens ’n Things Center, Inc.,  Linens ’n Things Canada Corp., the Subsidiary Guarantors (as defined  therein), UBS AG, Stamford Branch, Wachovia Bank, National Association, UBS  AG Canada Branch, Wachovia Capital Finance Corporation and The Bank of New  York                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.9(1)  |   | Employment  Agreement with Robert J. DiNicola                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.10(1) |   | Option  Grant Letter with Robert J. DiNicola                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.11(3) |   | Employment  Agreement with Francis M. Rowan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.12(1) |   | Amended  and Restated Employment Agreement with F. David Coder                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.13(1) |   | Option  Grant Letter with F. David Coder                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.14(1) |   | Amended  and Restated Employment Agreement with Robert Homler                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.15(7) |   | Second  Amended and Restated Employment Agreement with Scott Silver                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.16(1) |   | Linens  Holding Co. Stock Option Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.17(1) |   | Standard  Form of Option Grant Letter                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.18(1) |   | Director  Compensation Policy                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.19(1) |   | Standard  Form of Director Option Grant Letter                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.20(2) |   | Trademark  Security Agreement, dated as of February 14, 2006, by Bloomington, MN.,  L.T., Inc. in favor of The Bank of New York                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.21(2) |   | Trademark  Security Agreement, dated as of February 14, 2006, by LNT Merchandising  Company LLC in favor of The Bank of New York                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.22(2) |   | Trademark  Security Agreement, dated as of February 14, 2006, by LNT  Services, Inc. in favor of The Bank of New York                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.23(2) |   | Copyright  Security Agreement, dated as of February 14, 2006, by Linens ’n  Things, Inc. in favor of The Bank of New York                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.24(2) |   | Copyright  Security Agreement, dated as of February 14, 2006, by Linens ’n Things  Center, Inc. in favor of The Bank of New York                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

130

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| 14.1(2) |   | Code  of Ethics for the Chief Executive Officer and Senior Financial Officers of  Linens ’n Things, Inc. and Linens Holding Co.                                                                                                   |
|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                        |
| 16.1(6) |   | Letter  from KPMG LLP to the Securities and Exchange Commission, dated April 17,  2007.                                                                                                                                                |
|    |   |                                                                                                                                                                                                                                        |
| 21.1(1) |   | Subsidiaries  of Linens Holding Co.                                                                                                                                                                                                         |
|    |   |                                                                                                                                                                                                                                        |
| 31.1(7) |   | Certification  of the Chief Executive Officer of Linens Holding Co., Linens ’n  Things, Inc. and Linens ’n Things Center, Inc. pursuant to  Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended |
|    |   |                                                                                                                                                                                                                                        |
| 31.2(7) |   | Certification  of the Chief Financial Officer of Linens Holding Co., Linens ’n  Things, Inc. and Linens ’n Things Center, Inc. pursuant to  Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended |
|    |   |                                                                                                                                                                                                                                        |
| 32.1(7) |   | Certification  of the Chief Executive Officer and Chief Financial Officer of Linens Holding  Co., Linens ’n Things, Inc. and Linens ’n Things Center, Inc.  pursuant to 18 U.S.C. Section 1350                     |

 

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| *(1) * | Filed  previously as an exhibit to the Registration Statement on Form S-4 (File  No. 333-135646) filed by the Registrants on July 7, 2006.                  |
|-------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *(2) * | Filed  previously as an exhibit to the Registration Statement on Form S-4/A  (File No. 333-135646) filed by the Registrants on August 11, 2006.             |
| *(3) * | Filed  previously as an exhibit to the Annual Report on Form 10-K for the  fiscal year ended December 30, 2006 filed by the Registrants on  March 27, 2007. |
| *(4) * | Filed  previously as an exhibit to a Current Report on Form 8-K filed by the  Registrants on May 29, 2007.                                                       |
| *(5) * | Filed  previously as an exhibit to a Current Report on Form 8-K filed by the  Registrants on October 26, 2007.                                                   |
| *(6) * | Filed  previously as an exhibit to a Current Report on Form 8-K filed by the  Registrants on April 18, 2007.                                                     |
| *(7) * | Included  herein.                                                                                                                                                          |

 

131

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrants’ have duly caused this Report to be signed ontheir behalf by the undersigned, thereunto duly authorized.

 
| ** **                      | ** ** | **LINENS  HOLDING CO.**                    |
|---------------------------------|------------|--------------------------------------------|
| ** **                      | ** ** | **LINENS  ’N THINGS****,  INC.**      |
| ** **                      | ** ** | **LINENS  ’N THINGS****CENTER, INC.** |
| ** **                      | ** ** | ** **                                 |
| Date:  March 20, 2008 | By:        | /s/ Robert J. DiNicola                     |
| ** **                      | ** ** | Robert  J. DiNicola                        |
| ** **                      | ** ** | Chairman  and Chief Executive Officer      |
| ** **                      | ** ** | (principal  executive officer)             |
|                                 |            |                                            |  |

 

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this Report hasbeen signed below by the following persons on behalf of the Registrants and inthe capacities indicated on the 20th day of March, 2008.

 
| **Signature**             | ** ** | **Title**                                          | ** ** | **Date**            |
|---------------------------|------------|----------------------------------------------------|------------|---------------------|
|                      |       |                                               |       |                |
| /s/ Robert J. DiNicola    |       | Chairman  and Chief Executive Officer              |       | March 20, 2008 |
| **Robert J. DiNicola**    |       | (principal  executive officer)                     |       |                |
|                      |       |                                               |       |                |
|                      |       |                                               |       |                |
| /s/ Francis M. Rowan      |       | Senior  Vice President and Chief Financial Officer |       | March 20, 2008 |
| **Francis M. Rowan**      |       | (principal  financial and accounting officer)      |       |                |
|                      |       |                                               |       |                |
|                      |       |                                               |       |                |
| /s/ Joyce F. Brown        |       | Director                                           |       | March 20, 2008 |
| **Joyce F. Brown**        | ** ** | ** **                                         | ** ** | ** **          |
| ** **                | ** ** | ** **                                         | ** ** | ** **          |
| ** **                | ** ** | ** **                                         | ** ** | ** **          |
| /s/ Peter P. Copses       |       | Director                                           |       | March 20, 2008 |
| **Peter P. Copses**       | ** ** | ** **                                         | ** ** | ** **          |
| ** **                | ** ** | ** **                                         | ** ** | ** **          |
| ** **                | ** ** | ** **                                         | ** ** | ** **          |
| /s/ Damian J. Giangiacomo |       | Director                                           |       | March 20, 2008 |
| **Damian J. Giangiacomo** | ** ** | ** **                                         | ** ** | ** **          |
| ** **                | ** ** | ** **                                         | ** ** | ** **          |
| ** **                | ** ** | ** **                                         | ** ** | ** **          |
| /s/ George G. Golleher    |       | Director                                           |       | March 20, 2008 |
| **George G. Golleher**    |       |                                               |       |                |
|                      |       |                                               |       |                |
|                      |       |                                               |       |                |
| /s/ Andrew S. Jhawar      |       | Director                                           |       | March 20, 2008 |
| **Andrew S. Jhawar**      | ** ** | ** **                                         | ** ** | ** **          |
| ** **                | ** ** | ** **                                         | ** ** | ** **          |
| ** **                | ** ** | ** **                                         | ** ** | ** **          |
| /s/ Ron Marshall          |       | Director                                           |       | March 20, 2008 |
| **Ron Marshall**          | ** ** | ** **                                         | ** ** | ** **          |
| ** **                | ** ** | ** **                                         | ** ** | ** **          |
| ** **                | ** ** | ** **                                         | ** ** | ** **          |
| /s/ Lee S. Neibart        |       | Director                                           |       | March 20, 2008 |
| **Lee S. Neibart**        | ** ** | ** **                                         | ** ** | ** **          |
| ** **                | ** ** | ** **                                         | ** ** | ** **          |
| ** **                | ** ** | ** **                                         | ** ** | ** **          |
| /s/ Brian H. Pall         |       | Director                                           |       | March 20, 2008 |
| **Brian H. Pall**         | ** ** | ** **                                         | ** ** | ** **          |
| ** **                | ** ** | ** **                                         | ** ** | ** **          |
| ** **                | ** ** | ** **                                         | ** ** | ** **          |
| /s/ Pamela J. Romano      |       | Director                                           |       | March 20, 2008 |
| **Pamela J. Romano**      | ** ** | ** **                                         | ** ** | ** **          |

 

132

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