**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **(Mark)**                                             |
|--------------------------------------------------------|
| **x**                                                  | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
| ** **                                             | ** ** | ** ** |
| **For the Quarterly Period Ended September  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**                       | ** ** | **20-4192917**       |
|------------------------------------|------------|----------------------|
| **Delaware**                       | ** ** | **22-3463939**       |
| **California**                     | ** ** | **59-2740308**       |
| (States or other jurisdictions  of |       | (I.R.S. Employer     |
| incorporation or organization)     |       | Identification Nos.) |

** **

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

(Address of principal executive offices) (ZipCode)

 

**(973) 778-1300**

(Registrants’ telephone number, including areacode)

 

Indicate by check markwhether the registrants (1) have filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) have been subject to such filingrequirements for the past 90 days:

 

Yes x     No o

 

Indicate by check markwhether the registrants are large accelerated filers, accelerated filers, ornon-accelerated filers. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large Accelerated Filer o | Accelerated Filer o | Non-accelerated filer x |
|--------------------------------|--------------------------|------------------------------|

 

Indicateby check mark whether the registrants are a shell company (as defined inRule 12b-2 of the Act):

 

Yes o     No x

 

As of October 31, 2007,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.

 

 

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**INDEX**

 
| ** **                                          | **Page No.**                                                                                                                                                                                                                                                                     |
|-----------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                |                                                                                                                                                                                                                                                                                  |
| **Explanatory Note and Forward-Looking Statements** | 3                                                                                                                                                                                                                                                                                     |
|                                                |                                                                                                                                                                                                                                                                                  |   |
| **Part I.**                                         | **Financial Information**                                                                                                                                                                                                                                                             | ** ** |
|                                                |                                                                                                                                                                                                                                                                                  |   |
| **Item 1.**                                         | **Financial Statements**                                                                                                                                                                                                                                                              | ** ** |
|                                                |                                                                                                                                                                                                                                                                                  |   |
|                                                | Condensed Consolidated Statements of Operations (Unaudited) for the  thirteen weeks ended September 29, 2007 and September 30, 2006                                                                                                                                                   | 4 |
|                                                |                                                                                                                                                                                                                                                                                  |   |
|                                                | Condensed Consolidated Statements of Operations (Unaudited) for the  thirty-nine weeks ended September 29, 2007 (Successor Entity); the period  February 14, 2006 to September 30, 2006 (Successor Entity); and the period  January 1, 2006 to February 13, 2006 (Predecessor Entity) | 5 |
|                                                |                                                                                                                                                                                                                                                                                  |   |
|                                                | Condensed Consolidated Balance Sheets (Unaudited) as of September 29,  2007; December 30, 2006; and September 30, 2006                                                                                                                                                                | 6 |
|                                                |                                                                                                                                                                                                                                                                                  |   |
|                                                | Condensed Consolidated Statements of Cash Flows (Unaudited) for the  thirty-nine weeks ended September 29, 2007 (Successor Entity); the period  February 14, 2006 to September 30, 2006 (Successor Entity); and the period  January 1, 2006 to February 13, 2006 (Predecessor Entity) | 7 |
|                                                |                                                                                                                                                                                                                                                                                  |   |
|                                                | Notes to Unaudited Condensed Consolidated  Financial Statements                                                                                                                                                                                                                       | 8 |
|                                                |                                                                                                                                                                                                                                                                                  |   |
| **Item 2.**                                         | **Management’s Discussion and Analysis of  Financial Condition and Results of Operations**                                                                                                                                                                                       | 34 |
|                                                |                                                                                                                                                                                                                                                                                  |   |
| **Item 3.**                                         | **Quantitative and Qualitative Disclosures  about Market Risk**                                                                                                                                                                                                                       | 44 |
|                                                |                                                                                                                                                                                                                                                                                  |   |
| **Item 4.**                                         | **Controls and Procedures**                                                                                                                                                                                                                                                           | 46 |
|                                                | ** **                                                                                                                                                                                                                                                                            |   |
| **Part II.**                                        | **Other Information**                                                                                                                                                                                                                                                                 |   |
|                                                | ** **                                                                                                                                                                                                                                                                            |   |
| **Item 1.**                                         | **Legal Proceedings**                                                                                                                                                                                                                                                                 | 47 |
|                                                | ** **                                                                                                                                                                                                                                                                            |   |
| **Item 1A.**                                        | **Risk Factors**                                                                                                                                                                                                                                                                      | 47 |
|                                                | ** **                                                                                                                                                                                                                                                                            |   |
| **Item 4.**                                         | **Submission of  Matters to a Vote of Security Holders**                                                                                                                                                                                                                              | 47 |
|                                                | ** **                                                                                                                                                                                                                                                                            |   |
| **Item 6.**                                         | **Exhibits**                                                                                                                                                                                                                                                                          | 47 |
|                                                | ** **                                                                                                                                                                                                                                                                            |   |
| ** **                                          | **Signatures**                                                                                                                                                                                                                                                                        | 48 |

 

2

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**EXPLANATORYNOTE**

 

On November 8, 2005, Linens Merger Sub Co.was formed by affiliates of Apollo Management, L.P., and National Realty &Development Corp. and Silver Point Capital Fund Investments LLC (collectively,the “Sponsors”) to serve as a holding company. On February 14, 2006, LinensMerger Sub Co. merged with and into Linens ‘n Things, Inc. (the “Merger”), andLinens ‘n Things, Inc., as the surviving corporation, became a wholly ownedsubsidiary of Linens Holding Co. (the “Company”). The Merger was financed inpart by the issuance of $650.0 million aggregate principal amount of SeniorSecured Floating Rate Notes (the “Notes”) due 2014 of Linens ‘n Things, Inc. andLinens ‘n Things Center, Inc., a wholly owned subsidiary of Linens ‘n Things,Inc. The Notes are guaranteed by the Company and each of its domesticsubsidiaries (other than Linens ‘n Things, Inc. and Linens ‘n Things Center,Inc.). This report also contains the condensed consolidated financialstatements of the Company’s predecessor entity, Linens ‘n Things, Inc. and itssubsidiaries, for the period January 1, 2006 to February 13, 2006. Theaccompanying condensed consolidated financial statements are those of LinensHolding Co. and its subsidiaries. The Company has not presented separatefinancial statements for Linens ‘n Things, Inc. and its subsidiaries or Linens ‘nThings Center, Inc. and its subsidiaries (collectively, the “Issuers” asdescribed in Note 13) because management has determined that the differences insuch financial statements are minor. Unlessthe context requires otherwise, “we,” “us,” “our,” or the “Company” refer toLinens Holding Co. and its subsidiaries and, for periods prior to February 14,2006, the Company’s predecessor entity and its subsidiaries.

 

**FORWARD-LOOKINGSTATEMENTS**

** **

This report may contain forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995 (Section 27A of the Securities Act of 1933 and Section 21E ofthe Securities Exchange Act of 1934) with respect to the Company’s financialcondition, results of operations and business that is not historicalinformation. All statements, other than statements of historical fact, includedin this report are forward-looking statements. In particular, statements thatthe Company makes relating to its overall volume trends, industry forces,margin trends, anticipated capital expenditures and its strategies are forward-lookingstatements. When used in this document, the words “believe,” “expect,” “anticipate,”“intend,” “estimate,” “project,” “plan,” and similar expressions, aswell as future or conditional verbs such as “will,” “should,” “would” and “could,” are intended to identifyforward-looking statements.

 

These statements are based on assumptions and assessments made by theCompany’s management in light of its experience and its perception ofhistorical trends, current conditions, expected future developments and otherfactors it believes to be appropriate. The Company believes there is areasonable basis for its expectations and beliefs, but they are inherentlyuncertain, the Company may not realize its expectations and its beliefs may notprove correct. Any forward-looking statements are not guarantees of the Company’sfuture performance and are subject to risks and uncertainties that could causeactual results, developments and business decisions to differ materially fromthose described or implied by any such forward-looking statements. The Companyundertakes no obligation to publicly update or revise any forward-lookingstatement, whether as a result of new information, future events or otherwise.Such factors include, without limitation: general economic conditions; changesin the retailing environment and consumer spending habits; inclement weatherand natural disasters; competition from existing and potential competitors; theamount of merchandise markdowns; loss or retirement of key members ofmanagement; increases in the costs of borrowings and unavailability ofadditional debt or equity capital; impact of the Company’s substantialindebtedness on its operating income and its ability to grow; the cost oflabor; labor disputes; increased healthcare benefit costs; other costs and expenses;and other important factors that could cause actual results to differmaterially from those described or implied by the forward-looking statementscontained in this report.

 

3

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**PART I –FINANCIAL INFORMATION**

 

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

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(In thousands) (Unaudited)**

** **
| ** **                                              | ** ** | **Thirteen Weeks Ended  September 29, 2007** | ** **  | **Thirteen Weeks Ended  September 30, 2006** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------------------|-------------|------------------------------------------------------------------|------------|
|                                                    |       |                                                             |        |                                                             |       |
| **Net sales**                                           | ** ** | **$**                                                            | **666,791** | ** **                                                       | **$**      | **658,155** | ** ** |
| Cost of sales, including buying and  distribution costs |       | 405,687                                                          |        | 388,579                                                          |       |
|                                                    |       |                                                             |        |                                                             |       |
| **Gross profit**                                        | ** ** | **261,104**                                                      | ** **  | **269,576**                                                      | ** ** |
|                                                    |       |                                                             |        |                                                             |       |
| Selling, general and administrative  expenses           |       | 300,927                                                          |        | 287,429                                                          |       |
| Impairment of property and equipment                    |       | 16,779                                                           |        | —                                                           |       |
| ** **                                              | ** ** | ** **                                                       | ** **  | ** **                                                       | ** ** |
| **Operating loss**                                      | ** ** | **(56,602**                                                      | **)**       | **(17,853**                                                      | **)**      |
|                                                    |       |                                                             |        |                                                             |       |
| Interest income                                         |       | (74                                                              | )           | (18                                                              | )          |
| Interest expense                                        |       | 24,197                                                           |        | 23,572                                                           |       |
|                                                    |       |                                                             |        |                                                             |       |
| Interest expense, net                                   |       | 24,123                                                           |        | 23,554                                                           |       |
|                                                    |       |                                                             |        |                                                             |       |
| Other (income) expense, net                             |       | (1,539                                                           | )           | 323                                                              |       |
|                                                    |       |                                                             |        |                                                             |       |
| **Loss before provision (benefit) for income  taxes**   | ** ** | **(79,186**                                                      | **)**       | **(41,730**                                                      | **)**      |
| Provision (benefit) for income taxes                    |       | 743                                                              |        | (14,355                                                          | )          |
|                                                    |       |                                                             |        |                                                             |       |
| **Net loss**                                            | ** ** | **$**                                                            | **(79,929** | **)**                                                            | **$**      | **(27,375** | **)** |

 

*See accompanying Notes to Unaudited CondensedConsolidated Financial Statements*

 

4

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

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(In thousands) (Unaudited)**

 
| ** **                                              | ** ** | **Thirty-nine Weeks  Ended September 29,  2007** | ** **    | **February 14, 2006 to  September 30, 2006** | ** ** | ** **    | **January 1, 2006 to  February 13, 2006** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------------------------------|---------------|-----------------------------------------------------------------------|------------|---------------|--------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **(Successor Entity)**                                     | ** **    | **(Successor Entity)**                                           | ** ** | ** **    | **(Predecessor  Entity)**                                          | ** ** |
|                                                    |       |                                                            |          |                                                                  |       |          |                                                               |       |
| **Net sales**                                           | ** ** | **$**                                                           | **1,831,922** | ** **                                                            | **$**      | **1,577,583** | ** **                                                         | ** ** | **$** | **284,971** | ** ** |
| Cost of sales, including buying and  distribution costs |       | 1,110,417                                                       |          | 951,007                                                               |       |          | 180,675                                                            |       |
|                                                    |       |                                                            |          |                                                                  |       |          |                                                               |       |
| **Gross profit**                                        | ** ** | **721,505**                                                     | ** **    | **626,576**                                                           | ** ** | ** **    | **104,296**                                                        | ** ** |
|                                                    |       |                                                            |          |                                                                  |       |          |                                                               |       |
| Selling, general and administrative  expenses           |       | 873,042                                                         |          | 708,113                                                               |       |          | 175,424                                                            |       |
| Impairment of property and equipment                    |       | 16,779                                                          |          | —                                                                |       |          | —                                                             |       |
|                                                    |       |                                                            |          |                                                                  |       |          |                                                               |       |
| **Operating loss**                                      | ** ** | **(168,316**                                                    | **)**         | **(81,537**                                                           | **)**      | ** **    | **(71,128**                                                        | **)**      |
|                                                    |       |                                                            |          |                                                                  |       |          |                                                               |       |
| Interest income                                         |       | (338                                                            | )             | (137                                                                  | )          |          | (668                                                               | )          |
| Interest expense                                        |       | 74,084                                                          |          | 55,404                                                                |       |          | —                                                             |       |
|                                                    |       |                                                            |          |                                                                  |       |          |                                                               |       |
| Interest expense (income), net                          |       | 73,746                                                          |          | 55,267                                                                |       |          | (668                                                               | )          |
|                                                    |       |                                                            |          |                                                                  |       |          |                                                               |       |
| Other income, net                                       |       | (3,837                                                          | )             | (2,408                                                                | )          |          | (1,286                                                             | )          |
|                                                    |       |                                                            |          |                                                                  |       |          |                                                               |       |
| **Loss before benefit for income taxes**                | ** ** | **(238,225**                                                    | **)**         | **(134,396**                                                          | **)**      | ** **    | **(69,174**                                                        | **)**      |
| Benefit for income taxes                                |       | (58,136                                                         | )             | (50,322                                                               | )          |          | (21,270                                                            | )          |
|                                                    |       |                                                            |          |                                                                  |       |          |                                                               |       |
| **Net loss**                                            | ** ** | **$**                                                           | **(180,089**  | **)**                                                                 | **$**      | **(84,074**   | **)**                                                              | ** ** | **$** | **(47,904** | **)** |

 

*See accompanying Notes to Unaudited CondensedConsolidated Financial Statements*

 

5

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

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(In thousands, except share amounts)(Unaudited)**

 
| ** **                                                                                                                                                                | ** ** | **September 29,  2007** | ** **    | **December 30,  2006** | ** ** | **September 30,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|---------------|-----------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                                                |       |                         |          |                        |       |                         |       |
| **Assets**                                                                                                                                                                |       |                         |          |                        |       |                         |       |
| Current assets:                                                                                                                                                           |       |                         |          |                        |       |                         |       |
| Cash and cash equivalents                                                                                                                                                 |       | $                            | 12,101        |                        | $          | 12,526                       |       | $ | 11,394 |   |
| Accounts receivable                                                                                                                                                       |       | 33,942                       |          | 37,063                      |       | 33,886                       |       |
| Inventories                                                                                                                                                               |       | 976,005                      |          | 793,002                     |       | 999,316                      |       |
| Prepaid expenses and other current assets                                                                                                                                 |       | 17,253                       |          | 15,308                      |       | 66,788                       |       |
| Current deferred taxes                                                                                                                                                    |       | 13,788                       |          | 16,815                      |       | 12,225                       |       |
|                                                                                                                                                                      |       |                         |          |                        |       |                         |       |
| **Total current assets**                                                                                                                                                  | ** ** | **1,053,089**                | ** **    | **874,714**                 | ** ** | **1,123,609**                | ** ** |
| Property and equipment, net of accumulated  depreciation of $188,671, $100,616 and $74,339 at September 29, 2007,  December 30, 2006 and September 30, 2006, respectively |       | 447,773                      |          | 530,829                     |       | 572,500                      |       |
| Identifiable intangible assets, net                                                                                                                                       |       | 144,583                      |          | 150,044                     |       | 155,361                      |       |
| Goodwill                                                                                                                                                                  |       | 272,081                      |          | 267,830                     |       | 265,702                      |       |
| Deferred financing costs and other  noncurrent assets                                                                                                                     |       | 41,001                       |          | 34,517                      |       | 35,218                       |       |
|                                                                                                                                                                      |       |                         |          |                        |       |                         |       |
| **Total assets**                                                                                                                                                          | ** ** | **$**                        | **1,958,527** | ** **                  | **$**      | **1,857,934**                | ** ** | **$** | **2,152,390** | ** ** |
|                                                                                                                                                                      |       |                         |          |                        |       |                         |       |
| **Liabilities and Shareholders’ Equity**                                                                                                                             |       |                         |          |                        |       |                         |       |
| Current liabilities:                                                                                                                                                      |       |                         |          |                        |       |                         |       |
| Accounts payable                                                                                                                                                          |       | $                            | 267,054       |                        | $          | 204,760                      |       | $ | 291,683 |   |
| Accrued expenses and other current  liabilities                                                                                                                           |       | 203,528                      |          | 241,911                     |       | 195,120                      |       |
| Short-term borrowings                                                                                                                                                     |       | —                       |          | —                      |       | 225,870                      |       |
|                                                                                                                                                                      |       |                         |          |                        |       |                         |       |
| **Total current liabilities**                                                                                                                                             | ** ** | **470,582**                  | ** **    | **446,671**                 | ** ** | **712,673**                  | ** ** |
| Senior secured notes and other long-term  debt                                                                                                                            |       | 978,180                      |          | 689,876                     |       | 652,092                      |       |
| Noncurrent deferred income taxes                                                                                                                                          |       | 67,914                       |          | 125,977                     |       | 170,491                      |       |
| Other long-term liabilities                                                                                                                                               |       | 59,611                       |          | 50,667                      |       | 48,512                       |       |
|                                                                                                                                                                      |       |                         |          |                        |       |                         |       |
| **Total liabilities**                                                                                                                                                     | ** ** | **1,576,287**                | ** **    | **1,313,191**               | ** ** | **1,583,768**                | ** ** |
|                                                                                                                                                                      |       |                         |          |                        |       |                         |       |
| **Shareholders’ equity:**                                                                                                                                            |       |                         |          |                        |       |                         |       |
| Common stock, $0.01 par value; 15,000,000  shares authorized; 13,013,000 shares issued and outstanding at September 29,  2007, December 30, 2006 and September 30, 2006   |       | 131                          |          | 131                         |       | 131                          |       |
| Additional paid-in capital                                                                                                                                                |       | 654,727                      |          | 652,395                     |       | 651,636                      |       |
| Accumulated deficit                                                                                                                                                       |       | (286,622                     | )             | (106,533                    | )          | (84,074                      | )          |
| Accumulated other comprehensive income  (loss)                                                                                                                            |       | 14,004                       |          | (1,250                      | )          | 929                          |       |
|                                                                                                                                                                      |       |                         |          |                        |       |                         |       |
| **Total shareholders’ equity**                                                                                                                                       | ** ** | **382,240**                  | ** **    | **544,743**                 | ** ** | **568,622**                  | ** ** |
|                                                                                                                                                                      |       |                         |          |                        |       |                         |       |
| **Total liabilities and shareholders’ equity**                                                                                                                       | ** ** | **$**                        | **1,958,527** | ** **                  | **$**      | **1,857,934**                | ** ** | **$** | **2,152,390** | ** ** |

* *

*See accompanying Notes to Unaudited CondensedConsolidated Financial Statements*

 

6

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

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands) (Unaudited)**

 
| ** **                                                                         | ** ** | **Successor Entity**                                       | ** **  | ** **                                                        | **Predecessor Entity** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|-------------|-------------------------------------------------------------------|-----------------------------|------------|
| ** **                                                                         | ** ** | **Thirty-nine Weeks  Ended September 29,  2007** | ** **  | **February 14, 2006  to September 30,  2006** | ** **                  | ** ** | **January 1, 2006  to February 13,  2006** | ** ** |
|                                                                               |       |                                                            |        |                                                              |                        |       |   |   |
| **Cash flows from operating activities:**                                          |       |                                                            |        |                                                              |                        |       |   |   |
| Net loss                                                                           |       | $                                                               | (180,089    | )                                                                 | $                           | (84,074    | ) |   | $ | (47,904 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:       |       |                                                            |        |                                                              |                        |       |   |   |
| Depreciation and amortization                                                      |       | 97,274                                                          |        | 80,215                                                            |                        |       | 12,642 |   |
| Deferred income taxes                                                              |       | (64,075                                                         | )           | (23,234                                                           | )                           |       | (6,725 | ) |
| Share-based compensation                                                           |       | 2,330                                                           |        | 3,363                                                             |                        |       | 12,484 |   |
| Amortization of deferred financing charges                                         |       | 6,076                                                           |        | 5,429                                                             |                        |       | 43 |   |
| Loss on sales and disposals of property and  equipment                             |       | 539                                                             |        | 416                                                               |                        |       | — |   |
| Impairment of property and equipment                                               |       | 16,779                                                          |        | —                                                            |                        |       | — |   |
| Changes in assets and liabilities, net of  effect of acquisition:                  |       |                                                            |        |                                                              |                        |       |   |   |
| Decrease (increase) in accounts receivable                                         |       | 3,580                                                           |        | 12,047                                                            |                        |       | (2,240 | ) |
| Increase in inventories                                                            |       | (172,723                                                        | )           | (177,910                                                          | )                           |       | (31,886 | ) |
| Decrease (increase) in prepaid expenses and  other current assets                  |       | 1,625                                                           |        | (34,097                                                           | )                           |       | (12,153 | ) |
| Decrease (increase) in identifiable  intangible assets and other noncurrent assets |       | 119                                                             |        | (2,498                                                            | )                           |       | 9,580 |   |
| Increase in accounts payable                                                       |       | 56,488                                                          |        | 59,051                                                            |                        |       | 12,010 |   |
| Decrease in accrued expenses and other  liabilities                                |       | (29,217                                                         | )           | (42,038                                                           | )                           |       | (7,807 | ) |
|                                                                               |       |                                                            |        |                                                              |                        |       |   |   |
| **Net cash used in operating activities**                                          | ** ** | **(261,294**                                                    | **)**       | **(203,330**                                                      | **)**                       | ** ** | **(61,956** | **)** |
|                                                                               |       |                                                            |        |                                                              |                        |       |   |   |
| **Cash flows from investing activities:**                                          |       |                                                            |        |                                                              |                        |       |   |   |
| Acquisition of the Predecessor Entity, net  of cash acquired(1)                    |       | —                                                          |        | (1,205,502                                                        | )                           |       | — |   |
| Additions to property and equipment                                                |       | (31,247                                                         | )           | (48,776                                                           | )                           |       | (10,956 | ) |
| Proceeds from sales of property and  equipment                                     |       | 5,400                                                           |        | 3,100                                                             |                        |       | — |   |
|                                                                               |       |                                                            |        |                                                              |                        |       |   |   |
| **Net cash used in investing activities**                                          | ** ** | **(25,847**                                                     | **)**       | **(1,251,178**                                                    | **)**                       | ** ** | **(10,956** | **)** |
|                                                                               |       |                                                            |        |                                                              |                        |       |   |   |
| **Cash flows 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                                             |       | (2,146                                                          | )           | (59,930                                                           | )                           |       | — |   |
| Premium paid for derivative financial  instrument                                  |       | —                                                          |        | (700                                                              | )                           |       | — |   |
| Federal tax benefit from common stock  issued under stock incentive plans          |       | —                                                          |        | —                                                            |                        |       | 4,298 |   |
| Net increase in borrowings under revolving  credit facility                        |       | 290,380                                                         |        | 225,870                                                           |                        |       | — |   |
| Decrease in treasury stock                                                         |       | —                                                          |        | —                                                            |                        |       | 674 |   |
| Payments on mortgage note                                                          |       | (2,076                                                          | )           | (38                                                               | )                           |       | (10 | ) |
|                                                                               |       |                                                            |        |                                                              |                        |       |   |   |
| **Net cash provided by financing activities**                                      | ** ** | **286,158**                                                     | ** **  | **1,465,852**                                                     | ** **                  | ** ** | **4,962** |   |
|                                                                               |       |                                                            |        |                                                              |                        |       |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                      |       | 558                                                             |        | 50                                                                |                        |       | 125 |   |
| Net (decrease) increase in cash and cash  equivalents                              |       | (425                                                            | )           | 11,394                                                            |                        |       | (67,825 | ) |
| **Cash and cash equivalents at beginning of  period**                              | ** ** | **12,526**                                                      | ** **  | **—**                                                        | ** **                  | ** ** | **158,158** |   |
|                                                                               |       |                                                            |        |                                                              |                        |       |   |   |
| **Cash and cash equivalents at end of period**                                     | ** ** | **$**                                                           | **12,101**  | ** **                                                        | **$**                       | **11,394** | ** ** | ** ** | **$** | **90,333** |   |
|                                                                               |       |                                                            |        |                                                              |                        |       |   |   |
| **Supplemental disclosure of cash flow  information**                              |       |                                                            |        |                                                              |                        |       |   |   |
| **Cash paid during the period for:**                                               |       |                                                            |        |                                                              |                        |       |   |   |
| Interest (net of amounts capitalized)                                              |       | $                                                               | 66,709      |                                                              | $                           | 35,397     |   |   | $ | 135 |   |
| Income taxes                                                                       |       |                                                            |        |                                                              |                        |       |   |   |
| Income taxes paid                                                                  |       | $                                                               | 13,012      |                                                              | $                           | 40,858     |   |   | $ | 57 |   |
| Income tax refunds                                                                 |       | $                                                               | 1,351       |                                                              | $                           | 2,229      |   |   | $ | — |   |
|                                                                               |       |                                                            |        |                                                              |                        |       |   |   |
| **Non-cash transactions****:**                                                     |       |                                                            |        |                                                              |                        |       |   |   |
| Increase (decrease) in goodwill due to purchase  accounting adjustments, net       |       | $                                                               |  4,251 |                                                              | $                           |  (283 | ) |   | $ |  — |   |
| Decrease in accrued additions to property and equipment                            |       | $                                                               | 7,734       |                                                              | $                           | 7,638      |   |   | $ | 3,180 |   |

** **

----

(1)           In connection with the Merger, net cashsettlements of approximately $20.0 million and $4.4 million for stockoptions and restricted stock units, respectively, are included in “Acquisitionof the Predecessor Entity, net of cash acquired.”

 

*See accompanying Notes to Unaudited CondensedConsolidated Financial Statements*

 

7

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** **

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

**NOTES TOUNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1. Basis of Presentation**

 

OnNovember 8, 2005, Linens Merger Sub Co. was formed by affiliates of ApolloManagement, L.P., and National Realty & Development Corp. and Silver PointCapital Fund Investments LLC (collectively, the “Sponsors”) to serve as aholding company. On February 14, 2006, Linens Merger Sub Co. merged with andinto Linens ‘n Things, Inc. (the “Merger”), and Linens ‘n Things, Inc., as thesurviving corporation, became a wholly owned subsidiary of Linens Holding Co.(the “Company”). The acquisition and related financings are referred tocollectively as the “Transactions” and are discussed in more detail in Note 3to the audited consolidated financial statements included in the Company’s 2006Annual Report on Form 10-K. As a result of the consummation of theTransactions, a new entity (the “Successor” or “Successor Entity”) was formedfor financial accounting purposes with an effective date of February 14,2006, consisting of Linens Holding Co. and Subsidiaries. The condensedconsolidated financial statements as of September 29, 2007 and September 30,2006, for the thirty-nine weeks ended September 29, 2007 and for the period February 14,2006 to September 30, 2006 show the financial position and results ofoperations and cash flows of the Successor Entity, Linens Holding Co. andSubsidiaries. The condensed consolidated financial statements for the periodJanuary 1, 2006 to February 13, 2006 show the results of operationsand cash flows of Linens ’n Things, Inc. and Subsidiaries (the “Predecessor”or “Predecessor Entity”).

 

Theaccompanying condensed consolidated financial statements are unaudited. In theopinion of management, the accompanying condensed consolidated financialstatements for the Successor Entity and Predecessor Entity include all normaland recurring adjustments that are considered necessary to present fairly thefinancial position and the results of operations and cash flows for therespective periods presented. As a result of the consummation of theTransactions, the condensed consolidated financial statements for the periodsafter February 13, 2006 are presented on a different basis than that forthe periods before February 14, 2006 as a result of the application ofpurchase accounting as of February 14, 2006 and, therefore, are notcomparable.

 

Thepreparation of financial statements in conformity with U.S. generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of revenues and expenses during the reportingperiod. Actual results could differ from those estimates. Because of theseasonality of the specialty retailing business, operating results of theCompany on a quarterly or interim basis may not be indicative of operatingresults for the full year.

 

Thesecondensed consolidated financial statements should be read in conjunction withthe audited consolidated financial statements for the fiscal year endedDecember 30, 2006 included in the Company’s 2006 Annual Report onForm 10-K available from the Securities and Exchange Commission (“SEC”) orthrough the Company’s website at *lnt.com* postedon March 27, 2007 under *SEC Filings*. Allsignificant intercompany accounts and transactions have been eliminated.

 

Theaccompanying condensed consolidated financial statements are those of LinensHolding Co. and its subsidiaries. The Company has not presented separatefinancial statements for Linens ‘n Things, Inc. and its subsidiaries or Linens ‘nThings Center, Inc. and its subsidiaries (collectively, the “Issuers” asdescribed in Note 13) because management has determined that the differences insuch financial statements are minor.

 

**2. Share-based Compensation**

 

OnJanuary 1, 2006, the Company adopted Statement of Financial AccountingStandards (“SFAS”) No. 123 (Revised 2004), “*Share-BasedPayment*” (“SFAS No. 123 (Revised 2004)”), 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-Based Compensation*,” and supersededAccounting Principles Board (“APB”) Opinion No. 25, “*Accountingfor Stock Issued to Employees*.”

 

TheCompany recognizes the cost of all time-based employee stock options on astraight-line attribution basis and the cost of all performance-based employeestock options on an accelerated basis in accordance with Financial AccountingStandards Board Interpretation No. 28, “*Accounting for StockAppreciation Rights and Other Variable Stock Option or Award Plans*”over their respective vesting periods, net of estimated forfeitures.

 

8

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

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, cont’d**

 

***Share-based Compensation Plans—Predecessor Entity***

 

Priorto the completion of the Merger, the Predecessor granted stock options andrestricted stock units for a fixed number of shares to employees and directorsunder share-based compensation plans, which are more fully described in Note 13to the audited consolidated financial statements included in the Company’s 2006Annual Report on Form 10-K under “*Share-basedCompensation Plans—Predecessor Entity*.”  The exercise prices ofthe stock options were equal to the fair market value of the underlying sharesat the date of grant. Compensation expense for restricted stock awards wasmeasured at fair value on the date of grant based on the number of sharesgranted and the quoted market price of the Predecessor’s common stock. Suchvalue was recognized as an expense over the vesting period of the awardadjusted for actual forfeitures.

 

Uponcompletion of the Merger and in accordance with the terms of the stock plans,all of the outstanding stock options became fully vested and immediatelyexercisable. Each option was valued at an amount equal to the excess of $28.00over the underlying stock option exercise price, less applicable withholdingtaxes. Each restricted stock unit award was exercised at $28.00 in cash,without interest, less applicable withholding taxes.

 

Therewere no share-based grants during the period January 1, 2006 toFebruary 13, 2006. The total intrinsic value of stock options andrestricted stock units exercised due to the Merger was approximately$20.0 million and $4.4 million, respectively, for the periodJanuary 1, 2006 to February 13, 2006.

 

Thetotal fair value of stock options and restricted stock units vested during theperiod from January 1, 2006 to February 13, 2006 was approximately$11.2 million and $4.0 million, respectively.

 

Asof January 1, 2006, there was approximately $9.3 million and$3.2 million of total unrecognized compensation cost related to stockoption grants and restricted stock unit awards, respectively, under theshare-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 expense in the condensedconsolidated statements of operations for the period January 1, 2006 toFebruary 13, 2006.

 

***Share-based Compensation Plans—Successor Entity***

 

OnFebruary 14, 2006, the board of directors (the “Board”) and stockholdersof Linens Holding Co. adopted the Linens Holding Co. Stock Option Plan (the “Plan”).The Plan provides employees or directors of the Company or its subsidiaries,who are in a position to contribute to the long-term success of these entities,with options to acquire shares in the Company to aid in attracting, retainingand motivating persons of outstanding ability. The Plan was amended inMarch 2006 to increase the number of shares of common stock, par value$0.01 per share, of Linens Holding Co. (the “Common Stock”) available forissuance under the Plan to 1,157,298 shares.

 

Asof September 29, 2007, a total of 953,696 stock options were outstanding.

 

Stockoptions granted under the Plan to each optionee are equally divided between a “TimeOption” and a “Performance Option,” as those terms are defined in the standardform of option grant letter. For each stock option  granted the estimated fair market value ofthe underlying 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 tooptions initially granted March 27, 2006 or (2) on each of the first fouranniversaries of the date of grant for all other 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 target stock price.

 

9

----

 

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

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, cont’d**

 

Thefollowing is a summary of share-based option activity for the thirty-nine weeksended September 29, 2007:

 
| **Successor Entity**             | ** ** |
|---------------------------------------|------------|
| **Options**                           | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual**

**Term (years)** | ** ** |
|                                  |       |   |   |   |   |   |   |
| **Outstanding at December 30, 2006**  | ** ** | **839,946** | ** ** | **$** | **50.00** | ** ** | ** ** | ** ** |
| Options granted                       |       | 221,750 |   | 50.00 |   |   |   |
| Exercised                             |       | — |   | — |   |   |   |
| Canceled                              |       | (108,000 | ) | 50.00 |   |   |   |
|                                  |       |   |   |   |   |   |   |
| **Outstanding at September 29, 2007** | ** ** | **953,696** | ** ** | **$** | **50.00** | ** ** | **5.77** | ** ** |
|                                  |       |   |   |   |   |   |   |
| **Exercisable at September 29, 2007** | ** ** | **190,157** | ** ** | **$** | **50.00** | ** ** | **5.62** | ** ** |

 

Thereare no provisions in the Plan for the issuance of restricted stock units.

 

Theweighted-average grant date fair value of options granted during thethirty-nine weeks ended September 29, 2007 and the period February 14, 2006 toSeptember 30, 2006 was $9.30 and $17.34, respectively.

 

Therewere no stock option exercises during the thirty-nine weeks ended September 29,2007 and the period February 14, 2006 to September 30, 2006.

 

Thefollowing is a summary of the activity for nonvested stock option grants as ofSeptember 29, 2007 and the changes for the thirty-nine weeks then ended:

 
| ** **                          | ** ** | **Successor Entity   Stock Options** | ** ** |
|-------------------------------------|------------|------------------------------------------------|------------|
| ** **                          | ** ** | **Options**                                    | ** ** | **Fair Value(1)** | ** ** |
| **Nonvested at December 30, 2006**  | ** ** | **736,946**                                    | ** ** | **$** | **17.41** | ** ** |
| Grants                              |       | 221,750                                        | ** ** | **$** | **9.30** | ** ** |
| Vested                              |       | (90,655                                        | )          | **$** | **16.59** | ** ** |
| Canceled                            |       | (104,502                                       | )          | **$** | **16.91** | ** ** |
|                                |       |                                           |       |   |   |
| **Nonvested at September 29, 2007** | ** ** | **763,539**                                    | ** ** | **$** | **15.22** | ** ** |

 

----

(1)         Represents the weighted-average grant datefair value per option, using the Monte Carlo simulation option-pricing modelfor Performance Options, and the Black-Scholes option-pricing model for TimeOptions.

 

Thetotal fair value of stock options vested during the thirty-nine weeks endedSeptember 29, 2007 and the period February 14, 2006 to September 30, 2006 wasapproximately $1.5 million and $1.6 million, respectively.

 

Asof September 29, 2007, there was approximately $7.7 million of totalunrecognized compensation cost related to stock option grants both under andoutside the Plan. This cost is expected to be recognized over a remaining weighted-averageperiod of 2.3 years. The compensation cost that has been charged againstincome for stock option grants was approximately $0.9 million and $1.0million for the thirteen weeks ended September 29, 2007 and September 30, 2006,respectively. The compensation cost that has been charged against income forstock option grants was approximately $2.3 million and $3.4 million forthe thirty-nine weeks ended September 29, 2007 and for the period February 14,2006 to September 30, 2006, respectively. Such compensation cost is included inselling, general and administrative expenses in the condensed consolidatedstatements of operations.

 

10

----

 

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

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, cont’d**

 

Priorto the adoption of SFAS 123 (Revised 2004) the Company used theBlack-Scholes option-pricing model for estimating the fair value for alloptions granted. Beginning in the first quarter of 2006, the Company used theMonte Carlo simulation option-pricing model for estimating the fair value ofPerformance Options and the Black-Scholes option-pricing model for Time Options.This change was made in order to provide a better estimate of fair value. TheMonte Carlo option-pricing model is particularly useful in the valuation ofoptions with complicated features that make them difficult to value through astraight-forward Black-Scholes-style computation.

 

Presentedbelow is a comparative summary of valuation assumptions for grants issued ineach of the indicated periods:

 
| **Valuation Assumptions:**                       | ** ** | **Thirteen Weeks  Ended  September 29, 2007  (Monte Carlo  Simulation and**

**Black-Scholes)** | ** ** | **Thirteen Weeks  Ended  September 30, 2006  (Monte Carlo  Simulation and  Black-Scholes)** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| Weighted-average calculated value of  options granted |       | $                                                                                                                        | 9.03       |                                                                                                                 | $          | 16.43 |   |
| Expected volatility (1)                               |       | N/A                                                                                                                      |       | N/A                                                                                                                  |       |
| Weighted-average volatility (1)                       |       | 30.6                                                                                                                     | %          | 36.2                                                                                                                 | %          |
| Weighted-average expected term (in years)             |       | 3.6                                                                                                                      |       | 3.6                                                                                                                  |       |
| Dividend yield                                        |       | —                                                                                                                   |       | —                                                                                                               |       |
| Risk-free interest rate                               |       | 4.2% - 5.1                                                                                                               | %          | 4.6% - 5.0                                                                                                           | %          |
| Weighted-average risk-free interest rate              |       | 4.6                                                                                                                      | %          | 4.8                                                                                                                  | %          |
| Weighted average expected annual forfeiture           |       | 1.2                                                                                                                      | %          | 1.6                                                                                                                  | %          |
|                                                       |            |                                                                                                                          |            |                                                                                                                      |            |  |  |

 
| **Valuation Assumptions:**                       | ** ** | **Thirty-nine Weeks  Ended  September 29, 2007  (Monte Carlo  Simulation and   Black-Scholes)  (Successor Entity)** | ** ** | **February 14, 2006  to September 30,  2006  (Monte Carlo  Simulation and  Black-Scholes)  (Successor Entity)** | ** ** | ** ** | **January 1, 2006 to  February 13, 2006  (Black-Scholes)  (Predecessor Entity)** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|----------------------------------------------------------------------------------------------------------------|------------|
| Weighted-average calculated value of options  granted |       | $                                                                                                                                                      | 9.30       |                                                                                                                                               | $          | 17.34      |                                                                                                           |       | No Grants |   |
| Expected volatility (1)                               |       | N/A                                                                                                                                                    |       | N/A                                                                                                                                                |       |       | No Grants                                                                                                      |       |
| Weighted-average volatility (1)                       |       | 33.6                                                                                                                                                   | %          | 37.9                                                                                                                                               | %          |       | No Grants                                                                                                      |       |
| Weighted-average expected term (in years)             |       | 3.4                                                                                                                                                    |       | 3.7                                                                                                                                                |       |       | No Grants                                                                                                      |       |
| Dividend yield                                        |       | —                                                                                                                                                 |       | —                                                                                                                                             |       |       | No Grants                                                                                                      |       |
| Risk-free interest rate                               |       | 4.2% - 5.1                                                                                                                                             | %          | 4.6% - 5.2                                                                                                                                         | %          |       | No Grants                                                                                                      |       |
| Weighted-average risk-free interest rate              |       | 4.6                                                                                                                                                    | %          | 4.8                                                                                                                                                | %          |       | No Grants                                                                                                      |       |
| Weighted average expected annual forfeiture           |       | 1.9                                                                                                                                                    | %          | 3.8                                                                                                                                                | %          |       | No Grants                                                                                                      |       |
|                                                       |            |                                                                                                                                                        |            |                                                                                                                                                    |            |            |                                                                                                                |            |  |  |

 

----

(1)               The Company used the average of the historicalvolatility of each of the component companies included in theStandard & Poor’s Specialty Retail Index as a substitute for expectedvolatility.

 

Itis not possible for the Company, whose stock is not publicly traded, to useCompany-specific volatility in determining a reasonable estimate of fair valueof options granted. Accordingly, the Company is required to use an alternativemeasurement method. Under the alternative measurement method, a nonpublicentity uses a calculated volatility, determined by applying the historicalvolatility of an appropriate index of public entities, as an input to thevaluation models. The Company used the Standard & Poor’s SpecialtyRetail Index for a period approximating the expected term as this index mostclosely approximates the Company’s applicable operating industry. Expected termof share options granted represents the period of time that the option grantsare expected to be outstanding. The Company is not expected to pay dividendsand, accordingly, the dividend yield is zero. The risk-free interest ratewithin the expected term was based on the U.S. Treasury yield curve in effectat the time of grant.

 

11

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

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, cont’d**

 

Share-basedemployee compensation expense included in net loss in the condensedconsolidated statements of operations, net of related tax effects, is detailedas follows:

 
| ** **                                                                 | ** ** | **Successor Entity**                                   | ** ** | ** **                                                    | **Predecessor  Entity** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------------------------------------|-------------------------|------------|
| **(****In thousands)**                                                | ** ** | **Thirty-nine  Weeks Ended  September 29,  2007** | ** ** | **February 14,  2006 to  September 30,  2006** | ** **              | ** ** | **January 1, 2006  to February 13,  2006** | ** ** |
| **Compensation expense:**                                                  |       |                                                        |       |                                                          |                    |       |   |   |
| Stock option grants                                                        |       | $                                                           | 2,330      |                                                          | $                       | 3,363      |   |   | $ | 9,305 |   |
| Restricted stock units                                                     |       | —                                                      |       | —                                                        |                    |       | 3,179 |   |
|                                                                       |       |                                                        |       |                                                          |                    |       |   |   |
|                                                                       |       | 2,330                                                       |       | 3,363                                                         |                    |       | 12,484 |   |
|                                                                       |       |                                                        |       |                                                          |                    |       |   |   |
| **Benefit for income taxes:**                                              |       |                                                        |       |                                                          |                    |       |   |   |
| Stock option grants                                                        |       | (569                                                        | )          | (1,258                                                        | )                       |       | (2,861 | ) |
| Restricted stock units                                                     |       | —                                                      |       | —                                                        |                    |       | (978 | ) |
|                                                                       |       |                                                        |       |                                                          |                    |       |   |   |
|                                                                       |       | (569                                                        | )          | (1,258                                                        | )                       |       | (3,839 | ) |
|                                                                       |       |                                                        |       |                                                          |                    |       |   |   |
| **Share-based employee compensation expense,  net of related tax effects** |       | $                                                           | 1,761      |                                                          | $                       | 2,105      |   |   | $ | 8,645 |   |

 

**3. Comprehensive Loss**

 

Comprehensiveloss for the thirteen weeks ended September 29, 2007 and September 30, 2006 isas follows:

 
| **(In thousands)**                  | ** ** | **Thirteen Weeks  Ended  September 29,  2007** | ** **  | **Thirteen Weeks  Ended  September 30,  2006** | ** ** |
|------------------------------------------|------------|----------------------------------------------------------|-------------|----------------------------------------------------------|------------|
| Net loss                                 | ** ** | **$**                                                    | **(79,929** | )                                                        | $          | (27,375 | ) |
| Other comprehensive income (loss)        |       |                                                     |        |                                                     |       |
| Cumulative translation adjustments       |       | 6,007                                                    |        | (127                                                     | )          |
| Unrealized loss on hedge arrangements(1) |       | (22                                                      | )           | (898                                                     | )          |
|                                     |       |                                                     |        |                                                     |       |
| **Comprehensive loss**                   | ** ** | **$**                                                    | **(73,944** | **)**                                                    | **$**      | **(28,400** | **)** |

 

----

(1)         On July 7, 2006 the Issuers entered into azero cost interest rate collar agreement to hedge the cash flows associatedwith the LIBOR component of the interest rate on the Notes. On July 7, 2006 theIssuers also purchased a one-year forward-starting interest rate cap agreementwhich takes effect on January 15, 2008 (see Note 9 for disclosures regardingthese derivatives).

 

12

----

 

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

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, cont’d**

 

Comprehensiveloss for the thirty-nine weeks ended September 29, 2007, the period February14, 2006 to September 30, 2006 and the period January 1, 2006 to February 13,2006 is as follows:

 
| ** **                                       | ** ** | **Successor Entity**                                   | ** **   | ** **                                                    | **Predecessor  Entity** | ** **  |
|--------------------------------------------------|------------|-------------------------------------------------------------|--------------|---------------------------------------------------------------|-------------------------|-------------|
| **(In thousands)**                          | ** ** | **Thirty-nine  Weeks Ended  September 29,  2007** | ** **   | **February 14,  2006 to  September 30,  2006** | ** **              | ** **  | **January 1,  2006 to  February 13,  2006** | ** ** |
| Net loss                                         | ** ** | **$**                                                       | **(180,089** | )                                                             | $                       | (84,074     | ) |   | $ | (47,904 | ) |
| Other comprehensive income (loss)                |       |                                                        |         |                                                          |                    |        |   |   |
| Cumulative translation adjustments               |       | 15,227                                                      |         | 1,827                                                         |                    |        | 253 |   |
| Unrealized gain (loss) on hedge  arrangements(1) |       | 27                                                          |         | (898                                                          | )                       |        | — |   |
|                                             |       |                                                        |         |                                                          |                    |        |   |   |
| **Comprehensive loss**                           | ** ** | **$**                                                       | **(164,835** | **)**                                                         | **$**                   | **(83,145** | **)** | ** ** | **$** | **(47,651** | **)** |

 

----

(1)         On July 7, 2006 the Issuers entered into azero cost interest rate collar agreement to hedge the cash flows associatedwith the LIBOR component of the interest rate on the Notes. On July 7, 2006 theIssuers also purchased a one-year forward-starting interest rate cap agreementwhich takes effect on January 15, 2008 (see Note 9 for disclosures regardingthese derivatives).

 

**4. Impairment of Property and Equipment**

 

Duringthe thirteen weeks ended September 29, 2007, the Company initiated a formalimpairment analysis of both tangible and intangible long-term assets. Based onthis analysis, the Company determined that the carrying value of certainproperty and equipment exceeded its related estimated future undiscounted cashflows. As a result, the Company reduced the carrying value of property andequipment to its fair value by approximately $16.8 million.

 

**5. Identifiable Intangible Assets (Including Goodwill)**

 

Theacquisition of Linens ’n Things, Inc. was accounted for as abusiness combination using the purchase method of accounting, whereby thepurchase price (including liabilities assumed) was allocated to the assetsacquired based on their estimated fair market values at the date of acquisition.Independent third-party appraisers were engaged to assist management andperform valuations of certain of the tangible and intangible assets acquired. Theexcess of the total purchase price over the fair value of the Company’s netassets was allocated to goodwill.

 

***Goodwill***

 

Thefollowing table presents an analysis of the change in goodwill for thethirty-nine weeks ended September 29, 2007:

 
| **(in thousands)**                   | ** ** | **Amount** | ** **  |
|-------------------------------------------|------------|------------|-------------|
|                                      |       |       |        |
| **Balance at December 30, 2006**          | ** ** | **$**      | **267,830** | ** ** |
| Pre-existing tax adjustments              |       | 12,634     |        |
| Pre-existing book adjustments             |       | (11,130    | )           |
| Other – foreign currency translation |       | 2,747      |        |
|                                      |       |       |        |
| **Balance at September 29, 2007**         | ** ** | **$**      | **272,081** | ** ** |

 

13

----

 

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

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, cont’d**

 

***Identifiable Intangible Assets***

 

Thecarrying amount and accumulated amortization of identifiable intangible assetsconsists of the following:

 
| **(in thousands)**                          | ** ** | **September 29,  2007** | ** **  | **December 30,  2006** | ** ** | **September 30,  2006** | ** ** |
|--------------------------------------------------|------------|------------------------------|-------------|-----------------------------|------------|------------------------------|------------|
| ** **                                       | ** ** | ** **                   | ** **  | ** **                  | ** ** | ** **                   | ** ** |
| Intangible assets subject to amortization:       |       |                         |        |                        |       |                         |       |
| Credit card customer relationships               |       | $                            | 10,257      |                        | $          | 10,129                       |       | $ | 10,163 |   |
| Customer list                                    |       | 406                          |        | 406                         |       | 406                          |       |
| Favorable leases                                 |       | 23,941                       |        | 23,852                      |       | 27,373                       |       |
|                                             |       |                         |        |                        |       |                         |       |
|                                             |       | 34,604                       |        | 34,387                      |       | 37,942                       |       |
| Less: accumulated amortization                   |       | (12,709                      | )           | (7,031                      | )          | (5,269                       | )          |
|                                             |       |                         |        |                        |       |                         |       |
| Total intangible assets subject to  amortization |       | 21,895                       |        | 27,356                      |       | 32,673                       |       |
| Total indefinite-lived trademarks                |       | 122,688                      |        | 122,688                     |       | 122,688                      |       |
|                                             |       |                         |        |                        |       |                         |       |
| **Total identifiable intangible assets**         | ** ** | **$**                        | **144,583** | ** **                  | **$**      | **150,044**                  | ** ** | **$** | **155,361** | ** ** |

 

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. For the thirteen weeks ended September 29, 2007and September 30, 2006 amortization expense of $1.9 million and $2.5 million,respectively, was recorded by the Company and is included in selling, generaland administrative expenses in the condensed consolidated statements of operations.For the thirty-nine weeks ended September 29, 2007, the period February 14,2006 to September 30, 2006 and the period January 1, 2006 to February 13, 2006,amortization expense of $5.6 million, $5.7 million and $0.02 million,respectively, was recorded by the Company.

 

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

 
| **Fiscal Year**                            | ** ** | **Amortization** | ** ** |
|-------------------------------------------------|------------|------------------|------------|
| 2007 (September 30, 2007 to December 29,  2007) |       | $                | 1,855      |   |
| 2008                                            |       | 6,538            |       |
| 2009                                            |       | 3,141            |       |
| 2010                                            |       | 2,416            |       |
| 2011                                            |       | 2,041            |       |
| 2012 and thereafter                             |       | 5,904            |       |
|                                            |       |             |       |
| Total                                           |       | $                | 21,895     |   |

 

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

 

Accruedexpenses and other current liabilities includes amounts due customersprincipally for gift card, customer rebate and sales return liabilities of$48.5 million, $55.3 million and $40.0 million as of September 29, 2007,December 30, 2006 and September 30, 2006, respectively. Income from gift cardsthat are not expected to be redeemed is recorded in other income, net in thecondensed consolidated statements of operations. Such amounts recognized forthe thirteen weeks ended September 29, 2007 and September 30, 2006 wereapproximately $1.1 million and $1.0 million, respectively. Such amountsrecognized for the thirty-nine weeks ended September 29, 2007, the periodFebruary 14, 2006 to September 30, 2006 and the period January 1, 2006 toFebruary 13, 2006 were approximately $2.7 million, $2.6 million and $0.5million, respectively.

 

14

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

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, cont’d**

 

**7. Senior Secured Notes, Asset-based Revolving CreditFacility and Other Long-Term Debt**

 

Seniorsecured notes, asset-based revolving credit facility and other long-term debtconsists of the following:

 
| **(in thousands)**                     | ** ** | **September 29,  2007** | ** **  | **December 30,  2006** | ** ** | **September 30,  2006** | ** ** |
|---------------------------------------------|------------|------------------------------|-------------|-----------------------------|------------|------------------------------|------------|
| ** **                                  | ** ** | ** **                   | ** **  | ** **                  | ** ** | ** **                   | ** ** |
| Senior secured floating rate notes due 2014 |       | $                            | 650,000     |                        | $          | 650,000                      |       | $ | 650,000 |   |
| Asset-based revolving credit facility       |       | 328,180                      |        | 37,800                      |       | —                  | (1)        |
| Mortgage note payable                       |       | —                       |        | 2,076                       |       | 2,092                        |       |
|                                        |       |                         |        |                        |       |                         |       |
| ** **                                  | ** ** | **$**                        | **978,180** | ** **                  | **$**      | **689,876**                  |       | **$** | **652,092** |   |

 

----

(1)         $225,870 inborrowings outstanding under the asset-basedrevolving credit facility was classified as short-term borrowings as ofSeptember 30, 2006.

 

***Senior Secured Floating Rate Notes Due 2014***

 

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 is tobe paid every three months on January 15, April 15, July 15 and October 15. Theinterest rate on the Notes is reset quarterly. The Notes mature onJanuary 15, 2014. As of September 29, 2007 the interest rate on the Noteswas 11.0%, based on a LIBOR rate of 5.4%.

 

OnJuly 7, 2006 the Issuers 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 Issuers also purchased aone-year forward-starting interest rate cap agreement which takes effect onJanuary 15, 2008 (see Note 9).

 

Deferredfinancing costs of approximately $31 million relating to the Notes arebeing amortized over eight years using the effective interest method.

 

TheNotes are fully and unconditionally guaranteed jointly and severally on asenior basis by the Company and by certain of the Company’s domesticsubsidiaries other than the Issuers (collectively, the “Note Guarantors”), andare secured by first-priority liens on all of the Company’s and Note Guarantors’equipment, intellectual property rights and related general intangibles and thecapital stock of the Issuers and certain subsidiaries and by second-priorityliens on the Issuers’ and the Note Guarantors’ inventory, accounts receivable,cash, securities and other general intangibles. The lien on capital stock maybe released under certain circumstances. As a result of the filing andeffectiveness of a registration statement on Form S-4 with the SEC with respectto the Notes, the Issuers and the Note Guarantors became subjectto applicable SEC rules with respect to information required to be included inthe prospectus in the registration statement.  To the extent that thesecurities of any Issuer or Note Guarantor constitute collateral forthe Notes and the value of the securities equals or exceeds 20% of theprincipal amount, or $130.0 million of the Notes, separate financialstatements of the Issuer or Note Guarantor would be required underthese SEC rules to be 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 stockon the date that the lien triggers this separate financial statementrequirement.  Accordingly, for any subsidiary with securities thatequal or exceed the 20% threshold, the lien on the capital stock securing theNotes has been released with respect to those securities.  The lien on thecapital stock of Linens ‘n Things, Inc. remains in place.

 

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. Prior to January 15, 2008, the Issuers may, attheir option, redeem up to 35% of the Notes with the proceeds of certain salesof its equity or of its subsidiaries. Prior to January 15, 2008, theIssuers may, at their option, redeem the Notes at a price equal to 100% of theprincipal amount of the Notes plus a “make-whole” premium.

 

15

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

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, cont’d**

 

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

 

InFebruary 2006, the Company entered into a new senior secured asset-basedrevolving credit facility agreement (the “Original Credit Facility”) withthird-party institutional lenders, which expires February 14, 2011. In May2007, the Company entered into an amended and restated credit agreement (the “OldCredit Facility”). The provisions of the Old Credit Facility are substantiallythe same as in the Original Credit Facility with several modifications that aregenerally favorable to the Company. The provisions of the Old Credit Facilitywere modified for: (i) a $100.0 million increase in the Old Credit Facilitymaximum availability from $600.0 million to $700.0 million; (ii) a decrease inthe “Excess Availability” threshold for purposes of mandatory compliance withcertain financial ratio maintenance covenants from $75.0 million to $70.0million; and (iii) several other modifications that are all favorable to theCompany. A copy of the Old Credit Facility is attached as Exhibit 10.1 to Form8-K filed with the SEC on May 29, 2007.

 

TheOld Credit Facility provides senior secured financing of up to$700.0 million, subject to a borrowing base consisting of certain eligibleinventory and receivables, minus certain reserves. A portion of the Old CreditFacility, not to exceed $40.0 million, is also available to a Canadiansubsidiary of the Company subject to the Canadian borrowing base. The Companyincurred deferred financing costs of approximately $17 million and $2million related to the Original Credit Facility and the Old Credit Facility,respectively, which are being amortized over five years on a straight-linebasis.

 

Allobligations under the Old Credit Facility, and the guarantees of thoseobligations, are secured, subject to certain exceptions, by substantially allof the Company’s, the Issuers’ and the subsidiary guarantors’ assets,including: (1) a first-priority security interest in inventory, accountsreceivable, 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 the Issuers andthe capital stock of certain subsidiaries.

 

Borrowingsunder the Old 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) the federal funds effective rate plus 0.50% or (b) a LIBOR rate,with respect to any Eurodollar borrowing, determined by reference to the costsof funds for U.S. dollar deposits for the interest period relevant to suchborrowing adjusted for certain additional costs, in each case plus anapplicable margin. In addition to paying interest on outstanding principalunder the Old Credit Facility, the Company is required to pay a variable ratecommitment fee in respect of the unutilized commitments thereunder. The OldCredit Facility requires the Company to comply with financial ratio maintenancecovenants if the excess availability under the Old Credit Facility, at anytime, does not exceed $70.0 million and also contains certain restrictivecovenants including the Company’s ability to pay dividends and certaincustomary affirmative and negative covenants and events of default. During thethirty-nine weeks ended September 29, 2007, the Company always maintainedexcess availability above $70.0 million.

 

As of September 29, 2007, the Issuers had (i)$328.2 million in borrowings outstanding under the Old Credit Facility atan average interest rate of 6.9%; (ii) $12.1 million of cash on hand; (iii)$109.0 million of letters of credit outstanding issued under the Old CreditFacility, which includes standby letters of credit and import letters of creditused for merchandise purchases; and (iv) $238.5 million of excess availabilityunder the Old Credit Facility.

 

In October 2007, the Company entered into a new seniorsecured asset-based revolving credit facility agreement (the “New Credit Facility”)with third-party institutional lenders, which expires October 24, 2012. The NewCredit Facility replaced the Old Credit Facility described above (see Note 12).

 

***Mortgage Note Payable***

 

Mortgagenote payable represented an 8.2% fixed-rate mortgage note on the land andbuilding of one of the Company’s closed stores. In July 2007 the land andbuilding was sold and the mortgage was repaid.

 

16

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

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, cont’d**

 

**8. Income Taxes (Including the Adoption of FIN No. 48)**

 

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

 

TheCompany is subject to tax in the United States and in various states andforeign jurisdictions. The Company, joined by its domestic subsidiaries, filesa consolidated income tax return for Federal income tax purposes. With fewexceptions, the Company is no longer subject to U.S. Federal, state and localincome tax or non-U.S. income tax examinations by tax authorities for tax yearsbefore 2004. The Internal Revenue Service (“IRS”) commenced an examination ofthe Company’s U.S. consolidated income tax returns for the years 2004 and 2005and the period January 1, 2006 to February 13, 2006, inclusive, in the firstquarter of 2007. Based on its work to date, the IRS has not proposed anyadjustments to any of the Company’s tax positions.

 

FinancialAccounting Standards Board (“FASB”) Interpretation No. 48, “Accounting forUncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (“FINNo. 48”), was issued in July 2006 and interprets FASB SFAS  No. 109, “Accounting for Income Taxes” (“SFASNo. 109”). FIN No. 48 is effective for fiscal years beginning after December15, 2006. The Company, in its opening balance sheet for 2007, is required toreflect, as cumulative adjustments to the Company’s retained earnings, the impactof  FIN No. 48 on its income tax accrualsfor all prior years subject to adjustment by federal, state, local and foreigntaxing 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 hasdetermined that no adjustment to shareholders’ equity is required as a resultof applying FIN No. 48. The Company expects no material change for the nexttwelve months as a result of adopting FIN No. 48. The Company will continue itspolicy of classifying interest on tax liabilities as part of the provision forincome taxes. The Company does not anticipate any significant payments withrespect to any tax assessments within the next twelve months.

 

TheCompany adopted the provisions of FIN No. 48 on December 31, 2006. As a resultof the implementation of FIN No. 48, the Company recognized no change withrespect to any unrealized tax benefits and therefore made no change to theDecember 31, 2006 opening retained earnings balance. A reconciliation of thebeginning and ending amount of unrecognized tax benefits, including accruedinterest and penalties, is as follows (in thousands):

 
| ** **                                                          | ** ** | **Amount** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|
| Beginning balance at December 31, 2006  (date of adoption)          |       | $          | 8,702      |   |
| Additions for current year tax positions                            |       | 76         |       |
| Additions for prior year tax positions                              |       | 4,821      |       |
| Reductions for prior year tax positions                             |       | —     |       |
| Settlements                                                         |       | —     |       |
| Reductions due to a lapse of the applicable  statute of limitations |       | —     |       |
|                                                                |       |       |       |
| Ending balance at September 29, 2007                                |       | $          | 13,599     |   |

 

Includedin the ending balance at September 29, 2007 are approximately $13.1 million oftax positions ($11.6 million net of tax benefits) for which the ultimatedeductibility is highly certain but for which uncertainty exists as to thetiming of such deductions.

 

TheCompany recognizes interest and penalties accrued related to unrecognized taxbenefits as part of the provision for income taxes. At September 29, 2007 andDecember 31, 2006 (the date of adoption), accrued interest and penaltiesincluded in the FIN No. 48 reserve amounted to approximately $2.0 million and$0.9 million, respectively (net of tax benefits). The FIN No. 48 reserve isincluded in accrued expenses and other current liabilities in the condensedconsolidated balance sheets. The Company recorded approximately $0.8 millionand $1.2 million of interest and penalties during the thirteen weeks andthirty-nine weeks ended September 29, 2007, respectively, which is included inprovision (benefit) for income taxes in the condensed consolidated statementsof operations.

 

17

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

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, cont’d**

 

Duringthe thirteen weeks ended September 29, 2007, the Company recorded income taxexpense of approximately $0.7 million on a loss before taxes of $79.2 millionat an effective income tax rate of 0.9%. A current quarter tax benefit on theloss before taxes was offset by a valuation allowance of $25.1 million whichwas recorded against United States net operating losses resulting in aneffective income tax rate lower than the Federal statutory rate of 35%.

 

Duringthe thirty-nine weeks ended September 29, 2007, the Company recorded an incometax benefit of approximately $58.1 million on a loss before taxes of $238.2million at an effective tax benefit rate of 24.4%. The Federal statutory rateof 35.0% is higher than the effective tax benefit rate primarily due to thevaluation allowance against United States net operating losses referred to inthe immediately preceding paragraph and to different tax rules outside theUnited States.

 

Inassessing the realizability of deferred tax assets included in the condensedconsolidated 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 ofSFAS No. 109, the valuation allowance of $25.1 million referred to above wasrecorded against United States net operating losses in the current quarter.

 

**9.****DerivativeFinancial Instruments**

 

TheCompany accounts for derivative instruments in accordance with SFASNo. 133, “*Accounting for Derivative Instruments andHedging Activities*” (“SFAS No. 133”), as amended. In accordancewith SFAS No. 133, the Company reports all derivative financialinstruments on its balance sheet at fair value and has established criteria fordesignation and evaluation of effectiveness of transactions entered into forhedging purposes.

 

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 faces credit risk if the counterparties tothese transactions are unable to perform their obligations. However, theCompany seeks to minimize this risk by entering into transactions withcounterparties that are major financial institutions with high credit ratings.

 

TheCompany records unrealized gains and losses on derivative financial instrumentsqualifying as cash flow hedges in accumulated other comprehensive income (loss)on the condensed consolidated balance sheets, to the extent that hedges areeffective. For derivative financial instruments which do not qualify as cashflow hedges, any changes in fair value would be recorded in the condensedconsolidated statements of operations.

 

TheCompany may at its discretion terminate or de-designate any such hedginginstrument agreements prior to maturity. At that time, any gains or lossespreviously reported in accumulated other comprehensive income (loss) ontermination would amortize into interest expense or interest income tocorrespond to the recognition of interest expense or interest income on thehedged debt. If such debt instrument was also terminated, the gain or lossassociated with the terminated derivative included in accumulated othercomprehensive income (loss) at the time of termination of the debt would berecognized in the condensed consolidated statements of operations at that time.

 

OnJuly 7, 2006 the Issuers entered into a zero cost interest rate collaragreement (the “Collar Agreement”) to hedge the cash flows associated with theLIBOR component of the interest rate on the Notes. The Collar Agreementprovides for payments to be made to or received from the counterparty where theLIBOR component of the rate in effect for the Notes is below 4.45% or above6.51% for a given reset period. Such payments represent the difference betweenthe rates stated above in the Collar Agreement and those in effect on the Notesfor the given reset period. Payment and reset dates under the Collar Agreementare matched exactly to those of the Notes. The Collar Agreement has an ultimatematurity of January 15, 2008. To the extent that the three-month LIBOR rate isbelow the Collar Agreement floor, payment is due from the Company to thecounterparty for the difference. To the extent the three-month LIBOR rate isabove the Collar Agreement cap, the Company is entitled to receive thedifference from the counterparty. At the inception of the Collar Agreement, theCompany determined that the hedging relationship would have no ineffectiveness,and the Company will continue to verify and document that the critical terms ofthe hedging instrument and the hedged item are exactly matched. At September29, 2007, the notional amount of debt related to the Collar Agreement was$650.0 million and the fair value of the Collar Agreement was a de minimisliability.

 

18

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

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, cont’d**

 

OnJuly 7, 2006 the Issuers also purchased a one-year forward-starting interestrate cap agreement (the “Cap Agreement”) which takes effect on January 15, 2008.The Cap Agreement provides for payments to be received from the counterpartywhere the LIBOR component of the rate in effect on a LIBOR-based borrowingarrangement is above 6.51% for a given reset period. Such payments representthe difference between the LIBOR rate stated above in the Cap Agreement andthose in effect on a LIBOR-based borrowing arrangement for the given resetperiod. Payment and reset dates under the Cap Agreement are matched exactly tothose of the LIBOR-based borrowing arrangement. The Cap Agreement has anultimate maturity of January 15, 2009. The Issuers paid a premium of $0.7million to purchase the Cap Agreement. The Cap Agreement consists of twocomponents, a forward contract and an interest 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 should enablethe Company to achieve this objective. The Company will assess theeffectiveness of the forward contract quarterly. Once the forward contractbecomes an interest rate cap agreement, effectiveness will be assessed anddocumented as a new relationship. The interest rate cap agreement is expectedto be perfectly effective at such time, and the Company will continue tosubsequently verify and document that the critical terms of the interest ratecap agreement and the hedged item continue to match exactly over the remaininglife of the relationship. At September 29, 2007, the notional amount of debtrelated to the Cap Agreement was $650.0 million and the fair value of theinstrument was approximately a $0.02 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 the Collar Agreement and the CapAgreement have been recorded in accumulated other comprehensive income (loss)on the condensed consolidated balances sheets. During the thirteen weeks endedSeptember 29, 2007 and September 30, 2006 the Company has recorded a loss ofapproximately $0.02 million and $0.9 million, respectively, in accumulatedother comprehensive income (loss) related to these changes in fair value. Duringthe thirty-nine weeks ended September 29, 2007 and the period February 14, 2006to September 30, 2006 the Company has recorded a gain of approximately $0.03million and a loss of approximately $0.9 million, respectively, in accumulatedother comprehensive income (loss) related to these changes in fair value. TheCollar Agreement and the Cap Agreement had no ineffectiveness and provided noamounts received or paid under the hedges that affected net loss during theperiod. Both agreements are expected to have no ineffectiveness during theircontractual lives.

 

**10.Recent Accounting Pronouncements**

 

InFebruary 2007, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 159, “*The FairValue Option for Financial Assets and Financial Liabilities - Including an Amendmentof FASB Statement No. 115*” (“SFAS No. 159”). SFAS No. 159 permits,but does not require, companies to report at fair value the majority ofrecognized financial assets, financial liabilities and firm commitments. Underthis standard, unrealized gains and losses on items for which the fair valueoption is elected are reported in earnings at each subsequent reporting date. TheCompany is currently assessing the effect SFAS No. 159 may have, if any, on itsconsolidated financial statements when it becomes effective as of the beginningof fiscal 2008.

 

InSeptember 2006, the FASB issued Statement of Financial Accounting StandardsNo. 158, “**Employers’ Accounting for Defined Benefit Pension andOther Postretirement Plans, an amendment of FASB Statements No. 87, 88,106, and 132(R)****”**(“SFAS No. 158”). SFAS No. 158 requires, among otheritems, recognition of the overfunded or underfunded status of an entity’sdefined benefit postretirement plan as an asset or liability, respectively, inthe balance sheet, requires the measurement of defined benefit postretirementplan assets and obligations as of the end of the employer’s fiscal year, andrequires recognition of changes in funded status of defined benefitpostretirement plans in the year in which the changes occur in othercomprehensive income. SFAS No. 158 is effective as of the end of the fiscalyear ending after June 15, 2007 and early application is encouraged. Theadoption of SFAS No. 158 is not expected to have a material effect on theCompany’s financial position or results of operations.

 

InSeptember 2006, the FASB issued Statement of Financial Accounting StandardsNo. 157, “*Fair Value Measurements*” (“SFASNo. 157”) which is effective for fiscal years beginning after November 15,2007 and for interim periods within those years. This statement defines fairvalue, establishes a framework for measuring fair value and expands the relateddisclosure requirements. The Company is in the process of determining theeffect, if any, that the adoption of SFAS No. 157 will have on its financialstatements.

 

19

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

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, cont’d**

 

InSeptember 2006, the SEC staff issued Staff Accounting BulletinNo. 108, “*Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements*” (“SAB No. 108”). SAB No. 108 provides guidance onthe consideration of the effects of prior year misstatements in quantifyingcurrent year misstatements for the purpose of a materiality assessment. SABNo. 108 establishes an approach that requires quantification of financialstatement errors based on the effects on each of the Company’s financial statementsand related financial statement disclosures. SAB No. 108 permits existingpublic companies to record the cumulative effect of initially applying thisapproach in the first year ending after November 15, 2006 by recording thenecessary correcting adjustments to the carrying values of assets andliabilities as of the beginning of that year with the offsetting adjustmentrecorded to the opening balance of retained earnings. Additionally, the use ofthe cumulative effect transition method requires detailed disclosure of thenature and amount of each individual error being corrected through thecumulative adjustment and how and when it arose.

 

InJune 2006, the FASB’s Emerging Issues Task Force reached a consensus on IssueNo. 06-3, “*How Taxes Collected from Customers and Remitted toGovernmental Authorities Should be Presented in the Income Statement (That Is,Gross versus Net Presentation)*” (“EITF 06-3”). EITF 06-3 includessales, use, value-added and some excise taxes that are assessed by a governmentalauthority on specific revenue-producing transactions between a seller and acustomer. EITF 06-3 requires disclosure of the method of accounting for theapplicable assessed taxes and the amount of assessed taxes included in revenuesif such taxes are accounted for under the gross method. EITF 06-3 becameeffective for both interim and annual periods beginning in fiscal year 2007. EITF06-3 did not impact the Company’s method for recording these applicableassessed taxes because the Company has historically presented sales excludingsuch taxes, that is “net” presentation.

 

**11. Related Party Transactions**

 

***Management Services Agreement***

 

Uponconsummation of the Merger, the Company entered into a management servicesagreement with Apollo Management V, L.P., NRDC Linens B LLC and Silver PointCapital Fund Investments LLC (each of whom is an affiliate of the Company). Underthis management services agreement, the Sponsors agreed to provide to theCompany certain investment banking, management, consulting, financial planningand real estate advisory services on an ongoing basis for a fee of$2.0 million per year. Under this management services agreement, ApolloManagement V, L.P. also agreed to provide to the Company certain financialadvisory and investment banking services from time to time in connection withmajor financial transactions that may be undertaken by it or its subsidiariesin exchange for fees customary for such services after taking into accountApollo Management V, L.P.’s expertise and relationships within the business andfinancial community. Under this management services agreement, the Company alsoagreed to provide customary indemnification. In addition, the Company paid atransaction fee of $15.0 million in the aggregate (plus reimbursement of expenses)to the Sponsors for financial advisory services rendered in connection with theMerger. Thirty percent of this fee, or $4.5 million, was included as part ofthe purchase price and the remaining 70%, or $10.5 million, has been includedin deferred financing costs. These services included assisting the Company instructuring the Merger, taking into account tax considerations and optimalaccess to financing, and assisting in the negotiation of the Company’s materialagreements and financing arrangements in connection with the Merger.

 

***Stockholders’ Agreement***

 

Theonly stockholders of the Company are Linens Investors, LLC, a limited liabilitycompany owned by the Sponsors, two executives of the Company, Robert J.DiNicola, Chairman and Chief Executive Officer, and F. David Coder, ExecutiveVice President, Store Operations, and one nonemployee director, George G.Golleher. Linens Investors, LLC has entered into a stockholders’ agreement withthe Company, and each of the other stockholders have entered into joinderagreements to be bound by the stockholders’ agreement. The stockholders’agreement sets forth certain provisions relating to the management of theCompany. In addition, the stockholders’ agreement contains customary drag alongrights, tag along rights, registration rights, restrictions on the transfer ofthe Company’s common stock and an indemnity of the Sponsors.

 

20

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

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, cont’d**

 

**12. Subsequent Event**

 

In October 2007, the Company entered into a new seniorsecured asset-based revolving credit facility agreement with third-partyinstitutional lenders, which expires October 24, 2012. The New Credit Facilityreplaced the Old Credit Facility, which is more fully described in Note 7.

 

TheNew Credit Facility extends $700.0 million of revolving credit facilities tothe Company, comprised of (i) a $625.0 million Revolving Commitment and (ii) 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,is also available to a Canadian subsidiary of the Company subject to theCanadian borrowing base. The borrowing base is a formula based on certaineligible inventory and receivables, minus certain reserves, and the New CreditFacility reflects increases in the Company’s advance rates on this collateral,which will enhance the liquidity position of the Company in comparison to theOld Credit Facility. The New Credit Facility also eliminates all financialmaintenance covenants. These changes will result in a material increase to theCompany’s aggregate borrowing base and excess availability as compared with theOld Credit Facility. As of September 29, 2007, if the New Credit Facility hadbeen in effect at the end of the third quarter, the excess availability underthe New Credit Facility on a pro forma basis would have been $255.5 million,which compares to $238.5 million under the Old Credit Facility. Insofar as theOld Credit Facility had a financial maintenance covenant (which as noted abovehas been eliminated in the New Credit Facility) that would have likelyrestricted the use of the last $70.0 million of availability, the effectiveincrease in excess availability under the New Credit Facility would have been$87.0 million. Other terms and conditions in the New Credit Facility aresimilar to those under the Old Credit Facility.

 

All obligations under the New Credit Facilityare unconditionally guaranteed by the Company and certain of its existing andfuture domestic subsidiaries. All obligations under the New Credit Facility,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 ‘n ThingsCanada Corp. (collectively, the “Borrowers”), and the subsidiary guarantors,including: (i) a first-priority security interest in inventory, accountsreceivable, cash, securities and other general intangibles; and (ii) asecond-priority security interest in equipment, intellectual property rightsand related general intangibles and all of the capital stock of Linens ‘n Things,Inc. and the capital stock of certain subsidiaries.

 

Borrowings under the New Credit Facility bearinterest at a rate equal to, at the Borrowers’ option, either (a) an alternatebase rate determined by reference to the higher of (1) the base rate in effecton such day and (2) the federal funds effective rate plus 0.50% or (b) a LIBORrate, with respect to any Eurodollar borrowing, determined by reference to thecosts of funds for U.S. dollar deposits for the interest period relevant tosuch borrowing adjusted for certain additional costs, in each case plus anapplicable margin. The initial applicable margin for borrowings under the NewCredit Facility is 0.25% with respect to alternate base rate borrowings and1.50% with respect to LIBOR borrowings. The applicable margin with respect toTranche B Loans (consisting of per annum rate margins) shall be 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 applicablemargin for borrowings under the New Credit Facility will be subject toadjustment 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 initiated borrowingsunder the New Credit Facility on October 24, 2007 to meet operational workingcapital needs. A portion of the proceeds of the New Credit Facility was used topay off the outstanding amounts under and terminate the Old Credit Facilitywhich is more fully described in Note 7.

 

The New Credit Facility will require theCompany to accelerate the writeoff of approximately $7.0 million of deferredfinancing costs related to the Old Credit Facility in the subsequent period.

 

A copy of the New Credit Facility is attachedas Exhibit 10.1 to Form 8-K filed with the SEC on October 26, 2007.

 

**13. Supplemental Condensed Consolidating FinancialInformation**

 

OnFebruary 14, 2006 Linens ‘n Things, Inc. and Linens ‘n ThingsCenter, Inc. (collectively, the “Issuers”) issued $650.0 millionaggregate principal amount of Senior Secured Floating Rate Notes due 2014. 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 that guarantee the Company’s asset-based revolving credit facilityexcept for its Canadian subsidiaries. The Company’s Canadian subsidiaries (the “Non-Guarantors”)are not guarantors of the Notes.

 

21

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

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS, cont’d**

 

Thefollowing tables present the supplemental condensed consolidating financialinformation for the Company (Parent), the Co-Issuers, the Guarantors (excludingthe Company which is also a Guarantor but is separately presented) and theNon-Guarantors, together with eliminations, as of and for the periods indicated.The Company has not presented separate financial statements and otherdisclosures concerning the Co-Issuers, Guarantors and Non-Guarantors becausemanagement has determined that such information is not meaningful to investors.The accounting policies for Parent, Co-Issuers, Guarantors, and Non-Guarantorsare the same as those more fully described in Note 2 to the auditedconsolidated financial statements included in the Company’s 2006 Annual Reporton Form 10-K under “*Summaryof Significant Accounting Policies*”. The financial information maynot necessarily be indicative of the financial position, results of operationsor cash flows had the Parent, Co-Issuers, Guarantors and Non-Guarantorsoperated as independent entities.

 

The information (1) at September29, 2007, December 30, 2006 and September 30, 2006 and (2) for the thirteenweeks ended September 29, 2007 and September 30, 2006, the thirty-nine weeksended September 29, 2007 and the period February 14, 2006 to September 30,2006, presents the financial position and results of operations and cash flows,respectively, of the Successor Entity. The information for the periodJanuary 1, 2006 to February 13, 2006 presents the results ofoperations and cash flows of the Predecessor Entity.

 

22

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

** **

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**For the Thirteen Week Period Ended September 29, 2007**

**(InThousands) (Unaudited)**

** **
| ** **                                             | ** ** | **Parent** | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** **  | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|----------------------|-------------|------------------|------------|------------------|------------|
| ** **                                             | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** **  | ** **       | ** ** | ** **       | ** ** |
| **Net sales**                                          | ** ** | **$**      | **—** | ** **     | **$**      | **14,421**     | ** ** | **$**                | **587,813** | ** **       | **$**      | **64,557**       | ** ** | **$** | **—** | ** ** | **$** | **666,791** | ** ** |
| Cost of sales, including buying and distribution costs |       | —     |       | 8,791          |       | 362,579        |       | 34,317               |        | —           |       | 405,687          |       |
|                                                   |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| **Gross profit**                                       | ** ** | **—** | ** ** | **5,630**      | ** ** | **225,234**    | ** ** | **30,240**           | ** **  | **—**       | ** ** | **261,104**      | ** ** |
| ** **                                             | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** **  | ** **       | ** ** | ** **       | ** ** |
| Selling, general and administrative expenses           |       | —     |       | 5,589          |       | 269,094        |       | 26,244               |        | —           |       | 300,927          |       |
| Impairment of property and equipment                   |       | —     |       | —         |       | 16,779         |       | —               |        | —           |       | 16,779           |       |
|                                                   |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| **Operating profit (loss)**                            | ** ** | **—** | ** ** | **41**         | ** ** | **(60,639**    | **)**      | **3,996**            | ** **  | **—**       | ** ** | **(56,602**      | **)**      |
|                                                   |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| Interest income                                        |       | —     |       | (3,586         | )          | —         |       | (74                  | )           | 3,586            |       | (74              | )          |
| Interest expense                                       |       | —     |       | —         |       | 27,437         |       | 346                  |        | (3,586           | )          | 24,197           |       |
|                                                   |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| Interest (income) expense, net                         |       | —     |       | (3,586         | )          | 27,437         |       | 272                  |        | —           |       | 24,123           |       |
|                                                   |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| Other income, net                                      |       | —     |       | (26            | )          | (1,122         | )          | (391                 | )           | —           |       | (1,539           | )          |
|                                                   |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| **Income (loss) before income taxes**                  | ** ** | **—** | ** ** | **3,653**      | ** ** | **(86,954**    | **)**      | **4,115**            | ** **  | **—**       | ** ** | **(79,186**      | **)**      |
|                                                   |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| Provision (benefit) for income taxes                   |       | —     |       | 2,522          |       | (3,201         | )          | 1,422                |        | —           |       | 743              |       |
|                                                   |       |       |       |           |       |           |       |                 |        |             |       |             |       |
| **Net  income (loss)**                                 | ** ** | **$**      | **—** | ** **     | **$**      | **1,131**      | ** ** | **$**                | **(83,753** | **)**            | **$**      | **2,693**        | ** ** | **$** | **—** | ** ** | **$** | **(79,929** | **)** |

 

23

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

** **

**SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTOF OPERATIONS**

**For the Thirteen Week Period Ended September 30,2006**

**(InThousands) (Unaudited)**

** **
| ** **                                              | ** ** | **Parent** | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non- Guarantors** | ** **  | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|--------------------------|-------------|------------------|------------|------------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **               | ** **  | ** **       | ** ** | ** **       | ** ** |
| **Net sales**                                           | ** ** | **$**      | **—** | ** **     | **$**      | **16,195**     | ** ** | **$**                    | **590,722** | ** **       | **$**      | **51,238**       | ** ** | **$** | **—** | ** ** | **$** | **658,155** | ** ** |
| Cost of sales, including buying and distribution  costs |       | —     |       | 9,396          |       | 353,872        |       | 25,311                   |        | —           |       | 388,579          |       |
|                                                    |       |       |       |           |       |           |       |                     |        |             |       |             |       |
| **Gross profit**                                        | ** ** | **—** | ** ** | **6,799**      | ** ** | **236,850**    | ** ** | **25,927**               | ** **  | **—**       | ** ** | **269,576**      | ** ** |
| Selling, general and administrative expenses            |       | —     |       | 5,377          |       | 262,126        |       | 19,926                   |        | —           |       | 287,429          |       |
|                                                    |       |       |       |           |       |           |       |                     |        |             |       |             |       |
| **Operating profit (loss)**                             | ** ** | **—** | ** ** | **1,422**      | ** ** | **(25,276**    | **)**      | **6,001**                | ** **  | **—**       | ** ** | **(17,853**      | **)**      |
|                                                    |       |       |       |           |       |           |       |                     |        |             |       |             |       |
| Interest income                                         |       | —     |       | (26,754        | )          | (34            | )          | (15                      | )           | 26,785           |       | (18              | )          |
| Interest expense                                        |       | —     |       | 23,273         |       | 26,732         |       | 352                      |        | (26,785          | )          | 23,572           |       |
|                                                    |       |       |       |           |       |           |       |                     |        |             |       |             |       |
| Interest (income) expense, net                          |       | —     |       | (3,481         | )          | 26,698         |       | 337                      |        | —           |       | 23,554           |       |
|                                                    |       |       |       |           |       |           |       |                     |        |             |       |             |       |
| Other (income) expense, net                             |       | —     |       | (23            | )          | 299            |       | 47                       |        | —           |       | 323              |       |
|                                                    |       |       |       |           |       |           |       |                     |        |             |       |             |       |
| **Income (loss) before income taxes**                   | ** ** | **—** | ** ** | **4,926**      | ** ** | **(52,273**    | **)**      | **5,617**                | ** **  | **—**       | ** ** | **(41,730**      | **)**      |
|                                                    |       |       |       |           |       |           |       |                     |        |             |       |             |       |
| Provision (benefit) for income taxes                    |       | —     |       | 1,736          |       | (18,423        | )          | 2,332                    |        | —           |       | (14,355          | )          |
|                                                    |       |       |       |           |       |           |       |                     |        |             |       |             |       |
| **Net income (loss)**                                   | ** ** | **$**      | **—** | ** **     | **$**      | **3,190**      | ** ** | **$**                    | **(33,850** | **)**            | **$**      | **3,285**        | ** ** | **$** | **—** | ** ** | **$** | **(27,375** | **)** |

 

 

24

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

**(Successor Entity)**

**SUPPLEMENTAL CONDENSED CONSOLIDATINGSTATEMENT OF OPERATIONS**

**For the Thirty-nine Week Period EndedSeptember 29, 2007**

**(In Thousands) (Unaudited)**

 
| ** **                                              | ** ** | **Parent** | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|----------------------|---------------|------------------|------------|------------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| **Net sales**                                           | ** ** | **$**      | **—** | ** **     | **$**      | **42,232**     | ** ** | **$**                | **1,629,141** | ** **       | **$**      | **160,549**      | ** ** | **$** | **—** | ** ** | **$** | **1,831,922** | ** ** |
| Cost of sales, including buying and  distribution costs |       | —     |       | 25,311         |       | 1,002,190      |       | 82,916               |          | —           |       | 1,110,417        |       |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| **Gross profit**                                        | ** ** | **—** | ** ** | **16,921**     | ** ** | **626,951**    | ** ** | **77,633**           | ** **    | **—**       | ** ** | **721,505**      | ** ** |
| ** **                                              | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| Selling, general and administrative  expenses           |       | —     |       | 15,774         |       | 785,720        |       | 71,548               |          | —           |       | 873,042          |       |
| Impairment of property and equipment                    |       | —     |       | —         |       | 16,779         |       | —               |          | —           |       | 16,779           |       |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| **Operating profit (loss)**                             | ** ** | **—** | ** ** | **1,147**      | ** ** | **(175,548**   | **)**      | **6,085**            | ** **    | **—**       | ** ** | **(168,316**     | **)**      |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| Interest income                                         |       | —     |       | (9             | )          | (9             | )          | (320                 | )             | —           |       | (338             | )          |
| Interest expense                                        |       | —     |       | 10,454         |       | 62,631         |       | 999                  |          | —           |       | 74,084           |       |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| Interest expense, net                                   |       | —     |       | 10,445         |       | 62,622         |       | 679                  |          | —           |       | 73,746           |       |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| Other expense (income), net                             |       | —     |       | 222            |       | (2,394         | )          | (1,665               | )             | —           |       | (3,837           | )          |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| **(Loss) income before income taxes**                   | ** ** | **—** | ** ** | **(9,520**     | **)**      | **(235,776**   | **)**      | **7,071**            | ** **    | **—**       | ** ** | **(238,225**     | **)**      |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| (Benefit) provision for income taxes                    |       | —     |       | (2,377         | )          | (58,029        | )          | 2,270                |          | —           |       | (58,136          | )          |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| **Net (loss) income**                                   | ** ** | **$**      | **—** | ** **     | **$**      | **(7,143**     | **)**      | **$**                | **(177,747**  | **)**            | **$**      | **4,801**        | ** ** | **$** | **—** | ** ** | **$** | **(180,089** | **)** |

 

25

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

**(Successor Entity)**

**SUPPLEMENTAL CONDENSED CONSOLIDATINGSTATEMENT OF OPERATIONS**

**For the Period February 14, 2006 - September30, 2006**

**(In Thousands) (Unaudited)**

** **
| ** **                                              | ** ** | **Parent** | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|----------------------|---------------|------------------|------------|------------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| **Net sales**                                           | ** ** | **$**      | **—** | ** **     | **$**      | **40,129**     | ** ** | **$**                | **1,424,163** | ** **       | **$**      | **113,291**      | ** ** | **$** | **—** | ** ** | **$** | **1,577,583** | ** ** |
| Cost of sales, including buying and  distribution costs |       | —     |       | 23,596         |       | 870,081        |       | 57,330               |          | —           |       | 951,007          |       |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| **Gross profit**                                        | ** ** | **—** | ** ** | **16,533**     | ** ** | **554,082**    | ** ** | **55,961**           | ** **    | **—**       | ** ** | **626,576**      | ** ** |
| Selling, general and administrative  expenses           |       | —     |       | 12,965         |       | 645,897        |       | 49,251               |          | —           |       | 708,113          |       |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| **Operating profit (loss)**                             | ** ** | **—** | ** ** | **3,568**      | ** ** | **(91,815**    | **)**      | **6,710**            | ** **    | **—**       | ** ** | **(81,537**      | **)**      |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| Interest income                                         |       | —     |       | (72,157        | )          | (115           | )          | (63                  | )             | 72,198           |       | (137             | )          |
| Interest expense                                        |       | —     |       | 55,628         |       | 71,000         |       | 974                  |          | (72,198          | )          | 55,404           |       |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| Interest (income) expense, net                          |       | —     |       | (16,529        | )          | 70,885         |       | 911                  |          | —           |       | 55,267           |       |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| Other income, net                                       |       | —     |       | (680           | )          | (1,185         | )          | (543                 | )             | —           |       | (2,408           | )          |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| **Income (loss) before income taxes**                   | ** ** | **—** | ** ** | **20,777**     | ** ** | **(161,515**   | **)**      | **6,342**            | ** **    | **—**       | ** ** | **(134,396**     | **)**      |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| Provision (benefit) for income taxes                    |       | —     |       | 7,844          |       | (60,196        | )          | 2,030                |          | —           |       | (50,322          | )          |
|                                                    |       |       |       |           |       |           |       |                 |          |             |       |             |       |
| **Net income (loss)**                                   | ** ** | **$**      | **—** | ** **     | **$**      | **12,933**     | ** ** | **$**                | **(101,319**  | **)**            | **$**      | **4,312**        | ** ** | **$** | **—** | ** ** | **$** | **(84,074** | **)** |

 

26

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

**(Predecessor Entity)**

**SUPPLEMENTAL CONDENSED CONSOLIDATINGSTATEMENT OF OPERATIONS**

**For the Period January 1, 2006 - February 13,2006**

**(In Thousands) (Unaudited)**

 
| ** **                                              | ** ** | **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** | **)** |

 

27

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

** **

**SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCESHEET**

**September 29, 2007**

**(In Thousands) (Unaudited)**

 
| ** **                                            | ** ** | **Parent**  | ** **  | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|-------------|-------------|----------------|------------|----------------|------------|----------------------|---------------|------------------|------------|------------------|------------|
| **Assets**                                            | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| Current assets:                                       | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| Cash and cash equivalents                             |       | $           | —      |           | $          | 2,377          |       | $                    | 7,692         |             | $          | 2,032            |       | $ | — |   | $ | 12,101 |   |
| Accounts receivable                                   |       | —      |        | 428            |       | 30,954         |       | 2,560                |          | —           |       | 33,942           |       |
| Inventories                                           |       | —      |        | 16,401         |       | 881,170        |       | 78,434               |          | —           |       | 976,005          |       |
| Prepaid expenses and other current assets             |       | —      |        | 233            |       | 15,300         |       | 1,720                |          | —           |       | 17,253           |       |
| Current deferred taxes                                |       | —      |        | 191            |       | 13,317         |       | 280                  |          | —           |       | 13,788           |       |
| **Total current assets**                              | ** ** | **—**  | ** **  | **19,630**     | ** ** | **948,433**    | ** ** | **85,026**           | ** **    | **—**       | ** ** | **1,053,089**    | ** ** |
|                                                  |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| Property and equipment, net                           |       | —      |        | 5,841          |       | 394,123        |       | 47,809               |          | —           |       | 447,773          |       |
| Identifiable intangible assets, net                   |       | —      |        | 622            |       | 142,371        |       | 1,590                |          | —           |       | 144,583          |       |
| Goodwill                                              |       | —      |        | 11,254         |       | 241,905        |       | 18,922               |          | —           |       | 272,081          |       |
| Intercompany receivables                              |       | —      |        | —         |       | 479,134        |       | 21,086               |          | (500,220         | )          | —           |       |
| Intercompany notes receivable                         |       | —      |        | 1,180,942      |       | —         |       | 27,278               |          | (1,208,220       | )          | —           |       |
| Investment in subsidiaries                            |       | 382,240     |        | 640,429        |       | —         |       | —               |          | (1,022,669       | )          | —           |       |
| Deferred financing costs and other  noncurrent assets |       | —      |        | 40,308         |       | 639            |       | 54                   |          | —           |       | 41,001           |       |
|                                                  |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| **Total assets**                                      | ** ** | **$**       | **382,240** | ** **     | **$**      | **1,899,026**  | ** ** | **$**                | **2,206,605** | ** **       | **$**      | **201,765**      | ** ** | **$** | **(2,731,109** | **)** | **$** | **1,958,527** | ** ** |
|                                                  |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| **Liabilities and Shareholders’ Equity**         |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| Current liabilities:                                  |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| Accounts payable                                      |       | $           | —      |           | $          | —         |       | $                    | 220,683       |             | $          | 46,371           |       | $ | — |   | $ | 267,054 |   |
| Accrued expenses and other current  liabilities       |       | —      |        | 37,034         |       | 159,804        |       | 6,690                |          | —           |       | 203,528          |       |
| **Total current liabilities**                         | ** ** | **—**  | ** **  | **37,034**     | ** ** | **380,487**    | ** ** | **53,061**           | ** **    | **—**       | ** ** | **470,582**      | ** ** |
| ** **                                            | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| Intercompany payable                                  |       | —      |        | 500,220        |       | —         |       | —               |          | (500,220         | )          | —           |       |
| Intercompany notes payable                            |       | —      |        | —         |       | 1,153,800      |       | 54,420               |          | (1,208,220       | )          | —           |       |
| Senior secured notes and other long-term  debt        |       | —      |        | 978,180        |       | —         |       | —               |          | —           |       | 978,180          |       |
| Noncurrent deferred income taxes                      |       | —      |        | 529            |       | 61,199         |       | 6,186                |          | —           |       | 67,914           |       |
| Other long-term liabilities                           |       | —      |        | 823            |       | 54,281         |       | 4,507                |          | —           |       | 59,611           |       |
| **Total liabilities**                                 | ** ** | **—**  | ** **  | **1,516,786**  | ** ** | **1,649,767**  | ** ** | **118,174**          | ** **    | **(1,708,440**   | **)**      | **1,576,287**    | ** ** |
|                                                  |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| **Total shareholders’ equity**                   | ** ** | **382,240** | ** **  | **382,240**    | ** ** | **556,838**    | ** ** | **83,591**           | ** **    | **(1,022,669**   | **)**      | **382,240**      | ** ** |
| ** **                                            | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| **Total liabilities and shareholders’ equity**   | ** ** | **$**       | **382,240** | ** **     | **$**      | **1,899,026**  | ** ** | **$**                | **2,206,605** | ** **       | **$**      | **201,765**      | ** ** | **$** | **(2,731,109** | **)** | **$** | **1,958,527** | ** ** |

 

28

----

 

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

** **

**SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCESHEET**

**December 30, 2006**

**(In Thousands) (Unaudited)**

 
| ** **                                            | ** ** | **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 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 |       | —      |        | 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        |       | —      |        | 687,800        |       | 2,076          |       | —               |          | —           |       | 689,876          |       |
| 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** | ** ** |

 

29

----

 

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

** **

**SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCESHEET**

**September 30, 2006**

**(In Thousands) (Unaudited)**

 
| ** **                                            | ** ** | **Parent**  | ** **  | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------|------------|-------------|-------------|----------------|------------|----------------|------------|----------------------|---------------|------------------|------------|------------------|------------|
| **Assets**                                            | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| Current assets:                                       | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| Cash and cash equivalents                             |       | $           | —      |           | $          | 2,882          |       | $                    | 6,618         |             | $          | 1,894            |       | $ | — |   | $ | 11,394 |   |
| Accounts receivable                                   |       | —      |        | 454            |       | 30,598         |       | 2,834                |          | —           |       | 33,886           |       |
| Inventories                                           |       | —      |        | 17,849         |       | 923,980        |       | 57,487               |          | —           |       | 999,316          |       |
| Prepaid expenses and other current assets             |       | —      |        | 50,908         |       | 14,622         |       | 1,258                |          | —           |       | 66,788           |       |
| Current deferred taxes                                |       | —      |        | 2,224          |       | 9,777          |       | 224                  |          | —           |       | 12,225           |       |
| **Total current assets**                              | ** ** | **—**  | ** **  | **74,317**     | ** ** | **985,595**    | ** ** | **63,697**           | ** **    | **—**       | ** ** | **1,123,609**    | ** ** |
|                                                  |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| Property and equipment, net                           |       | —      |        | 7,821          |       | 520,398        |       | 44,281               |          | —           |       | 572,500          |       |
| Identifiable intangible assets, net                   |       | —      |        | 767            |       | 152,751        |       | 1,843                |          | —           |       | 155,361          |       |
| Goodwill                                              |       | —      |        | 7,600          |       | 241,136        |       | 16,966               |          | —           |       | 265,702          |       |
| Intercompany receivables                              |       | —      |        | —         |       | 617,352        |       | —               |          | (617,352         | )          | —           |       |
| Intercompany notes receivable                         |       | —      |        | 1,178,039      |       | —         |       | 24,362               |          | (1,202,401       | )          | —           |       |
| Investment in subsidiaries                            |       | 568,624     |        | 824,803        |       | —         |       | —               |          | (1,393,427       | )          | —           |       |
| Deferred financing costs and other  noncurrent assets |       | —      |        | 34,625         |       | 575            |       | 18                   |          | —           |       | 35,218           |       |
|                                                  |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| **Total assets**                                      | ** ** | **$**       | **568,624** | ** **     | **$**      | **2,127,972**  | ** ** | **$**                | **2,517,807** | ** **       | **$**      | **151,167**      | ** ** | **$** | **(3,213,180** | **)** | **$** | **2,152,390** | ** ** |
|                                                  |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| **Liabilities and Shareholders’ Equity**         |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| Current liabilities:                                  |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| Accounts payable                                      |       | $           | —      |           | $          | —         |       | $                    | 278,636       |             | $          | 13,047           |       | $ | — |   | $ | 291,683 |   |
| Accrued expenses and other current  liabilities       |       | —      |        | 40,253         |       | 143,526        |       | 11,341               |          | —           |       | 195,120          |       |
| Short-term borrowings                                 |       | —      |        | 225,870        |       | —         |       | —               |          | —           |       | 225,870          |       |
| **Total current liabilities**                         | ** ** | **—**  | ** **  | **266,123**    | ** ** | **422,162**    | ** ** | **24,388**           | ** **    | **—**       | ** ** | **712,673**      | ** ** |
| ** **                                            | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| Intercompany payable                                  |       | —      |        | 609,020        |       | —         |       | 8,332                |          | (617,352         | )          | —           |       |
| Intercompany notes payable                            |       | —      |        | —         |       | 1,153,800      |       | 48,602               |          | (1,202,402       | )          | —           |       |
| Senior secured notes and other long-term  debt        |       | —      |        | 650,000        |       | 2,092          |       | —               |          | —           |       | 652,092          |       |
| Noncurrent deferred income taxes                      |       | —      |        | 33,080         |       | 131,923        |       | 5,488                |          | —           |       | 170,491          |       |
| Other long-term liabilities                           |       | —      |        | 1,128          |       | 44,655         |       | 2,729                |          | —           |       | 48,512           |       |
| **Total liabilities**                                 | ** ** | **—**  | ** **  | **1,559,351**  | ** ** | **1,754,632**  | ** ** | **89,539**           | ** **    | **(1,819,754**   | **)**      | **1,583,768**    | ** ** |
|                                                  |       |        |        |           |       |           |       |                 |          |             |       |             |       |
| **Total shareholders’ equity**                   | ** ** | **568,624** | ** **  | **568,621**    | ** ** | **763,175**    | ** ** | **61,628**           | ** **    | **(1,393,426**   | **)**      | **568,622**      | ** ** |
| ** **                                            | ** ** | ** **  | ** **  | ** **     | ** ** | ** **     | ** ** | ** **           | ** **    | ** **       | ** ** | ** **       | ** ** |
| **Total liabilities and shareholders’ equity**   | ** ** | **$**       | **568,624** | ** **     | **$**      | **2,127,972**  | ** ** | **$**                | **2,517,807** | ** **       | **$**      | **151,167**      | ** ** | **$** | **(3,213,180** | **)** | **$** | **2,152,390** | ** ** |

 

30

----

 

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

**(Successor Entity)**

**SUPPLEMENTAL CONDENSED CONSOLIDATINGSTATEMENT OF CASH FLOWS**

**For the Thirty-nine Week Period EndedSeptember 29, 2007**

**(In Thousands) (Unaudited)**

 
| ** **                                                                                          | ** ** | **Parent** | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                          | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Cash flows from operating activities:**                                                           | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net (loss) income                                                                                   |       | $          | —     |           | $          | (7,143         | )          | $                    | (177,747   | )                | $          | 4,801            |       | $ | — |   | $ | (180,089 | ) |
| Adjustments to reconcile net (loss) income  to net cash provided by (used in) operating activities: |       |       |       |           |       |           |       |                 |       |             |       |             |       |
| Depreciation and amortization                                                                       |       | —     |       | 1,884          |       | 88,302         |       | 7,088                |       | —           |       | 97,274           |       |
| Deferred income taxes                                                                               |       | —     |       | 18,116         |       | (82,060        | )          | (131                 | )          | —           |       | (64,075          | )          |
| Share-based compensation                                                                            |       | —     |       | 2,330          |       | —         |       | —               |       | —           |       | 2,330            |       |
| Amortization of deferred financing charges                                                          |       | —     |       | 6,075          |       | 1              |       | —               |       | —           |       | 6,076            |       |
| Loss on sales and disposals of property and  equipment                                              |       | —     |       | 291            |       | 247            |       | 1                    |       | —           |       | 539              |       |
| Impairment of property and equipment                                                                |       | —     |       | —         |       | 16,779         |       | —               |       | —           |       | 16,779           |       |
| Changes in assets and liabilities:                                                                  |       |       |       |           |       |           |       |                 |       |             |       |             |       |
| Decrease in accounts receivable                                                                     |       | —     |       | 8              |       | 2,129          |       | 1,443                |       | —           |       | 3,580            |       |
| Increase in inventories                                                                             |       | —     |       | (1,579         | )          | (152,667       | )          | (18,477              | )          | —           |       | (172,723         | )          |
| (Increase) decrease in prepaid expenses and  other current assets                                   |       | —     |       | (92            | )          | (639           | )          | 2,356                |       | —           |       | 1,625            |       |
| Decrease (increase) in identifiable  intangible assets and other noncurrent assets                  |       | —     |       | —         |       | 148            |       | (29                  | )          | —           |       | 119              |       |
| Increase in accounts payable                                                                        |       | —     |       | —         |       | 39,525         |       | 16,963               |       | —           |       | 56,488           |       |
| Decrease in accrued expenses and other  liabilities                                                 |       | —     |       | (3,934         | )          | (12,911        | )          | (12,372              | )          | —           |       | (29,217          | )          |
|                                                                                                |       |       |       |           |       |           |       |                 |       |             |       |             |       |
| **Net cash provided by (used in) operating  activities**                                            | ** ** | **—** | ** ** | **15,956**     | ** ** | **(278,893**   | **)**      | **1,643**            | ** ** | **—**       | ** ** | **(261,294**     | **)**      |
| ** **                                                                                          | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Cash flows from investing activities:**                                                           | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Additions to property and equipment                                                                 |       | —     |       | (1,878         | )          | (25,287        | )          | (4,082               | )          | —           |       | (31,247          | )          |
| Proceeds from sales of property and equipment                                                       |       | —     |       | 3,300          |       | 2,100          |       | —               |       | —           |       | 5,400            |       |
|                                                                                                |       |       |       |           |       |           |       |                 |       |             |       |             |       |
| **Net cash provided by (used in) investing  activities**                                            | ** ** | **—** | ** ** | **1,422**      | ** ** | **(23,187**    | **)**      | **(4,082**           | **)**      | **—**       | ** ** | **(25,847**      | **)**      |
| ** **                                                                                          | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Cash flows from financing activities:**                                                           | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Financing and direct acquisition costs                                                              |       | —     |       | (12,391        | )          | 9,591          |       | 654                  |       | —           |       | (2,146           | )          |
| Intercompany movements                                                                              |       | —     |       | (294,077       | )          | 292,039        |       | 2,038                |       | —           |       | —           |       |
| Net increase in borrowings under revolving  credit facility                                         |       | —     |       | 290,380        |       | —         |       | —               |       | —           |       | 290,380          |       |
| Payments on mortgage note                                                                           |       | —     |       | —         |       | (2,076         | )          | —               |       | —           |       | (2,076           | )          |
|                                                                                                |       |       |       |           |       |           |       |                 |       |             |       |             |       |
| **Net cash (used in) provided by financing  activities**                                            | ** ** | **—** | ** ** | **(16,088**    | **)**      | **299,554**    | ** ** | **2,692**            | ** ** | **—**       | ** ** | **286,158**      | ** ** |
|                                                                                                |       |       |       |           |       |           |       |                 |       |             |       |             |       |
| **Effect of exchange rate changes on cash and  cash equivalents**                                   | ** ** | **—** | ** ** | **—**     | ** ** | **—**     | ** ** | **558**              | ** ** | **—**       | ** ** | **558**          | ** ** |
|                                                                                                |       |       |       |           |       |           |       |                 |       |             |       |             |       |
| Net increase (decrease) in cash and cash  equivalents                                               |       | —     |       | 1,290          |       | (2,526         | )          | 811                  |       | —           |       | (425             | )          |
| Cash and cash equivalents at beginning of  period                                                   |       | —     |       | 1,087          |       | 10,218         |       | 1,221                |       | —           |       | 12,526           |       |
|                                                                                                |       |       |       |           |       |           |       |                 |       |             |       |             |       |
| **Cash and cash equivalents at end of period**                                                      | ** ** | **$**      | **—** | ** **     | **$**      | **2,377**      | ** ** | **$**                | **7,692**  | ** **       | **$**      | **2,032**        | ** ** | **$** | **—** | ** ** | **$** | **12,101** | ** ** |

 

31

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

**(Successor Entity)**

**SUPPLEMENTAL CONDENSED CONSOLIDATINGSTATEMENT OF CASH FLOWS**

**For the Period February 14, 2006 - September30, 2006**

**(In Thousands) (Unaudited)**

 
| ** **                                                                                          | ** ** | **Parent**   | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------|------------|----------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                          | ** ** | ** **   | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Cash flows from operating activities:**                                                           | ** ** | ** **   | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net income (loss)                                                                                   |       | $            | —     |           | $          | 12,933         |       | $                    | (101,319   | )                | $          | 4,312            |       | $ | — |   | $ | (84,074 | ) |
| Adjustments to reconcile net income (loss)  to net cash (used in) provided by operating activities: |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| Depreciation and amortization                                                                       |       | —       |       | 1,370          |       | 73,923         |       | 4,922                |       | —           |       | 80,215           |       |
| Deferred income taxes                                                                               |       | —       |       | 29,784         |       | (52,789        | )          | (229                 | )          | —           |       | (23,234          | )          |
| Share-based compensation                                                                            |       | —       |       | 3,363          |       | —         |       | —               |       | —           |       | 3,363            |       |
| Amortization of deferred financing charges                                                          |       | —       |       | 5,429          |       | —         |       | —               |       | —           |       | 5,429            |       |
| Loss on sale and disposals of property and  equipment                                               |       | —       |       | —         |       | 416            |       | —               |       | —           |       | 416              |       |
| Changes in assets and liabilities, net of  effect of acquisition:                                   |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| Decrease in accounts receivable                                                                     |       | —       |       | 195            |       | 11,741         |       | 111                  |       | —           |       | 12,047           |       |
| Increase in inventories                                                                             |       | —       |       | (3,430         | )          | (167,646       | )          | (6,834               | )          | —           |       | (177,910         | )          |
| (Increase) decrease in prepaid expenses and  other current assets                                   |       | —       |       | (50,574        | )          | 16,825         |       | (348                 | )          | —           |       | (34,097          | )          |
| (Increase) decrease in identifiable  intangible assets and other noncurrent assets                  |       | —       |       | (3,402         | )          | 907            |       | (3                   | )          | —           |       | (2,498           | )          |
| Increase (decrease) in accounts payable                                                             |       | —       |       | —         |       | 60,953         |       | (1,902               | )          | —           |       | 59,051           |       |
| (Decrease) increase in accrued expenses and  other liabilities                                      |       | —       |       | (62,616        | )          | 19,554         |       | 1,024                |       | —           |       | (42,038          | )          |
|                                                                                                |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| **Net cash (used in) provided by operating  activities**                                            | ** ** | **—**   | ** ** | **(66,948**    | **)**      | **(137,435**   | **)**      | **1,053**            | ** ** | **—**       | ** ** | **(203,330**     | **)**      |
| ** **                                                                                          | ** ** | ** **   | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Cash flows from investing activities:**                                                           | ** ** | ** **   | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Acquisition of the Company, net of cash  acquired                                                   |       | —       |       | (1,220,465     | )          | 7,632          |       | 7,331                |       | —           |       | (1,205,502       | )          |
| Investment in Linens ’n Things, Inc.                                                           |       | (741,675     | )          | —         |       | —         |       | —               |       | 741,675          |       | —           |       |
| Additions to property and equipment                                                                 |       | —       |       | (381           | )          | (43,637        | )          | (4,758               | )          | —           |       | (48,776          | )          |
| Proceeds from sale of property and  equipment                                                       |       | —       |       | —         |       | 3,100          |       | —               |       | —           |       | 3,100            |       |
| Decrease (increase) in investment in  subsidiary                                                    |       | 91,025       |       | (257           | )          | —         |       | —               |       | (90,768          | )          | —           |       |
|                                                                                                |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| **Net cash (used in) provided by investing  activities**                                            | ** ** | **(650,650** | **)**      | **(1,221,103** | **)**      | **(32,905**    | **)**      | **2,573**            | ** ** | **650,907**      | ** ** | **(1,251,178**   | **)**      |
| ** **                                                                                          | ** ** | ** **   | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Cash flows from financing activities:**                                                           | ** ** | ** **   | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| Issuance of common stock to Linens  Investors LLC and others                                        |       | 650,650      |       | —         |       | —         |       | 257                  |       | (257             | )          | 650,650          |       |
| Investment from Parent                                                                              |       | —       |       | 650,650        |       | —         |       | —               |       | (650,650         | )          | —           |       |
| Issuance of floating rate notes                                                                     |       | —       |       | 650,000        |       | —         |       | —               |       | —           |       | 650,000          |       |
| Financing and direct acquisition costs                                                              |       | —       |       | (59,254        | )          | (676           | )          | —               |       | —           |       | (59,930          | )          |
| Premium paid for derivative financial  instrument                                                   |       | —       |       | (700           | )          | —         |       | —               |       | —           |       | (700             | )          |
| Intercompany movements                                                                              |       | —       |       | (175,633       | )          | 177,672        |       | (2,039               | )          | —           |       | —           |       |
| Net increase in borrowings under revolving  credit facility                                         |       | —       |       | 225,870        |       | —         |       | —               |       | —           |       | 225,870          |       |
| Payments on mortgage note                                                                           |       | —       |       | —         |       | (38            | )          | —               |       | —           |       | (38              | )          |
|                                                                                                |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| **Net cash provided by (used in) financing  activities**                                            | ** ** | **650,650**  | ** ** | **1,290,933**  | ** ** | **176,958**    | ** ** | **(1,782**           | **)**      | **(650,907**     | **)**      | **1,465,852**    | ** ** |
|                                                                                                |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| **Effect of exchange rate changes on cash and  cash equivalents**                                   | ** ** | **—**   | ** ** | **—**     | ** ** | **—**     | ** ** | **50**               | ** ** | **—**       | ** ** | **50**           | ** ** |
|                                                                                                |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| Net increase in cash and cash equivalents                                                           |       | —       |       | 2,882          |       | 6,618          |       | 1,894                |       | —           |       | 11,394           |       |
| Cash and cash equivalents at beginning of  period                                                   |       | —       |       | —         |       | —         |       | —               |       | —           |       | —           |       |
|                                                                                                |       |         |       |           |       |           |       |                 |       |             |       |             |       |
| **Cash and cash equivalents at end of period**                                                      | ** ** | **$**        | **—** | ** **     | **$**      | **2,882**      | ** ** | **$**                | **6,618**  | ** **       | **$**      | **1,894**        | ** ** | **$** | **—** | ** ** | **$** | **11,394** | ** ** |

 

32

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

**(Predecessor Entity)**

**SUPPLEMENTAL CONDENSED CONSOLIDATINGSTATEMENT OF CASH FLOWS**

**For the Period January 1, 2006 - February 13,2006**

**(In Thousands) (Unaudited)**

** **
| ** **                                                                            | ** ** | **Co-Issuers** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                            | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Cash flows 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           | )          |
| Share-based compensation                                                              |       | 12,484         |       | —         |       | —               |       | —           |       | 12,484           |       |
| Amortization of deferred financing charges                                            |       | —         |       | 43             |       | —               |       | —           |       | 43               |       |
| Changes in assets and liabilities:                                                    |       |           |       |           |       |                 |       |             |       |             |       |
| (Increase) decrease in accounts receivable                                            |       | (288           | )          | (2,582         | )          | 630                  |       | —           |       | (2,240           | )          |
| Decrease (increase) in inventories                                                    |       | 687            |       | (30,481        | )          | (2,092               | )          | —           |       | (31,886          | )          |
| (Increase) decrease in prepaid expenses and  other current assets                     |       | (250           | )          | (12,595        | )          | 692                  |       | —           |       | (12,153          | )          |
| Decrease in identifiable intangible assets  and other noncurrent assets               |       | 11             |       | 9,515          |       | 54                   |       | —           |       | 9,580            |       |
| Increase (decrease) in accounts payable                                               |       | —         |       | 13,064         |       | (1,054               | )          | —           |       | 12,010           |       |
| (Decrease) increase in 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 flows 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**      | **)**      |
| ** **                                                                            | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Cash flows 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** | ** ** |

 

33

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**Item 2.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

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

**MANAGEMENT’S DISCUSSION AND ANALYSIS**

**OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

The following discussion and analysis should be readin conjunction with the condensed consolidated financial statements of theCompany and the notes thereto appearing elsewhere in this report.

 

**General**

** **

The Company is a holding company. It does not hold anyassets other than its investment in Linens ‘n Things, Inc., which the Companyacquired in February 2006. Linens ‘n Things, Inc., together with itssubsidiaries, is the operating subsidiary of the Company.

 

The Company, under the name “Linens ‘n Things,” is oneof the leading national large format specialty retailers of home textiles,housewares and home accessories, carrying both national brands and privatelabel goods. As of September 29, 2007, the Company operated 585 stores in 47states and in seven provinces across Canada.

 

**CriticalAccounting Policies**

** **

Thefollowing includes discussion and analysis about the condensed consolidatedfinancial statements of Linens Holding Co. and its subsidiaries and Predecessor.The Company has not presented separate financial statements for Linens ‘nThings, Inc. and its subsidiaries or Linens ‘n Things Center, Inc. and itssubsidiaries (collectively, the issuers as described in Note 13) becausemanagement has determined that the differences in such financial statements areminor.

 

The preparation of financial statements in conformitywith U.S. generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts and timing of revenues and ofexpenses during the reporting periods. The Company bases its estimates onhistorical experience and on other assumptions that it believes to be relevantunder the circumstances, the results of which form the basis for makingjudgments about the carrying value of assets and liabilities that are notreadily apparent from other sources. The Company’s management believes thefollowing critical accounting estimates involve significant estimates andjudgments inherent in the preparation of the condensed consolidated financialstatements. The Company bases these estimates on historical results and variousother assumptions believed to be reasonable at the time. These criticalaccounting estimates are discussed in detail in the Company’s 2006 AnnualReport on Form 10-K.

 

*BusinessCombination*

 

OnFebruary 14, 2006, the Company acquired all of the outstanding common stock ofthe Company’s Predecessor Entity, Linens ‘n Things, Inc., for total cashconsideration of approximately $1.3 billion. The acquisition of Linens ‘nThings, Inc. was accounted for as a business combination using the purchasemethod of accounting, whereby the purchase price (including liabilities assumed)was preliminarily allocated to the assets acquired based on their estimatedfair market values at the date of acquisition. The purchase price paid by theCompany to acquire Linens ‘n Things, Inc. and related purchase accountingadjustments were “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 acquisition was completed. Asa result, 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, which were based in part onthe work of third-party appraisers engaged to perform valuations of certain ofthe tangible and intangible assets acquired. In essence, the Company’s assetsand liabilities were adjusted to fair value as of the closing date of theacquisition, and the excess of the total purchase price over the fair value ofthe Company’s net assets was allocated to goodwill.

 

34

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*Valuationof Inventory*

 

Merchandiseinventory is a significant portion of the Company’s balance sheet, representingapproximately 49.8% of total assets at September 29, 2007. Inventories arevalued using the lower of cost or market value, determined by the retailinventory method (“RIM”). Under RIM, the valuation of inventories at cost andthe resulting gross margins are determined by applying a calculated cost-to-retailratio to the retail value of inventories. RIM is an averaging method that isused in the retail industry due to its practicality. Inherent in RIMcalculations are certain significant management judgments and estimatesincluding, among others, merchandise mark-on, mark-up, markdowns and shrinkagebased on historical experience between the dates of physical inventories, allof which significantly impact the ending inventory valuation at cost. Themethodologies utilized by the Company in its application of RIM are consistentfor all periods presented. Such methodologies include the development of thecost-to-retail ratios, the development of shrinkage reserves and the accountingfor price changes. At any one time, inventories include items that have beenwritten down to the Company’s best estimate of their realizable value. Factors considered in estimating realizable value include the age ofmerchandise and anticipated demand.  Actual realizable value could differmaterially from this estimate based upon future customer demand or economicconditions.

 

*SalesReturns*

 

TheCompany estimates future sales returns and records a provision in the periodthat the related sales are recorded based on 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 variedmaterially from historical provisions, estimating sales returns requiresmanagement judgment as to changes in preferences and quality of products beingsold, among other things; therefore, these estimates may vary materially in thefuture. The sales returns calculations are regularly compared with actualreturn experience. In preparing its condensed consolidated financial statementsas of September 29, 2007, December 30, 2006 and September 30, 2006, the Company’ssales returns reserve was approximately $4.3 million, $5.9 million and $5.7million, respectively.

 

*Impairmentof Long-Lived Assets (including Goodwill)*

 

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.

 

Goodwilland intangible assets that have indefinite useful lives are tested annually forimpairment. These assets are tested for impairment more frequently if eventsand circumstances indicate that the asset might be impaired. An impairment lossis recognized to the extent that the carrying amount exceeds the asset’s fairvalue.

 

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. At September 29, 2007, December 30,2006 and September 30, 2006, the Company’s net book value for property andequipment was approximately $447.8 million, $530.8 million and $572.5 million,respectively, goodwill was approximately $272.1 million, $267.8 million and$265.7 million, respectively, and identifiable intangible assets, net was$144.6 million, $150.0 million and $155.4 million, respectively.

 

Duringthe thirteen weeks ended September 29, 2007, the Company determined that thecarrying value of certain property and equipment exceeded its related estimatedfuture undiscounted cash flows. As a result, the Company reduced the carryingvalue of property and equipment to its fair value by approximately $16.8million.

 

Therewas no impairment loss recognized in the condensed consolidated statement ofoperations for any of the prior year periods presented.

 

35

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*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 prepared with theassistance of third party actuaries. Workers’ compensation is recorded at itsnet present value. In preparing the estimates, the Company also considers thenature and severity of the claims, analysis provided by third party claimsadministrators, as well as current legal, economic and regulatory factors. Theultimate cost of these claims may vary from the 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. The accrued obligation for theseself-insurance programs was approximately $16.1 million, $16.2 million and$14.7 million as of September 29, 2007, December 30, 2006 and September 30,2006, respectively.

 

*Share-basedCompensation*

 

OnJanuary 1, 2006, the Company adopted Statement of Financial AccountingStandards No. 123 (Revised 2004), “*Share-Based Payment*”(“SFAS No. 123 (Revised 2004)”), requiring the recognition of compensationcost for all equity classified awards granted, modified or settled after theeffective date and for the unvested portion of awards outstanding as of theeffective date using the fair-value measurement method.

 

Uponcompletion of the Merger and in accordance with the terms of the share-basedplans existing at the time, all of the outstanding stock options and restrictedstock units became fully vested and immediately exercisable. Accordingly, underSFAS No. 123 (Revised 2004) the Company recorded share-based compensationexpense for the entire portion of previously granted share-based awards thatremained unvested at the date of the adoption.

 

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 option grants on an accelerated basis. Thereare no restricted stock units under the Plan.

 

TheCompany uses the Monte Carlo simulation option-pricing model for estimating thefair value of performance-based employee stock option grants and the Black-Scholesoption-pricing model for time-based employee stock option grants issued underthe Plan. Both models include various assumptions, including the expected lifeof stock options, the expected volatility and the expected risk-free interestrate.  These assumptions reflect the Company’s best estimates, but theyinvolve inherent uncertainties based on certain conditions generally outsidethe control of the Company. As a result, if other assumptions had been used,total share-based compensation cost as determined in accordance with SFAS No.123 (Revised 2004) could have been materially impacted. Furthermore, if theCompany uses different assumptions for future grants, share-based compensationcost could be materially impacted in future periods.

 

UnderSFAS No. 123 (Revised 2004), the Company is also required to record share-basedcompensation expense net of estimated forfeitures. The Company’s forfeiturerate assumption used in determining its share-based compensation expense isestimated, primarily based upon historical data. The actual forfeiture ratecould differ from these estimates.

 

*DerivativeFinancial Instruments*

 

TheCompany has designated certain derivative instruments entered into on July 7,2006 as cash flow hedges and recognizes the fair value of the instruments onthe condensed consolidated balance sheet. Gains and losses related to a hedgeand that result from changes in the fair value of the hedge are eitherrecognized in income to offset the gain or loss on the hedged item, or deferredand reported as a component of accumulated other comprehensive income (loss) instockholders’ equity on the condensed consolidated balance sheet andsubsequently recognized in the condensed consolidated statement of operationswhen the hedged item affects income. The ineffective portion of the 

 

36

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changein fair value of a hedge is recognized in income immediately. There was nohedge ineffectiveness during the thirty-nine weeks ended September 29, 2007.

 

*IncomeTaxes*

 

TheCompany uses the asset and liability method to account for its incometaxes.  Deferred tax assets and liabilities are recognized for the futuretax consequences attributable to the differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases and operating loss and tax credit carryforwards. Deferredtax assets and liabilities are measured using enacted tax rates expected to beapplied to the 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 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.

 

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

 

*Litigation*

 

The Company records an estimated liability related tovarious claims and legal actions arising in the ordinary course of business,which is based on available information and advice from outside counsel whereapplicable. As additional information becomes available, the Company assessesthe potential liability related to its pending claims and may adjust itsestimates accordingly.

 

**Impact of theMerger and Related Transactions**

** **

On February 14, 2006, the Company acquired all of theoutstanding common stock of Linens ‘n Things, Inc. for total cash considerationof approximately $1.3 billion.

 

The acquisition of Linens ‘n Things, Inc. wasaccounted 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 acquisition. The purchase price paid by the Company to acquire Linens‘n Things, Inc. and related purchase accounting adjustments were “pushed down”and recorded in Linens ‘n Things, Inc. and its subsidiaries’ financialstatements and resulted in a new basis of accounting for the “Successor” periodbeginning on the day the acquisition was completed. As a result, the purchaseprice and related costs were allocated to the estimated fair values of theassets acquired and liabilities assumed at the time of the acquisition based onmanagement’s best estimates, which were based in part on the work ofthird-party appraisers engaged to perform valuations of certain of the tangibleand intangible assets acquired. In essence, the Company’s assets andliabilities were adjusted to fair value as of the closing date of theacquisition, and the excess of the total purchase price over the fair value ofthe Company’s net assets was allocated to goodwill.

 

In connection with the acquisition, the Companyincurred significant additional indebtedness, including $650.0 millionaggregate principal amount of Senior Secured Floating Rate Notes due 2014issued by two of the Company’s subsidiaries (the “Notes”), which increased theCompany’s interest expense. Payments required to service this indebtednesssubstantially increased the Company’s liquidity requirements in fiscal 2006 ascompared to fiscal 2005, and will do so in fiscal 2007 and future years. TheCompany’s depreciation and amortization expense 

 

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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.

 

The following discussion and analysis of the Company’shistorical financial condition and results of operation covers periods prior toand after the consummation of the acquisition.

 

**Results ofOperations**

** **

*Thirteen Weeks EndedSeptember 29, 2007 Compared with Thirteen Weeks Ended September 30, 2006*

* *

Net sales for the thirteen weeks ended September 29,2007 increased approximately 1.3% to $666.8 million compared to $658.2 millionfor the same period last year. The increase in net sales is primarily due tothe opening of new stores since September 30, 2006 offset by the impact of adecline in comparable store sales. Comparable store sales decreased 1.4% forthe thirteen weeks ended September 29, 2007 compared to an increase of 0.2% forthe same period last year. The decline in comparable store sales is primarilydue to a decline in guest transactions partially offset by an increase inaverage transaction value. At September 29, 2007, the Company operated 585stores, including 38 stores in Canada, as compared with 561 stores, including33 stores in Canada, at September 30, 2006. Store square footage increasedapproximately 3.6% to 19.3 million at September 29, 2007 compared with 18.6million at September 30, 2006. During the thirteen weeks ended September 29,2007, the Company opened five stores as compared with opening eight storesduring the same period last year. There were no stores closed in the currentperiod as compared with closing two stores during the same period last year.

 

In addition to the cost of inventory sold, the Companyincludes its buying and distribution expenses in its cost of sales. Buyingexpenses include all direct and indirect costs to procure merchandise. Distributionexpenses include the cost of operating the Company’s distribution centers andfreight expense related to transporting merchandise. For the thirteen weeksended September 29, 2007 gross profit was $261.1 million, or 39.2% of netsales, compared with $269.6 million, or 41.0% of net sales, for the same periodlast year. The decrease in gross profit as a percentage of net sales for thethird quarter reflects the highly promotional environment in the currentperiod.

 

The Company’s selling, general and administrativeexpenses (“SG&A”) consist of store selling expenses, occupancy costs,advertising expenses and corporate office expenses. SG&A for the thirteenweeks ended September 29, 2007 was $300.9 million, or 45.1% of net sales,compared with $287.4 million, or 43.7% of net sales, for the same period lastyear. SG&A also includes depreciation and amortization of $33.0 million, or4.9% of net sales, for the thirteen weeks ended September 29, 2007, comparedwith $33.4 million, or 5.1% of net sales, for the same period last year. Theincrease in SG&A (excluding depreciation and amortization) as a percentageof net sales from 38.6% to 40.2% is primarily due to higher occupancy costs andmarketing costs in the face of negative comparable store sales.

 

The Company determined that the carrying value ofcertain property and equipment exceeded its related estimated futureundiscounted cash flows. As a result, the Company reduced the carrying value ofproperty and equipment to its fair value by approximately $16.8 million, or2.5% of net sales, which is included in impairment of property and equipment onthe condensed consolidated statements of operations.

 

Operating loss for the thirteen weeks ended September29, 2007 was approximately $56.6 million, or (8.5%) of net sales, compared withan operating loss of $17.9 million, or (2.7%) of net sales, for the same periodlast year. .

 

Interest expense, net forthe thirteen weeks ended September 29, 2007 marginally increased toapproximately $24.1 million from $23.6 million during the same period lastyear.

 

Other (income)expense, net for the thirteen weeks ended September 29, 2007 increased to $1.5million of income, net, compared to $0.3 million of expense, net, for the sameperiod last year.

 

The Company’sincome tax expense was approximately $0.7 million for the thirteen weeks endedSeptember 29, 2007 compared with an income tax benefit of $14.4 million for thesame period last year.  The Company’s effective income tax rate for thethirteen weeks ended September 29, 2007 was 0.9% compared to an effective taxbenefit rate of 34.4% for the same period last year primarily due to the $25.1million valuation allowance which was recorded against United States netoperating losses in the current quarter. See Note 8 for additional detailconcerning the valuation allowance.

 

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The Company’s net loss for the thirteen weeks endedSeptember 29, 2007 was approximately $79.9 million compared with a net loss of$27.4 million for the same period last year. The increase in the net lossreflects the increase in the operating loss referred to above plus theimpairment of property and equipment and the tax valuation allowance. Excludingthe valuation allowance and the impairment charge, the Company’s net loss forthe thirteen weeks ended September 29, 2007 was approximately $43.2 million.

 

*Thirty-nine Weeks EndedSeptember 29, 2007 Compared with Thirty-nine Weeks Ended September 30, 2006*

* *

As a result of the acquisition, the prior period’sfinancial results for the thirty-nine weeks ended September 30, 2006 have been separatelypresented in the condensed consolidated statements of operations split betweenthe “Predecessor Entity”, covering the period January 1, 2006 through February13, 2006 and the “Successor Entity” covering the period February 14, 2006through September 30, 2006. For comparative purposes, the Company combined thetwo periods from January 1, 2006 through September 30, 2006 in its discussionbelow. This combination is not GAAP presentation. However, the Company believesthis presentation is useful to provide the reader a more accurate comparison.

 
| ** **                                              | ** ** | ** **                                                  | ** **    | **Thirty-nine Weeks Ended September 30, 2006**               | ** ** | ** **                                                                         | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------------|---------------|---------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **Thirty-nine  Weeks Ended  September  29, 2007** | ** **    | **January 1,  2006 to  February 13,  2006**

**(Predecessor  Entity)** | ** ** | **February 14,  2006 to  September  30, 2006  (Successor  Entity)** | ** ** | **January 1,  2006 to  September 30,  2006  (Combined)** | ** ** | **Increase  (Decrease)** | ** ** |
| ** **                                              | ** ** | ** **                                                  | ** **    | ** **                                                                            | ** ** | ** **                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net sales**                                           | ** ** | **$**                                                       | **1,831,922** | ** **                                                                            | **$**      | **284,971**                                                                        | ** ** | **$** | **1,577,583** | ** ** | **$** | **1,862,554** | ** ** | **$** | **(30,632** | **)** |
|                                                    |       |                                                        |          |                                                                                  |       |                                                                               |       |   |   |   |   |
| Cost of sales, including buying and  distribution costs |       | 1,110,417                                                   |          | 180,675                                                                               |       | 951,007                                                                            |       | 1,131,682 |   | (21,265 | ) |
|                                                    |       |                                                        |          |                                                                                  |       |                                                                               |       |   |   |   |   |
| **Gross profit**                                        | ** ** | **721,505**                                                 | ** **    | **104,296**                                                                           | ** ** | **626,576**                                                                        | ** ** | **730,872** | ** ** | **(9,367** | **)** |
|                                                    |       |                                                        |          |                                                                                  |       |                                                                               |       |   |   |   |   |
| Selling, general and administrative  expenses           |       | 873,042                                                     |          | 175,424                                                                               |       | 708,113                                                                            |       | 883,537 |   | (10,495 | ) |
| Impairment of property and equipment                    |       | 16,779                                                      |          | —                                                                                |       | —                                                                             |       | — |   | 16,779 |   |
|                                                    |       |                                                        |          |                                                                                  |       |                                                                               |       |   |   |   |   |
| **Operating loss**                                      | ** ** | **(168,316**                                                | **)**         | **(71,128**                                                                           | **)**      | **(81,537**                                                                        | **)**      | **(152,665** | **)** | **(15,651** | **)** |
|                                                    |       |                                                        |          |                                                                                  |       |                                                                               |       |   |   |   |   |
| Interest income                                         |       | (338                                                        | )             | (668                                                                                  | )          | (137                                                                               | )          | (805 | ) | 467 |   |
| Interest expense                                        |       | 74,084                                                      |          | —                                                                                |       | 55,404                                                                             |       | 55,404 |   | 18,680 |   |
|                                                    |       |                                                        |          |                                                                                  |       |                                                                               |       |   |   |   |   |
| Interest expense (income), net                          |       | 73,746                                                      |          | (668                                                                                  | )          | 55,267                                                                             |       | 54,599 |   | 19,147 |   |
|                                                    |       |                                                        |          |                                                                                  |       |                                                                               |       |   |   |   |   |
| Other income, net                                       |       | (3,837                                                      | )             | (1,286                                                                                | )          | (2,408                                                                             | )          | (3,694 | ) | (143 | ) |
|                                                    |       |                                                        |          |                                                                                  |       |                                                                               |       |   |   |   |   |
| **Loss before benefit for income taxes**                | ** ** | **(238,225**                                                | **)**         | **(69,174**                                                                           | **)**      | **(134,396**                                                                       | **)**      | **(203,570** | **)** | **(34,655** | **)** |
|                                                    |       |                                                        |          |                                                                                  |       |                                                                               |       |   |   |   |   |
| Benefit for income taxes                                |       | (58,136                                                     | )             | (21,270                                                                               | )          | (50,322                                                                            | )          | (71,592 | ) | 13,456 |   |
|                                                    |       |                                                        |          |                                                                                  |       |                                                                               |       |   |   |   |   |
| **Net loss**                                            | ** ** | **$**                                                       | **(180,089**  | **)**                                                                                 | **$**      | **(47,904**                                                                        | **)**      | **$** | **(84,074** | **)** | **$** | **(131,978** | **)** | **$** | **(48,111** | **)** |

 

Net sales for the thirty-nine weeks ended September29, 2007 decreased approximately 1.6% to $1,831.9 million compared to $1,862.6million for the same period last year. The decrease in net sales is primarilydue to the impact of a decline in comparable store sales offset by the openingof new stores since September 30, 2006. Comparable store sales decreased 4.6%for the thirty-nine weeks ended September 29, 2007 compared to a decline of1.0% for the same period last year. The decline in comparable store sales isprimarily due to a decline in guest transactions. During the thirty-nine weeksended September 29, 2007, the Company opened 14 stores as compared with opening21 stores during the same period last year. There were no stores closed in thecurrent period as compared with closing two stores during the same period lastyear.

 

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In addition to the cost of inventory sold, the Companyincludes its buying and distribution expenses in its cost of sales. Buyingexpenses include all direct and indirect costs to procure merchandise. Distributionexpenses include the cost of operating the Company’s distribution centers andfreight expense related to transporting merchandise. For the thirty-nine weeksended September 29, 2007 gross profit was $721.5 million, or 39.4% of netsales, compared with $730.9 million, or 39.2% of net sales, for the same periodlast year. The increase in gross profit as a percentage of net sales is due tolower markdowns offset by a decrease in product margin due to sales mix.

 

The Company’s selling, general and administrativeexpenses (“SG&A”) consist of store selling expenses, occupancy costs,advertising expenses and corporate office expenses. SG&A for thethirty-nine weeks ended September 29, 2007 was $873.0 million, or 47.7% of netsales, compared with $883.5 million, or 47.4% of net sales, for the same periodlast year, which included approximately $47.2 million of costs related to theacquisition, or 2.5% of net sales. SG&A also includes depreciation andamortization of $97.3 million, or 5.3% of net sales, for the thirty-nine weeksended September 29, 2007, compared with $92.9 million, or 5.0% of net sales,for the same period last year. The increase in SG&A (excluding depreciationand amortization and costs related to the acquisition in the prior year) as apercentage of net sales from 39.9% to 42.4% is primarily due to higheroccupancy costs and marketing costs in the face of negative comparable storesales.

 

The Company determined that the carrying value of certainproperty and equipment exceeded its related estimated future undiscounted cashflows. As a result, the Company reduced the carrying value of property andequipment to its fair value by approximately $16.8 million, or 0.9% of netsales, which is included in impairment of property and equipment on thecondensed consolidated statements of operations.

 

Operating loss for the thirty-nine weeks endedSeptember 29, 2007 was approximately $168.3 million, or (9.2%) of net sales,compared with an operating loss of $152.7 million, or (8.2%) of net sales, forthe same period last year.

 

Interest expense, net forthe thirty-nine weeks ended September 29, 2007 increased to approximately $73.7million from $54.6 million during the same period last year primarily due tothe additional interest expense associated with the Notes issued on February14, 2006.

 

Other income,net for the thirty-nine weeks ended September 29, 2007 increased marginally to$3.8 million compared to $3.7 million for the same period last year.

 

The Company’sincome tax benefit was approximately $58.1 million for the thirty-nine weeksended September 29, 2007 compared with an income tax benefit of $71.6 millionfor the same period last year.  The Company’s effective tax benefit ratefor the thirty-nine weeks ended September 29, 2007 decreased to 24.4% comparedto 35.2% for the same period last year primarily due to the $25.1 millionvaluation allowance which was recorded against United States net operatinglosses in the current year. See Note 8 for additional detail concerning thevaluation allowance.

 

The Company’s net loss forthe thirty-nine weeks ended September 29, 2007 was approximately $180.1 millioncompared with a net loss of $132.0 million for the same period last year. Asnoted above, the net loss for the current period is not necessarilycomparable to the net loss for the prior period as the current period includesproperty and equipment impairment and the tax valuation allowance while theprior period includes significantly higher costs related to the acquisitionpartially offset by lower interest, depreciation and amortization recordedprior to the completion of the Merger on February 14, 2006.

 

**Liquidity andCapital Resources**

** **

The Company incurred $650.0 million aggregateprincipal amount of Senior Secured Floating Rate Notes due 2014 of Linens ‘nThings, Inc. and Linens ‘n Things Center, Inc. in connection with the Merger. TheNotes bear interest at a per annum rate equal to LIBOR plus 5.625%, which is tobe paid every three months on January 15, April 15, July 15 and October 15. Theinterest rate on the Notes is reset quarterly. The Notes mature onJanuary 15, 2014. As of September 29, 2007 the interest rate on the Noteswas 11.0%, based on a LIBOR rate of 5.4%. On July 7, 2006 the Issuers 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 July7, 2006 the Issuers also purchased a one-year forward-starting interest ratecap agreement which takes effect on January 15, 2008.

 

The Notes are fully and unconditionally guaranteedjointly and severally on a senior basis by the Company and by certain of theCompany’s existing and future domestic subsidiaries other than the Issuers. 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 subsidiary guarantors’ equipment, intellectualproperty rights and related 

 

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general intangibles and the capital stock of theIssuers and certain of the subsidiaries. The Notes are also secured by second-priorityliens on the Issuers’ and the subsidiary guarantors’ inventory, accounts receivable,cash, securities and other general intangibles.

 

The lien on capital stock may be released undercertain circumstances. As a result of the filing and effectiveness of aregistration statement on Form S-4 with the SEC with respect to the Notes, the Issuersand the 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 ofany Issuer or guarantor constitute collateral for the Notes and thevalue of the securities equals or exceeds 20% of the principal amount, or$130.0 million of the Notes, separate financial statements ofthe Issuer or guarantor would be required under these SECrules to be 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 stockon the date that the lien triggers this separate financial statementrequirement.  Accordingly, for any subsidiary with securities thatequal or exceed the 20% threshold, the lien on the capital stock securing theNotes has been released with respect to those securities.  The lien on thecapital stock of Linens ‘n Things, Inc. remains in place.

 

Concurrent with the closing of the Merger in February2006, the Issuers also entered into a new senior secured asset-based revolvingcredit facility agreement (the “Original Credit Facility”) with third-partyinstitutional lenders, which expires February 14, 2011. In May 2007, theCompany entered into an amended and restated credit agreement (the “Old CreditFacility”). The provisions of the Old Credit Facility are substantially thesame as in the Original Credit Facility with several modifications that aregenerally favorable to the Company. The provisions of the Old Credit Facilitywere modified for: (i) a $100.0 million increase in the Old Credit Facilitymaximum availability from $600.0 million to $700.0 million; (ii) a decrease inthe “Excess Availability” threshold for purposes of mandatory compliance withcertain financial ratio maintenance covenants from $75.0 million to $70.0million; and (iii) several other modifications that are all favorable to theCompany. A copy of the Old Credit Facility is attached as Exhibit 10.1 to Form8-K filed with the SEC on May 29, 2007. See Note 7 for additional detailconcerning the Original Credit Facility and the Old Credit Facility.

 

As of September 29, 2007, the Issuers had (i)$328.2 million in borrowings outstanding under the Old Credit Facility atan average interest rate of 6.9%; (ii) $12.1 million of cash on hand; (iii)$109.0 million of letters of credit outstanding issued under the Old Credit Facility,which includes standby letters of credit and import letters of credit used formerchandise purchases; and (iv) $238.5 million of excess availability under theOld Credit Facility.

 

In October 2007, the Company entered into a new seniorsecured asset-based revolving credit facility agreement (the “New CreditFacility”) with third-party institutional lenders, which expires October 24,2012. The New Credit Facility replaced the senior secured asset-based revolvingcredit facility agreement originally entered into in February 2006 as amendedand restated in May 2007 (see Note 12). The New Credit Facility provides forincreased advance rates on inventory and accounts receivable and theelimination of all financial maintenance covenants. These changes will resultin a material increase to the Company’s aggregate borrowing base and excessavailability as compared with the Old Credit Facility. As of September 29,2007, pro forma as if the New Credit Facility were in place, excessavailability would have been $255.5 million compared to $238.5 million underthe Old Credit Facility . Insofar as the Old Credit Facility had a financialmaintenance covenant (which as noted above has been eliminated in the NewCredit Facility) that would have likely restricted the use of the last $70.0million of availability, the effective increase in excess availability underthe New Credit Facility would have been $87.0 million. Other terms andconditions in the New Credit Facility, which are summarized below, are similarto those under the Old Credit Facility.

 

The CreditAgreement extends $700.0 million of revolving credit facilities to the Company,comprised of (i) a $625.0 million Revolving Commitment and (ii) a $75.0 millionTranche B Commitment, both of which are subject to a borrowing base. Theborrowing base is a formula based on certain eligible inventory andreceivables, minus certain reserves, and the New Credit Facility reflectsincreases in the Company’s advance rates on this collateral. A portion of theNew Credit Facility, not to exceed $40.0 million, is also available to Linens ‘nThings Canada Corp. subject to the Canadian borrowing base. The New CreditFacility contains certain customary affirmative and negative covenants andevents of default, but all financial maintenance covenants were eliminated. Theprincipal amount outstanding of the loans under the New Credit Facility, plusinterest accrued and unpaid thereon, will be due and payable in full atmaturity, five years from October 24, 2007.

 

Allobligations under the New Credit Facility are unconditionally guaranteed by theCompany and certain of its existing and future domestic subsidiaries. Allobligations under the New Credit Facility, and the guarantees of thoseobligations, are secured, subject to certain exceptions, by substantially allof the assets of the borrowers, consisting 

 

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of Linens ‘nThings, Inc., Linens ‘n Things Center, Inc. and Linens ‘n Things Canada Corp.(collectively, the “Borrowers”), and the subsidiary guarantors, including: (i)a first-priority security interest in inventory, accounts receivable, cash,securities and other general intangibles; and (ii) a second-priority securityinterest in equipment, intellectual property rights and related generalintangibles and all of the capital stock of Linens ‘n Things, Inc. and thecapital 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 by reference tothe higher of (1) the base rate in effect on such day and (2) the federal fundseffective rate plus 0.50% or (b) a LIBOR rate, with respect to any Eurodollarborrowing, determined by reference to the costs of funds for U.S. dollar depositsfor the interest period relevant to such borrowing adjusted for certainadditional costs, in each case plus an applicable margin. The initialapplicable margin for borrowings under the New Credit Facility is 0.25% withrespect to alternate base rate borrowings and 1.50% with respect to LIBORborrowings. The applicable margin with respect to Tranche B Loans (consistingof per annum rate margins) shall be 2.75% in the case of Eurodollar borrowingsand, in the event the adjusted LIBOR rate is not available, 1.25% in the caseof alternate base rate borrowings. After the delivery of the financialstatements for the first full fiscal quarter after the closing date, 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. After thedelivery of financial statements for the first full fiscal quarter after theclosing date, the commitment fee will be subject to adjustment based on theexcess availability under the New Credit Facility. 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.

 

TheCompany funds its operations through a combination of internally generated cashfrom operations and from borrowings under the Old Credit Facility throughOctober 24, 2007 and the New Credit Facility thereafter. The Company’s primaryuses of cash are working capital requirements, new store expenditures, new storeinventory purchases and debt service requirements. The Company anticipates thatcash generated from operations together with amounts available under the NewCredit Facility will be sufficient to meet its future working capitalrequirements, new store expenditures, new store inventory purchases and debtservice obligations as they become due. However, the Company’s ability to fundfuture operating expenses and capital expenditures and its ability to makescheduled payments of interest on, to pay principal on or refinanceindebtedness and to satisfy any other present or future debt obligations willdepend on future operating performance which will be affected by generaleconomic, financial and other factors beyond the Company’s control.

 

As a result of theacquisition, the cash flow results for the thirty-nine weeks ended September30, 2006 have been separately presented in the condensed consolidatedstatements of cash flows split between the “Predecessor Entity”, covering theperiod January 1 to February 13, 2006 and the “Successor Entity” covering theperiod February 14 to September 30, 2006. The comparable period results for thecurrent year are presented under “Successor Entity.”  For comparative purposes, the Companycombined the two periods from January 1, 2006 through September 30, 2006 in itsdiscussion below. This combination is not a GAAP presentation. However, theCompany believes this combination is useful to provide the reader a moreaccurate comparison and is provided to enhance the reader’s understanding ofcash flows for the periods presented.

 

Net cash used in operatingactivities for the thirteen weeks ended September 29, 2007 was $59.3 million,which reflects seasonal working capital requirements as the Company preparesfor the holiday selling season. This compares with net cash used in operatingactivities of $55.9 million for the thirteen weeks ended September 30, 2006. Netcash used in operating activities for the thirty-nine weeks ended September 29,2007 was $261.3 million, which is marginally lower when compared with $265.3million used in operating activities for the same period last year,determined by combining net cash usedin operating activities of $203.3 million and $62.0 million for the periodsFebruary 14, 2006 to September 30, 2006 and January 1, 2006 to February 13,2006, respectively. The use of cash for the thirty-nine weeks ended September29, 2007 reflects the Company’s customary seasonal investment in workingcapital as it prepares for the upcoming holiday selling season as well as thepayment of cash interest and income taxes.

 

Net cash used in investingactivities for the thirteen weeks ended September 29, 2007 was $6.7 millionwhich reflects $8.8 million for additions to property and equipment offset by$2.1 million of proceeds from the sale of real 

 

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estate. This compares withnet cash used in investing activities of $16.0 million for the thirteen weeksended September 30, 2006. Net cash used in investing activities for thethirty-nine weeks ended September 29, 2007 was $25.8 million compared with$1,262.1 million used in investing activities for the same period lastyear, determined by combining net cashused in investing activities of $1,251.1 million and $11.0 million for theperiods February 14, 2006 to September 30, 2006 and January 1, 2006 to February13, 2006, respectively. Excluding the prior period cost in connectionwith the acquisition, net cash used in investing activities decreased $30.8million from the prior year due to fewer new store openings and the receipt of$5.4 million from sales of two real estate properties. The Company currentlyestimates capital expenditures will be approximately $40 million in fiscal2007, primarily to open approximately 20 new stores, to maintain existingstores, and for system enhancements and other capital additions.

 

Net cash provided byfinancing activities for the thirteen weeks ended September 29, 2007 was $61.0million primarily due to an increase in borrowings under the asset-basedrevolving credit facility. This compares with net cash provided by financingactivities of $69.9 million for the thirteen weeks ended September 30, 2006. Netcash provided by financing activities for the thirty-nine weeks ended September29, 2007 was $286.2 million compared with $1,470.8 million provided byfinancing activities for the same period last year, determined bycombining net cash provided byfinancing activities of $1,465.8 million and $5.0 million for the periodsFebruary 14, 2006 to September 30, 2006 and January 1, 2006 to February 13,2006, respectively. Excluding the prior period cash flows resulting from the acquisition, netcash provided by financing activities increased $61.0 million from the prioryear. The increase in net cash provided by financing activities is due tohigher borrowings from the asset-based revolving credit facility.

 

Management regularly reviews and evaluates itsliquidity and capital needs. The Company experiences peak periods for itsliquidity needs generally during the third quarter and fourth quarter of thefiscal year. As the Company’s business continues to grow and its current storeexpansion plan is implemented, such peak periods may require increases in theamounts available under the New Credit Facility from those currently existingand/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, workingcapital and non-acquisition business expansion requirements as they become due;however, no assurance can be given that it will be able to obtain access toincreases to the New Credit Facility or additional capacity from new creditfacilities in the future should they become necessary.

 

**Off-Balance SheetArrangements**

** **

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

 

**Inflation**

** **

The Company does not believe that its operatingresults have been materially affected by inflation during the preceding threeyears. There can be no assurance, however, that the Company’s operating resultswill not be affected by inflation in the future.

 

**Seasonality**

** **

The Company’s business is subject to substantialseasonal variations. Historically, the Company has realized a significantportion of its net sales and, prior to the Merger before the Company becamehighly leveraged, substantially all of its net income for the year during thethird and fourth quarters. The Company’s quarterly results of operations mayalso fluctuate significantly as a result of a variety of other factors,including the timing of new store openings. The Company believes this is thegeneral pattern associated with its segment of the retail industry and expectsthis pattern will continue in the future. Consequently, comparisons betweenquarters are not necessarily meaningful and the results for any quarter are notnecessarily indicative of future results.

 

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**Item 3.         Quantitative and QualitativeDisclosures About Market Risk**

 

The Company continuously evaluates the market riskassociated with its financial instruments.  Market risks relating to theCompany’s operations result primarily from changes in interest rates.  TheCompany does not engage in financial transactions for trading or speculativepurposes.

 

Market risk exposure has significantly increased dueto the issuance of the Notes in connection with the Transactions.

 

**Interest Rate Risk**

 

The Company’s financial instruments include cash andcash equivalents and borrowings under the Old Credit Facility, the New CreditFacility and the Notes.  The asset-based revolving credit facility and theNotes carry floating rate interest and, therefore, the Company’s condensedconsolidated statement of operations and the condensed consolidated statementof cash flows for fiscal 2007 will be exposed to changes in interestrates.  As of September 29, 2007, the Company had $328.2 million inborrowings under the Old Credit Facility at an average interest rate of 6.9%and $650.0 million aggregate principal amount in Notes at an interest rate of11.0%, based on a LIBOR rate of 5.4%.  As of September 29, 2007, a onepercentage point change in floating rate interest would cause an increase tointerest expense of approximately $9.8 million.

 

The Company employs derivative financial instrumentsto manage its exposure to interest rate changes and to limit the volatility andimpact of interest rate changes on earnings and cash flows.

 

The Company does not enter into other derivativefinancial instruments for trading or speculative purposes.  The Companyfaces credit risk if the counterparties to these transactions are unable toperform their obligations.  However, the Company seeks to minimize thisrisk by entering into transactions with counterparties that are major financialinstitutions with high credit ratings.

 

On July 7, 2006 the Issuers entered into a zero costinterest rate collar agreement to hedge the cash flows associated with theLIBOR component of the interest rate on the Notes.  The collar agreementprovides for payments to be made to or received from the counterparty where theLIBOR component of the rate in effect for the Notes is below 4.45% or above6.51% 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 thecollar agreement are matched exactly to those of the Notes.  The collaragreement has an ultimate maturity of January 15, 2008.  At the inceptionof the collar agreement, the Company determined that the hedging relationshipwould have no ineffectiveness, and the Company will continue to verify anddocument that the critical terms of the hedging instrument and the hedged itemare exactly matched.  At September 29, 2007, the notional amount of debtrelated to the collar agreement was $650.0 million and the fair value of thecollar agreement was a de minimis liability.

 

On July 7, 2006 the Issuers also purchased a one-yearforward-starting interest rate cap agreement which takes effect on January 15,2008.  The cap agreement provides for payments to be received from thecounterparty where the LIBOR component of the rate in effect on a LIBOR-basedborrowing arrangement is above 6.51% for a given reset period.  Paymentand reset dates under the cap agreement are matched exactly to those of theLIBOR-based borrowing arrangement.  The cap agreement has an ultimatematurity of January 15, 2009.  The Company paid a premium of $0.7 millionto purchase the cap agreement.  The cap agreement consists of twocomponents, a forward contract and an interest rate cap agreement.  TheCompany’s intent is to hedge the cash flow associated with the LIBOR componentof the interest rate on a LIBOR-based borrowing arrangement beyond 6.51% forthe period January 15, 2008 through January 15, 2009.  The forwardcontract should enable the Company to achieve this objective.  The Companywill assess the effectiveness of the forward contract quarterly.  Once theforward contract becomes an interest rate cap agreement, effectiveness will beassessed and documented as a new relationship.  The interest rate cap agreementis expected to be perfectly effective at such time, and the Company willcontinue to subsequently verify and document that the critical terms of theinterest rate cap agreement and the hedged item continue to match exactly overthe remaining life of the relationship.  At September 29, 2007, thenotional amount of debt related to the cap agreement was $650.0 million and thefair value of the instrument was approximately a $0.02 million asset.

 

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The Company has determined that the collar agreementand the cap agreement have been appropriately designated and documented as cashflow hedges under SFAS No. 133, “*Accounting for DerivativeInstruments and Hedging Activities*”, as amended. During the thirteenweeks ended September 29, 2007 and September 30, 2006 the Company has recordeda loss of approximately $0.02 million and $0.9 million, respectively, inaccumulated other comprehensive income (loss) related to these changes in fairvalue. During the thirty-nine weeks ended September 29, 2007 and the periodFebruary 14, 2006 to September 30, 2006 the Company has recorded a gain ofapproximately $0.03 million and a loss of approximately $0.9 million,respectively, in accumulated other comprehensive income (loss) related to thesechanges in fair value. The collar agreement and the cap agreement had noineffectiveness and provided no amounts received or paid under the hedges thataffected net loss during the period. Both agreements are expected to have noineffectiveness during their contractual lives.

 

**Foreign CurrencyRisk**

 

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.  TheCompany operated 38 stores in Canada as of September 29, 2007.  TheCompany believes 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.  As of September 29, 2007 and for the thirty-nineweeks then ended the Company did not hedge against foreign currency risks.

 

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**Item 4.         Controls and Procedures**

 

**DisclosureControls and Procedures**

** **

The Company’s management, including its ChiefExecutive Officer and its Chief Financial Officer, performed an evaluation ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures (as such term is defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)as of September 29, 2007. Based upon that evaluation, the Company’s management,including the Chief Executive Officer and the Chief Financial Officer,concluded that the Company’s disclosure controls and procedures are effectiveas of the end of the period covered by this report.

 

**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.

 

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Therefore,even those systems determined to be effective can provide only reasonableassurance with respect to financial statement preparation and presentation. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

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#### **PARTII - OTHER INFORMATION**

#### ** **

**Item 1.            Legal Proceedings**

 

The Company is subject to litigation in the normalcourse of business, but it does not believe that the resolution of any pendingproceedings will have a material impact on the Company’s financial position orresults of operations.

 

**Item 1A.         Risk Factors**

 

There have been no material changes in the riskfactors previously disclosed in the Company’s 2006 Annual Report on Form 10-K.

 

**Item 4.            Submission of Matters to aVote of Security Holders**

 

Effective July 18, 2007, the Company’s stockholdersexecuted a unanimous written consent in lieu of annual meeting for the purposeof re-electing each of the then current directors of the Company and ratifyingthe actions of the Company’s directors. As of the same date, the Company as the sole stockholder of Linens ‘nThings, Inc. and Linens ‘n Things, Inc. as the sole stockholder of Linens ‘nThings Center, Inc. executed respective written consents in lieu of annualmeeting to re-elect the then current directors and to ratify the actions ofdirectors.

 

**Item 6.            Exhibits**

 
| 31.1   |   | Certification of Principal Executive  Officer of Linens Holding Co. pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                 |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                            |
| 31.2   |   | Certification of Principal Financial  Officer of Linens Holding Co. pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                 |
|   |   |                                                                                                                                                                            |
| 31.3   |   | Certification of Principal Executive  Officer of Linens ‘n Things, Inc. pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                        |
|   |   |                                                                                                                                                                            |
| 31.4   |   | Certification of Principal Financial  Officer of Linens ‘n Things, Inc. pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                        |
|   |   |                                                                                                                                                                            |
| 31.5   |   | Certification of Principal Executive  Officer of Linens ‘n Things Center, Inc. pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                 |
|   |   |                                                                                                                                                                            |
| 31.6   |   | Certification of Principal Financial  Officer of Linens ‘n Things Center, Inc. pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                 |
|   |   |                                                                                                                                                                            |
| 32.1   |   | Certification of Principal Executive  Officer and Principal Financial Officer of Linens Holding Co. pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                 |
|   |   |                                                                                                                                                                            |
| 32.2   |   | Certification of Principal Executive  Officer and Principal Financial Officer of Linens ‘n Things, Inc. pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.        |
|   |   |                                                                                                                                                                            |
| 32.3   |   | Certification of Principal Executive  Officer and Principal Financial Officer of Linens ‘n Things Center, Inc.  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused thisQuarterly Report on Form 10-Q to be signed on its behalf by the undersignedthereunto duly authorized.

 
|                           | **LINENS  HOLDING CO.**                |
|--------------------------------|----------------------------------------|
|                           | **LINENS ‘N THINGS, INC.**        |
|                           | **LINENS ‘N THINGS CENTER, INC.** |
|                           | ** **                             |
|                           |                                   |
| Date:   November 13, 2007 | By:                                    | /s/ Robert J. DiNicola |
|                           |                                   | Robert  J. DiNicola |
|                           |                                   | Chairman  and Chief Executive Officer |
|                           |                                   | (principal  executive officer) |
|                           |                                   |   |
|                           |                                   |   |
| Date:   November 13, 2007 | By:                                    | /s/ Francis M. Rowan |
|                           |                                   | Francis  M. Rowan |
|                           |                                   | Senior  Vice President and Chief Financial Officer |
|                           |                                   | (principal financial and accounting officer) |

 

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