DEFM14A 1 ddefm14a.htm DEFINITIVE PROXY STATEMENT Definitive Proxy Statement
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14A

PROXY STATEMENT PURSUANT TO SECTION 14(a)

OF THE SECURITIES EXCHANGE ACT OF 1934

Filed by the Registrant  x                            Filed by a Party other than the Registrant  ¨

Check the appropriate box:

 

¨ Preliminary Proxy Statement

 

¨ Confidential, for use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

x Definitive Proxy Statement

 

¨ Definitive Additional Materials

 

¨ Soliciting Material Under Rule 14a-12

J.CREW GROUP, INC.

(Name of Registrant as Specified in its Charter)

Payment of Filing Fee (Check the appropriate box):

 

¨ No fee required

 

¨ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11

 

  (1) Title of each class of securities to which transaction applies:

 

       J.Crew Group, Inc. common stock, par value 0.01 (“common stock”)

 

 

  (2) Aggregate number of securities to which transaction applies:

 

       63,934,844 shares of common stock (including restricted shares) and 8,307,717 shares of common stock underlying outstanding options of the Company with an exercise price of $43.50 or less

 

 

  (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

       The proposed maximum aggregate value of the transaction for purposes of calculating the filing fee is $2,991,101,723. The maximum aggregate value of the transaction was calculated based upon the sum of (A) (1) 63,934,844 shares of common stock (including restricted shares) issued and outstanding and owned by persons other than the Company, Parent and Merger Sub on November 19, 2010, multiplied (2) by $43.50 per share (the “per share merger consideration”) and (B) (1) 8,307,717 shares of common stock underlying outstanding options of the Company with an exercise price of $43.50 or less, as of November 19, 2010, multiplied by (2) the excess of the per share merger consideration over the weighted average exercise price of $18.23. The filing fee equals the product of 0.00007130 multiplied by the maximum aggregate value of the transaction.

 

 

 

  (4) Proposed maximum aggregate value of transaction:

 

       $2,991,101,723

 

  (5)   Total fee paid:

 

       $213,265.55

 

 

x Fee paid previously with preliminary materials.

 

¨ Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.

 

  (1) Amount Previously Paid:

          

 

  (2) Form, Schedule or Registration Statement No.:

          

 

  (3) Filing party:

          

 

  (4) Date Filed:

 

 

 


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LOGO

January 25, 2011

To the Stockholders of J.Crew Group, Inc.:

You are cordially invited to attend a special meeting of stockholders of J.Crew Group, Inc., a Delaware corporation (the “Company,” “we,” “us” or “our”) to be held at 10:00 a.m., local time, on March 1, 2011, at The New Museum, 235 Bowery, New York, New York 10002.

On November 23, 2010, we entered into an Agreement and Plan of Merger, subsequently amended on January 18, 2011 by Amendment No. 1 to the Agreement and Plan of Merger (as amended, the “merger agreement”), with Chinos Holdings, Inc., a Delaware corporation (“Parent”), and Chinos Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”) providing for the merger of Merger Sub with and into the Company (the “merger”), with the Company surviving the merger as a wholly owned subsidiary of Parent. Parent and Merger Sub are beneficially owned by affiliates of TPG Capital, L.P. and Leonard Green & Partners, L.P. At the special meeting, we will ask you to adopt the merger agreement.

If the merger is completed, each share of Company common stock, other than as provided below, will be converted into the right to receive $43.50 in cash, without interest and less any applicable withholding taxes. We refer to this amount as the “per share merger consideration.” The following shares of Company common stock will not be converted into the right to receive the per share merger consideration in connection with the merger: (a) treasury shares owned by the Company, (b) shares owned by Parent, Merger Sub or any other direct or indirect wholly owned subsidiary of Parent, including shares contributed to Parent by the Rollover Investors (as defined below) and any members of our management team who may have the opportunity to invest in Parent and who choose to make this investment prior to the closing and (c) shares owned by stockholders who have exercised, perfected and not withdrawn a demand for, or lost the right to, appraisal rights under the Delaware General Corporation Law.

A special committee of our board of directors, consisting entirely of independent directors, reviewed and considered the terms and conditions of the merger agreement and the transactions contemplated by the merger agreement, including the merger. This special committee unanimously determined that the merger agreement and the transactions contemplated by the merger agreement, including the merger, are advisable, fair (both substantively and procedurally) to and in the best interests of the Company and its unaffiliated stockholders, and recommended that our board of directors approve and declare the advisability of the merger agreement and the transactions contemplated by the merger agreement, including the merger, and recommend that our stockholders adopt the merger agreement. Our board of directors, after careful consideration and acting on the unanimous recommendation of the special committee, deemed it advisable and in the best interests of the Company and our stockholders that the Company enter into the merger agreement, determined that the merger agreement and the transactions contemplated by the merger agreement, including the merger, are advisable, fair (both substantively and procedurally) to and in the best interests of the Company and its unaffiliated stockholders and recommended that our stockholders adopt the merger agreement at the special meeting. Our board of directors recommends that you vote “FOR” the proposal to adopt the merger agreement.

The merger cannot be completed unless the merger agreement is adopted by (i) stockholders holding at least a majority of the outstanding shares of Company common stock at the close of business on the record date and (ii) stockholders holding at least a majority of the outstanding shares of the Company’s common stock at the close of business on the record date other than shares owned, directly or indirectly, by Parent, Merger Sub, the Rollover Investors, any other officers or directors of the Company or any of their respective affiliates or associates (as defined under Section 12b-2 of the Exchange Act). More information about the merger is contained in the accompanying proxy statement and copies of the Agreement and Plan of Merger and Amendment No. 1 to the Agreement and Plan of Merger are attached thereto as Annex A and Annex B, respectively.


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In considering the recommendation of the special committee and the board of directors, you should be aware that some of the Company’s directors and executive officers have interests in the merger that are different from, or in addition to, the interests of our stockholders generally. Millard S. Drexler, our chairman of the board and chief executive officer, beneficially owns approximately 11.8% of the total number of outstanding shares of Company common stock. Mr. Drexler and certain related trusts party to the Rollover Agreement described in the accompanying proxy statement (collectively, the “Rollover Investors”) have agreed with Parent to contribute to Parent a portion of the shares of Company common stock owned by them in exchange for shares of Parent common stock immediately prior to the completion of the merger, and other members of our management team may also have the opportunity to invest in Parent prior to, or after, the special meeting. The accompanying proxy statement includes additional information regarding certain interests of the Company’s directors and executive officers that may be different from, or in addition to, the interests of our stockholders generally.

We encourage you to read the accompanying proxy statement in its entirety because it explains the proposed merger, the documents related to the merger and other related matters.

Regardless of the number of shares of Company common stock you own, your vote is important. The failure to vote will have the same effect as a vote against the proposal to adopt the merger agreement. Whether or not you plan to attend the special meeting, please take the time to submit a proxy by following the instructions on your proxy card as soon as possible. If your shares of Company common stock are held in an account at a broker, dealer, commercial bank, trust company or other nominee, you should instruct your broker, dealer, commercial bank, trust company or other nominee how to vote in accordance with the voting instruction form furnished by your broker, dealer, commercial bank, trust company or other nominee.

We appreciate your continued support of the Company.

 

Sincerely,
LOGO

Jennifer L. O’Connor

Senior Vice President, General Counsel and Secretary

The merger has not been approved or disapproved by the Securities and Exchange Commission or any state securities commission. Neither the Securities and Exchange Commission nor any state securities commission has passed upon the merits or fairness of the merger or upon the adequacy or accuracy of the information contained in this document or the accompanying proxy statement. Any representation to the contrary is a criminal offense.

The accompanying proxy statement is dated January 25, 2011 and is first being mailed to stockholders on or about January 26, 2011.


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LOGO

J.CREW GROUP, INC.

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD MARCH 1, 2011

NOTICE IS HEREBY GIVEN that the special meeting of stockholders of J.Crew Group, Inc. (the “Company,” “we,” “us” or “our”) will be held at 10:00 a.m., local time, on March 1, 2011, at The New Museum, 235 Bowery, New York, New York 10002, for the following purposes:

 

  1. To adopt the Agreement and Plan of Merger, dated November 23, 2010, as amended by Amendment No. 1 to the Agreement and Plan of Merger, dated January 18, 2011 (as amended, the “merger agreement”), with Chinos Holdings, Inc., a Delaware corporation (“Parent”), and Chinos Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”) providing for the merger of Merger Sub with and into the Company (the “merger”), with the Company surviving the merger as a wholly owned subsidiary of Parent. Parent and Merger Sub are beneficially owned by affiliates of TPG Capital, L.P. and Leonard Green & Partners, L.P.; and

 

  2. To approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement.

For more information about the merger and the other transactions contemplated by the merger agreement, please review the accompanying proxy statement and the Agreement and Plan of Merger and Amendment No. 1 to the Agreement and Plan of Merger attached thereto as Annex A and Annex B, respectively.

A special committee of our board of directors, consisting entirely of independent directors, reviewed and considered the terms and conditions of the merger agreement and the transactions contemplated by the merger agreement, including the merger. This special committee unanimously determined that the merger agreement and the transactions contemplated by the merger agreement, including the merger, are advisable, fair (both substantively and procedurally) to and in the best interests of the Company and its unaffiliated stockholders, and recommended that our board of directors approve and declare the advisability of the merger agreement and the transactions contemplated by the merger agreement, including the merger, and recommend that our stockholders adopt the merger agreement. Our board of directors, after careful consideration and acting on the unanimous recommendation of the special committee, deemed it advisable and in the best interests of the Company and our stockholders that the Company enter into the merger agreement, determined that the merger agreement and the transactions contemplated by the merger agreement, including the merger, are advisable, fair (both substantively and procedurally) to and in the best interests of the Company and its unaffiliated stockholders and recommended that our stockholders adopt the merger agreement at the special meeting. Our board of directors recommends that you vote “FOR” the proposal to adopt the merger agreement.

Millard S. Drexler, our chairman of the board and chief executive officer, beneficially owns approximately 11.8% of the total number of outstanding shares of Company common stock. Mr. Drexler and certain related trusts party to the Rollover Agreement described in the accompanying proxy statement (collectively, the “Rollover Investors”) have agreed with Parent to contribute to Parent a portion of the shares of Company common stock owned by them in exchange for shares of Parent common stock immediately prior to the completion of the merger, and other members of our management team may also have the opportunity to invest in Parent prior to, or after, the special meeting.

Only stockholders of record at the close of business on January 21, 2011 are entitled to notice of and to vote at the special meeting and at any and all adjournments or postponements thereof.


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The adoption of the merger agreement requires the affirmative vote of (i) stockholders holding at least a majority of the outstanding shares of Company common stock at the close of business on the record date and (ii) stockholders holding at least a majority of the outstanding shares of the Company’s common stock at the close of business on the record date other than shares owned, directly or indirectly, by Parent, Merger Sub, the Rollover Investors, any other officers or directors of the Company or any of their respective affiliates or associates (as defined under Section 12b-2 of the Exchange Act). The approval of the adjournment of the special meeting requires the affirmative vote of the holders of at least a majority of the shares of the Company common stock present and entitled to vote at the special meeting as of the record date, whether or not a quorum is present.

Regardless of the number of shares of Company common stock you own, your vote is important. The failure to vote will have the same effect as a vote against the proposal to adopt the merger agreement. Whether or not you plan to attend the special meeting, please take the time to submit a proxy by following the instructions on your proxy card as soon as possible. If your shares of Company common stock are held in an account at a broker, dealer, commercial bank, trust company or other nominee, you should instruct your broker, dealer, commercial bank, trust company or other nominee how to vote in accordance with the voting instruction form furnished by your broker, dealer, commercial bank, trust company or other nominee.

Company stockholders who do not vote in favor of adoption of the merger agreement will have the right to seek appraisal and receive the fair value of their shares in lieu of receiving the per share merger consideration if the merger closes but only if they perfect their appraisal rights by complying with the required procedures under Delaware law, which are summarized in the accompanying proxy statement.

If you plan to attend the special meeting, please note that you may be asked to present valid photo identification, such as a driver’s license or passport. If you wish to attend the special meeting and your shares of Company common stock are held in an account at a broker, dealer, commercial bank, trust company or other nominee (i.e., in “street name”), you will need to bring a copy of your voting instruction card or statement reflecting your share ownership as of the record date.

 

By Order of the Board of Directors,

LOGO

Jennifer L. O’Connor

Senior Vice President, General Counsel and Secretary

New York, New York
January 25, 2011

Important Notice of Internet Availability

This proxy statement for the special meeting to be held on March 1, 2011, is available free of charge at http://www.readmaterial.com/JCG.

YOUR VOTE IS IMPORTANT

WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, YOU ARE ENCOURAGED TO VOTE AS SOON AS POSSIBLE. YOU MAY VOTE YOUR SHARES OF COMPANY COMMON STOCK BY TELEPHONE, OVER THE INTERNET, OR IF YOU RECEIVED A PAPER COPY OF THE PROXY CARD, BY SIGNING AND DATING IT AND RETURNING IT PROMPTLY. VOTING BY PROXY WILL NOT PREVENT YOU FROM ATTENDING THE MEETING AND VOTING IN PERSON IF YOU SO DESIRE.


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SUMMARY VOTING INSTRUCTIONS

Ensure that your shares of Company common stock can be voted at the special meeting by submitting your proxy or contacting your broker, dealer, commercial bank, trust company or other nominee.

If your shares of Company common stock are registered in the name of a broker, dealer, commercial bank, trust company or other nominee: check the voting instruction card forwarded by your broker, dealer, commercial bank, trust company or other nominee to see which voting options are available or contact your broker, dealer, commercial bank, trust company or other nominee in order to obtain directions as to how to ensure that your shares of Company common stock are voted at the special meeting.

If your shares of Company common stock are registered in your name: submit your proxy as soon as possible by telephone, via the Internet or by signing, dating and returning the enclosed proxy card in the enclosed postage-paid envelope, so that your shares of Company common stock can be voted at the special meeting.

Instructions regarding telephone and Internet voting are included on the proxy card.

The failure to vote will have the same effect as a vote against the proposal to adopt the merger agreement. If you sign, date and mail your proxy card without indicating how you wish to vote, your proxy will be voted in favor of the proposal to adopt the merger agreement and the proposal to adjourn the special meeting, if necessary and appropriate, to solicit additional proxies.

If you have any questions, require assistance with voting your proxy card,

or need additional copies of proxy material, please call MacKenzie Partners

at the phone numbers listed below.

LOGO

105 Madison Avenue

New York, NY 10016

jcrewproxy@mackenziepartners.com

(212) 929-5500 (Call Collect)

Or

TOLL-FREE (800) 322-2885


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TABLE OF CONTENTS

 

     PAGE  

PROXY STATEMENT

     1   

SUMMARY TERM SHEET

     1   

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

     12   

SPECIAL FACTORS

     16   

The Parties

     16   

Business and Background of Natural Persons Related to the Company

     17   

Business and Background of Natural Persons Related to TPG VI, Parent, Merger Sub and the Leonard Green Entities

     19   

Overview of the Transaction

     20   

Management and Board of Directors of the Surviving Corporation

     20   

Background of the Merger

     21   

Recommendation of Our Board of Directors and Special Committee; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger

     36   

Opinion of Perella Weinberg, Financial Advisor to the Special Committee

     44   

Analyses of Goldman Sachs for the Company

     55   

Purposes and Reasons of TPG VI, the Leonard Green Entities, Parent, Merger Sub and the MD Parties for the Merger

     58   

Positions of TPG VI, the Leonard Green Entities, Parent and Merger Sub Regarding the Fairness of the Merger

     58   

Positions of the MD Parties Regarding the Fairness of the Merger

     61   

Analysis of Goldman Sachs, Financial Advisor to Parent

     62   

Certain Effects of the Merger

     68   

Alternatives to Merger

     71   

Effects on the Company if Merger is not Completed

     72   

Plans for the Company

     72   

Prospective Financial Information

     72   

Financing of the Merger

     76   

Limited Guaranty

     80   

Interests of the Company’s Directors and Executive Officers in the Merger

     80   

Relationship Between Us and Leonard Green and TPG

     93   

Dividends

     93   

Determination of the Per Share Merger Consideration

     94   

Regulatory Matters

     94   

Fees and Expenses

     94   

Certain Material United States Federal Income Tax Consequences

     94   

Delisting and Deregistration of the Company’s Common Shares

     97   

Litigation Relating to the Merger

     97   

THE SPECIAL MEETING

     101   

Date, Time and Place

     101   

Purpose of the Special Meeting

     101   

Recommendation of Our Board of Directors and Special Committee

     101   

Record Date; Stockholders Entitled to Vote; Quorum

     101   

Vote Required

     102   

Stock Ownership and Interests of Certain Persons

     102   

Voting Procedures

     102   

Other Business

     104   

Revocation of Proxies

     104   

Rights of Stockholders Who Object to the Merger

     104   

Solicitation of Proxies

     104   

Assistance

     104   


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THE MERGER AGREEMENT

     105   

Explanatory Note Regarding the Merger Agreement

     105   

Effects of the Merger; Directors and Officers; Certificate of Incorporation; Bylaws

     105   

Closing and Effective Time of the Merger; Marketing Period

     105   

Treatment of Common Stock, Options, Restricted Shares and Other Equity Awards

     107   

Financing Covenant; Company Cooperation

     108   

Representations and Warranties

     110   

Conduct of Our Business Pending the Merger

     114   

Solicitation of Takeover Proposals

     115   

Stockholders Meeting

     118   

Filings; Other Actions; Notification

     118   

Employee Benefit Matters

     119   

Conditions to the Merger

     120   

Termination

     121   

Termination Fees and Reimbursement of Expenses

     123   

Expenses

     124   

Remedies

     124   

Indemnification; Directors’ and Officers’ Insurance

     125   

Access

     126   

Modification or Amendment

     126   

COMMON STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS

     127   

COMMON STOCK TRANSACTION INFORMATION

     131   

APPRAISAL RIGHTS

     132   

SELECTED FINANCIAL INFORMATION

     136   

MARKET PRICE AND DIVIDEND INFORMATION

     139   

STOCKHOLDER PROPOSALS AND NOMINATIONS

     140   

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

     141   

WHERE YOU CAN FIND MORE INFORMATION

     142   

ANNEX A: MERGER AGREEMENT

     A-1   

ANNEX B: AMENDMENT NO. 1 TO THE MERGER AGREEMENT

     B-1   

ANNEX C: FINANCIAL ADVISOR OPINION

     C-1   

ANNEX D: DELAWARE GENERAL CORPORATION LAW SECTION 262

     D-1   


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J.CREW GROUP, INC.

SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD MARCH 1, 2011

 

 

PROXY STATEMENT

 

 

This proxy statement contains information related to a special meeting of stockholders of J.Crew Group, Inc. (the “Company,” “we,” “us” or “our”) which will be held at 10:00 a.m., local time, on March 1, 2011, at The New Museum, 235 Bowery, New York, New York 10002 and any adjournments or postponements thereof. We are furnishing this proxy statement to stockholders of J.Crew Group, Inc. as part of the solicitation of proxies by the Company’s board of directors for use at the special meeting. This proxy statement is dated January 25, 2011 and is first being mailed to stockholders on or about January 26, 2011.

SUMMARY TERM SHEET

This summary term sheet highlights selected information in this proxy statement and may not contain all of the information about the merger that is important to you. We have included page references in parentheses to direct you to more complete descriptions of the topics presented in this summary term sheet. You should carefully read this proxy statement in its entirety, including the annexes and the other documents to which we have referred you, for a more complete understanding of the matters being considered at the special meeting. You may obtain without charge copies of documents incorporated by reference into this proxy statement by following the instructions under “Where You Can Find More Information” beginning on page 142. In this proxy statement, the terms “we,” “us,” “our,” “J.Crew” and the “Company” refer to J.Crew Group, Inc. and its subsidiaries. We refer to TPG Capital, L.P. as “TPG,” and Leonard Green & Partners, L.P. as “Leonard Green.” We refer to Green Equity Investors V, L.P. as “GEI V,” Green Equity Investors Side V, L.P. as “GEI Side V,” and GEI V and GEI Side V together as the “Leonard Green Entities.” We refer to TPG Partners VI, L.P. as “TPG VI.” We refer to Chinos Holdings, Inc. as “Parent” and Chinos Acquisition Corporation as “Merger Sub.” We refer to The Drexler Family Revocable Trust, The Millard S. Drexler 2009 Grantor Retained Annuity Trust #1 and The Millard S. Drexler 2009 Grantor Retained Annuity Trust #2 as the “MD Trusts” and together with Mr. Drexler, the “MD Parties” or the “Rollover Investors.” When we refer to the “merger agreement” we mean the Agreement and Plan of Merger, dated as of November 23, 2010, among the Company, Parent and Merger Sub and, unless the context otherwise requires, Amendment No. 1 to the Agreement and Plan of Merger, dated as of January 18, 2011.

The Parties

(page 16)

J.Crew Group, Inc. is a nationally recognized multi-channel retailer of women’s, men’s and children’s apparel, shoes and accessories. As of January 18, 2011, the Company operates 249 retail stores (including 220 J.Crew retail stores, 9 crewcuts and 20 Madewell stores), the J.Crew catalog business, jcrew.com, madewell.com and 85 factory outlet stores. Both Parent and Merger Sub were formed for the sole purpose of entering into the merger agreement and consummating the transactions contemplated by the merger agreement. Both Parent and Merger Sub are beneficially owned by TPG VI and the Leonard Green Entities.

Millard S. Drexler, our chairman of the board and chief executive officer, beneficially owns approximately 11.8% of the total number of outstanding shares of Company common stock. The Rollover Investors have agreed

 

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with Parent to contribute to Parent a portion of the shares of Company common stock owned by them (the “Rollover Shares”) in exchange for shares of Parent common stock immediately prior to the completion of the merger, and other members of our management team may also have the opportunity to invest in Parent prior to, or after, the special meeting.

Overview of the Transaction

(page 20)

The Company, Parent and Merger Sub entered into the merger agreement on November 23, 2010 and entered into Amendment No. 1 to the Agreement and Plan of Merger on January 18, 2011. Under the terms of the merger agreement, Merger Sub will be merged with and into the Company, with the Company surviving the merger as a wholly owned subsidiary of Parent. Both Parent and Merger Sub are beneficially owned by TPG VI and the Leonard Green Entities. The following will occur in connection with the merger:

 

   

each share of Company common stock issued and outstanding immediately prior to the closing (other than treasury shares owned by the Company, shares owned by Parent, Merger Sub or any other direct or indirect wholly owned subsidiary of Parent, including shares contributed to Parent by the Rollover Investors and any members of our management team who may have the opportunity to invest in Parent and who choose to make this investment prior to the closing, and shares owned by stockholders who have exercised, perfected and not withdrawn a demand for, or lost the right to, appraisal rights under the Delaware General Corporation Law (“DGCL”)) will convert into the right to receive the per share merger consideration, as described below; and

 

   

all shares of Company common stock so converted will, at the closing of the merger, be canceled, and each holder of a certificate representing any shares of Company common stock shall cease to have any rights with respect thereto, except the right to receive the per share merger consideration upon surrender of such certificate (if such shares are certificated).

Following and as a result of the merger:

 

   

Company stockholders (other than the Rollover Investors and any members of our management team who may have the opportunity to invest in Parent and who choose to make this investment) will no longer have any interest in, and will no longer be stockholders of, the Company, and will not participate in any of the Company’s future earnings or growth;

 

   

shares of Company common stock will no longer be listed on The New York Stock Exchange (“NYSE”), and price quotations with respect to shares of Company common stock in the public market will no longer be available; and

 

   

the registration of shares of Company common stock under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) will be terminated.

The Special Meeting

(page 101)

The special meeting will be held on March 1, 2011 at The New Museum, 235 Bowery, New York, New York 10002. At the special meeting, you will be asked to, among other things, adopt the merger agreement. Please see the section of this proxy statement captioned “Questions and Answers About the Special Meeting and the Merger” for additional information on the special meeting, including how to vote your shares of Company common stock.

Stockholders Entitled to Vote; Vote Required to Adopt the Merger Agreement

(page 101)

You may vote at the special meeting if you owned any shares of Company common stock at the close of business on January 21, 2011, the record date for the special meeting. On that date, there were 63,907,720 shares

 

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of Company common stock outstanding and entitled to vote at the special meeting. You may cast one vote for each share of Company common stock that you owned on that date. Adoption of the merger agreement requires the affirmative vote of (i) stockholders holding at least a majority of the outstanding shares of the Company’s common stock at the close of business on the record date and (ii) stockholders holding at least a majority of the outstanding shares of the Company’s common stock at the close of business on the record date other than shares owned, directly or indirectly, by Parent, Merger Sub, the Rollover Investors, any other officers or directors of the Company or any of their respective affiliates or associates (as defined under Section 12b-2 of the Exchange Act). See “The Special Meeting” beginning on page 101 for additional information.

Merger Consideration

(page 105)

If the merger is completed, each share of Company common stock, other than as provided below, will be converted into the right to receive $43.50 in cash, without interest and less any applicable withholding taxes. We refer to this amount as the “per share merger consideration.” Common stock owned by the Company as treasury stock or owned by Parent, Merger Sub or any other direct or indirect wholly owned subsidiary of Parent (including shares of Company common stock contributed to Parent by the Rollover Investors and any members of our management team who may have the opportunity to invest in Parent and who choose to make this investment prior to the closing) will be canceled without payment of per share merger consideration. Shares of Company common stock owned by any of the Company’s wholly owned subsidiaries will, at the election of Parent, either convert into stock of the surviving corporation or be canceled without payment of per share merger consideration. Shares of Company common stock owned by stockholders who have exercised, perfected and not withdrawn a demand for, or lost the right to, appraisal rights under the DGCL will be canceled without payment of per share merger consideration and such stockholders will instead be entitled to appraisal rights under the DGCL.

A paying agent will send written instructions for surrendering your certificates representing shares of Company common stock (if your shares of Company common stock are certificated) and obtaining the per share merger consideration after we have completed the merger. Do not return your stock certificates with your proxy card and do not forward your stock certificates to the paying agent prior to receipt of the written instructions. If you hold uncertificated shares of Company common stock (i.e., you hold your shares in book entry), you will automatically receive your per share merger consideration as soon as practicable after the effective time of the merger without any further action required on your part. See “The Merger Agreement—Treatment of Common Stock, Options, Restricted Shares and Other Equity Awards—Exchange and Payment Procedures” beginning on page 107 for additional information.

Treatment of Company Stock Options and Restricted Stock

(page 107)

The merger agreement provides that, except as otherwise agreed by Parent and the holder of an outstanding stock option, immediately prior to the effective time of the merger each outstanding stock option (other than statutory options granted under the ESPP), whether vested or unvested, will fully vest contingent on the occurrence of the closing of the merger and will be canceled as of the effective time of the merger and converted into the right to receive, within three business days after the completion of the merger, an amount in cash equal to the excess, if any, of the per share merger consideration ($43.50) over the exercise price per share of such stock option, without interest and less any required withholding taxes.

Except as otherwise agreed by Parent and a holder of an outstanding restricted share of Company common stock, immediately prior to the effective time of the merger each outstanding restricted share will become fully vested immediately prior to and contingent on the occurrence of closing of the merger. Upon closing, each restricted share will be treated as a share of Company common stock and as such will be entitled to receive the per share merger consideration ($43.50), without interest and less applicable withholding taxes. See “The Merger Agreement—Treatment of Common Stock, Options, Restricted Shares and Other Equity Awards” beginning on page 107 for additional information.

 

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Recommendation of Our Board of Directors and Special Committee; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger

(page 36)

Our board of directors, after careful consideration and acting on the unanimous recommendation of the special committee composed entirely of independent directors, recommends that our stockholders vote “FOR” the proposal to adopt the merger agreement and “FOR” the proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement. Our board of directors and the special committee believe that the merger is fair (both substantively and procedurally) to our unaffiliated stockholders. For a discussion of the material factors considered by our board of directors and the special committee in determining to recommend the adoption of the merger agreement and in determining that the merger is fair (both substantively and procedurally) to our unaffiliated stockholders, see “Special Factors—Recommendation of Our Board of Directors and Special Committee; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger” beginning on page 36 for additional information.

Positions of TPG VI, the Leonard Green Entities, Parent, Merger Sub and the MD Parties Regarding the Fairness of the Merger

(page 58)

Each of TPG VI, the Leonard Green Entities, Parent, Merger Sub and the MD Parties believes that the merger is fair (both substantively and procedurally) to our unaffiliated stockholders. However, none of TPG VI, the Leonard Green Entities, Parent, Merger Sub or the MD Parties has performed, or engaged a financial advisor to perform, any valuation or other analysis for the purposes of assessing the fairness of the merger to our unaffiliated stockholders. Their belief is based upon the factors discussed under the captions, “Special Factors—Positions of TPG VI, the Leonard Green Entities, Parent and Merger Sub Regarding the Fairness of the Merger” and “Special Factors—Positions of the MD Parties Regarding the Fairness of the Merger” beginning on page 58 of this proxy statement.

Opinion of Perella Weinberg, Financial Advisor to the Special Committee

(page 44)

Perella Weinberg Partners LP, or “Perella Weinberg,” rendered its oral opinion, subsequently confirmed in writing, to the special committee that, on November 22, 2010, and based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations set forth in the opinion, the $43.50 cash per share merger consideration to be received by the holders of shares of Company common stock (other than Mr. Drexler and certain related trusts or other related persons (and any other persons) party to the Rollover Agreement described in this proxy statement and Parent, Merger Sub or any other direct or indirect wholly and subsidiary of Parent (which we refer to collectively as, the “Excluded Holders”) in the merger was fair, from a financial point of view, to such holders. Perella Weinberg was not requested to, and did not, deliver an opinion in connection with the execution of Amendment No. 1 to the Agreement and Plan of Merger on January 18, 2011. For the purposes of the descriptions of Perella Weinberg’s opinion or the financial analyses contained herein, any references to the “merger agreement” and the “merger” are without giving effect to Amendment No. 1 to the Agreement and Plan of Merger.

The full text of Perella Weinberg’s written opinion, dated November 22, 2010, which sets forth, among other things, the assumptions made, procedures followed, matters considered and qualifications and limitations on the review undertaken by Perella Weinberg, is attached as Annex C and is incorporated by reference herein. Holders of shares of Company common stock are urged to read the opinion carefully and in its entirety. The opinion does not address the Company’s underlying business decision to enter into the merger or the relative merits of the merger as compared with any other strategic alternative which may have been available to the Company. The opinion does not constitute a recommendation to any holder of shares of Company common stock as to how such holder should vote or otherwise act with respect to the

 

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merger or any other matter and does not in any manner address the prices at which shares of Company common stock will trade at any time. In addition, Perella Weinberg expressed no opinion as to the fairness of the merger to, or any consideration to, the holders of any other class of securities, creditors or other constituencies of the Company. Perella Weinberg provided its opinion for the information and assistance of the special committee in connection with, and for the purposes of its evaluation of, the merger. The Perella Weinberg opinion expressly allows reliance on the opinion by those members of the board of directors who are not members of the special committee (other than those members of the board of directors who recused themselves from voting on the approval of the merger and the merger agreement). This summary is qualified in its entirety by reference to the full text of the opinion.

Financing of the Merger

(page 76)

Parent estimates that the total amount of funds required to complete the merger and related transactions, including payment of fees and expenses in connection with the merger, is anticipated to be approximately $3 billion. This amount is expected to be provided through a combination of (i) equity contributions from TPG VI and the Leonard Green Entities totaling approximately $1.2 billion, (ii) rollover financing from the Rollover Investors totaling approximately $100 million, (iii) debt financing of approximately $1.6 billion and (iv) cash of the Company totaling approximately $312 million. See “Special Factors—Financing of the Merger” beginning on page 76 for additional information.

Limited Guaranty

(page 80)

TPG VI, GEI V and GEI Side V, severally and not jointly, have agreed to guarantee their respective percentages (determined based upon the relative size of their equity commitments to Parent) of the obligations of Parent under the merger agreement to pay, under certain circumstances, a reverse termination fee and reimburse certain expenses. See “Special Factors—Limited Guaranty” beginning on page 80 for additional information.

Interests of the Company’s Directors and Executive Officers in the Merger

(page 80)

In considering the recommendation of our board of directors, you should be aware that certain of our executive officers and directors have interests in the merger that may be different from, or in addition to, your interests as a stockholder. These interests include, among others:

 

   

Accelerated vesting of stock options and cash payments with respect to stock options that have an exercise price of less than $43.50 per share;

 

   

Accelerated vesting of restricted shares of Company common stock and cash payments with respect to restricted shares of Company common stock;

 

   

Mr. Drexler, Mr. James Scully, our chief administrative officer and chief financial officer, and Mr. James Coulter, Mr. Steven Grand-Jean and Mr. Stuart Sloan, members of our board of directors, each have certain relationships with TPG. See “Special Factors—Relationship Between Us and Leonard Green and TPG”;

 

   

The entry by Mr. Drexler into a new employment agreement in connection with the completion of the merger;

 

   

The expected ownership of equity interests in Parent by the Rollover Investors and possibly other members of our management team;

 

   

The establishment of a new equity-based management incentive plan and anticipated grants of equity awards to senior management, key employees and other employees after completion of the merger; and

 

   

Continued indemnification and liability insurance for directors and officers following completion of the merger.

 

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See “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger” beginning on page 80 for additional information.

Conditions to the Merger

(page 120)

The respective obligations of each of the Company, Parent and Merger Sub to consummate the merger are subject to the satisfaction or waiver of certain conditions. For a more detailed description of these conditions, please see “The Merger Agreement—Conditions to the Merger” beginning on page 120.

Regulatory Approvals

(page 94)

The merger is subject to review under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”). On January 7, 2011, the Federal Trade Commission granted early termination of the waiting period under the HSR Act. See “Special Factors—Regulatory Matters” beginning on page 94.

Solicitation of Takeover Proposals

(page 115)

Until 11:59 p.m., New York City time, on February 15, 2011 the Company is permitted to:

 

   

initiate, solicit and encourage any inquiry or the making of takeover proposals from third parties (or inquiries, proposals or offers or other efforts or attempts that may reasonably be expected to lead to a takeover proposal), including by providing third parties non-public information pursuant to acceptable confidentiality agreements (provided that the Company promptly make such information available to Parent and Merger Sub if not previously made available to Parent or Merger Sub); and

 

   

enter into, engage in, and maintain discussions or negotiations with any person with respect to any takeover proposal, or otherwise cooperate with or assist such inquiries, proposals, offers, efforts, attempts, discussions or negotiations.

From and after 12:00 a.m., New York City time, on February 16, 2011, the Company is required to immediately cease any discussions or negotiations with any persons that may be ongoing with respect to any takeover proposals, except as may relate to excluded parties (as defined below), and must notify Parent within two business days of the identity of each person that submitted a takeover proposal prior to such date. At any time from and after 12:00 a.m., New York City time, on February 16, 2011 and until the effective time or, if earlier, the termination of the merger agreement, the Company, its subsidiaries and its representatives may not:

 

   

solicit, initiate or knowingly facilitate or encourage any inquiry or the making of any takeover proposals;

 

   

engage in, continue or otherwise participate in discussions or negotiations with any person with respect to any takeover proposal;

 

   

provide any non-public information to any person in connection with or to encourage or facilitate a takeover proposal; or

 

   

enter into any letter of intent, agreement or agreement in principle with respect to any takeover proposal.

Notwithstanding the foregoing, the Company may continue to engage in the activities permitted during the period prior to 11:59 p.m., New York City time, on February 15, 2011 described above with each excluded party (as defined below). The Company must provide to Parent an unredacted copy of the takeover proposal made by any excluded party and a written summary of any material terms not made in writing.

 

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At any time from and after 12:00 a.m., New York City time, on February 16, 2011 and prior to the time the Company’s stockholders adopt the merger agreement, if the Company receives an unsolicited written takeover proposal from an excluded party or from any other person making or renewing a takeover proposal after such date, the Company may:

 

   

contact such person to clarify the terms and conditions of such proposal; and

 

   

engage in discussions or negotiations with such person, and furnish to such third party information (including non-public information) pursuant to an acceptable confidentiality agreement (provided that the Company promptly makes such information available to Parent and Merger Sub if not previously made available to Parent or Merger Sub), if the special committee determines in good faith, after consultation with its financial advisor and outside legal counsel, that such takeover proposal either constitutes a superior proposal or could reasonably be expected to lead to a superior proposal.

The Company must provide to Parent an unredacted copy of such takeover proposal and a written summary of any material terms not made in writing.

In this proxy statement, we refer to any person that submitted a takeover proposal after the execution of the merger agreement and prior to 11:59 p.m., New York City time, on February 15, 2011 that the special committee determines, prior to or as of February 15, 2011 in consultation with its financial advisor and outside legal counsel, constitutes a superior proposal as an “excluded party”; provided, however, that such person shall cease to be an excluded party at any time such person ceases to be actively pursuing efforts to acquire the Company.

Termination of the Merger Agreement

(page 121)

The Company and Parent may, by mutual written consent duly authorized by each of their respective boards of directors (in the case of the Company, acting upon the recommendation of the special committee), terminate the merger agreement and abandon the merger at any time prior to the effective time, whether before or after the adoption of the merger agreement by the Company’s stockholders.

The merger agreement may also be terminated and the merger abandoned at any time prior to the effective time as follows:

by either Parent or the Company, if:

 

   

the merger has not been consummated by May 18, 2011 (the “walk-away date”) (but this right to terminate will not be available to a party if the failure to consummate the merger prior to the walk-away date was primarily due to the failure of such party to perform in all material respects any of its obligations under the merger agreement);

 

   

any law, injunction, judgment, or ruling enacted, promulgated, issued, entered, amended or enforced by any governmental authority shall be in effect enjoining, restraining, preventing or prohibiting consummation of the merger or making the consummation of the merger illegal has become final and non-appealable (but this right to terminate will not be available to a party if the issuance of such final, non-appealable law, injunction, judgment, or ruling is primarily due to the failure of such party to perform in all material respects any of its obligations under the merger agreement); or

 

   

the stockholder approvals shall not have been obtained at the stockholders meeting duly convened therefor or any adjournment or postponement thereof;

by Parent, if:

 

   

the representations and warranties of the Company shall not be true and correct or the Company shall have breached or failed to perform any of its covenants or agreements set forth in the merger agreement (except the covenants and agreements described under “The Merger Agreement—

 

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Solicitation of Takeover Proposals”), which failure to be true and correct, breach or failure to perform (i) would give rise to the failure of a condition to Parent and Merger Sub’s obligation to effect the merger and (ii) cannot be cured by the Company by the walk-away date, or if capable of being cured, shall not have commenced to have been cured within 15 days following receipt by the Company of written notice from Parent of Parent’s intention to terminate (or, if earlier, the walk-away date); provided that, Parent shall not have the right to terminate if either Parent or Merger Sub is then in material breach of any representations, warranties, covenants or other agreements hereunder that would result in the conditions to the Company’s obligation to effect the merger not being satisfied;

 

   

the Company shall have breached in any material respect its obligations described under “The Merger Agreement—Solicitation of Takeover Proposals,” which breach (i) would give rise to the failure of a condition to Parent’s obligation to effect the merger and (ii) cannot be cured by the Company by the walk-away date or if capable of being cured, shall not have been cured within 5 business days following receipt of written notice from Parent of such breach (or, if earlier, the walk-away date); provided that, Parent shall not have the right to terminate if either Parent or Merger Sub is then in material breach of any representations, warranties, covenants or other agreements hereunder that would result in the conditions to the Company’s obligation to effect the merger not being satisfied; or

 

   

(i) the board of directors shall have failed to include its recommendation of the merger in the proxy statement or effected an adverse recommendation change or a change in recommendation; (ii) the board of directors shall have failed to publicly reaffirm its recommendation of the merger agreement in the absence of a publicly announced takeover proposal within five business days after Parent so requests in writing; (iii) the Company enters into any letter of intent, agreement or agreement in principle with respect to any takeover proposal; (iv) the Company or the board of directors shall have publicly announced its intention to do any of the foregoing or (v) the Company fails to hold the stockholders meeting within ten business days prior to the walk-away date;

by the Company, if:

 

   

the representations and warranties of Parent or Merger Sub shall not be true and correct or Parent or Merger Sub shall have breached or failed to perform any of their covenants or agreements contained in the merger agreement, which failure to be true and correct, breach or failure to perform (i) would give rise to the failure of a condition to the Company’s obligation to effect the merger and (ii) cannot be cured by the walk-away date, or if capable of being cured, shall not have commenced to have been cured within 15 days following receipt by the Parent or Merger Sub of written notice from the Company of the Company’s intention to terminate (or, if earlier, the walk-away date); provided that, the Company shall not have the right to terminate if it is then in material breach of any representations, warranties, covenants or other agreements hereunder that would result in the conditions to Parent and Merger Sub’s obligation to effect the merger not being satisfied;

 

   

prior to the receipt of the stockholder approvals, in order to concurrently enter into an agreement with respect to a takeover proposal that constitutes a superior proposal, if (i) the Company has complied in all material respects with the requirements described under “The Merger Agreement—Solicitation of Takeover Proposals” and (ii) prior to or concurrently with such termination, the Company pays the termination fee described under “The Merger Agreement—Termination Fees and Reimbursement of Expenses;” or

 

   

(i) the marketing period described under “The Merger Agreement—Closing and Effective Time of the Merger; Marketing Period” has ended and the conditions to Parent and Merger Sub’s obligation to effect the merger (other than those conditions that by their nature are to be satisfied by actions taken at the closing) have been satisfied on the date the closing should have been consummated, (ii) the Company has irrevocably confirmed by notice to Parent after the end of the marketing period that all conditions to the Company’s obligation to effect the merger have been satisfied or that it is willing to waive any unsatisfied conditions and (iii) the merger shall not have been consummated within three business days after the delivery of such notice.

 

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Termination Fees and Reimbursement of Expenses

(page 123)

The merger agreement contains certain termination rights for the Company and Parent. Upon termination of the merger agreement under specified circumstances, the Company will be required to pay Parent a termination fee of $20 million. The merger agreement also provides that Parent will be required to pay the Company a reverse termination fee of $200 million in the event that the Company terminates the merger agreement because of Parent’s breach of the merger agreement or because Parent has not closed the merger within three business days of notice, delivered after completion of the marketing period, that all conditions are satisfied. In addition, in certain circumstances, the Company will be required to reimburse Parent for out-of-pocket fees and expenses incurred in connection with the transactions contemplated by the merger agreement (subject to a cap of $5 million), See “The Merger Agreement—Termination Fees and Reimbursement of Expenses” beginning on page 123.

Remedies

(page 124)

The Company’s right to receive the reverse termination fee from Parent (or TPG VI, GEI V and GEI Side V pursuant to the limited guaranty) and certain reimbursement and indemnification payments from Parent will be, subject to certain rights to equitable relief, including specific performance, described below, the sole and exclusive remedy of the Company and its subsidiaries and stockholders against Parent, Merger Sub, the guarantors, the parties to the rollover letter agreement, the financing sources of the debt financing or any of their respective former, current or future general or limited partners, stockholders, financing sources, managers, members, directors, officers or affiliates for any loss suffered as a result of the failure of the merger to be consummated or for a breach or failure to perform under the merger agreement or otherwise, and upon payment of such amount no such related party shall have any further liability or obligation relating to or arising out of the merger agreement or the transactions contemplated thereby.

Parent’s right to receive payment from the Company of its expenses or the applicable termination fee will be, subject to equitable relief, including specific performance, described below, the sole and exclusive remedy of Parent and Merger Sub (and the other related parties described in the preceding paragraph) against the Company and its subsidiaries and any of their respective former, current or future officers, directors, partners, stockholders, managers, members or affiliates for any loss suffered as a result of the failure of the merger to be consummated or for a breach or failure to perform under the merger agreement or otherwise, and upon payment of such amount(s), no such related party will have any further liability or obligation relating to or arising out of the merger agreement or the transactions contemplated thereby.

Under no circumstances will the Company be entitled to monetary damages in excess of the amount of the Parent termination fee (and certain reimbursement and indemnification payments from Parent). While the Company may pursue both a grant of specific performance and the payment of the Parent termination fee, under no circumstances will the Company be permitted or entitled to receive both a grant of specific performance and any money damages, including all or any portion of the Parent termination fee.

The parties are entitled to an injunction or injunctions, specific performance or other equitable relief to prevent breaches of the merger agreement and to enforce specifically the terms and provisions thereof, in addition to any other remedy to which they are entitled under the merger agreement. However, the right of the Company to seek an injunction, specific performance or other equitable remedies in connection with enforcing Parent’s obligation to cause the equity financing to be funded will be subject to the requirements that (i) the marketing period has ended and all conditions to the obligations of Parent and Merger Sub to effect the merger were satisfied (other than those conditions that by their terms are to be satisfied by actions taken at the closing) at the time when the closing would have been required to occur but for the failure of the equity financing to be funded, (ii) the debt financing (including any alternative financing that has been obtained in accordance with the merger agreement) has been funded in accordance with the terms thereof or will be funded in accordance with

 

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the terms thereof at the closing if the equity financing is funded at the closing, (iii) the equity rollover contribution is made at the closing and (iv) the Company has irrevocably confirmed that if the equity financing and debt financing are funded, then it would take such actions that are within its control to cause the closing to occur.

Appraisal Rights

(page 132)

If the merger is consummated, persons who are stockholders of the Company will have certain rights under Delaware law to dissent and demand appraisal of, and payment in cash of the fair value of, their shares of Company common stock. Any shares of Company common stock held by a person who does not vote in favor adoption of the merger agreement, demands appraisal of such shares of Company common stock and who complies with the applicable provisions of Delaware law will not be converted into the right to receive the per share merger consideration. Such appraisal rights, if the statutory procedures were complied with, will lead to a judicial determination of the fair value (excluding any element of value arising from the accomplishment or expectation of the merger) required to be paid in cash to such dissenting shareholders for their shares of Company common stock. The value so determined could be more or less than, or the same as, per share merger consideration.

You should read “Appraisal Rights” beginning on page 132 for a more complete discussion of the appraisal rights in relation to the merger as well as Annex D which contains a full text of the applicable Delaware statute.

Litigation Relating to the Merger

(page 97)

The Company, certain officers of the Company, the members of the board of directors, Parent, Merger Sub, TPG, TPG VI, Leonard Green and the Leonard Green Entities are named as defendants in purported class action lawsuits brought by stockholders of the Company. The lawsuits allege, among other things, that the members of the board of directors breached their fiduciary duties owed to the Company’s public stockholders and seek, among other things, to enjoin the defendants from completing the merger on the agreed-upon terms.

One of the conditions to the closing of the merger is that no injunction, judgment or ruling by a court or other governmental entity shall be in effect that enjoins, restrains, prevents or prohibits consummation of the merger or that makes the consummation of the merger illegal. As such, if the plaintiffs are successful in obtaining an injunction prohibiting the defendants from completing the merger on the agreed-upon terms, then such injunction may prevent the merger from becoming effective, or from becoming effective within the expected timeframe.

On January 16, 2011, the Company entered into a memorandum of understanding with the parties in In re J.Crew Group, Inc. Shareholders Litigation, C.A. No. 6043 (the “Consolidated Delaware Action”) providing for the settlement of the claims against the Company and the other defendants in the Consolidated Delaware Action, which was brought in connection with the merger agreement. The memorandum of understanding was agreed to by the Company, Mr. Drexler, Parent, Merger Sub, TPG, TPG VI, Leonard Green and the Leonard Green entities pending the execution of a more formal settlement agreement. The settlement is subject to the approval of the Court of Chancery of the State of Delaware. See “Special Factors—Litigation Relating to the Merger” beginning on page 97.

Certain Material United States Federal Income Tax Consequences

(page 94)

The exchange of shares of Company common stock for cash pursuant to the merger will be a taxable transaction for U.S. federal income tax purposes. In general, a U.S. Holder who receives cash for shares of

 

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Company common stock pursuant to the merger will recognize gain or loss, if any, equal to the difference between the amount of cash received and the holder’s adjusted tax basis in the shares of Company common stock. You should read “Special Factors—Certain Material United States Federal Income Tax Consequences” beginning on page 94 for more information regarding the United States federal income tax consequences of the merger to stockholders. Because individual circumstances may differ, we urge stockholders to consult their tax advisors for a complete analysis of the effect of the merger on their U.S. federal, state and local and/or non-U.S. taxes.

Additional Information

(page 142)

You can find more information about the Company in the periodic reports and other information we file with the SEC. The information is available at the SEC’s public reference facilities and at the website maintained by the SEC at www.sec.gov. For a more detailed description of the additional information available, please see the section entitled “Where You Can Find More Information” beginning on page 142.

 

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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

 

Q: Why am I receiving this proxy statement?

 

A: On November 23, 2010, we entered into an Agreement and Plan of Merger, subsequently amended on January 18, 2011 by Amendment No. 1 to the Agreement and Plan of Merger (as amended, the “merger agreement”), with Parent and Merger Sub providing for the merger of Merger Sub with and into the Company (the “merger”), with the Company surviving the merger as a wholly owned subsidiary of Parent. Parent and Merger Sub are beneficially owned by investment funds affiliated with TPG and Leonard Green. You are receiving this proxy statement in connection with the solicitation of proxies by the board of directors of the Company in favor of the adoption of the merger agreement.

 

Q: What matters will be voted on at the special meeting?

 

A: You will be asked to consider and vote on the following proposals:

 

   

Adoption of the merger agreement; and

 

   

Approval of the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement.

 

Q: As a stockholder, what will I receive in the merger?

 

A: If the merger is completed, you will be entitled to receive $43.50 in cash, without interest thereon and less any required withholding taxes, for each share of Company common stock that you own immediately prior to the effective time of the merger as described in the merger agreement.

See “Special Factors—Certain Material United States Federal Income Tax Consequences” beginning on page 94 for a more detailed description of the United States federal tax consequences of the merger. You should consult your own tax advisor for a full understanding of how the merger will affect your federal, state, local and/or non-U.S. taxes.

 

Q: When and where is the special meeting of our stockholders?

 

A: The special meeting of stockholders will be held at 10:00 a.m., local time, on March 1, 2011, at The New Museum, 235 Bowery, New York, New York 10002.

 

Q: What vote of our stockholders is required to adopt the merger agreement?

 

A: For us to complete the merger, both (i) stockholders holding at least a majority of the shares of Company common stock outstanding at the close of business on the record date and (ii) stockholders holding at least a majority of the outstanding shares of the Company’s common stock at the close of business on the record date other than shares owned, directly or indirectly, by Parent, Merger Sub, the Rollover Investors, any other officers or directors of the Company or any of their respective affiliates or associates (as defined under Section 12b-2 of the Exchange Act) must vote “FOR” the proposal to adopt the merger agreement.

At the close of business on January 21, 2011, the record date, 63,907,720 shares of Company common stock were outstanding and entitled to vote at the special meeting.

 

Q: Who can attend and vote at the special meeting?

 

A:

All stockholders of record as of the close of business on January 21, 2011, the record date for the special meeting, are entitled to receive notice of and to attend and vote at the special meeting, or any postponement or adjournment thereof. If you wish to attend the special meeting and your shares of Company common stock are held in an account at a broker, dealer, commercial bank, trust company or other nominee (i.e., in “street name”), you will need to bring a copy of your voting instruction card or statement reflecting your share ownership as of the record date. “Street name” holders who wish to vote at the special meeting will

 

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need to obtain a proxy from the broker, dealer, commercial bank, trust company or other nominee that holds their shares of Company common stock. Seating will be limited at the special meeting. Admission to the special meeting will be on a first-come, first-served basis.

 

Q: How does our board of directors recommend that I vote?

 

A: Our board of directors, after careful consideration and acting on the unanimous recommendation of the special committee composed entirely of independent directors, recommends that our stockholders vote “FOR” the proposal to adopt the merger agreement and “FOR” the proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement. In connection with the approval of the merger agreement by the Company’s board of directors, Mr. Coulter was recused from the meeting, Mr. Drexler recused himself and Ms. Reisman was unavailable.

You should read “Special Factors—Recommendation of our Board of Directors and Special Committee; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger” beginning on page 36 for a discussion of the factors that our special committee and board of directors considered in deciding to recommend the adoption of the merger agreement. In addition, in considering the recommendation of the special committee and the board of directors with respect to the merger agreement, you should be aware that some of the Company’s directors and executive officers may have interests that are different from, or in addition to, the interests of our stockholders generally. See “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger,” beginning on page 80.

 

Q: How will our directors and executive officers vote on the proposal to adopt the merger agreement?

 

A: Our directors and current executive officers have informed us that, as of the date of this proxy statement, they intend to vote all of their shares of Company common stock in favor of the adoption of the merger agreement. As of January 21, 2011, the record date for the special meeting, our directors (including Mr. Drexler) and current executive officers owned, in the aggregate, 3,906,178 shares of Company common stock and restricted shares entitled to vote at the special meeting, or collectively approximately 6.11% of the outstanding shares of Company common stock entitled to vote at the special meeting.

 

Q: Am I entitled to exercise appraisal rights instead of receiving the per share merger consideration for my shares of Company common stock?

 

A: Shareholders of Company common stock who do not vote in favor of adoption of the merger agreement will have the right to seek appraisal and receive the fair value of their shares of Company common stock in lieu of receiving the per share merger consideration if the merger closes but only if they perfect their appraisal rights by complying with the required procedures under Delaware law. See “Appraisal Rights” beginning on page 132. For the full text of Section 262 of the DGCL, please see Annex D hereto.

 

Q: How do I cast my vote if I am a holder of record?

 

A: If you were a holder of record on January 21, 2011, you may vote in person at the special meeting or by submitting a proxy for the special meeting. You can submit your proxy by completing, signing, dating and returning the enclosed proxy card in the accompanying pre-addressed, postage paid envelope. Holders of record may also vote by telephone or the Internet by following the instructions on the proxy card.

If you properly transmit your proxy, but do not indicate how you want to vote, your proxy will be voted “FOR” the adoption of the merger agreement and “FOR” the proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement.

 

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Q: How do I cast my vote if my shares of Company common stock are held in “street name” by my broker, dealer, commercial bank, trust company or other nominee?

 

A: If you hold your shares in “street name,” which means your shares of Company common stock are held of record on January 21, 2011 by a broker, dealer, commercial bank, trust company or other nominee, you must provide the record holder of your shares of Company common stock with instructions on how to vote your shares of Company common stock in accordance with the voting directions provided by your broker, dealer, commercial bank, trust company or other nominee. If you do not provide your broker, dealer, commercial bank, trust company or other nominee with instructions on how to vote your shares, your shares of Company common stock will not be voted, which will have the same effect as voting “AGAINST” the proposal to adopt the merger agreement. Please refer to the voting instruction card used by your broker, dealer, commercial bank, trust company or other nominee to see if you may submit voting instructions using the Internet or telephone.

 

Q: What will happen if I abstain from voting or fail to vote on the proposal to adopt the merger agreement?

 

A: If you abstain from voting, fail to cast your vote in person or by proxy or fail to give voting instructions to your broker, dealer, commercial bank, trust company or other nominee, it will have the same effect as a vote against the adoption of the merger agreement.

 

Q: Can I change my vote after I have delivered my proxy?

 

A: Yes. If you are a record holder, you can change your vote at any time before your proxy is voted at the special meeting by properly delivering a later-dated proxy either by mail, the Internet or telephone or attending the special meeting in person and voting. You also may revoke your proxy by delivering a notice of revocation to the Company’s corporate secretary prior to the vote at the special meeting. If your shares of Company common stock are held in street name, you must contact your broker, dealer, commercial bank, trust company or other nominee to revoke your proxy.

 

Q: What should I do if I receive more than one set of voting materials?

 

A. You may receive more than one set of voting materials, including multiple copies of this proxy statement or multiple proxy or voting instruction cards. For example, if you hold your shares of Company common stock in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold shares of Company common stock. If you are a holder of record and your shares of Company common stock are registered in more than one name, you will receive more than one proxy card. Please submit each proxy and voting instruction card that you receive.

 

Q: If I am a holder of certificated shares of Company common stock, should I send in my share certificates now?

 

A: No. Promptly after the merger is completed, each holder of record as of the time of the merger will be sent written instructions for exchanging their stock certificates for the per share merger consideration. These instructions will tell you how and where to send in your stock certificates for your cash consideration. You will receive your cash payment after the paying agent receives your share certificates and any other documents requested in the instructions. Please do not send stock certificates with your proxy.

Holders of uncertificated shares of Company common stock (i.e., holders whose shares are held in book entry) will automatically receive their cash consideration as soon as practicable after the effective time of the merger without any further action required on the part of such holders.

 

Q: What happens if the merger is not completed?

 

A:

If the merger agreement is not adopted by our stockholders, or if the merger is not completed for any other reason, our stockholders will not receive any payment for their Company common stock pursuant to the

 

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merger agreement, nor will our stockholders who are certified by the Court of Chancery of the State of Delaware as part of the plaintiff class receive a settlement payment of $10 million in connection with certain litigation related to the merger, described further in “Special Factors—Litigation Relating to the Merger.” Instead, we will remain as a public company and our common stock will continue to be registered under the Exchange Act and listed and traded on the NYSE. Under specified circumstances, we may be required to pay Parent a termination fee or reimburse Parent for up to $5 million of its out of pocket expenses or Parent may be required to pay us a termination fee. See “The Merger Agreement—Termination Fees and Reimbursement of Expenses.”

 

Q: When is the merger expected to be completed?

 

A: We are working to complete the merger as quickly as possible. We currently expect the transaction to close in the first half of fiscal year 2011, however, we cannot predict the exact timing of the merger. In order to complete the merger, we must obtain stockholder approvals and the other closing conditions under the merger agreement must be satisfied or waived.

 

Q: What is householding and how does it affect me?

 

A: The Securities and Exchange Commission (“SEC”) permits companies to send a single set of certain disclosure documents to any household at which two or more stockholders reside, unless contrary instructions have been received, but only if the company provides advance notice and follows certain procedures. In such cases, each stockholder continues to receive a separate notice of the meeting and proxy card. This householding process reduces the volume of duplicate information and reduces printing and mailing expenses. We have not instituted householding for stockholders of record; however, certain brokerage firms may have instituted householding for beneficial owners of Company common stock held through brokerage firms. If your family has multiple accounts holding Company common stock, you may have already received householding notification from your broker. Please contact your broker directly if you have any questions or require additional copies of this proxy statement. The broker will arrange for delivery of a separate copy of this proxy statement promptly upon your written or oral request. You may decide at any time to revoke your decision to household, and thereby receive multiple copies.

 

Q: Who can help answer my questions?

 

A: If you have any questions about the merger or how to submit your proxy, or if you need additional copies of this proxy statement or the enclosed proxy card, you should contact MacKenzie Partners toll-free at 800-322-2885, collect at 212-929-5500, by email at jcrewproxy@mackenziepartners.com or at 105 Madison Avenue, New York, New York 10016.

 

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SPECIAL FACTORS

The following is a description of the material aspects of the merger. While we believe that the following description covers the material terms of the merger, the description may not contain all of the information that is important to you. We encourage you to read carefully this entire document, including the Agreement and Plan of Merger and Amendment No. 1 to the Agreement and Plan of Merger attached to this proxy statement as Annex A and Annex B, respectively, for a more complete understanding of the merger. The following description is subject to, and is qualified in its entirety by reference to, the merger agreement.

The Parties

J.Crew Group, Inc.

J.Crew Group, Inc. is a nationally recognized multi-channel retailer of women’s, men’s and children’s apparel, shoes and accessories. As of January 18, 2011, the Company operates 249 retail stores (including 220 J.Crew retail stores, 9 crewcuts and 20 Madewell stores), the J.Crew catalog business, jcrew.com, madewell.com and 85 factory outlet stores. The Company’s principal executive offices are located at 770 Broadway, New York, New York 10003. Our telephone number is (212) 209-2500.

TPG VI

TPG VI is a private equity fund that was formed by TPG in 2008 for the purpose of making investments in securities of public and private companies. The ultimate general partner of TPG VI is TPG Group Holdings (SBS) Advisors, Inc., a Delaware corporation (“SBS Advisors”). SBS Advisors was formed for the sole purpose of acting as the ultimate general partner of TPG VI. The directors of SBS Advisors are David Bonderman and James G. Coulter. The officers of SBS Advisors are David Bonderman, James G. Coulter, John E. Viola, Ronald Cami, David C. Reintjes, G. Douglas Puckett and Steven A. Willmann. The principal executive offices of TPG and TPG VI is 301 Commerce Street, Suite 3300, Fort Worth, Texas 76102, and their telephone number is (817) 871-4000.

Leonard Green Entities

GEI V and GEI Side V are affiliates of Leonard Green (GEI V and GEI Side V together, the “Leonard Green Entities”). Leonard Green is a private equity firm that serves as the management company for GEI V, GEI Side V and their affiliated investment funds. The principal business of GEI Capital V, LLC (“GEI Capital”) is acting as the sole general partner of each of GEI V and GEI Side V. The managers of GEI Capital are Jonathan D. Sokoloff, John G. Danhakl and Peter J. Nolan. The principal executive offices of Leonard Green and the Leonard Green Entities are located at 11111 Santa Monica Boulevard, Los Angeles, California 90025, and their telephone number is (310) 954-0444.

MD Parties

Mr. Drexler is a director, chairman of the board of directors and chief executive officer of the Company. The Drexler Family Revocable Trust, The Millard S. Drexler 2009 Grantor Retained Annuity Trust #1 and The Millard S. Drexler 2009 Grantor Retained Annuity Trust #2 (collectively, the “MD Trusts”) are trusts affiliated with Mr. Drexler. We refer to the MD Trusts and Mr. Drexler collectively as the “MD Parties” or the “Rollover Investors.” The co-trustees of each of the MD Trusts are Mr. Drexler and Peggy Fishman Drexler, Mr. Drexler’s wife. The business address for Mr. Drexler and each of the MD Trusts (including Mr. Drexler and Mrs. Drexler in their capacities as co-trustees of each of the MD Trusts) is c/o J.Crew Group, Inc., 770 Broadway, New York, New York 10003, and their telephone number is (212) 209-2500.

 

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Chinos Holdings, Inc.

Chinos Holdings, Inc., which we refer to as “Parent,” was formed by TPG VI, GEI V and GEI Side V solely for the purpose of owning the Company after the merger and arranging the related financing transactions. Parent is currently owned by TPG VI, GEI V and GEI Side V. Parent has not engaged in any business except for activities incidental to its formation and in connection with the merger and the other transactions contemplated by the merger agreement. The principal executive offices of Parent are located at 301 Commerce Street, Suite 3300, Fort Worth, Texas 76102, and its telephone number is (817) 871-4000.

Chinos Acquisition Corporation

Chinos Acquisition Corporation, which we refer to as “Merger Sub,” was formed by Parent solely for the purpose of completing the merger. Merger Sub is wholly owned by Parent and has not engaged in any business except for activities incidental to its formation and in connection with the merger and the other transactions contemplated by the merger agreement. Upon the completion of the merger, Merger Sub will cease to exist. The principal executive offices of Merger Sub are located at 301 Commerce Street, Suite 3300, Fort Worth, Texas 76102, and its telephone number is (817) 871-4000.

Business and Background of Natural Persons Related to the Company

Set forth below for each director and executive officer of the Company is his or her respective present principal occupation or employment, the name of the corporation or other organization in which such occupation or employment is conducted and the five-year employment history of each such director or executive officer. None of the Company nor any of the Company’s directors or executive officers has, during the past five years, been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors). None of the Company nor any of the Company’s directors or executive officers listed below has, during the past five years, been a party to any judicial or administrative proceeding (except for matters that were dismissed without sanction or settlement) that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws. Each of the individuals listed below, with the exception of Ms. Reisman, is a citizen of the United States. Ms. Reisman is a citizen of Canada.

Executive Officers

Trish Donnelly. Ms. Donnelly has been the Company’s Executive Vice President—Direct since November 2009 and before that served as Senior Vice President- Direct Merchandising since October 2007. Prior to that she served as Vice President of Direct Merchandising from January 2005. She joined J.Crew in January 2004 as DMM—Men’s and Women’s Footwear & Accessories. Prior to joining J.Crew, Ms. Donnelly served as Director of Retail Merchandising, Chief Merchant for Cole Haan from 2001 through 2004 and held various positions at Polo Ralph Lauren from 1988 through 2001.

Millard Drexler. Mr. Drexler has been the Company’s Chief Executive Officer, Chairman of the Board and a director since 2003. Before joining J.Crew, Mr. Drexler was Chief Executive Officer of The Gap, Inc. from 1995 until 2002, and was President of The Gap, Inc. from 1987 to 1995. Mr. Drexler also serves on the Board of Directors and Compensation and Nominating and Corporate Governance Committees of Apple, Inc.

Jenna Lyons. Ms. Lyons has been the Company’s President-Executive Creative Director since July 2010, and before that served as Executive Creative Director since April 2010. Prior to that, she was Creative Director since 2007 and, before that, was Senior Vice President of Women’s Design since 2005. Ms. Lyons joined J.Crew in 1990 as an Assistant Designer and has held a variety of positions within the Company, including Designer from 1994 to 1995, Design Director from 1996 to 1998, Senior Design Director in 1999, Vice President of Women’s Design from 1999 to 2005.

 

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Lynda Markoe. Ms. Markoe has been the Company’s Executive Vice President—Human Resources since 2007 and was previously Vice President and then Senior Vice President—Human Resources since 2003. Before joining J.Crew, Ms. Markoe worked at The Gap, Inc. where she held a variety of positions over 15 years.

James Scully. Mr. Scully has been the Company’s Chief Administrative Officer and Chief Financial Officer since 2008. Prior to that, he was our Executive Vice President and Chief Financial Officer since 2005. Prior to joining J.Crew, Mr. Scully served as Executive Vice President of Human Resources and Strategic Planning of Saks Incorporated from 2004. Before that Mr. Scully served as Saks Incorporated’s Senior Vice President of Strategic and Financial Planning from 1999 to 2004 and as Senior Vice President, Treasurer from 1997 to 1999. Prior to joining Saks Incorporated, Mr. Scully held the position of Senior Vice President of Corporate Finance at Bank of America (formerly NationsBank) from 1994 to 1997.

Libby Wadle. Ms. Wadle has been the Company’s Executive Vice President—Retail and Factory since July 2010, and before that, served as Executive Vice President—Factory and Madewell since 2007. Before that Ms. Wadle served as Vice President and then Senior Vice President of J.Crew Factory since 2004. Prior to joining J.Crew, Ms. Wadle was Division Vice President of Women’s Merchandising at Coach, Inc. from 2003 to 2004 and held various merchandising positions at The Gap, Inc. from 1995 to 2003.

Directors (other than Mr. Drexler)

Mary Ann Casati. Ms. Casati has been a director since 2006. Ms. Casati is a founding partner of Circle Financial Group LLC, a private wealth management membership practice, and has served as such since 2003. Prior to that, Ms. Casati was a partner and managing director of The Goldman Sachs Group, Inc. where she was employed for twenty years and developed and ran their Global Retailing Industry Investment Banking business.

James Coulter. Mr. Coulter has been a director since 1997. Mr. Coulter is a founding partner of TPG, where he has worked since 1992.

Steven Grand-Jean. Mr. Grand-Jean has been a director since 2003. Mr. Grand-Jean has been President of Grand-Jean Capital Management for more than five years. Grand-Jean Capital Management provides financial advisory and investment services to the Drexler family, including a family foundation established by Mr. Drexler, and receives customary compensation for those services.

David House. Mr. House has been a director since 2007. Mr. House is Chairman of Serenoa LLC, a family-owned investment business. Prior to that, Mr. House was Group President of the Global Network and Establishment Services and Travelers Cheques and Prepaid Services businesses at American Express Company, a diversified global travel and financial services company, from 2000 until 2006 and served on its Global Leadership Team during this period. He joined American Express in 1993 and held various senior positions there prior to assuming his global role as a Group President. Mr. House also serves on the Board of Directors of Modern Bank.

Heather Reisman. Ms. Reisman has been a director since 2007. She is the founder of Indigo Books & Music, Inc., a Canadian book and music retailer, and has served as its Chief Executive Officer since 1996. Ms. Reisman also serves on the Board of Directors of Onex Corporation.

Stuart Sloan. Mr. Sloan has been a director since 2003. Mr. Sloan is the founder of Sloan Capital Companies, a private investment company, and has been a Principal thereof since 1984. Mr. Sloan was also the Chairman of the Board from 1986 to 1998 and the Chief Executive Officer from 1991 to 1996 of Quality Food Centers, Inc., a supermarket chain. Mr. Sloan also serves on the Board of Directors and Compensation Committee of Anixter International, Inc. He previously served on the Boards of Directors of Rite Aid Corporation from 2000 to 2007 and Clearwire Corporation from 2004 to 2008.

 

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Stephen Squeri. Mr. Squeri has been a director since September 2010. Mr. Squeri has been Group President of Global Services and Chief Information Officer at American Express Company since 2009. Mr. Squeri joined American Express in 1985 and has held various senior positions since then, including executive vice president and chief information officer from 2005 to 2009, president of the Global Commercial Card division from 2002 to 2005 and president of Establishment Services Canada and the United States from 2000 to 2001. Prior to joining American Express, Mr. Squeri was a management consultant at Arthur Andersen and Company from 1981 to 1985.

Josh Weston. Mr. Weston has been a director since 1998. Mr. Weston also served as Honorary Chairman of the Board of Directors of Automatic Data Processing, a computing services business, from 1998 to 2004. Mr. Weston was Chairman of the Board of Directors of Automatic Data Processing from 1996 until 1998, and Chairman and Chief Executive Officer for more than five years prior thereto. Mr. Weston served on the Board of Directors and Compensation Committee of Gentiva Health Services, Inc. and its predecessor company, the Olsten Corp., for over ten years until May 2009. He also previously served on the Board of Directors of Russ Berrie and Company, Inc. from 1999 until 2007.

Business and Background of Natural Persons Related to TPG VI, Parent, Merger Sub and the Leonard Green Entities

Set forth below for each director or officer of SBS Advisors (the ultimate general partner of TPG VI), GEI Capital (the general partner of each of GEI V and GEI V Side), Parent and Merger Sub, is his or her respective present principal occupation or employment, the name of the organization in which such occupation or employment is conducted and the five-year employment history of each such person. The directors of each of SBS Advisors, Parent and Merger Sub are David Bonderman and James G. Coulter, and the officers of each of SBS Advisors, Parent and Merger Sub are David Bonderman (President), James G. Coulter (Senior Vice President), Ronald Cami (Vice President and Secretary), John E. Viola (Vice President and Treasurer), David C. Reintjes (Chief Compliance Officer and Assistant Secretary), G. Douglas Puckett (Assistant Treasurer) and Steven A. Willmann (Assistant Treasurer). The managers of GEI Capital are Jonathan D. Sokoloff, John G. Danhakl and Peter J. Nolan.

During the past five years, none of Parent, Merger Sub, TPG VI, SBS Advisors, GEI V, GEI Side V or GEI Capital, and none of their respective directors or executive officers, has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors). In addition, during the past five years, none of Parent, Merger Sub, TPG VI, SBS Advisors, GEI V, GEI Side V or GEI Capital, and none of their respective directors or executive officers, has been a party to any judicial or administrative proceeding (except for matters that were dismissed without sanction or settlement) that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws or a finding of any violation of federal or state securities laws. Each of the individuals listed below is a citizen of the United States.

TPG VI, Parent and Merger Sub

James G. Coulter is a founding partner of TPG, where he has worked since 1992.

David Bonderman is a founding partner of TPG, where he has worked since 1992.

Ronald Cami is a Partner and General Counsel of TPG and a member of the firm’s Management Committee. From 2000 until he joined TPG in 2010, Mr. Cami was partner at the law firm Cravath, Swaine & Moore LLP.

David C. Reintjes is the Chief Compliance Officer and Deputy General Counsel of TPG. Prior to joining TPG in 2007, Mr. Reintjes was a member of the corporate practice group at Sonnenschein Nath & Rosenthal LLP.

G. Douglas Puckett is the Tax Director for TPG, where he has worked since 2002.

 

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John E. Viola is a partner and the Chief Financial Officer of TPG, where he has worked since 2001.

Steven A. Willmann is the Treasurer of TPG. Prior to joining TPG in 2007, Mr. Willmann was a Vice President at JPMorgan Chase & Co., where he spent nine years as a corporate banker.

The Leonard Green Entities

John G. Danhakl is a Managing Partner at Leonard Green, where he has worked since 1995.

Peter J. Nolan is a Managing Partner at Leonard Green, where he has worked since 1997.

Jonathan D. Sokoloff is a Managing Partner at Leonard Green, where he has worked since 1990.

Overview of the Transaction

The Company, Parent and Merger Sub entered into the merger agreement on November 23, 2010, which was subsequently amended on January 18, 2011. Under the terms of the merger agreement, Merger Sub will be merged with and into the Company, with the Company surviving the merger as a wholly owned subsidiary of Parent. Parent and Merger Sub are beneficially owned by investment funds affiliated with TPG and Leonard Green. The following will occur in connection with the merger:

 

   

each share of Company common stock issued and outstanding immediately prior to the closing (other than treasury shares owned by the Company, shares owned by Parent, Merger Sub or any other direct or indirect wholly owned subsidiary of Parent, including the shares contributed to Parent by the Rollover Investors and any members of our management team who may have the opportunity to invest in Parent and who choose to make this investment prior to the closing, and shares owned by stockholders who have exercised, perfected and not withdrawn a demand for, or lost the right to, appraisal rights under the DGCL) will convert into the right to receive the per share merger consideration; and

 

   

all shares of Company common stock so converted will, at the closing of the merger, be canceled, and each holder of a certificate representing any shares of Company common stock shall cease to have any rights with respect thereto, except the right to receive the per share merger consideration upon surrender of such certificate (if such shares are certificated).

Following and as a result of the merger:

 

   

Company stockholders (other than the Rollover Investors and any members of our management team who may have the opportunity to invest in Parent and who choose to make this investment) will no longer have any interest in, and will no longer be stockholders of, the Company, and will not participate in any of the Company’s future earnings or growth;

 

   

shares of Company common stock will no longer be listed on the NYSE, and price quotations with respect to shares of Company common stock in the public market will no longer be available; and

 

   

the registration of shares of Company common stock under the Exchange Act will be terminated.

Management and Board of Directors of the Surviving Corporation

The board of directors of the surviving corporation will, from and after the effective time of the merger (which we refer to as the “effective time”), consist of the directors of Merger Sub until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal. The officers of the surviving corporation will, from and after the effective time, be the officers of the Company until their successors have been duly appointed and qualified or until their earlier death, resignation or removal.

 

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Background of the Merger

Prior Ownership of the Company by TPG

The Company has a prior relationship with TPG. In 1997, the Company completed a leveraged recapitalization with an entity controlled by affiliates of TPG, pursuant to which TPG acquired approximately 85.2% of the shares of the Company’s outstanding common stock, with management holding the remaining outstanding shares of common stock. Following the Company’s initial public offering in July 2006, TPG’s beneficial ownership of the Company’s outstanding common stock was reduced to approximately 39.2%. The remaining shares of the Company’s common stock beneficially owned by TPG were subsequently sold from time to time into the market such that, by April 2009, TPG ceased to beneficially own any shares of the Company’s common stock. Mr. James Coulter, a founding partner of TPG, continues to serve as a member of the Company’s board of directors (the “Board”), having most recently been re-elected by the Company’s stockholders in 2009. In addition, Mr. Coulter beneficially owns approximately 11,236 shares of Company common stock.

Recent Performance

On August 26, 2010, the Company announced its second quarter results of operations as well as updated guidance for the full year. The Company’s revised full year fiscal 2010 guidance was diluted earnings per share in the range of $2.25 to $2.35, as compared to the Company’s previous guidance of $2.35 to $2.45. The decrease in the Company’s full year guidance was a result of the Company’s weakening financial performance beginning late in the second quarter of 2010.

On November 23, 2010, the Company announced its third quarter results of operations as well as guidance for the fourth quarter and updated guidance for the full year. The Company’s third quarter results of operations and fourth quarter guidance reflected a weakening in the Company’s actual and expected operating performance over these periods. For the third quarter of fiscal 2010, the Company’s gross margin decreased to 43.5% from 48.4% in the third quarter of fiscal 2009. Operating income during the period decreased to $64.1 million, or 14.9% of revenues, compared to $75.2 million, or 18.2% of revenues, in the third quarter of fiscal 2009. The softness in the Company’s third quarter results was primarily due to weaker operating performance in the Company’s women’s retail and direct businesses.

Concurrently with the Company’s release of its third quarter earnings, the Company provided its fourth quarter guidance and updated full year guidance. The Company’s revised full year fiscal 2010 guidance expects diluted earnings per share in the range of $2.08 to $2.13, as compared to the Company’s previous guidance of $2.25 to $2.35 and fiscal 2009 diluted earnings per share of $1.91. The decrease in the Company’s full year guidance is a result of a weakening fourth quarter outlook, which is primarily due to an expected gross margin decrease in the fourth quarter of approximately 600 to 700 basis points as compared to the fourth quarter of fiscal 2009, again, due to weaker operating performance in the Company’s women’s retail and direct businesses. On January 20, 2011, the Company filed a Form 8-K that, among other things, reaffirmed this guidance.

Activities Leading Up to the Merger

The Board and senior management of the Company periodically review the Company’s long-term strategic plan with the goal of maximizing stockholder value. As part of this ongoing process, the Board and senior management also have periodically reviewed strategic alternatives that may be available to the Company.

From time to time over the last several years, a number of parties have approached Mr. Millard S. Drexler, the Company’s chairman of the Board and chief executive officer, about possible transactions involving the sale of the Company. In the fourth quarter of 2008, representatives of TPG discussed with the Company’s management, on a highly preliminary basis, the feasibility of a leveraged buy-out of the Company, but concluded in early 2009 that market conditions, including for debt financing, would make such a transaction either not feasible or unlikely to proceed at any value that TPG believed would be sufficient to merit serious consideration

 

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by the Board, and there were no further discussions on the matter. In addition, none of the approaches from other parties proceeded past preliminary conversations.

In August 2010, aware of TPG and the Company’s history, representatives of Leonard Green had a conversation with representatives of TPG in which Leonard Green expressed interest in meeting with Mr. Drexler. Following such conversation, a representative of TPG facilitated an introductory meeting on August 23, 2010, between a representative of Leonard Green and Mr. Drexler. At the meeting the representative of Leonard Green discussed, on a highly preliminary basis, a potential leveraged buyout of the Company. The conversations between Leonard Green and Mr. Drexler did not proceed beyond such general discussion.

On September 1, 2010, there was a regularly scheduled meeting of the Board, during which, among other things, Mr. James S. Scully, the Company’s Chief Administrative Officer and Chief Financial Officer, presented to the Board management’s then current estimates for third quarter results and management’s then current outlook for fourth quarter and full year performance. Mr. Scully also presented to the Board a long range model necessary to achieve a preliminary goal of approximately 20% year-over-year profit growth over the next three years (the “September target model”). The September target model reflected sales, margin, expense and capital expenditure targets that supported the target growth level, without necessarily addressing the feasibility of the targets contained therein. The September target model, including its preliminary 20% year-over-year profit growth target, was the initial step in the Company’s regular annual budget planning process, and was based upon methodologies and factors customarily used by the Company in preparing target setting documents for the Board’s consideration at the initial Board meeting relating to this process, including expected future performance of the Company’s competitors, conversations with the Company’s suppliers and the Company’s sales projections prepared in mid-July (which was prior to the weakening in the Company’s performance that began late in the second quarter of 2010).

At a dinner between Mr. Coulter and Mr. Drexler following the September 1, 2010 Board meeting, Mr. Coulter raised with Mr. Drexler TPG’s potential interest in exploring an acquisition of the Company. Mr. Coulter and Mr. Drexler discussed that if a potential acquisition would be financially acceptable to TPG within a price range that TPG believed would be sufficient to merit serious consideration by the Board, any proposal relating to such potential acquisition would be brought to the attention of the full Board for consideration. On September 8, 2010, Mr. Drexler’s office called Mr. Coulter’s office to schedule a meeting for September 13, 2010, so that the Company’s senior management could better understand TPG’s potential interest in the Company.

On September 10, 2010, Mr. Coulter’s assistant contacted the office of Mr. Scully to request that Mr. Coulter be sent copies of certain board materials that had previously been provided to Mr. Coulter and the other directors. These materials were sent to Mr. Coulter.

On September 13, 2010, there was a meeting between Messrs. Drexler and Scully, representatives of TPG, and legal counsel to Mr. Drexler from Willkie Farr & Gallagher LLP, which we refer to as Willkie Farr. The purpose of this meeting was for the Company’s senior management to gather additional information about TPG’s potential interest in a transaction involving the Company, and for TPG to assess, on a preliminary basis, whether a transaction might be financially acceptable to TPG (including the ability to raise sufficient debt financing in connection with the transaction) within a price range that TPG believed would be sufficient to merit serious consideration by the Board. During this meeting, the parties discussed that members of the Board other than Messrs. Drexler and Coulter would decide if a potential transaction would proceed and, if so, the appropriate process for such transaction.

On September 15, 2010, Mr. Drexler received a call on behalf of the chief executive officer of a company, which we refer to as Party A, during which Party A indicated its potential interest in a transaction involving the Company. Party A has contacted Mr. Drexler from time to time in the past several years to indicate its interest in a potential transaction with the Company, or to otherwise work with Mr. Drexler. None of these contacts ever

 

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developed into meaningful discussions regarding a transaction or other working relationship. Between September 15, 2010 and the execution of the merger agreement, Party A did not have any further substantive contact with the Company.

On September 15, 2010, a meeting was held between representatives of TPG, Mr. Stuart Haselden, the Company’s Senior Vice President, Finance and Treasurer, and Mr. Scully as a follow-up to the September 13, 2010 meeting. The purpose of this meeting was for TPG to further evaluate their potential interest in a transaction involving the Company. During the course of this meeting, representatives of TPG were provided certain non-public information about the Company, including management’s then current estimates for third quarter results and management’s then current outlook for the fourth quarter and full year performance.

On September 21, 2010, in response to a request from Company management in connection with management’s review of strategic alternatives available to the Company, representatives of Goldman Sachs met with Mr. Scully and Mr. Haselden to discuss the analysis of a potential recapitalization of the Company by means of a special dividend or stock repurchase prepared by Goldman Sachs, at the request of Mr. Scully, on September 13, 2010.

Following the September 21, 2010 meeting and as a result of the continued substantial uncertainty about the possibility of a transaction with affiliates of TPG, Goldman Sachs prepared, at Mr. Scully’s request, an updated analysis of a potential recapitalization of the Company by means of a special dividend or a stock repurchase on September 23, 2010 for Company management. The Goldman Sachs September 13 and September 23 analyses were not prepared in connection with the transaction with affiliates of TPG. Rather, they were prepared in connection with management’s review of other strategic alternatives available to the Company given management’s concern at that time that a proposal from TPG would not materialize. Management was not relying on the financial analyses of Goldman Sachs in connection with their consideration of a possible transaction between the Company and affiliates of TPG. The Goldman Sachs September 13 and September 23 analyses were discussed by representatives of Goldman Sachs only with Messrs. Scully and Haselden. The Goldman Sachs September 13 and September 23 analyses were not discussed with, considered by or relied upon by any other officer of the Company, including Mr. Drexler, or by any member of the Board, including any member of the special committee, in connection with their evaluation of a transaction with affiliates of TPG or otherwise.

Over the past two years, Goldman Sachs has from time to time, at the request of the Company’s management, prepared various illustrative financial analyses for the Company. During this period, Goldman Sachs has never been retained by the Company to act as its financial advisor in connection with any transaction or matter, including the potential acquisition of the Company by TPG and Leonard Green, and Goldman Sachs has not received any compensation from any person in connection with the preparation of these various financial analyses for the Company. Goldman Sachs was not asked to, and did not, at any time, prepare for or render to the Company (i) any opinion as to the fairness of the consideration to be offered to the Company’s security holders in the merger, (ii) any opinion or appraisal as to the value of the Company or (iii) any other opinion. During this period, Goldman Sachs has not made, and its illustrative financial analyses do not constitute, a recommendation to the Board or a recommendation as to how any shareholder of the Company should vote with respect to the merger or any other matter.

On September 28, 2010, there was a conference call between Messrs. Drexler and Scully and representatives of TPG, during which Messrs. Drexler and Scully provided representatives of TPG with a high-level overview of the Company’s business and a general overview of the Company’s financial performance for the remainder of its 2010 fiscal year. Also during such call representatives of TPG provided an illustrative overview of a leveraged buy-out involving the Company and provided Messrs. Drexler and Scully with materials that included possible leverage and valuation scenarios (including a sensitivity analysis of such valuations) for a potential transaction.

On September 30, 2010, there was a follow-up conference call between Messrs. Drexler and Scully and representatives of TPG to continue the discussion from the September 28, 2010 call. Representatives of TPG

 

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indicated that Mr. Drexler and his executive management team were of critical importance to TPG’s view of the Company’s business, that any acquisition of the Company by TPG would be conditioned on Mr. Drexler retaining an equity stake in the Company and continuing to be employed by the Company after the transaction and that TPG planned to provide an equity pool for the Company’s executive management team following consummation of any transaction. Following a preliminary discussion of these matters, Mr. Drexler indicated that although he understood TPG’s view, he was not then in a position to commit to participating on that basis in a potential transaction. The parties also discussed that any potential transaction, including Mr. Drexler’s role therein, would need to be approved by members of the Board other than Messrs. Drexler and Coulter.

On October 5, 2010, there was a call between Messrs. Drexler, Scully and Coulter to gauge the seriousness of TPG’s interest in a transaction with the Company. Mr. Coulter indicated that, in light of information that TPG had been able to evaluate to date, TPG believed that a transaction was financially acceptable to it within a price range that TPG believed would be sufficient to merit serious consideration by the Board and that TPG had a bona fide interest in pursuing a transaction. Messrs. Drexler and Scully then determined that the Board should be promptly apprised of the situation. Mr. Coulter indicated that he also would call directors to inform them of TPG’s interest.

Between October 7, 2010 and October 11, 2010, Mr. Drexler contacted each other member of the Board to inform them of TPG’s potential interest in a transaction involving the sale of the Company. During the course of these conversations, Mr. Drexler informed members of the Board that he might be interested in participating with TPG in a transaction of this nature and discussed the need to form a special committee to evaluate any potential transaction. Mr. Coulter also independently called each other member of the Board to confirm TPG’s potential interest in a transaction involving the Company.

On October 14, 2010, there was an informal telephonic meeting of members of the Board attended by Ms. Mary Ann Casati, Mr. Drexler, Mr. David House, Ms. Heather Reisman, Mr. Stephen Squeri and Mr. Josh Weston. Also present at the meeting were Mr. Scully, Ms. Alice Givens, senior corporate counsel to the Company, and Cleary Gottlieb Steen & Hamilton LLP, which we refer to as Cleary Gottlieb, as the Company’s legal advisor. Mr. Drexler informed the directors who were present that he would recuse himself from the meeting because he may be an interested party in any transaction involving the sale of the Company, and Mr. Drexler then recused himself from the meeting. Ms. Reisman then informed the other directors that she too was a potentially interested party given the fact that her husband is a founding partner of and she is a board member of a private equity firm that might be interested in participating with TPG in a transaction involving the sale of the Company, following which Ms. Reisman recused herself from the meeting. Mr. Scully, Ms. Givens and Cleary Gottlieb then led a discussion with the remaining directors related to the process of forming a special committee and of that special committee retaining separate legal and financial advisors. The remaining directors then determined to present a request to the Board the following day to be constituted as a special committee consisting of independent members of the Board.

On October 15, 2010, Mr. Drexler spoke with a representative of a private equity fund, which we refer to as Party B, during which such representative expressed Party B’s interest in acquiring the Company, perhaps in conjunction with TPG. At no time did Party B and TPG work together in connection with a proposed transaction involving the Company.

Later on October 15, 2010, a telephonic Board meeting was held to discuss the formation of the special committee and the retention by such committee of financial and legal advisors in relation to a potential transaction involving the sale of the Company. Ms. Givens, Mr. Scully and Cleary Gottlieb also participated in the meeting. Mr. Coulter and Ms. Reisman recused themselves from this meeting. Following discussion of the information provided to them by Messrs. Drexler and Coulter in the calls made between October 7, 2010 and October 11, 2010 and in the meeting on October 14, 2010, the Board determined that it was advisable and in the best interests of the Company and its stockholders to form a special committee, consisting of Ms. Casati, Mr. House, Mr. Squeri and Mr. Weston, four independent members of the Board (the “special committee”) to

 

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(i) consider any proposal from TPG to acquire the Company and to consider any alternative proposal from any other party, (ii) engage independent legal and financial advisors to the special committee and (iii) present to the Board a proposal for a more detailed mandate of, and delegation of authority to, the special committee. Later on October 15, 2010, Mr. Drexler reported to Mr. Weston, in Mr. Weston’s role as a member of the special committee, Mr. Drexler’s prior conversations with Party A and Party B.

Between October 15, 2010 and October 19, 2010, Mr. Scully received several phone calls from representatives of TPG, during which the parties discussed the financing of a potential transaction and the due diligence process necessary for TPG to complete its financial analysis. TPG requested that the Company organize customary financial due diligence sessions for TPG and for TPG’s three potential debt financing sources for a potential transaction, Bank of America Merrill Lynch, Goldman Sachs Bank USA, and one other financial institution. In response to this request, TPG was informed that all diligence requests would need to be directed to, and decided by, the special committee.

On October 20, 2010, the special committee met and discussed various aspects of the potential transaction and the related process, and appointed Mr. Weston to serve as Chair of the special committee. The special committee then interviewed two law firms seeking to act as counsel to the special committee. After considering the presentations made by each law firm, including their respective qualifications, reputation and experience, the special committee selected Cravath, Swaine & Moore LLP, which we refer to as Cravath, to act as its legal counsel. Later on October 20, 2010, Cravath met with the special committee to discuss various matters with respect to the potential transaction and related process.

On October 21, 2010, the special committee interviewed two investment banks seeking to act as financial advisor to the special committee. After considering the presentations made by each investment bank, including their respective qualifications, reputation and experience, the special committee selected Perella Weinberg to act as its financial advisor. Cravath then met with the special committee to discuss various matters with respect to the potential transaction and related process.

Later on October 21, 2010, Cravath sent an email on behalf of the special committee to representatives of TPG informing them that (i) the special committee was in the process of getting up to speed, (ii) the special committee would like to freeze the process in place while the special committee got up to speed, and as such during this period there should be no contact between anyone at the Company and anyone at TPG or its advisors, (iii) TPG and its representatives were expected to keep all non-public information related to the Company that they may have received in complete confidence and (iv) it was the strong preference of the special committee not to receive any kind of acquisition proposal while the special committee was determining how it wished to proceed. Representatives of TPG acknowledged these requests and informed the representatives of the special committee that it would honor them.

Also on October 21, 2010, Cravath sent an email on behalf of the special committee to Mr. Drexler (and Mr. Drexler’s legal advisor, Willkie Farr) and Mr. Scully informing them that (i) the special committee was in the process of getting up to speed, (ii) the special committee would like to freeze the process in place while the special committee got up to speed, and as such during this period there should be no contact between anyone at the Company and anyone at TPG or its advisors, (iii) if anyone other than TPG contacted them about acquiring or participating in an acquisition of the Company, the response should be limited to saying that such interest would be conveyed to the Board, and that they should promptly convey the interest of such parties to the special committee and (iv) it was the strong preference of the special committee not to receive any kind of acquisition proposal while the special committee was determining how it wished to proceed. Messrs. Drexler and Scully acknowledged, and informed Cravath that they would honor, such requests.

On October 22, 2010, there was a meeting of the Board to formally establish, and set forth the mandate of and delegations of authority to, the special committee. Ms. Givens and Mr. Scully of the Company and Cravath and Cleary Gottlieb also participated in the meeting. Mr. Coulter recused himself from the meeting and

 

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Ms. Reisman was not available. The Board delegated full power and authority to the special committee in connection with its evaluation of strategic alternatives, including the full power and authority to (i) formulate, establish, oversee and direct a process for the identification, evaluation and negotiation of a potential sale of the Company, (ii) evaluate and negotiate the terms of any proposed definitive or other agreements in respect of a potential sale of the Company, (iii) make recommendations to the Board in respect of any potential transaction, including, without limitation, any recommendation to not proceed with or to recommend that the Company’s stockholders reject a potential sale of the Company and (iv) make recommendations to the Board that the Board take other actions or consider other matters that the special committee deems necessary or appropriate with respect to any potential sale of the Company or other potential strategic transactions. In connection with the formation of the special committee, the Board resolved that it would not approve or recommend to the Company’s stockholders any potential sale of the Company without the favorable recommendation of the special committee.

Between October 22, 2010 and the end of the month, representatives of TPG engaged in preliminary discussions with Mr. Drexler and his representatives regarding Mr. Drexler’s potential participation in a potential transaction involving TPG. In later conversations between Cravath and representatives of TPG, the representatives of TPG realized that the scope of the special committee’s earlier limitation on communication with Company personnel included not only discussions with the Company’s management concerning due diligence and discussions with other members of senior management regarding their employment or participation in a potential transaction, but also conversations regarding Mr. Drexler’s potential participation in a possible transaction. Representatives of TPG informed representatives of Mr. Drexler of this fact and the preliminary discussions regarding Mr. Drexler were discontinued at that time.

On October 25, 2010, representatives of TPG requested of Cravath that TPG’s three previously identified potential debt financing sources be given access to due diligence on the Company so that TPG could finalize its financial analysis concerning a potential acquisition of the Company and present a firm proposal to acquire the Company to the special committee. Also on October 25, 2010, representatives of TPG notified Cravath that TPG had discussed partnering with Leonard Green in connection with a potential acquisition of the Company, and requested that Leonard Green also be given access to due diligence on the Company. Cravath declined to discuss the topic further pending discussion with the special committee, and no due diligence was provided at that time to either the potential debt financing sources or to representatives of TPG or Leonard Green. At the request of Cravath, the representatives of TPG confirmed that TPG would not discuss the possible transaction with, or provide information related to the Company to, any potential debt or equity financing sources other than Leonard Green and the three previously identified potential debt financing sources.

Later on October 25, 2010, the special committee met with Cravath and Perella Weinberg. Among other things, the special committee reviewed the events that had occurred both prior to and following formation of the special committee, and there was a discussion of the special committee’s fiduciary duties. During the course of this meeting, the special committee decided to retain Richards, Layton & Finger, P.A. as its Delaware counsel. Mr. Scully joined for a portion of the meeting to review with the special committee management’s then current estimates for third quarter results, fourth quarter outlook and full year performance, including how such information compared to the views previously given to the Board and to representatives of TPG. Mr. Scully also presented to the special committee five year projections for the Company that had been prepared by management as of October 20, 2010 (the “October five year projections”). Although management does not ordinarily prepare an interim budget at this time in its annual budget planning process, management prepared the October five year projections in order to provide the special committee with an interim update for consideration in connection with its evaluation of strategic alternatives. Unlike the September target model, the October five year projections were not based on a pre-set goal of achieving a particular year-over-year profit growth target. They were instead based upon methodologies and factors customarily used by the Company in preparing projections for the Board’s consideration at the Board’s December meeting in connection with the annual budget planning process. These methodologies and factors included the Company’s most recently updated sales projections, which reflected the Company’s weaker operating performance since the sales projections that had been prepared

 

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in mid-July and that had been used in preparing the September target model, updated projected margins and actual division level expense projections prepared by management with input from division level managers, rather than the target expense levels used in the September target model. As a result, the October five year projections included estimates of year-over-year profit growth that were lower than the profit growth rate targets in the September target model. A discussion ensued regarding the October five year projections compared to the September target model. Perella Weinberg also presented preliminary observations regarding the Company’s financial performance and outlook information that they had received in the course of a prior due diligence session with members of the Company’s management team, including a preliminary comparison of the October five year projections to the September target model that was presented for illustrative and comparative purposes only.

On October 29, 2010, the special committee met with Mr. Drexler to better understand Mr. Drexler’s position with respect to a potential sale of the Company. Mr. Drexler informed the special committee that he was prepared to support either a decision by the special committee to pursue a sale of the Company or for the Company to remain independent, and that his focus was on doing the right thing for the Company and its stockholders. Mr. Drexler also informed the special committee that, if the Company were to be sold, given that he is 66 years old, he had significant reservations about the prospect of working for a new boss, but that he had a high comfort level with TPG and had a positive experience with them during the period in which TPG owned the Company.

Later on October 29, 2010, the special committee met with Perella Weinberg and Cravath. Members of the special committee first discussed their meeting earlier on October 29, 2010 with Mr. Drexler and concluded based on Mr. Drexler’s statements at the meeting that Mr. Drexler would be unwilling to work for any third party other than TPG. In addition, the special committee discussed possible next steps, as well as management’s then current estimates for third quarter results, fourth quarter outlook and full year performance, the October five year projections, and the financial analysis (including valuation work and analyses related to a possible leveraged recapitalization) that Perella Weinberg was performing to assist the special committee in its consideration of strategic alternatives. Perella Weinberg also reviewed with the special committee a comparison of the October five year projections to the September target model that Perella Weinberg had prepared for illustrative and comparative purposes only. Mr. Scully joined for the portion of the meeting during which the special committee discussed the management’s then current estimates and the October five year projections. The special committee then considered the likelihood of the Company receiving an offer to acquire the Company at an attractive valuation that could be finalized in a definitive agreement with the bidder and announced prior to November 23, 2010, which was the day targeted for the Company’s third quarter earnings announcement and update on fourth quarter guidance. Based on all information that was available to the special committee, including management’s then current estimates for third quarter results, fourth quarter outlook and full year performance, the latter two of which were expected to be materially lower than current “Street” consensus figures, and the special committee’s knowledge and understanding of the business, operations, management and recent changes in the management team, financial condition, earnings and prospects of the Company, including the prospects of the Company as an independent entity, the special committee concluded that pursuing the opportunity to conclude a sale agreement in this manner and on this timing would be in the best interests of the Company’s stockholders. Also relevant was that November 23, 2010 was just before the Christmas shopping season, and executing a definitive acquisition agreement prior to such date permitted the Company to minimize the risk to unaffiliated stockholders of the Company underperforming during the holiday season by shifting this risk to TPG whereas the Company could still benefit from a holiday season performance that exceeded expectations because other potential acquirors of the Company would have the ability to take such performance into account when valuing the Company during the “go shop” period. Taking into account the foregoing and all other relevant circumstances, including the knowledge that TPG already had about the Company and Mr. Drexler’s prior statement to the special committee regarding his reservations about working for a third party other than TPG, the special committee decided that the best way to achieve an announcement by November 23, 2010 of the sale of the Company at an attractive valuation would be to explore a potential transaction with TPG and to not engage at that time with other potential bidders, including Parties A and B. The special committee, however, was only prepared to proceed on this basis

 

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if there was an attractive valuation offered and if the terms of a transaction with TPG allowed, among other things, a meaningful opportunity for the Company to solicit superior alternative transactions for a sufficient period of time following the announcement of such a transaction. As such, the special committee decided to inform TPG that it was willing to consider an acquisition proposal by TPG for the Company. At the special committee’s request, Cravath then communicated this decision to representatives of TPG later on October 29, 2010.

On November 1, 2010, the special committee received a written proposal from TPG and Leonard Green to acquire all of the outstanding shares of the Company’s common stock for a price of $41.00 per share, subject to confirmatory due diligence and certain other conditions set forth in the proposal, including Mr. Drexler’s participation in the transaction on terms acceptable to TPG and Leonard Green, which the proposal indicated would include, among other things, a rollover of a portion of his equity in the Company. Along with a letter communicating this proposal, representatives of TPG sent Cravath drafts of a proposed merger agreement, equity financing commitment letters from each of TPG and Leonard Green and debt financing commitment letters from the three potential debt financing sources for a potential transaction, including Bank of America Merrill Lynch and Goldman Sachs (which subsequently also was engaged as a financial advisor to TPG in connection with the transaction). The letter also noted that TPG and Leonard Green would be willing to agree to a post-signing “go shop” period and the draft merger agreement contained such a “go shop” period.

Later on November 1, 2010, the special committee held a meeting, which was attended by Cravath and Perella Weinberg, to discuss the proposal from TPG and Leonard Green. Following presentations by Perella Weinberg and discussions with its advisors, the special committee determined that pursuing such offer by TPG and Leonard Green was not in the best interests of the Company’s stockholders. As a result, the special committee instructed Cravath to inform representatives of TPG that the special committee was ending discussions regarding a sale of the Company to TPG and Leonard Green and the special committee determined to meet at a later date to discuss other potential strategic alternatives that the Company might pursue. Following the meeting, Cravath informed representatives of TPG that the special committee was ending discussions regarding a sale of the Company to TPG and Leonard Green. On November 2, 2010, Mr. Weston confirmed this in an email to Mr. Coulter.

During early November, after the special committee had rejected TPG and Leonard Green’s proposal and indicated that it was ending discussions regarding a sale of the Company, representatives of TPG had preliminary discussions with Mr. Drexler and his representatives regarding the feasibility of a transaction involving the Company at a higher price and Mr. Drexler’s participation in such a transaction.

On November 4, 2010, the special committee convened a telephonic meeting, which was attended by Cravath and Perella Weinberg as well as Mr. Scully, to continue its discussion of, among other things, strategic alternatives, including a possible sale of the Company and potential return-of-capital initiatives, including a stock repurchase program and the implementation of a recurring dividend. Following a discussion of potential return-of-capital initiatives, the special committee discussed the timing of any such initiatives. The special committee determined to consider further proposing to the Board that the Company announce concurrently with its third quarter earnings call (i) the authorization of a stock repurchase program to which the Company would be authorized to use cash on hand to repurchase in the open market over time an amount of stock, up to a to be determined maximum and (ii) the institution of a regular quarterly dividend. The special committee determined that any further consideration of a possible sale of the Company likely would not be feasible prior to the end of the December holiday season.

On November 8, 2010, representatives of TPG indicated to Cravath that TPG and Leonard Green intended to submit a revised proposal, which would represent their best and final offer. The following day, on November 9, 2010, the special committee received a second written proposal from TPG and Leonard Green to acquire all of the outstanding shares of the Company’s common stock for a price of $45.00 per share, subject, as before, to confirmatory due diligence and certain other conditions set forth in the proposal, including

 

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Mr. Drexler’s participation in the transaction on terms acceptable to TPG and Leonard Green, which the proposal letter indicated would include a rollover of a portion of his equity in the Company. In the proposal letter, TPG and Leonard Green communicated that the offer was their best and final offer and that they expected they could be in a position to execute a definitive agreement by or before November 23, 2010, which was the date targeted for the Company’s third quarter earnings announcement.

Later on November 9, 2010, the special committee convened a telephonic meeting, which was attended by Cravath and Perella Weinberg, to discuss the revised proposal from TPG and Leonard Green. The special committee discussed, among other things, whether the price offered by TPG and Leonard Green represented an attractive valuation for stockholders, and concluded that it did, as a result of which they determined that the proposal merited further consideration. The special committee also discussed, among other things, that if they were to enter into negotiations with TPG and Leonard Green on this accelerated timetable, the Company would require a meaningful post-signing “go shop” right to permit the Company to solicit and consider alternative transactions for a sufficient period of time after signing the merger agreement. The special committee decided to respond to TPG and Leonard Green with a counterproposal of $46.00 per share. This counterproposal was then communicated by Cravath to representatives of TPG.

Between November 10, 2010, and November 13, 2010, the special committee, either directly through one of its members or indirectly through Cravath and Perella Weinberg, engaged representatives of TPG in an effort to convince TPG and Leonard Green to increase the offered price per share. Throughout all conversations during this period, representatives of TPG and Leonard Green expressed their unwillingness to increase their offer for the Company above $45.00 per share. During this time period, the special committee convened telephonic meetings each day with its advisors to discuss the status of the negotiations and to provide instructions to its advisors regarding future discussions and other next steps.

Beginning on November 4, 2010, Mr. Drexler received emails from a representative of Party B, which Mr. Drexler understood related to Party B’s interest in further discussing an acquisition of the Company. Mr. Drexler promptly referred the indication of interest to Perella Weinberg, who following various correspondences with Party B scheduled an in-person meeting with Party B for November 16, 2010. The meeting was held on such date, and at such meeting a representative of Party B discussed with Perella Weinberg its potential interest in an acquisition of the Company. During the course of the meeting, Party B indicated, among other things, that it would only be interested in a potential transaction if Mr. Drexler was willing to remain with the Company following an acquisition of the Company by Party B, which the special committee believed Mr. Drexler was unwilling to do.

On November 14, 2010, following discussions over the preceding days with the other members of the special committee and its advisors and in light of the continued unwillingness of TPG and Leonard Green to increase their offer price, Mr. Weston raised with Mr. Coulter the possibility of “splitting the difference” between $45.00 per share and $46.00 per share at a price of $45.50 per share. Late in the day on November 14, 2010, Mr. Coulter accepted this proposal, subject to, among other things, confirmatory due diligence and Mr. Drexler’s participation in the transaction.

On November 15, 2010, Cravath sent a draft of a confidentiality agreement to representatives of TPG, and had discussions regarding the draft with such representatives.

On November 16, 2010, the special committee convened a telephonic meeting which was attended by Cravath and Perella Weinberg. Among other things, the special committee discussed the open points on the confidentiality agreement, focusing on the special committee’s desire that the confidentiality agreement contain certain provisions that would limit TPG’s ability to enter into agreements with debt and equity financing sources that could adversely affect the efficacy of the “go shop” process expected to commence immediately following the execution of a merger agreement. During the meeting, the special committee also discussed the relative timing of the Company’s earnings announcement and the announcement of any transaction with TPG and

 

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Leonard Green, and decided that regardless of whether a satisfactory merger agreement could be negotiated with TPG and Leonard Green, it was in the best interests of the Company and its stockholders not to delay its earnings announcement past the previously planned date of November 23, 2010. The special committee also discussed key terms in the draft merger agreement that was received from representatives of TPG on November 1, 2010, as well as potential responses to these terms. The special committee focused, among other things, on its desire for a meaningful “go shop” period following execution of the merger agreement, including an appropriately reduced termination fee payable by the Company during the “go shop” period, as well as a high level of certainty that, assuming the Company did not exercise its rights to terminate a transaction with TPG and Leonard Green to enter into a superior alternative transaction, such transaction with TPG and Leonard Green would be consummated.

Following discussions regarding the terms of the confidentiality agreement, TPG and Leonard Green executed a confidentiality agreement with the Company on November 16, 2010. The terms of the executed confidentiality agreement included customary standstill restrictions on TPG and Leonard Green, and also helped to protect the meaningfulness of the “go shop” period by (i) limiting the ability of TPG and Leonard Green to enter into or establish with any financing source, including the three previously identified potential debt financing sources, any exclusive, lock-up, dry-up or similar agreement or arrangement that could reasonably be expected to limit or otherwise impair such financing source from acting as a financing source to any third party in connection with a transaction related to the Company and (ii) limiting the ability of TPG and Leonard Green to provide confidential information or enter into any discussions, agreements or arrangements with any potential equity financing source or other co-investor without the Company’s prior written consent. The executed confidentiality agreement also prevented TPG and Leonard Green from discussing the transaction with the Company’s directors, officers and employees unless given permission to do so by the special committee. On November 18, 2010, TPG’s and Leonard Green’s previously identified potential debt financing sources executed joinder agreements to the confidentiality agreement, which were in addition to existing confidentiality agreements between TPG and the financing sources.

Following execution of the confidentiality agreement on November 16, 2010, representatives of TPG and Leonard Green began due diligence on the Company, including due diligence sessions with the Company’s management team and Perella Weinberg. During the course of these due diligence sessions, representatives of TPG and Leonard Green were apprised for the first time of revised management estimates for third quarter results and management’s then current outlook for fourth quarter and full year performance, that were lower than management’s estimates for third quarter results and management’s then current estimates for fourth quarter outlook and full year performance that had previously been provided to TPG. Representatives of TPG and Leonard Green were also provided with the October five year projections. The special committee also authorized TPG to have preliminary conversations with Mr. Drexler and his representatives relating to Mr. Drexler’s involvement in a potential transaction.

On November 17, 2010, on behalf of the special committee Cravath delivered suggested revisions to the draft merger agreement proposed by TPG which, at the direction of the special committee, focused on, among other things, a meaningful “go shop” period following execution of the merger agreement and a high level of certainty that, assuming the Company did not exercise its rights to terminate any transaction with TPG and Leonard Green to enter into a superior alternative agreement, such transaction with TPG and Leonard Green would be consummated.

On November 17, 2010, the special committee convened a telephonic meeting, which was attended by Cravath and Perella Weinberg, at which, among other things, Perella Weinberg updated the special committee with respect to the ongoing due diligence being conducted by TPG and Leonard Green. At the meeting, the special committee determined to proceed with the Company’s scheduled announcement the following day that the Company would be releasing its third quarter financial results on November 23, 2010.

Also on November 17, 2010, Cravath informed representatives of TPG that the special committee accepted TPG’s request that it and Mr. Drexler be permitted to negotiate the terms of Mr. Drexler’s rollover investment and going-forward employment arrangements should an acquisition of the Company be consummated by TPG.

 

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On November 18, 2010, the Company announced that it would be releasing its third quarter financial results at 4:30 p.m., Eastern Time, on November 23, 2010.

Later on November 18, 2010, the special committee convened a telephonic meeting, which was attended by Cravath and Perella Weinberg as well as Mr. Haselden, Ms. Jennifer O’Connor, the Company’s newly hired General Counsel, and Mr. Scully. Among other things, management reported to the special committee the Company’s third quarter results and management’s revised outlook for fourth quarter and full year performance. Mr. Scully also presented to the special committee revised five year projections for the Company that management had prepared as of November 17, 2010 (the “November five year projections”). The November five year projections were prepared using the Company’s most recently updated sales projections, which reflected the Company’s continuing weakening operating performance since the prior sales projections that had been used in preparing the October five year projections, as well as updated expense and margin projections from the Company’s ongoing regular annual budget planning process. A discussion ensued regarding the November five year projections compared to the October five year projections. The special committee then discussed the third quarter results, management’s updated outlook for the remainder of 2010 and the November five year projections, including the potential negative impact the weakening in the Company’s financial performance, 2010 outlook and November five year projections could have on the Company’s stock price. Following the conclusion of the special committee meeting, the Company’s audit committee, which consists of the four members of the special committee, held an ordinary course telephonic meeting to discuss, among other things, the Company’s third quarter results and the Company’s proposed fourth quarter guidance in advance of the Company’s November 23, 2010 earnings release.

On November 18, 2010, as part of the ongoing due diligence in connection with a potential transaction, members of the Company’s senior management conducted a presentation for representatives of TPG, Leonard Green and their potential debt financing sources. In advance of this presentation, TPG, Leonard Green and their potential debt financing sources were provided with the November five year projections. On November 19, 2010, there was a follow-up telephonic due diligence session between members of the Company’s management team, Perella Weinberg, and representatives of the three potential debt financing sources.

On November 19, 2010, representatives of TPG delivered suggested revisions to the revised merger agreement that Cravath had distributed on November 17, 2010, and over the course of the next several days Cravath and representatives of TPG continued to negotiate the merger agreement and various other documents. During the course of these negotiations, Cravath and representatives of TPG were unable to agree on several key provisions in the transaction documents, including with respect to TPG’s continued requests that Mr. Drexler (i) be prohibited from discussing or entering into any agreement regarding an equity contribution by him in connection with a third party superior alternative transaction and restricted in his ability to participate in the Company’s solicitation of alternative proposals during the “go shop” period and (ii) agree to vote all shares of the Company’s common stock that he beneficially owned in favor of a transaction with TPG and Leonard Green and, in the event the Company were to terminate the merger agreement to enter into a superior alternative transaction, against such alternative transaction and any other transaction proposed during the 12 month period following the termination of the merger agreement. Mr. Drexler and his representatives also had not yet agreed with TPG on the terms of these potential arrangements. In addition, the parties continued to disagree with respect to various other key provisions, including the specific terms of the go shop period, the scope and strength of the Company’s right to seek specific performance of Parent’s obligations under the merger agreement, TPG’s and Leonard Green’s equity commitments, and the size of the fees payable by Parent or by the Company, as the case may be, under certain circumstances in the event of termination of the merger agreement.

On November 21, 2010, representatives of TPG indicated to Mr. Weston and Cravath that TPG and Leonard Green were reconsidering their willingness to proceed with the potential transaction in light of several factors, including their discovery during the due diligence process of the Company’s third quarter performance and weakening anticipated fourth quarter financial performance, their view that the weakness in the women’s apparel businesses could affect 2011 results, and the inability of the parties to make progress on the contractual terms of

 

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the transaction. Representatives of TPG made clear, however, that TPG had not yet reached a conclusion with respect to the potential transaction and that representatives of TPG would apprise the special committee of any decisions the following day.

Later on November 21, 2010, the special committee convened a meeting, which was attended by Cravath and Perella Weinberg as well as Mr. Scully and Ms. O’Connor. In addition to discussing the earlier conversations that Mr. Weston and Cravath had with representatives of TPG, the special committee discussed, among other things, strategic alternatives with respect to the sale of the Company and potential return-of-capital initiatives if the contemplated transaction with TPG and Leonard Green did not go forward, including a stock repurchase program and the implementation of a regular quarterly dividend. The special committee determined that, in the event an agreement with TPG and Leonard Green was not reached, the special committee would propose at the Board’s scheduled meeting on November 22, 2010 that the Company (i) announce the authorization of a stock repurchase program concurrently with its third quarter earnings call on November 23, 2010, pursuant to which the Company would repurchase shares in the open market up to the authorized limit over a timeframe to be determined, and (ii)consider instituting a regular quarterly dividend. Following the return of capital discussion, representatives of Perella Weinberg reviewed for the special committee various financial analyses, and Cravath discussed with the special committee certain key open terms, related to the potential transaction with TPG and Leonard Green.

On November 22, 2010, TPG and Leonard Green determined that they no longer wished to pursue an acquisition of the Company due to the results of their diligence, including the Company’s weaker third quarter financial performance, weakening anticipated fourth quarter financial performance and TPG’s and Leonard Green’s view that this weakness could affect the Company’s 2011 results, the inability of the parties to make progress on the contractual terms of the transaction, as well as TPG’s and Leonard Green’s belief that the special committee would not entertain a lower price offer. Mr. Coulter then separately called Mr. Weston and Mr. Drexler to inform each of them that due to the Company’s weaker recent and anticipated future financial performance and the inability of the parties to agree on contractual terms, TPG and Leonard Green no longer wished to pursue an acquisition of the Company, and were therefore withdrawing their offer. Following these discussions, Mr. Drexler stated in a separate discussion with Mr. Weston that, although TPG and Leonard Green had withdrawn their offer for the Company, he still believed that moving forward with a process for the sale of the Company might be in the best interests of the Company and its stockholders, and that if the special committee decided to move forward with such a process, Mr. Drexler would be open to continuing his employment with the Company following a sale to an acquiror other than TPG.

Later on November 22, 2010, Mr. Weston called Mr. Coulter in an attempt to better understand TPG’s unwillingness to pursue an acquisition of the Company, including whether TPG and Leonard Green’s unwillingness to continue to pursue a transaction was based on valuation concerns (including the magnitude of any such concerns) or other issues. Later that day after discussing such conversation with Leonard Green, TPG and Leonard Green determined to make an offer at a price lower than $45.50, and Mr. Coulter called Mr. Weston to ask him to convey to the special committee that TPG and Leonard Green would be willing to enter into a merger agreement at a price of $43.00 per share. Mr. Coulter informed Mr. Weston that in the context of TPG’s revised proposal, TPG had agreed to drop certain of its prior demands that would have restricted Mr. Drexler’s ability to participate in other alternative transactions and that would have obligated Mr. Drexler to vote in favor of a transaction with TPG and Leonard Green (and against any alternative transaction). In a subsequent discussion with Mr. Weston on November 22, 2010, Mr. Drexler stated that if the special committee were to accept the revised proposal from TPG and Leonard Green, he would be willing to actively engage in solicitations in connection with a post-signing “go shop” and that he was open to continuing his employment with the Company following a sale to an acquiror other than TPG.

Later on November 22, 2010, the special committee convened a telephonic meeting, which was attended by Cravath and Perella Weinberg. The special committee discussed, among other things, whether the revised price offered by TPG and Leonard Green represented an attractive valuation for stockholders when considered in light

 

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of the Company’s third quarter financial results and management’s then current views on guidance for fourth quarter and full year performance, as well as the special committee’s knowledge and understanding of the business, operations, management and recent changes in the management team, financial condition, earnings and prospects of the Company, including the prospects of the Company as an independent entity, and concluded that it did, subject to agreement on the other terms of the transaction. The special committee also considered the possibility of rejecting the offer from TPG and Leonard Green and either pursuing a process whereby it would broadly solicit interest from third parties in acquiring the Company or continuing as a stand-alone company. The special committee decided to respond to TPG and Leonard Green with a counterproposal of $44.00 per share, which counterproposal would be conditioned on satisfactory resolution of several other key deal terms, including (i) confirmation that the proposal from TPG and Leonard Green included the elimination of any restrictions on Mr. Drexler’s ability to solicit an alternative transaction or to participate or invest in, or vote in favor of, a superior alternative transaction, (ii) a satisfactory “go shop” period and terms related thereto, (iii) a reduction in the fees that may be owed by the Company under certain circumstances, including in connection with the Company’s termination of the agreement to accept a superior alternative proposal (see “The Merger Agreement—Termination Fees and Reimbursement of Expenses”), (iv) a $200 million fee payable by Parent under certain circumstances in connection with the termination by the Company of the merger agreement rather than the $100 million fee proposed by representatives of TPG (see “The Merger Agreement—Termination Fees and Reimbursement of Expenses”) and (v) a specific performance remedy providing the Company with the ability, under certain circumstances described in the Merger Agreement, to seek specific performance to prevent breaches of the Merger Agreement by Parent and to compel the funding of TPG’s and Leonard Green’s equity commitments. At the special committee’s instruction, the terms of the special committee’s counterproposal were then communicated by Cravath to representatives of TPG.

Still later on November 22, 2010, the special committee convened a meeting, which was attended by Cravath and Perella Weinberg. During the course of this meeting, a representative of TPG spoke by telephone to Cravath, and after further negotiation with Cravath during the course of the meeting, the TPG representative informed Cravath that TPG and Leonard Green were willing to accept a price of $43.50 per share for the Company, together with acceptance of the Company’s proposals with respect to the lack of any participation, investment or voting restrictions on Mr. Drexler, the Company’s proposal with respect to specific performance rights, the size of the fees payable by Parent or, with immaterial modifications by the Company, respectively, in the event of termination of the merger agreement under certain circumstances. Representatives of TPG also indicated TPG’s and Leonard Green’s willingness to accept a “go shop” period that would run through January 15, 2011, and which could be extended under certain circumstances as described under “The Merger Agreement—Solicitation of Takeover Proposals.” The special committee then concluded that it was willing to proceed on this basis with a transaction with TPG and Leonard Green, and Cravath so confirmed with representatives of TPG. There then was a discussion of the special committee’s fiduciary duties and of the key terms of the proposed transaction. Perella Weinberg then made a financial presentation regarding the Company and the consideration that would be paid to the Company’s stockholders in the potential merger. Thereafter, Perella Weinberg provided its oral opinion, subsequently confirmed in writing, to the special committee to the effect that, as of November 22, 2010, and based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations set forth therein, the $43.50 cash per share merger consideration to be received by the holders of shares of Company Common Stock (other than the Excluded Holders) pursuant to the merger agreement was fair, from a financial point of view, to such holders. After considering the proposed terms of the merger agreement and the other transaction agreements and the various presentations of Cravath and Perella Weinberg, including receipt of Perella Weinberg’s oral opinion, and taking into account the other factors described below under the heading titled “Recommendation of Our Board of Directors and Special Committee; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger,” the special committee then unanimously determined that the merger agreement, the merger and the other transactions contemplated by the merger agreement were advisable and fair (both substantively and procedurally) to and in the best interests of the Company and its unaffiliated stockholders, and recommended that the Board adopt a resolution approving and declaring the advisability of the merger agreement, the merger and the other transactions contemplated by the merger agreement and recommending that the stockholders of the Company adopt the merger agreement.

 

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Following the meeting of the special committee, the Board convened on November 22, 2010, with Cravath, Cleary Gottlieb and Perella Weinberg, as well as Ms. O’Connor and Mr. Scully, in attendance. Mr. Coulter was recused from the meeting and Ms. Reisman was not available. At the beginning of the meeting, Mr. Drexler gave his views on the potential transaction to the Board. As part of Mr. Drexler’s discussion with the Board, Mr. Drexler confirmed to the Board that he would be willing to actively engage in the solicitation of alternative proposals in connection with a post-signing “go shop” and that he was open to continuing his employment with the Company following a sale to an acquiror other than TPG. Mr. Drexler then recused himself from the meeting. There followed a discussion of the Board’s fiduciary duties and of the key terms of the proposed transaction. There was then a discussion of whether any participants in the meeting had interests with either TPG or Leonard Green, which interests are described under the heading titled “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger.” Perella Weinberg then shared the financial presentation previously given to the special committee regarding the Company and the consideration that would be paid to the Company’s stockholders in the potential merger, and indicated that the Board (other than those members of the Board who recused themselves from voting on the approval of the merger and the merger agreement) was entitled to rely on the opinion that Perella Weinberg had orally provided to the special committee, as subsequently confirmed in writing, to the effect that, as of November 22, 2010, and based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations set forth therein, the $43.50 cash per share merger consideration to be received by the holders of shares of Company Common Stock (other than the Excluded Holders) pursuant to the merger agreement was fair, from a financial point of view, to such holders. Thereafter the special committee presented its recommendation to the Board. After considering the proposed terms of the merger agreement and the other transaction agreements and the various presentations of Cravath and Perella Weinberg, including Perella Weinberg’s fairness opinion provided to the special committee that the Board (other than those members of the Board who recused themselves from voting on the approval of the merger and the merger agreement) was entitled to rely upon, and taking into account the other factors described below under the heading titled “Recommendation of Our Board of Directors and Special Committee; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger,” the Board, with Messrs. Coulter and Drexler and Ms. Reisman not present or participating, unanimously approved and declared advisable the merger agreement, the merger and the other transactions contemplated by the merger agreement and recommended that the stockholders of the Company adopt the merger agreement. See “Recommendation of Our Board of Directors and Special Committee; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger—Recommendation of the Company’s Board of Directors” for a full description of the resolutions of the Board at this meeting.

In the early hours of November 23, 2010, Mr. Drexler and TPG finalized their agreements regarding Mr. Drexler’s rollover investment in connection with the TPG and Leonard Green transaction and his going-forward employment arrangements if the TPG and Leonard Green transaction is consummated.

On the morning of November 23, 2010, Parent, Merger Sub and the Company executed the merger agreement and the other transaction documents, and the Company, TPG and Leonard Green issued a joint press release announcing the execution of such documents. Concurrently with the announcement of the transaction, the Company issued a press release announcing its financial results for the quarter ended October 30, 2010. A copy of the press release was furnished as an exhibit to the Form 8-K filed by the Company with the Securities and Exchange Commission on November 23, 2010, and is incorporated by reference herein.

On January 16, 2011, the Company and the other parties to the consolidated litigation in Delaware entered into a memorandum of understanding providing for a settlement, subject to the approval of the Board and the special committee, and pending execution of a more formal settlement agreement which will be subject to court approval.

On January 17, 2011, the special committee convened a meeting, which was attended by Cravath. After considering the proposed terms of the proposed settlement, including the memorandum of understanding with stockholder plaintiffs and Amendment No. 1 to the Agreement and Plan of Merger contemplated thereby, and

 

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taking into account the other factors described below under the heading titled “Special Factors—Recommendation of Our Board of Directors and Special Committee; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger,” the special committee unanimously determined that the memorandum of understanding, Amendment No. 1 to the Agreement and Plan of Merger and the transactions contemplated by the merger agreement, as amended, were advisable and fair (both substantively and procedurally) to and in the best interests of the Company and its unaffiliated stockholders, and recommended that the Board adopt a resolution approving and declaring the advisability of the foregoing and recommending that the stockholders of the Company adopt the merger agreement, as amended. For a description of the memorandum of understanding and the terms of Amendment No. 1, see “Special Factors—Litigation Relating to the Merger” beginning on page 97.

Following the meeting of the special committee, the Board convened on January 17, 2011, with Cravath and Cleary Gottlieb, as well as Ms. O’Connor and Mr. Scully, in attendance. Mr. Coulter recused himself from the meeting and Mr. Drexler recused himself from the meeting prior to the time the Board made its determinations. At the meeting, the special committee presented its recommendation to the Board. After considering the proposed terms of Amendment No. 1, and taking into account the other factors described below under the heading titled “Special Factors—Recommendation of Our Board of Directors and Special Committee; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger,” the Board, with Messrs. Coulter and Drexler not present, unanimously deemed it advisable and in the best interests of the Company and its unaffiliated stockholders to enter into Amendment No. 1 and that Amendment No. 1 and the transactions contemplated by the merger agreement, as amended, were advisable and fair (both procedurally and substantively) to and in the best interests of the Company and its unaffiliated stockholders. The Board, with Messrs. Coulter and Drexler not present or participating, also unanimously directed that the adoption of the merger agreement, as amended, be submitted to a vote at a meeting of the stockholders of the Company and recommended to the stockholders of the Company that they vote for the adoption of the merger agreement, as amended, and all other actions or matters necessary or appropriate to give effect to the foregoing pursuant to the DGCL.

The merger agreement provides that, until 11:59 p.m., New York City time, on February 15, 2011, the Company is permitted to initiate, solicit and encourage any inquiry or the making of takeover proposals from third parties, including by providing non-public information, and to enter into, engage in and maintain discussions or negotiations with third parties with respect to such proposals or otherwise cooperate with or assist such discussions or proposals. Prior to and during this “go shop” period to date, none of the members of the Company’s senior management, other than Mr. Drexler, have had discussions with or entered into any agreement, arrangement or understanding with representatives of Parent, TPG or Leonard Green concerning post-closing employment with, or the right to participate in the equity of, the surviving corporation or Parent. In the case of Mr. Drexler, Mr. Drexler entered into an interim investors agreement with TPG, which among other things includes employment arrangements, and a cooperation agreement with the Company pursuant to which Mr. Drexler agreed to cooperate with, and not take any action intended to frustrate, delay, interfere with or impede, the special committee’s efforts to initiate or solicit takeover proposals and any discussions or negotiations in connection therewith. See “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger—Interim Investors Agreement” beginning on page 89 and “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger—Cooperation Agreement” beginning on page 91. At the direction and under the supervision of the special committee, Perella Weinberg has been contacting potentially interested parties pursuant to the “go shop” process on behalf of the Company. Representatives of Perella Weinberg have contacted parties that they believe, based on size and business interests, might be capable of, and might be interested in, pursuing a transaction with the Company. Representatives of Perella Weinberg have contacted a total of 58 parties to date, comprised of 39 strategic parties and 19 financial parties, to solicit their interests in a possible alternative transaction. The 58 parties contacted to date included Party A and Party B. Of the 58 parties contacted, six parties have thus far requested and been provided with draft confidentiality agreements. Three of these parties have not responded further and the other three of these parties negotiated and entered into confidentiality agreements with the Company. These three parties that entered into confidentiality

 

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agreements were subsequently granted access to non-public information regarding the Company through an on-line data room. One of the three parties that entered into a confidentiality agreement requested, and was granted, a meeting with members of the Company’s senior management, including Mr. Drexler.

On January 18, 2011, the Company issued a press release announcing the preliminary results of the “go shop” period to date, including that, despite an active and extensive solicitation of potentially interested parties in connection with the “go shop” period since the announcement of the merger agreement, the Company has not received any alternative acquisition proposals to date.

Recommendation of Our Board of Directors and Special Committee; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger

The Special Committee

Following being apprised of TPG’s indication of potential interest in acquiring the Company, the Board determined that it was advisable and in the best interests of the Company and its stockholders to form the special committee consisting only of independent directors for the purpose of evaluating strategic alternatives available to the Company. The Board appointed each of Ms. Mary Ann Casati, Mr. David House, Mr. Stephen Squeri and Mr. Josh Weston as members of the special committee. The Board delegated full power and authority to the special committee in connection with its evaluation of strategic alternatives, including the full power and authority to (i) formulate, establish, oversee and direct a process for the identification, evaluation and negotiation of a potential sale of the Company, (ii) evaluate and negotiate the terms of any proposed definitive or other agreements in respect of a potential sale of the Company, (iii) make recommendations to the Board in respect of any potential transaction, including, without limitation, any recommendation to not proceed with or to recommend that the Company’s stockholders reject a potential sale of the Company and (iv) make recommendations to the Board that the Board take other actions or consider other matters that the special committee deems necessary or appropriate with respect to any potential sale of the Company or other potential strategic transactions. In connection with the formation of the special committee, the Board resolved that it would not approve or recommend to the Company’s stockholders any potential sale of the Company without the favorable recommendation of the special committee.

The special committee, at a meeting held on November 22, 2010, unanimously determined that the merger agreement (for the purposes of this section, all references to the “merger agreement” and the “merger” are on the terms set forth in the Agreement and Plan of Merger, dated as of November 23, 2010), the merger and the other transactions contemplated by the merger agreement were advisable and fair (both substantively and procedurally) to and in the best interests of the Company and its unaffiliated stockholders, and recommended that the Board adopt a resolution approving and declaring the advisability of the merger agreement, the merger and the other transactions contemplated by the merger agreement and recommending that the stockholders of the Company adopt the merger agreement. In reaching its determination, the special committee consulted with and received the advice of its financial and legal advisors, discussed certain issues with the Company’s senior management team as well as the Company’s outside legal advisor, and considered a number of factors that it believed supported its decision to enter into the merger agreement and consummate the proposed merger, including, but not limited to, the following material factors:

 

   

the $43.50 per share price to be paid in cash in respect of each share of Company common stock, which represented a 19.2% premium over the closing price of the Company’s common stock on November 19, 2010, and a 29.6% premium over the average closing price of the Company’s common stock during the month prior to such date;

 

   

the fact that the per share price of $43.50 represents a valuation of the Company at an 8.6 multiple to the Company’s EBITDA for the period from November 1, 2009 through October 30, 2010;

 

   

the fact that the Company’s third quarter financial results and management’s views on guidance for fourth quarter and full year performance, as well as the special committee’s knowledge and

 

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understanding of the business, operations, management and recent changes in the management team, financial condition, earnings and prospects of the Company, including the prospects of the Company as an independent entity, made the transaction desirable at this time, as compared with other times, in the Company’s operating history;

 

   

the possibility that it could take a considerable period of time before the trading price of the Company’s common stock would reach and sustain at least the per share merger consideration of $43.50, as adjusted for present value;

 

   

the fact that the consideration to be paid in the proposed merger is all cash, which provides certainty of value and liquidity to the Company’s stockholders, including because stockholders will not be exposed to the risks and uncertainties relating to the Company’s prospects (including the prospects described in management’s projections summarized under “Special FactorsProspective Financial Information” below);

 

   

the financial analyses presented to the special committee by Perella Weinberg and shared with the Board, as well as the opinion of Perella Weinberg, dated November 22, 2010, to the special committee which expressly allows reliance on the opinion by those members of the Board who are not members of the special committee (other than those members of the Board who recused themselves from voting on the approval of the merger and merger agreement) to the effect that, as of that date, and based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations set forth therein, the $43.50 cash per share merger consideration to be received by the holders of shares of Company common stock (other than the Excluded Holders) pursuant to the merger agreement was fair, from a financial point of view, to such holders. The full text of the written opinion of Perella Weinberg is attached as Annex C to this proxy statement;

 

   

the possible alternatives to a sale to TPG and Leonard Green, including an alternative sales process or continuing as a standalone company and conducting a stock repurchase, implementing a dividend or undertaking a recapitalization, which alternatives the special committee evaluated with the assistance of Perella Weinberg and determined were less favorable to the Company’s stockholders than the merger given the potential risks, rewards and uncertainties associated with those alternatives;

 

   

the likelihood that the merger would be completed based on, among other things (not in any relative order of importance):

 

   

the fact that Parent and Merger Sub had obtained committed debt and equity financing for the transaction, the limited number and nature of the conditions to the debt and equity financing, the reputation of the financing sources and the obligation of Parent to use its reasonable best efforts to obtain the debt financing (including through litigation pursued in good faith), each of which, in the reasonable judgment of the special committee, increases the likelihood of such financings being completed;

 

   

the absence of a financing condition in the merger agreement;

 

   

the likelihood and anticipated timing of completing the proposed merger in light of the scope of the conditions to completion, including the absence of significant required regulatory approvals;

 

   

the fact that the merger agreement provides that, in the event of a failure of the merger to be consummated under certain circumstances, Parent will pay the Company a $200 million termination fee, without the Company having to establish any damages, and the guarantee of such payment obligation by TPG VI, GEI V and GEI Side V, severally and not jointly, pursuant to the limited guaranty;

 

   

the Company’s ability, under certain circumstances pursuant to the merger agreement and the equity commitment letters, to seek specific performance of Parent’s obligation to cause TPG VI, GEI V and GEI Side V to make or secure the equity contributions to Parent pursuant to the equity commitment letters;

 

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the Company’s ability, under certain circumstances pursuant to the merger agreement, to seek specific performance to prevent breaches of the merger agreement and to enforce specifically the terms of the merger agreement;

 

   

the reputation of TPG VI and the Leonard Green Entities; and

 

   

TPG VI’s and the Leonard Green Entities’ ability to complete large acquisition transactions;

 

   

the other terms of the merger agreement and related agreements, including:

 

   

the Company’s ability during the period beginning on the date of the merger agreement and continuing until 11:59 p.m., New York City time, on January 15, 2011 (the “go shop period”) to initiate, solicit and encourage alternative acquisition proposals from third parties and to enter into, engage in, and maintain discussions or negotiations with third parties with respect to such proposals;

 

   

the Company’s ability to continue discussions after the end of the go shop period with parties from whom the Company has received during the go shop period an acquisition proposal that the special committee determines in good faith, prior to the end of the go shop period, constitutes a superior proposal or could reasonably be expected to lead to a superior proposal until 11:59 p.m., New York City time, on January 31, 2011, and the Company’s ability to continue discussions with such parties thereafter if such party submits an alternative acquisition proposal prior to February 1, 2011 that the special committee determines in good faith prior to February 1, 2011 constitutes a superior proposal (in each case, with the termination of the merger agreement in order to enter an agreement providing for such superior proposal by an excluded party resulting in the payment to Parent of the lower termination fee of $27 million);

 

   

the Company’s ability, at any time from and after the end of the go shop period but prior to the time the Company stockholders adopt the merger agreement, to consider and respond to an unsolicited written acquisition proposal, to furnish confidential information to the person making such a proposal and to engage in discussions or negotiations with the person making such a proposal, if the special committee, prior to taking any such actions, determines in good faith that such acquisition proposal either constitutes a superior proposal or could reasonably be expected to lead to a superior proposal;

 

   

the agreement of Mr. Drexler to assist in the Company’s efforts to solicit alternative acquisition proposals during the go shop period, and the ability of Mr. Drexler to engage in discussions and enter into agreements, without material restriction under his arrangements with TPG and Leonard Green, with third parties making acquisition proposals, including regarding his participation in their proposals to acquire the Company if the merger agreement is terminated;

 

   

the Board’s ability (acting upon the recommendation of the special committee), under certain circumstances, to withhold, withdraw, qualify or modify its recommendation that its stockholders vote to adopt the merger agreement;

 

   

the Company’s ability, under certain circumstances, to terminate the merger agreement in order to enter into an agreement providing for a superior proposal, provided that the Company complies with its obligations relating to the entering into of any such agreement and concurrently with the termination of the merger agreement pays to Parent a termination fee of $27 million, in connection with an agreement for a superior proposal entered into prior to the end of the go shop period or with an excluded party, or $54 million in all other circumstances, plus in each case up to $5 million in Parent’s expenses;

 

   

the termination fee and expenses payable to Parent under certain circumstances, including as described above, in connection with a termination of the merger agreement, which the special committee concluded were reasonable in the context of termination fees and expenses payable in comparable transactions and in light of the overall terms of the merger agreement including the per share merger consideration; and

 

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the availability of appraisal rights under the DGCL to holders of Company common stock who comply with all of the required procedures under the DGCL, which allows such holders to seek appraisal of the fair value of their shares of Company common stock as determined by the Delaware Court of Chancery.

The special committee also believed that sufficient procedural safeguards were and are present to ensure the fairness of the proposed merger and to permit the special committee to represent effectively the interests of the Company’s unaffiliated stockholders. These procedural safeguards include:

 

   

the fact that the special committee is comprised of four independent directors who are not affiliated with either the Rollover Investors or Parent, Merger Sub or any direct or indirect wholly owned subsidiary of Parent (together with Parent and Merger Sub, the “Parent Affiliates”) and are not employees of the Company or any of its subsidiaries;

 

   

the fact that, other than their receipt of Board and special committee fees (which are not contingent upon the consummation of the merger or the special committee’s or Board’s recommendation of the merger) and their interests described under “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger,” members of the special committee do not have interests in the merger different from, or in addition to, those of the Company’s unaffiliated stockholders;

 

   

the fact that the determination to engage in discussions related to the proposed merger and the consideration and negotiation of the price and other terms of the proposed merger was conducted entirely under the oversight of the members of the special committee without the involvement of any director who is affiliated with TPG or Leonard Green or is a member of the Company’s management and without any limitation on the authority of the special committee to act with respect to any alternative transaction or any related matters;

 

   

the recognition by the special committee that it had the authority not to recommend the approval of the merger or any other transaction;

 

   

the special committee’s extensive negotiations with TPG and Leonard Green, which, among other things, resulted in an increase in the offer price from $41.00 to $43.50 per share and resulted in significantly better contractual terms than initially proposed by TPG and Leonard Green, including Mr. Drexler having no material restrictions or agreements in place related to his ability to participate with or invest in any other potential acquiror in a proposed acquisition of the Company or related to his ability to vote shares of Company common stock held directly or indirectly by him;

 

   

the fact that the special committee was advised by Perella Weinberg, as financial advisor, and Cravath, as legal advisor, each an internationally recognized firm selected by the special committee, and the fact that the special committee requested and received from Perella Weinberg an opinion (based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations set forth therein), as of November 22, 2010, with respect to the fairness of the per share merger consideration to be received by the holders of Company common stock (other than the Excluded Holders);

 

   

the fact that although the merger agreement does not require the vote of at least a majority of unaffiliated stockholders, stockholders representing in excess of 85% of the outstanding Company common stock are not affiliates of the Rollover Investors or the Parent Affiliates and will have a meaningful opportunity to consider and vote upon the adoption of the merger agreement;

 

   

the fact that the terms and conditions of the merger agreement and related agreements were designed to encourage a superior proposal, including:

 

   

a 54-day go shop period during which the Company may solicit and consider alternative proposals, which may be extended with respect to any excluded parties, and the Company’s ability, at any time from and after the end of the go shop period but prior to the time the Company

 

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stockholders adopt the merger agreement, to consider and respond to a written acquisition proposal, to furnish confidential information to the person making such a proposal and to engage in discussions or negotiations with the person making such a proposal, if the special committee, prior to taking any such actions, determines in good faith that such acquisition proposal either constitutes a superior proposal or could reasonably be expected to lead to a superior proposal;

 

   

the agreement from Mr. Drexler to cooperate in the Company’s solicitation of alternative proposals during the go shop period and in connection with any superior proposal that is accepted by the Company in connection with the termination of the merger agreement;

 

   

restrictions on the ability of TPG and Leonard Green to enter into exclusive arrangements with their debt financing sources;

 

   

restrictions on the ability of TPG and Leonard Green to seek or obtain additional equity commitments or financing in respect to the proposed merger and the related transactions; and

 

   

restrictions on the ability of TPG and Leonard Green to enter into any discussions or arrangements with any member of the Company’s management or any other Company employee, other than Mr. Drexler, without the special committee’s consent, and, in the case of Mr. Drexler, restrictions on the ability of TPG and Leonard Green to enter into any discussions or arrangements with him that would in any way interfere with his ability to participate in the solicitations contemplated to be made during the go shop period or to discuss and enter into arrangements with another bidder in connection with an acquisition of the Company by such a bidder.

In the course of its deliberations, the special committee also considered a variety of risks and other countervailing factors related to entering into the merger agreement and the proposed merger, including:

 

   

the risk that the proposed merger might not be completed in a timely manner or at all, including the risk that the proposed merger will not occur if the financing contemplated by the acquisition financing commitments, described under the caption “Special FactorsFinancing of the Merger,” is not obtained, as Parent does not on its own possess sufficient funds to complete the transaction;

 

   

that the public stockholders of the Company (other than the Rollover Investors, the Parent Affiliates and any members of our management team who may have the opportunity to invest in Parent and who choose to make this investment) will have no ongoing equity in the surviving corporation following the proposed merger, meaning that the public stockholders (other than the Rollover Investors, the Parent Affiliates and any members of our management team who may have the opportunity to invest in Parent and who choose to make this investment) will cease to participate in the Company’s future earnings or growth, or to benefit from any increases in the value of the Company’s common stock;

 

   

the restrictions on the conduct of the Company’s business prior to the completion of the proposed merger, which may delay or prevent the Company from undertaking business opportunities that may arise or any other action it would otherwise take with respect to the operations of the Company pending completion of the proposed merger;

 

   

the risks and costs to the Company if the proposed merger does not close, including the diversion of management and employee attention, potential employee attrition and the potential disruptive effect on business and customer relationships;

 

   

the possibility that the up to $5 million in Parent’s expenses plus the $27 million or $54 million, as applicable, termination fee payable by the Company upon the termination of the merger agreement could discourage other potential acquirors from making a competing bid to acquire the Company;

 

   

that if the proposed merger is not completed, the Company will be required to pay its own expenses associated with the merger agreement, the merger and the other transactions contemplated by the merger agreement as well as, under certain circumstances, pay Parent a termination fee of $27 million or $54 million, as applicable, and/or reimburse Parent’s expenses (up to a $5 million cap), in connection with the termination of the merger agreement;

 

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the fact that Parent and Merger Sub are newly formed corporations with essentially no assets other than the equity commitments of TPG VI, GEI V and GEI Side V and that the Company’s remedy in the event of breach of the merger agreement by Parent or Merger Sub may be limited to receipt of the $200 million termination fee, which is guaranteed by TPG VI, GEI V and GEI Side V, and that under certain circumstances the Company may not be entitled to a termination fee at all;

 

   

the fact that an all cash transaction would be taxable to the Company’s stockholders that are U.S. holders for U.S. federal income tax purposes; and

 

   

the terms of Mr. Drexler’s and the other Rollover Investors’ participation in the merger and the fact that Mr. Drexler and our other executive officers and directors may have interests in the transaction that are different from, or in addition to, those of our unaffiliated stockholders; see the section captioned “Special FactorsInterests of the Company’s Directors and Executive Officers in the Merger” on page 80.

In analyzing the proposed merger and in reaching its determination as to the fairness (both substantively and procedurally) of the transactions contemplated by the merger agreement, the special committee considered, among other factors, the analyses and methodologies of Perella Weinberg in evaluating the going concern value of the Company. See “Special FactorsOpinion of Perella Weinberg, Financial Advisor to the Special Committee” beginning on page 44. Perella Weinberg’s analyses were based upon certain management-provided scenarios and assumptions, but did not include an independent analysis of the liquidation value or book value of the Company. The special committee did not consider liquidation value as a factor because it considers the Company to be a viable going concern business and the trading history of the Company’s common stock to generally be an indication of its value as such. In addition, due to the fact that the Company is being sold as a going concern, the special committee did not consider the liquidation value of the Company relevant to a determination as to whether the proposed merger is fair to the Company’s unaffiliated stockholders as they believed the value of the Company’s assets that might be realized in a liquidation would be significantly less than its going concern value. Further, the special committee did not consider net book value a material indicator of the value of the Company because it believed that net book value is not a material indicator of the value of the Company as a going concern but rather is reflective of historical costs. The Company’s net book value per diluted share was $7.72 as of October 30, 2010, which is substantially below the per share merger consideration. As part of its consideration of the proposed merger and other potential strategic transactions, the special committee also considered recapitalization, stock repurchase and dividend analyses prepared by Perella Weinberg.

The special committee, at a meeting held on January 17, 2011, unanimously recommended that the Board approve and agree to a proposed settlement of the consolidated litigation in Delaware on the terms set forth in a memorandum of understanding with the stockholder plaintiffs. At the January 17, 2011 meeting, the special committee unanimously determined that Amendment No. 1 to the Agreement and Plan of Merger, dated January 18, 2011 (“Amendment No. 1”) and the transactions contemplated by the merger agreement, as amended, were advisable and fair (both substantively and procedurally) to and in the best interests of the Company and its unaffiliated stockholders, and recommended that the Board adopt a resolution approving and declaring the advisability of Amendment No. 1 and the transactions contemplated by the merger agreement, as amended, and recommending that the stockholders of the Company adopt the merger agreement, as amended. In reaching its determination, the special committee consulted with and received the advice of its legal advisor, discussed certain issues with the Company’s senior management team as well as the Company’s outside legal advisor, and considered a number of factors that it believed supported its decision to enter into Amendment No. 1, including, but not limited to, the following material factors:

 

   

the material factors, procedural safeguards and risks and other countervailing factors described above; and

 

   

the additional benefits to the Company and its unaffiliated stockholders described in “Special Factors—Litigation Relating to the Merger.”

 

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For a description of the memorandum of understanding and the terms of Amendment No. 1, see “Special FactorsLitigation Relating to the Merger” beginning on page 97.

The foregoing discussion of the factors considered by the special committee is not intended to be exhaustive, but rather includes the principal factors considered by the special committee. The special committee collectively reached the conclusion to approve the merger agreement, the merger and the other transactions contemplated by the merger agreement in light of the various factors described above and other factors that the members of the special committee believed were appropriate. In view of the wide variety of factors considered by the special committee in connection with its evaluation of the proposed merger and the complexity of these matters, the special committee did not consider it practical, and did not attempt, to quantify, rank or otherwise assign relative weights to the specific factors it considered in reaching its decision and did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to the ultimate determination of the special committee. Rather, the special committee made its recommendation based on the totality of information presented to it and the investigation conducted by it. In considering the factors discussed above, individual members of the special committee may have given different weights to different factors.

Recommendation of the Company’s Board of Directors

The Board, acting upon the unanimous recommendation of the special committee, at a meeting described above on November 22, 2010:

 

   

deemed it advisable and in the best interests of the Company and its unaffiliated stockholders that the Company enter into the merger agreement, and that the merger agreement, the merger and the other transactions contemplated by the merger agreement are advisable and fair (both substantively and procedurally) to and in the best interests of the Company and its unaffiliated stockholders; and

 

   

directed that the adoption of the merger agreement be submitted to a vote at a meeting of the stockholders of the Company and recommended to the stockholders of the Company that they vote for the adoption of the merger agreement and all other actions or matters necessary or appropriate to give effect to the foregoing pursuant to the DGCL.

In reaching these determinations, the Board considered a number of factors, including the following material factors:

 

   

the special committee’s analysis, conclusions and unanimous determination, which the Board adopted, that the merger agreement, the merger and the other transactions contemplated by the merger agreement were advisable and fair (both substantively and procedurally) to and in the best interests of the Company and its unaffiliated stockholders and the special committee’s unanimous recommendation that the Board adopt a resolution approving and declaring the advisability of the merger agreement, the merger and the other transactions contemplated by the merger agreement and recommending that the stockholders of the Company adopt the merger agreement;

 

   

the fact that the special committee is comprised of four independent directors who are not affiliated with either the Rollover Investors or the Parent Affiliates and are not employees of the Company or any of its subsidiaries and the fact that, other than their receipt of Board and special committee fees (which are not contingent upon the consummation of the merger or the special committee’s or Board’s recommendation of the merger) and their interests described under “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger,” members of the special committee do not have an interest in the merger different from, or in addition to, that of the Company’s unaffiliated stockholders; and

 

   

the financial analysis presented to the special committee by Perella Weinberg and shared with the Board, as well as the opinion of Perella Weinberg, dated November 22, 2010, to the special committee,

 

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which expressly allows reliance on the fairness opinion by those members of the Board who are not members of the special committee (other than those members of the Board who recused themselves from voting on the approval of the merger and the merger agreement), to the effect that, as of that date, and based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations set forth therein, the $43.50 cash per share merger consideration to be received by the holders of shares of Company common stock (other than the Excluded Holders ) pursuant to the merger agreement was fair, from a financial point of view, to such holders (the full text of which is attached as Annex C to this proxy statement).

Mr. Drexler, our chairman and chief executive officer and a Rollover Investor, and Mr. Coulter, who is affiliated with TPG, recused themselves from the foregoing determination and approval due to their affiliation with the Parent Affiliates and Ms. Reisman was unavailable to participate in the foregoing determination and approval.

The Board, at a meeting held on January 17, 2011, approved and agreed to a proposed settlement of the consolidated litigation in Delaware on the terms set forth in a memorandum of understanding with the stockholder plaintiffs. At the January 17, 2011 meeting, the Board, acting upon the unanimous recommendation of the special committee, deemed it advisable and in the best interests of the Company and its unaffiliated stockholders to enter into Amendment No. 1 and that Amendment No. 1 and the transactions contemplated by the merger agreement, as amended, were advisable and fair (both procedurally and substantively) to and in the best interests of the Company and its unaffiliated stockholders. The Board also directed that the adoption of the merger agreement, as amended, be submitted to a vote at a meeting of the stockholders of the Company and recommended to the stockholders of the Company that they vote for the adoption of the merger agreement, as amended, and all other actions or matters necessary or appropriate to give effect to the foregoing pursuant to the DGCL. In reaching these determinations, the Board considered a number of factors, including the following material factors:

 

   

the material factors described above;

 

   

the special committee’s analysis and conclusion and unanimous determination, which the Board adopts; and

 

   

the additional benefits to the Company and its unaffiliated stockholders described in “Special Factors—Litigation Relating to the Merger.”

The approval and recommendation set forth above were unanimously approved by the Board, other than Messrs. Coulter and Drexler, who recused themselves. For a description of the memorandum of understanding and the terms of Amendment No. 1, see “Special FactorsLitigation Relating to the Merger” beginning on page 97.

The foregoing discussion of the factors considered by the Board is not intended to be exhaustive, but rather includes the principal factors considered by the Board. The Board (other than Messrs. Drexler and Coulter and Ms. Reisman) collectively reached the conclusion to approve the merger agreement, the merger and the other transactions contemplated by the merger agreement in light of the various factors described above and other factors that the members of the Board believed were appropriate. In view of the wide variety of factors considered by the Board in connection with its evaluation of the proposed merger and the complexity of these matters, the Board did not consider it practical, and did not attempt, to quantify, rank or otherwise assign relative weights to the specific factors it considered in reaching its decision and did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to the ultimate determination of the Board. Rather, the Board made its recommendation based on the totality of information presented to it and the investigation conducted by it. In considering the factors discussed above, individual directors may have given different weights to different factors. In light of the procedural protections described above, other than the special committee and its legal and financial advisors, the Board did not consider it necessary to retain an unaffiliated representative to act solely on behalf of the Company’s unaffiliated stockholders for purposes of negotiating the terms of the merger agreement or preparing a report

 

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concerning the fairness of the merger agreement and the merger, nor did the Board consider it necessary to make any provision to grant unaffiliated stockholders access to the Company’s corporate files or to obtain counsel or appraisal services for unaffiliated stockholders .

In connection with the consummation of the merger, certain of the Company’s directors may receive benefits and compensation that may differ from the per share merger consideration you would receive. See “Special FactorsInterests of the Company’s Directors and Executive Officers in the Merger” beginning on page 80 of this proxy statement.

The Board recommends that the stockholders of the Company vote “FOR” adoption of the merger agreement.

Opinion of Perella Weinberg, Financial Advisor to the Special Committee

The special committee retained Perella Weinberg to act as its financial advisor in connection with the proposed merger. The special committee selected Perella Weinberg based on Perella Weinberg’s qualifications, expertise and reputation and its knowledge of the industries in which the Company conducts its business. Perella Weinberg, as part of its investment banking business, is continually engaged in performing financial analyses with respect to businesses and their securities in connection with mergers and acquisitions, leveraged buyouts and other transactions as well as for corporate and other purposes.

On November 22, 2010, Perella Weinberg rendered its oral opinion, subsequently confirmed in writing, to the special committee that, as of such date, and based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations set forth in the opinion, the $43.50 cash per share merger consideration to be received by the holders of shares of Company common stock (other than the Excluded Holders) in the merger was fair, from a financial point of view, to such holders. Perella Weinberg was not requested to, and did not, deliver an opinion in connection with the execution of Amendment No. 1 on January 18, 2011. For the purposes of the descriptions of Perella Weinberg’s opinion or the financial analyses contained herein, any references to the “merger agreement” and the “merger” are without giving effect to Amendment No. 1.

The full text of Perella Weinberg’s written opinion, dated November 22, 2010, which sets forth, among other things, the assumptions made, procedures followed, matters considered and qualifications and limitations on the review undertaken by Perella Weinberg, is attached as Annex C and is incorporated by reference herein. Holders of shares of Company common stock are urged to read the opinion carefully and in its entirety. The opinion does not address the Company’s underlying business decision to enter into the merger or the relative merits of the merger as compared with any other strategic alternative which may have been available to the Company. The opinion does not constitute a recommendation to any holder of the Company’s common stock as to how such holder should vote or otherwise act with respect to the merger or any other matter and does not in any manner address the prices at which shares of Company common stock will trade at any time. In addition, Perella Weinberg expressed no opinion as to the fairness of the merger to, or any consideration to, the holders of any other class of securities, creditors or other constituencies of the Company. Perella Weinberg provided its opinion for the information and assistance of the special committee in connection with, and for the purposes of its evaluation of, the merger. The Perella Weinberg opinion expressly allows reliance on the opinion by those members of the Board who are not members of the special committee (other than those members of the Board who recused themselves from voting on the approval of the merger and the merger agreement). This summary is qualified in its entirety by reference to the full text of the opinion.

In arriving at its opinion, Perella Weinberg, among other things:

 

   

reviewed certain publicly available financial statements and other business and financial information of the Company, including research analyst reports;

 

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reviewed certain internal financial statements, analyses, forecasts, and other financial and operating data relating to the business of the Company, in each case, prepared by management of the Company;

 

   

reviewed certain publicly available financial forecasts relating to the Company;

 

   

discussed the past and current operations, financial condition and prospects of the Company with senior executives of the Company;

 

   

compared the financial performance of the Company with that of certain publicly traded companies which it believed to be generally relevant;

 

   

compared the financial terms of the merger with the publicly available financial terms of certain transactions which it believed to be generally relevant;

 

   

reviewed the historical trading prices and trading activity for shares of Company common stock, and compared such price and trading activity of shares of Company common stock with that of securities of certain publicly traded companies which it believed to be generally relevant;

 

   

reviewed the premia paid in certain publicly available transactions, which it believed to be generally relevant;

 

   

reviewed a draft dated November 22, 2010, of the merger agreement; and

 

   

conducted such other financial studies, analyses and investigations, and considered such other factors, as it deemed appropriate.

In arriving at its opinion, Perella Weinberg assumed and relied upon, without independent verification, the accuracy and completeness of the financial and other information supplied or otherwise made available to it (including information that was available from generally recognized public sources) for purposes of its opinion and further relied upon the assurances of the management of the Company that information furnished by them for purposes of Perella Weinberg’s analysis did not contain any material omissions or misstatements of material fact. With respect to the financial forecasts prepared by the Company’s management, Perella Weinberg was advised by the management of the Company and assumed, with the consent of the special committee, that such forecasts had been reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of the management of the Company as to the future financial performance of the Company and the other matters covered thereby and Perella Weinberg expressed no view as to the assumptions on which they were based. In arriving at its opinion, Perella Weinberg did not make any independent valuation or appraisal of the assets or liabilities (including any contingent, derivative or off-balance-sheet assets and liabilities) of the Company, nor was it furnished with any such valuations or appraisals, nor did it assume any obligation to conduct, nor did it conduct, any physical inspection of the properties or facilities of the Company. In addition, Perella Weinberg did not evaluate the solvency of any party to the merger agreement under any state or federal laws relating to bankruptcy, insolvency or similar matters. Perella Weinberg assumed that the final executed merger agreement would not differ in any material respect from the draft merger agreement reviewed by it and that the merger would be consummated in accordance with the terms set forth in the merger agreement, without material modification, waiver or delay. In addition, Perella Weinberg assumed that in connection with the receipt of all the necessary approvals of the proposed merger, no delays, limitations, conditions or restrictions would be imposed that could have an adverse effect on the Company. Perella Weinberg relied as to all legal matters relevant to rendering its opinion upon the advice of counsel.

Perella Weinberg’s opinion addressed only the fairness from a financial point of view, as of the date thereof, of the $43.50 cash per share merger consideration to be received by the holders of shares of Company common stock (other than the Excluded Holders) pursuant to the merger agreement. Perella Weinberg was not asked to, nor did it, offer any opinion as to any other term of the merger agreement (or any related agreement) or the form of the merger or the likely timeframe in which the merger would be consummated. In addition, Perella Weinberg expressed no opinion as to the fairness of the amount or nature of any compensation to be received by any officers, directors or employees of any parties to the merger, or any class of such persons, whether relative to the

 

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$43.50 cash per share merger consideration to be received by the holders of shares of Company common stock pursuant to the merger agreement or otherwise. Perella Weinberg did not express any opinion as to any tax or other consequences that may result from the transactions contemplated by the merger agreement, nor did its opinion address any legal, tax, regulatory or accounting matters, as to which it understood the Company had received such advice as it deemed necessary from qualified professionals. Perella Weinberg’s opinion did not address the underlying business decision of the Company to enter into the merger or the relative merits of the merger as compared with any other strategic alternative which may have been available to the Company. As of the date of the opinion, Perella Weinberg was not authorized to solicit, and did not solicit, indications of interest in a transaction with the Company from any party. Except as described above, the special committee imposed no other limitations on the investigations made or procedures followed by Perella Weinberg in rendering its opinion.

Perella Weinberg’s opinion was necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to Perella Weinberg as of, the date of its opinion. It should be understood that subsequent developments may affect Perella Weinberg’s opinion and the assumptions used in preparing it, and Perella Weinberg does not have any obligation to update, revise, or reaffirm its opinion. The issuance of Perella Weinberg’s opinion was approved by a fairness committee of Perella Weinberg.

Summary of Material Financial Analyses

The following is a summary of the material financial analyses performed by Perella Weinberg and reviewed by the special committee in connection with Perella Weinberg’s opinion relating to the merger and does not purport to be a complete description of the financial analyses performed by Perella Weinberg. The order of analyses described below does not represent the relative importance or weight given to those analyses by Perella Weinberg. Some of the summaries of the financial analyses include information presented in tabular format.

In order to fully understand Perella Weinberg’s financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Perella Weinberg’s financial analyses.

Analysis of Implied Premia and Multiples. Perella Weinberg calculated the implied premium represented by the $43.50 cash per share merger consideration to be received by the holders of shares of Company common stock in the merger relative to the following:

 

   

the closing market price per share of the Company’s common stock on November 19, 2010, (referred to herein as the “Reference Date”); and

 

   

the average closing market price per share of the Company’s common stock for each of the one-month, three-month, and twelve-month periods ended on the Reference Date.

The results of these calculations are summarized in the following table:

 

     Price for Period
Ended on the
Reference Date
     Implied
Premium
 

Closing Price on Reference Date

   $ 36.49         19.2

One-month average

   $ 33.57         29.6

Three-month average

   $ 33.66         29.2

Twelve-month average

   $ 40.01         8.7

In the analysis of implied multiples, Perella Weinberg first derived the implied enterprise value of the Company based on the $43.50 cash per share merger consideration to be received by the holders of shares of

 

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Company common stock in the merger. Enterprise value for the Company was calculated as the aggregate value of the Company’s fully diluted equity (based on the total number of fully diluted outstanding shares of Company common stock and the $43.50 cash per share merger consideration) plus debt at book value, less cash and cash equivalents as provided by the Company’s management. At $43.50 cash per share merger consideration, the implied enterprise value for the Company was calculated to be approximately $2.693 billion. Perella Weinberg also reviewed historical and estimated earnings before interest, taxes, depreciation and amortization, or EBITDA, for the Company for certain periods described below.

In this analysis, Perella Weinberg calculated the following multiples of historical and estimated financial results for the Company:

 

   

enterprise value, or EV, as a multiple of last twelve months, or LTM, EBITDA as of Q3 2010, adjusted for certain one-time items;

 

   

enterprise value as a multiple of estimated EBITDA for fiscal years 2010 and 2011 based on the Consensus Forecasts prepared by the Institutional Brokers’ Estimate System, or I/B/E/S;

 

   

enterprise value as a multiple of estimated EBITDA for fiscal years 2010 and 2011 based on the November five year projections prepared by the Company’s management;

 

   

share price to estimated earnings per share, or P/E, for fiscal years 2010 and 2011 based on the I/B/E/S Consensus Forecasts; and

 

   

share price to estimated earnings per share for fiscal years 2010 and 2011 based on the November five year projections prepared by the Company’s management.

The results of these analyses are summarized in the following table:

 

Financial Multiple

   Based on $43.50 Cash Per Share
Merger Consideration
 

EV / LTM EBITDA

     8.6x   

(based on LTM EBITDA of $314mm)

  

I/B/E/S Consensus Estimates

  

EV/EBITDA FY 2010E

     8.9x   

(based on EBITDA FY 2010E of $303mm)

  

EV/EBITDA FY 2011E

     8.5x   

(based on EBITDA FY 2011E of $317mm)

  

Price/Earnings FY 2010E

     19.3x   

(based on Earnings/Share FY 2010E of $2.25)

  

Price/Earnings FY 2011E

     17.8x   

(based on Earnings/Share FY 2011E of $2.45)

  

November five year projections

  

EV/EBITDA FY 2010E

     9.6x   

(based on EBITDA FY 2010E of $281mm)

  

EV/EBITDA FY 2011E

     8.3x   

(based on EBITDA FY 2011E of $326mm)

  

Price/Earnings FY 2010E

     21.0x   

(based on Earnings/Share FY 2010E of $2.07)

  

Price/Earnings FY 2011E

     17.9x   

(based on Earnings/Share FY 2011E of $2.43)

  

Historical Stock Trading. Perella Weinberg reviewed the historical trading price per share of the Company’s common stock for the twelve month period ending on the Reference Date and the historical trading price per share of the Company’s common stock since its initial public offering on June 27, 2006 and ending on the Reference Date. Perella Weinberg noted that the Company’s stock had fallen by 11% over the last twelve months while an equal weighted index of peer companies was up 40% and that the S&P Retail Index Exchange Traded

 

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Fund, which is comprised of approximately sixty-six companies in sectors such as apparel retail, automotive retail, catalog retail and department stores (the fund seeks to replicate an index derived from the retail segment of the United States total market index), was also up 31% for the same period. Perella Weinberg also noted that since its initial public offering on June 27, 2006, the Company’s share price had risen 82% while an equal weighted index of peer companies was up 50% and the S&P Retail Index Exchange Traded Fund was up 26% for the same period and that the range of closing market prices per share of the Company’s common stock since its initial public offering was $8.77 to $56.63 and that the average price per share since the initial public offering was $34.65. The selected peer companies that were represented by an equal weighted average index were Abercrombie & Fitch, Aeropostale, American Eagle, Ann Taylor, Bebe, Carter’s, Chico’s, Children’s Place, Coach, Coldwater Creek, The Dress Barn, The Gap, Guess?, Limited Brands, New York & Company, Polo Ralph Lauren, Talbots, Under Armour and Urban Outfitters. Perella Weinberg also noted that the range of market prices per share of Company common stock for the twelve month period ending on the Reference Date was $30.06 to $50.96.

Equity Research Analyst Price Target Statistics. Perella Weinberg reviewed and analyzed the most recent publicly available research analyst price targets for shares of Company common stock prepared and published by 17 selected equity research analysts prior to the Reference Date. Perella Weinberg noted that the range of recent equity analyst price targets for shares of Company common stock prior to the Reference Date was $30.00 to $50.00 per share, with a median price target of $35.00 per share. The results of these analyses are summarized in the following table:

 

Institution

   Target
Price
     Date  

Oppenheimer & Co.

   $ 50.00         8/27/2010   

Baird Capital Partners

   $ 49.00         8/27/2010   

Atlantic Equities

   $ 44.00         11/15/2010   

Brean Murray, Carret & Co.

   $ 42.00         8/27/2010   

Wedbush Securities

   $ 40.00         8/27/2010   

Weeden & Co.

   $ 40.00         8/26/2010   

J.P. Morgan

   $ 37.00         7/15/2010   

UBS

   $ 35.00         8/26/2010   

Jefferies & Co.

   $ 35.00         8/27/2010   

MKM Partners

   $ 35.00         10/25/2010   

Bank of America

   $ 35.00         10/5/2010   

Nomura Securities

   $ 34.00         11/9/2010   

Piper Jaffray & Co.

   $ 34.00         10/21/2010   

Goldman Sachs

   $ 33.00         11/11/2010   

BMO Financial Group

   $ 31.00         8/26/2010   

Janney Montgomery Scott

   $ 31.00         10/21/2010   

Morgan Stanley

   $ 30.00         11/18/2010   

The public market trading price targets published by equity research analysts do not necessarily reflect current market trading prices for shares of Company common stock and these estimates are subject to uncertainties, including the future financial performance of the Company and future financial market conditions. Furthermore, the public market trading price targets published by equity research analysts typically represent price targets to be achieved over a six to twelve month period.

Selected Publicly Traded Companies Analysis. Perella Weinberg reviewed and compared certain financial information for the Company to corresponding financial information, ratios and public market multiples for the following publicly traded companies in the apparel retail industry, which, in the exercise of its professional judgment and based on its knowledge of the industry, Perella Weinberg determined to be relevant to its analysis. Perella Weinberg analyzed those branded specialty apparel retail companies that Perella Weinberg and the

 

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Company’s management identified as being the most comparable to the Company, referred to below as “Selected Peer Companies,” as well as other specialty apparel retail companies with highly visible brands that compete with the Company for customers, referred to below as “Other Peer Companies.” Although none of the following companies is identical to the Company, Perella Weinberg selected these companies because they had publicly traded equity securities and were deemed to be similar to the Company in one or more respects including the nature of their business, size, financial performance and geographic concentration.

 

Selected Peer Companies

  

Other Peer Companies

Abercrombie & Fitch    American Eagle
Aeropostale    Ann Taylor
Chico’s FAS    Bebe
Urban Outfitters    Carter’s
   Children’s Place
   Coach
   Coldwater Creek
   The Dress Barn
   Guess?
   Limited Brands
   Polo Ralph Lauren
   Talbots
   The Gap

For each of the selected companies, Perella Weinberg calculated and compared financial information and various financial market multiples and ratios based on SEC filings for historical information and third-party research estimates from I/B/E/S for forecasted information. For the Company, Perella Weinberg made calculations based on the November five year projections prepared by the Company’s management and summarized in this proxy statement under the section entitled “Special Factors—Prospective Financial Information” and third-party research estimates from I/B/E/S for forecasted information and SEC filings for historical information.

 

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With respect to the Company and each of the selected companies, Perella Weinberg reviewed enterprise value as a multiple of estimated EBITDA for fiscal year 2010 and share price to estimated earnings per share for fiscal year 2010, in each case as of the Reference Date. The results of these analyses are summarized in the following table:

 

     EV / FY2010E EBITDA      Share Price /
FY2010E
Earnings
 

Selected Peer Companies

     

Aeropostale

     4.6x         10.0x   

Chico’s FAS

     5.5x         17.2x   

Abercrombie & Fitch

     8.3x         25.7x   

Urban Outfitters

     10.6x         22.3x   

High

     10.6x         25.7x   

Median

     6.9x         19.7x   

Low

     4.6x         10.0x   

Other Peer Companies

     

The Gap

     4.8x         11.4x   

The Dress Barn

     4.9x         12.3x   

American Eagle

     5.5x         16.1x   

Talbots

     5.8x         12.9x   

The Children’s Place

     6.0x         17.3x   

Ann Taylor

     6.1x         22.0x   

Coldwater Creek

     6.6x         —     

Carter’s

     6.9x         12.3x   

Coach

     7.6x         21.1x   

Limited Brands

     7.8x         17.1x   

Guess?

     8.2x         15.3x   

Polo Ralph Lauren

     10.4x         20.9x   

Bebe

     16.8x         —     

High

     16.8x         22.0x   

Median

     6.6x         16.1x   

Low

     4.8x         11.4x   

J.Crew (November five year projections)

     7.8x         17.6x   

J.Crew (I/B/E/S Consensus Estimates)

     7.2x         16.2x   

Perella Weinberg conducted this analysis based on a range of multiples around the median for the Selected Peer Companies and Other Peer Companies. Perella Weinberg noted that this analysis implied a per share equity reference range for the Company common stock of $32.00-$41.00. Although the selected companies were used for comparison purposes, no business of any selected company was either identical or directly comparable to the Company’s business. Accordingly, Perella Weinberg’s comparison of selected companies to the Company and analysis of the results of such comparisons was not purely mathematical, but instead necessarily involved complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the relative values of the selected companies and the Company.

Discounted Cash Flow Analysis. Perella Weinberg conducted a discounted cash flow analysis for the Company to calculate the present value as of January 31, 2011 of the estimated standalone unlevered free cash flows that the Company could generate between fiscal years 2011 and 2015. Estimates of unlevered free cash flows used for this analysis utilized the November five year projections prepared by the Company’s management that are disclosed in this proxy statement under the section entitled “Special Factors—Prospective Financial Information.” Perella Weinberg also calculated a range of terminal values assuming terminal year multiples of next twelve months EBITDA ranging from 6.0x to 7.5x (which range was selected because it was consistent with

 

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the range of enterprise values to estimated EBITDA multiples of the Company and certain peer companies over a two year period) and discount rates ranging from 11% to 15% based on estimates of the weighted average cost of capital of the Company. Perella Weinberg estimated the Company’s weighted average cost of capital by calculating the weighted average of the Company’s cost of equity (derived utilizing the capital asset pricing model) and the Company’s after-tax cost of debt. The present values of unlevered free cash flows generated over the period described above were then added to the present values of terminal values resulting in a range of implied enterprise values for the Company. For each such range of implied enterprise values, Perella Weinberg derived ranges of implied equity values for the Company. These analyses resulted in the following reference ranges of implied enterprise values and implied equity values per share of the Company’s common stock:

 

Range of Implied Enterprise Present Value (in millions)

  

Range of Implied Present Value Per Share

$2,362 – $3,223    $39.71 – $51.55

Selected Transactions Analysis. Perella Weinberg analyzed certain information relating to selected precedent transactions in the specialty apparel and branded retail industries from November 2004 to October 2010 which, in the exercise of its professional judgment, Perella Weinberg determined to involve relevant public companies with operations similar to the Company. The selected transactions analyzed were the following:

 

Transaction

Announcement

  

Target

  

Acquirer

   Enterprise
Value ($mm)
     Enterprise
Value/LTM
EBITDA
 

Specialty Apparel

           

December 2005

   Tommy Hilfiger    Apax Partners    $ 1,547         7.9x   

March 2007

   Claire’s Stores    Apollo Management    $ 2,581         7.9x   

July 2007

   Deb Shops    Lee Equity Partners    $ 259         7.8x   

August 2009

   Charlotte Russe    Advent International    $ 312         6.6x   

March 2010

   Tommy Hilfiger    Van Heusen    $ 3,136         7.9x   

October 2010

   Gymboree    Bain Capital    $ 1,761         8.2x   

Branded Retail

           

November 2004

   Barneys New York    Jones Apparel Group    $ 400         8.1x   

February 2005

   The May Department Stores Company    Federated Department Stores    $ 17,260         8.9x   

March 2005

   Toys “R” Us    Private equity consortium    $ 6,213         9.4x   

May 2005

   Neiman Marcus    Private equity consortium    $ 4,981         10.2x   

November 2005

   Linens n Things    Apollo Management    $ 1,305         8.8x   

January 2006

   Burlington Coat Factory    Bain Capital    $ 1,958         7.2x   

June 2006

   Michaels Stores    Private equity consortium    $ 5,604         12.2x   

July 2006

   Petco    Private equity consortium    $ 1,819         8.7x   

June 2007

   Barneys New York    Istithmar    $ 942         14.1x   

For each of the selected transactions, Perella Weinberg calculated and compared the resulting enterprise value in the transaction as a multiple of LTM EBITDA (as adjusted from U.S. generally accepted accounting principles (“GAAP”) to exclude certain one-time items relating to forfeited share-based awards, lease termination and severance costs). Such multiples for the selected transactions were based on publicly available information at the time of the relevant transaction. The results of these analyses are summarized in the following table:

 

     Selected Transactions  

Enterprise Value / LTM EBITDA

   High      Median      Low  

Specialty Apparel

     8.2x         7.9x         6.6x   

Branded Retail

     14.1x         8.9x         7.2x   

Overall

     14.1x         8.2x         6.6x   

 

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Perella Weinberg conducted this analysis based on a range of multiples around the median for the multiples found in the specialty apparel and branded retail transactions listed above. Perella Weinberg observed that, as discussed above under “Analysis of Implied Premia and Multiples,” the implied enterprise value of the Company based on the $43.50 cash per share merger consideration as a multiple of LTM EBITDA, based on publicly available information, was 8.6x.

Although the selected transactions were used for comparison purposes, none of the selected transactions nor the companies involved in them was either identical or directly comparable to the merger or the Company.

Illustrative Premiums Paid Analysis. Perella Weinberg analyzed the premiums paid in 100% cash acquisitions of 82 publicly traded companies in the United States from 2005 to the present with transaction values of $2 billion to $4 billion. For each of the transactions, based on publicly available information obtained from Dealogic, Perella Weinberg calculated the premiums of the offer price in the transaction to the target company’s closing stock price one day, one week and one month prior to the announcement of the transaction. The results of these analyses are summarized in the following table:

 

     Selected Transactions Premiums Paid  
     Third Quartile Low     Second Quartile High     Median  

One Day Prior

     11.1     36.2     21.3

One Week Prior

     18.2     38.8     21.0

One Month Prior

     21.5     34.2     25.9

Perella Weinberg observed that, as discussed above under “Analysis of Implied Premia and Multiples,” the implied premium represented by the $43.50 cash per share merger consideration to be received by the holders of shares of Company common stock in the merger relative to $36.49, the closing market price per share of the Company’s common stock on the Reference Date, was 19.2%, while the implied premium to the Company’s closing stock price one week and one month prior to the Reference Date was 28.3% and 37.3% respectively.

Miscellaneous

The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary set forth herein, without considering the analyses or the summary as a whole could create an incomplete view of the processes underlying Perella Weinberg’s opinion. In arriving at its fairness determination, Perella Weinberg considered the results of all of its analyses and did not attribute any particular weight to any factor or analysis. Rather, Perella Weinberg made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of its analyses. No company or transaction used in the analyses described herein as a comparison is directly comparable to the Company or the merger.

Perella Weinberg prepared the analyses described herein for purposes of providing its opinion to the special committee as to the fairness, from a financial point of view, as of the date of such opinion, of the $43.50 cash per share merger consideration to be received by the holders of shares of Company common stock (other than the Excluded Holders) in the merger. These analyses do not purport to be appraisals or necessarily reflect the prices at which businesses or securities actually may be sold. Perella Weinberg’s analyses were based in part upon the November five year projections prepared by the Company’s management and third party research analyst estimates, which are not necessarily indicative of actual future results, and which may be significantly more or less favorable than suggested by Perella Weinberg’s analyses. Because these analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of the parties to the merger agreement or their respective advisors, none of the Company, Perella Weinberg or any other person assumes responsibility if future results are materially different from those forecasted by the Company’s management or third parties.

 

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As described above, the opinion of Perella Weinberg to the special committee was one of many factors taken into consideration by the special committee in making its determination to approve the merger. Perella Weinberg was not asked to, and did not, recommend the specific consideration provided for in the merger agreement, which consideration was determined through negotiations between the special committee and Parent.

Pursuant to the terms of the engagement letter between Perella Weinberg and the Company, the Company agreed to pay to Perella Weinberg, upon the closing of the merger, a fee equal to 0.55% of the transaction value or approximately $16.5 million based on an estimated transaction value of $3 billion; $250,000 of which was payable as an initial retainer and $3.25 million of which was payable upon Perella Weinberg’s delivery of its opinion. In the event that the proposed merger is not consummated and the Company receives compensation pursuant to the termination provisions contained in the merger agreement, Perella Weinberg will receive a fee equal to the lesser of (i) 20% of any such compensation paid to the Company and (ii) 25% of the transaction fee described above, in each case reduced by the amounts previously paid in connection with the retention of Perella Weinberg and the delivery of its opinion. In addition, the Company agreed to reimburse Perella Weinberg for its reasonable expenses, including attorneys’ fees and disbursements and to indemnify Perella Weinberg and related persons against various liabilities, including certain liabilities under the federal securities laws.

In the ordinary course of its business activities, Perella Weinberg or its affiliates may at any time hold long or short positions, and may trade or otherwise effect transactions, for their own account or the accounts of customers or clients, in debt or equity or other securities (or related derivative securities) or financial instruments (including bank loans or other obligations) of the Company or Parent or any of their respective affiliates. During the two year period prior to the date of Perella Weinberg’s opinion, no material relationship existed between Perella Weinberg and its affiliates and the Company or Parent or any of their respective affiliates pursuant to which compensation was received by Perella Weinberg or its affiliates; however Perella Weinberg and its affiliates may in the future provide investment banking and other financial services to the Company or Parent and their respective affiliates for which they would expect to receive compensation.

The opinion and presentation of Perella Weinberg summarized above will be made available for inspection and copying at the principal executive offices of the Company during regular business hours by any interested Company stockholder or its representative who has been designated in writing. In addition, a copy of the Perella Weinberg opinion is attached to this proxy statement as Annex C and a copy of the Perella Weinberg presentation is attached as exhibit (c)(2) to the statement on Schedule 13E-3 filed by the Company and the filing persons listed thereon with the SEC on December 6, 2010.

Other Presentations by Perella Weinberg

In addition to the final financial presentation made to the special committee on November 22, 2010 that is described above, Perella Weinberg also gave presentations to the special committee during meetings held on October 25, October 29, November 1, November 4, November 9, and November 21, 2010. None of these other presentations by Perella Weinberg, alone or together, constitute an opinion of Perella Weinberg with respect to the fairness, from a financial point of view, of the $43.50 cash per share merger consideration.

The analyses contained within these other presentations were based on information that was available as of the dates of the respective presentations, including, as applicable, the October five year projections and the November five year projections, and on Perella Weinberg’s preliminary working assumptions at those times. The contents of these presentations are summarized below:

 

   

At the October 25, 2010 meeting Perella Weinberg presented background information regarding the Company and preliminary observations relating to the Company’s recent financial performance and Wall Street research analyst estimates, as well as those of selected peer companies. As part of this presentation, Perella Weinberg reviewed its preliminary observations on the Company’s financial performance based on certain metrics, including sales, gross margin percentages and earnings per share, and in comparison to peers, and presented a preliminary comparison of the October five year

 

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projections to the September target model for illustrative and comparative purposes only. The presentation also covered trends in the Company’s share price performance. In addition, Perella Weinberg reviewed perspectives on the special committee’s options and decision points.

 

   

On October 29, 2010, Perella Weinberg met with the special committee to provide an update on the process and market conditions and to discuss preliminary observations regarding financial data with respect to the Company and transaction alternatives. The presentation included additional information regarding Perella Weinberg’s preliminary market analyses, including an overview of the Company’s stock price performance over time, price to earnings valuations relative to peers, a leveraged buyout analysis, a leveraged recapitalization analysis and Wall Street research analyst estimates. Perella Weinberg also reviewed with the special committee the October five year projections, and for illustrative and comparative purposes only, the September target model, and presented initial, preliminary financial analyses. Perella Weinberg also provided an overview of potential strategic buyers or merger partners and reviewed perspectives on the special committee’s options and decision points.

 

   

The presentation by Perella Weinberg to the special committee during the November 1, 2010 meeting included a financial analysis of the initial offer of $41.00 per share for all of the outstanding shares of the Company’s common stock made by TPG and Leonard Green on November 1, 2010, along with a financial analysis of selected precedent transactions. Perella Weinberg also presented further preliminary financial analyses based on the October five year projections, and for illustrative and comparative purposes only, the September target model, including an analysis regarding the Company’s future share price and the present value of the future share price on a stand-alone basis at a range of assumed price to earnings multiples.

 

   

In the course of the November 4, 2010 meeting, Perella Weinberg reviewed with the special committee transaction alternatives including potential return-of-capital initiatives on the basis of the October five year projections. Perella Weinberg also reviewed the experiences of peer companies which had engaged in such alternatives and presented analyses of the dividend yield and payout ratios of peer companies and the Company’s pro forma financial profile under various related scenarios. The presentation on return-of-capital alternatives included preliminary analyses of the potential impact of various scenarios involving share buy back programs and dividends on both the future share price and the Company’s capital structure and financial flexibility.

 

   

On November 9, 2010, Perella Weinberg presented its analyses of the revised offer of $45.00 per share for all of the outstanding shares of the Company’s common stock made by TPG and Leonard Green on November 9, 2010 along with a financial analysis of selected precedent transactions. At the meeting Perella Weinberg also reviewed its previously presented preliminary financial analyses with respect to the Company, which were prepared on the basis of the October five year projections.

 

   

On November 21, 2010, Perella Weinberg presented its financial analysis of the revised offer made by TPG and Leonard Green of $45.50 per share for all of the outstanding shares of the Company’s common stock. The presentation included a summary of the preliminary financial analysis, historical and future projections of financial performance on the basis of the November five year projections, and other analyses related to evaluating the contemplated transaction. Perella Weinberg also provided an additional presentation on return-of-capital alternatives, which was substantially similar to that previously presented on November 4, 2010, but updated to reflect the November five year projections and then current market conditions.

The financial analyses contained in these other presentations were based on the November five year projections and the October five year projections, as applicable, and market, economic, and other conditions as they existed as of such dates as well as other information that was available and Perella Weinberg’s preliminary working assumptions at those times. Except as described above, the methodologies and types of financial analyses conducted by Perella Weinberg throughout its engagement as financial advisor to the special committee

 

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were substantially similar to the analyses contained in the final financial presentation given to the special committee on November 22, 2010. However, the results of the financial analyses contained in these other presentations occasionally differed due to changes in management’s projections, the terms of TPG’s and Leonard Green’s offer and market and economic conditions. In addition, throughout its engagement, Perella Weinberg continued to refine various aspects of its financial analyses with the respect to the Company over time. The other presentations described above were in each case preliminary and did not reflect the final transaction structure or price that the special committee considered on November 22, 2010. These other presentations were therefore superseded by the presentation that Perella Weinberg made to the special committee on November 22, 2010 before giving its oral opinion, subsequently confirmed in writing, that, as of that date, and based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations set forth therein, the $43.50 cash per share merger consideration to be received by the holders of shares of Company common stock (other than the Excluded Holders ) pursuant to the merger agreement was fair, from a financial point of view, to such holders, which is described above.

The presentations of Perella Weinberg summarized above will be made available for inspection and copying at the principal executive offices of the Company during regular business hours by any interested Company stockholder or its representative who has been designated in writing. In addition, copies of the Perella Weinberg presentations are attached as exhibits (c)(4)-(10) to the statement on Schedule 13E-3 filed by the Company and the filing persons listed thereon with the SEC on December 29, 2010.

Analyses by Goldman Sachs for the Company

Over the past two years, Goldman Sachs has from time to time, at the request of the Company’s management, prepared various illustrative financial analyses for the Company. During this period, Goldman Sachs has never been retained by the Company to act as its financial advisor in connection with any transaction or matter, including the potential acquisition of the Company by TPG and Leonard Green, and Goldman Sachs has not received any compensation from any person in connection with the preparation of these various financial analyses for the Company. Goldman Sachs was not asked to, and did not, at any time, prepare for or render to the Company (i) any opinion as to the fairness of the consideration to be offered to the Company’s security holders in the merger, (ii) any opinion or appraisal as to the value of the Company or (iii) any other opinion. During this period, Goldman Sachs has not made, and its illustrative financial analyses do not constitute, a recommendation to the Board or a recommendation as to how any shareholder of the Company should vote with respect to the merger or any other matter.

As described above in “Special FactorsBackground of the Merger,” at Mr. Scully’s request, Goldman Sachs prepared illustrative analyses on September 13, 2010 (the “Goldman Sachs September 13 illustrative analyses”) and on September 23, 2010 (the “Goldman Sachs September 23 illustrative analyses”; together with the Goldman Sachs September 13 illustrative analyses, the “Goldman Sachs Illustrative Analyses”), both of which are summarized below.

In connection with preparing the Goldman Sachs Illustrative Analyses and performing its related financial analyses, Goldman Sachs reviewed, among other things:

 

   

certain publicly available business and financial information relating to the Company and certain other companies believed by Goldman Sachs to be generally relevant; and

 

   

income statement items from the Company’s September target model and certain other estimated information relating to the Company.

The Company’s September target model, including the income statement information therein reviewed by Goldman Sachs in preparation for the Goldman Sachs Illustrative Analyses, was later superseded by the October five year projections and the November five year projections. The November five year projections were used by Perella Weinberg in the presentation described under “Special Factors—Opinion of Perella Weinberg, Financial

 

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Advisor to the Special Committee” and, together with the financial advice and financial analyses of Perella Weinberg, were used by the special committee and the Board in considering whether to approve and recommend the merger.

Goldman Sachs relied upon and assumed, without assuming any responsibility for independent verification, the accuracy and completeness of all of the financial, accounting, legal, tax and other information provided to, discussed with or reviewed by it and assumed such accuracy and completeness for purposes of preparing the Goldman Sachs Illustrative Analyses. In addition, Goldman Sachs did not make an independent evaluation or appraisal of the assets and liabilities (including any contingent, derivative or off-balance-sheet assets and liabilities) of the Company or any of its subsidiaries and Goldman Sachs was not furnished with any such evaluation or appraisal.

Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before September 23, 2010 or September 13, 2010, respectively, did not take into account the more current financial information and other methodologies and factors reflected in the October five year projections or the November five year projections, and is not necessarily indicative of current market conditions.

Goldman Sachs September 13 illustrative analyses summary

Goldman Sachs analyzed certain illustrative recapitalization transactions involving the Company and the theoretical value the Company’s stockholders could receive in such transactions. In this illustrative recapitalization analysis, Goldman Sachs assumed that the Company used $203 million in available cash held by the Company plus net proceeds from new bank loans at a LIBOR-based interest rate (subject to a floor of 1.75%) plus 4.25%, with such cash and bank loans totaling $600 million, $700 million, $800 million, $933 million, $1,000 million and $1,100 million, respectively, to fund a cash tender offer for shares at prices of $41.00, $41.00, $41.00, $41.00, $41.00 and $42.71 per share of the Company’s common stock, respectively, or to fund a one-time special dividend of $9.41, $10.98, $12.55, $14.63, $15.69 and $17.25 per share of the Company’s common stock, respectively. Goldman Sachs then calculated the illustrative post-recapitalization trading value of shares of the Company’s common stock based upon a range of price to estimated 2011 earnings per share multiples of 9.3x to 11.3x and projected 2011 earnings per share of the Company utilizing the Company’s projections after giving effect to the incremental interest expense and fully diluted share count in each scenario. This analysis resulted in a range of illustrative post-recapitalization trading values of shares of the Company’s common stock of $35.25 to $45.17 utilizing the cash tender offer scenario and $36.94 to $45.01 utilizing the one-time special dividend scenario.

Goldman Sachs performed an illustrative analysis of the price per share of the Company’s common stock that an acquirer theoretically would pay to acquire the Company in a leveraged buyout transaction that closed at the end of 2010, assuming cash held by the Company of $403 million, bank debt of $1.0 billion at a LIBOR-based interest rate (subject to a floor of 1.75%) plus 4.75%, and senior notes totaling $615 million at an interest rate of 10.0%, plus $1,392 million of new cash equity and $223 million of rollover equity. The analysis also assumed that the acquirer resells the Company at the end of fiscal year 2015 at an exit price equal to 8.0x estimated 2015 EBITDA and assumed an acquirer targeted internal rate of return on equity of 25.0%, sensitized to apply a range of (4.0)% to 0.0% change in the annual sales growth assumptions and (4.0)% to 0.0% change in EBITDA margin assumptions. The analysis resulted in a range of implied values per share of the Company’s common stock of $45.79 to $54.81.

Goldman Sachs September 23 illustrative analyses summary

Goldman Sachs analyzed certain illustrative recapitalization transactions involving the Company and the theoretical value the Company’s stockholders could receive in such transactions. In this illustrative recapitalization analysis, Goldman Sachs assumed that the Company used $250 million in available cash held by

 

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the Company plus net proceeds from new bank loans at a LIBOR-based interest rate (subject to a floor of 1.75%) plus 4.25%, with such cash and bank loans totaling $500 million, $600 million, $700 million, $723 million, $800 million and $900 million, respectively, to fund a one-time special dividend of $7.84, $9.41, $10.98, $11.33, $12.55 and $14.12 per share of the Company’s common stock, respectively, or to fund cash tender offers for shares at prices of $36.00, $34.50, $33.00 per share of the Company’s common stock, respectively representing 20.0%, 15.0% and 10.0% premiums to a $30 stock price. Goldman Sachs then calculated the illustrative post-recapitalization trading value of shares of the Company’s common stock based upon a range of price to estimated 2011 earnings per share multiples of 7.9x to 9.9x and projected 2011 earnings per share of the Company utilizing the Company’s projections after giving effect to the incremental interest expense and fully diluted share count in each scenario. This analysis resulted in a range of illustrative post-recapitalization trading values of shares of the Company’s common stock of $30.87 to $40.51 utilizing the one-time share special dividend, $29.07 to $42.19 utilizing the $36.00 per share cash tender offer scenario, $29.41 to $43.31 utilizing the $34.50 per share cash tender offer scenario, and $29.79 to $44.61 utilizing the $33.00 per share cash tender offer scenario.

Other Analyses by Goldman Sachs for the Company

In addition to the Goldman Sachs Illustrative Analyses provided to Mr. Scully and Mr. Haselden, Goldman Sachs also provided analyses and, in certain cases, presented those analyses, as described below, to members of the Company’s management, as described below, on August 31, July 19, June 3, and May 20, 2010, and November 20, 2009, (together, the “Goldman Sachs Other Analyses”). The Goldman Sachs Other Analyses were based on information that was publicly available as of the dates of the respective analyses or was provided to Goldman Sachs in connection with their preparation of such analyses and on Goldman Sachs’ preliminary working assumptions at those times. Some or all of the Goldman Sachs Other Analyses included the following types of analyses: market performance analyses of the Company and as compared with its peers; share price analyses against the industry and the market and analyses of analysts’ commentary; analyses of changes in Company stockholders; current and possible capital structures of the Company and illustrative outcomes of possible capital structural changes; comparative analyses of potential acquirers’ strategic fit and ability to purchase the Company at various share prices; general considerations for the acquisition process including a comparison of recent transactions with “go shop” provisions; projected costs of capital at different bond rating levels; and recent merger and acquisition transactions in retail and other industries.

The preparation of financial analyses is a complex process and is not necessarily susceptible to summary description. Goldman Sachs also made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of TPG, Leonard Green and the Company. Goldman Sachs’s analyses were necessarily based on market, industry and other conditions as in effect on, and the information made available to Goldman Sachs as of, the dates of the respective analyses. Any estimates contained in the illustrative analyses performed by Goldman Sachs and described above are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than suggested by such analyses. In addition, analyses relating to the value of the Company do not purport to be appraisals or to reflect the prices at which the Company may actually be sold. Because such estimates are inherently subject to uncertainty, none of TPG VI, TPG, the Leonard Green Entities, Leonard Green, the Company, Goldman Sachs or any other person assumes responsibility for their accuracy.

The summaries set forth above do not purport to be a complete description of the illustrative analyses prepared by Goldman Sachs. Copies of the illustrative analyses prepared by Goldman Sachs are attached as exhibits (c)(11)-(17) to the statement on Schedule 13E-3 filed by the Company and the filing persons listed thereon with the SEC on January 20, 2011.

Goldman Sachs is a full service securities firm engaged, either directly or through its affiliates, in securities trading, investment management, financial planning and benefits counseling, financing and brokerage activities for both companies and individuals. In the ordinary course of their trading, investment management, financing and brokerage activities, Goldman Sachs and its affiliates may actively trade the debt and equity securities of the

 

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Company (or related derivative securities) for their own account and for the accounts of their customers and may at any time hold long and short positions of such securities.

Purposes and Reasons of TPG VI, the Leonard Green Entities, Parent, Merger Sub and the MD Parties for the Merger

Under a possible interpretation of the SEC rules governing “going-private” transactions, each of TPG VI, each of the Leonard Green Entities, Parent, Merger Sub and the MD Parties may be deemed to be affiliates of the Company and, therefore, required to express their reasons for the merger to the Company’s unaffiliated stockholders, as defined in Rule 13e-3 of the Exchange Act. TPG VI, the Leonard Green Entities, Parent, Merger Sub and the MD Parties are making the statements included in this section solely for the purpose of complying with the requirements of Rule 13e-3 and related rules under the Exchange Act. For TPG VI, the Leonard Green Entities, Parent, Merger Sub and the MD Parties, the purpose of the merger is to enable Parent to acquire control of the Company, in a transaction in which the unaffiliated stockholders will be cashed out for $43.50 per share, so Parent will bear the rewards and risks of the ownership of the Company after shares of Company common stock cease to be publicly traded. In addition, with respect to the MD Parties, the merger will allow the MD Parties to maintain a significant portion of their investment in the Company through their respective commitments to make an equity investment in Parent as described in this proxy statement under the section captioned “Special Factors—Financing of the Merger—Rollover Financing,” and at the same time enable Mr. Drexler to maintain a leadership role with the surviving corporation.

Positions of TPG VI, the Leonard Green Entities, Parent and Merger Sub Regarding the Fairness of the Merger

Under a possible interpretation of the SEC rules governing “going-private” transactions, each of TPG VI, each of the Leonard Green Entities, Parent and Merger Sub may be deemed to be affiliates of the Company and required to express their beliefs as to the fairness of the merger to the unaffiliated stockholders of the Company. TPG VI, the Leonard Green Entities, Parent and Merger Sub believe that the merger (which is the Rule 13e-3 transaction for which a Schedule 13E-3 Transaction Statement has been filed with the SEC) is fair to the Company’s unaffiliated stockholders on the basis of the factors described under “Special Factors—Recommendation of Our Board of Directors and Special Committee; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger” and the additional factors described below.

In this section and in the section captioned “Special Factors—Positions of the MD Parties Regarding the Fairness of the Merger,” we refer to the Company’s board of directors, other than Mr. Coulter, who is affiliated with TPG VI, Mr. Drexler, who has committed to contribute a portion of the shares of Company common stock owned by him and the MD Trusts to Parent in connection with the merger and after the merger will be an equity holder in Parent, and Ms. Reisman, who was unavailable to participate in the Board’s determination with respect to the merger agreement and the proposed merger as the “Board.” Each of Messrs. Coulter and Drexler recused himself from, and Ms. Reisman was not available to participate in, the deliberations and the Board’s determination with respect to the merger agreement and the proposed merger.

None of TPG VI or the Leonard Green Entities participated in the deliberations of the special committee or the Board regarding, or received advice from the Company’s legal advisor or the special committee’s legal or financial advisors as to, the fairness of the merger. Neither TPG VI nor the Leonard Green Entities has performed, or engaged a financial advisor to perform, any valuation or other analysis for the purposes of assessing the fairness of the merger to the Company’s unaffiliated stockholders. Based on these entities’ knowledge and analysis of available information regarding the Company, as well as discussions with members of the Company’s senior management regarding the Company and its business and the factors considered by, and the analysis and resulting conclusions of, the Board and the special committee discussed in this proxy statement in the sections entitled “Special Factors—Recommendation of Our Board of Directors and Special Committee; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger” (which analysis and

 

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resulting conclusions TPG VI and the Leonard Green Entities adopt), TPG VI and the Leonard Green Entities believe that the merger is substantively fair to the Company’s unaffiliated stockholders. In particular, TPG VI and the Leonard Green Entities considered the following:

 

   

other than their receipt of special committee fees (which are not contingent upon the consummation of the merger or the special committee’s recommendation of the merger) and their interests described under “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger,” no member of the special committee has a financial interest in the merger that is different from, or in addition to, the interests of the Company’s unaffiliated stockholders generally, although the merger agreement does include customary provisions for indemnity and the continuation of liability insurance for the Company’s officers and directors;

 

   

the special committee determined, by the unanimous vote of all members of the special committee, and the Board determined, by the unanimous vote of all members of the Board (other than Messrs. Coulter and Drexler who recused themselves from such determination and Ms. Reisman who was unavailable), that the merger is fair (both substantively and procedurally) to, and in the best interests of, the Company and its unaffiliated stockholders;

 

   

the per share price of $43.50 represents a 15.5% premium to the closing price of the Company’s stock on November 22, 2010 of $37.65;

 

   

the per share price of $43.50 represents a 29% premium over the Company’s average closing share price for the one-month period prior to and ending on November 22, 2010;

 

   

the per share price of $43.50 represents a valuation of the Company at an 8.6 multiple to the Company’s EBITDA for the period from November 1, 2009 through October 30, 2010; and

 

   

the merger will provide consideration to the Company’s stockholders entirely in cash, allowing the Company’s stockholders (other than the Rollover Investors and Parent Affiliates) to immediately realize a certain and fair value for all their shares of Company common stock.

TPG VI and the Leonard Green Entities did not establish, and did not consider, a pre-merger going concern value of the Company’s common stock as a public company for the purposes of determining the per share merger consideration or the fairness of the per share merger consideration to the unaffiliated stockholders because, following the merger, the Company will have a significantly different capital structure. However, to the extent the pre-merger going concern value was reflected in the pre-announcement per share price of the Company’s common stock, the per share merger consideration of $43.50 represented a premium to the going concern value of the Company. In addition, TPG VI and the Leonard Green Entities did not consider net book value because they believe that net book value, which is an accounting concept, does not reflect, or have any meaningful impact on, either the market trading prices of common stock or the Company’s value as a going concern. TPG VI and the Leonard Green Entities do note, however, that the per share merger consideration of $43.50 is higher than the net book value of the Company per diluted share of $7.72 as of October 30, 2010. TPG VI and the Leonard Green Entities did not consider liquidation value in determining the fairness of the merger to the unaffiliated stockholders because of their belief that liquidation sales generally result in proceeds substantially less than sales of a going concern, because of the impracticability of determining a liquidation value given the significant execution risk involved in any breakup, because they considered the Company to be a viable, going concern and because the Company will continue to operate its business following the merger.

TPG VI and the Leonard Green Entities believe that the merger is procedurally fair to the Company’s unaffiliated stockholders based upon the following factors:

 

   

the fact that, other than their receipt of Board and special committee fees (which are not contingent upon the consummation of the merger or the special committee’s or Board’s recommendation of the merger) and their interests described under “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger,” the special committee, consisting solely of directors who are

 

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not officers or employees of the Company and who are not affiliated with TPG VI, the Leonard Green Entities or the MD Parties, and who have no financial interest in the merger different from, or in addition to, the Company’s unaffiliated stockholders generally, was given exclusive authority to, among other things, review, evaluate and negotiate the terms of the proposed merger, to decide not to engage in the merger, and to consider alternatives to the merger;

 

   

the special committee’s independent financial advisor, Perella Weinberg, rendered an opinion to the special committee that, as of November 22, 2010, and based upon and subject to various assumptions made, matters considered and limitations described in the opinion, the $43.50 per share merger consideration to be received by holders of shares of the Company common stock (other than the Excluded Holders) in the merger was fair, from a financial point of view, to such holders;

 

   

$43.50 per share cash consideration and the other terms and conditions of the merger agreement resulted from extensive arm’s-length negotiations between Parent and its advisors, on the one hand, and the special committee and its advisors, on the other hand;

 

   

the Company’s ability during the go shop period to initiate, solicit and encourage alternative acquisition proposals from third parties and to enter into, engage in, and maintain discussions or negotiations with third parties with respect to such proposals;

 

   

the Company’s ability to continue discussions with such parties thereafter if such party submits an alternative acquisition proposal prior to 11:59 p.m., New York City time, on February 15, 2011 that the special committee determines in good faith prior to or as of February 15, 2011 constitutes a superior proposal (in each case, with the termination of the merger agreement in order to enter an agreement providing for such superior proposal by an excluded party resulting in the payment to Parent of the termination fee of $20 million);

 

   

the merger was approved by the special committee;

 

   

the affirmative vote of a majority of the outstanding shares of the Company common stock is required under Delaware law and under the merger agreement to adopt the merger agreement and that, in this regard, TPG, Leonard Green and their respective affiliates (excluding the MD Parties) do not own a significant enough interest, in the aggregate, in the shares of Company common stock to influence substantially the outcome of the stockholder vote;

 

   

the Company’s ability to terminate the merger agreement if stockholders do not adopt it, subject to paying an expense reimbursement of up to $5 million (equal to approximately .17% of the equity value of the transaction) and, in certain circumstances, a termination fee of $20 million (See “The Merger Agreement—Termination Fees and Reimbursement of Expenses” beginning on page 123); and

 

   

the availability of appraisal rights to the Company’s stockholders who comply with all of the required procedures under Delaware law for exercising appraisal rights, which allow such holders to seek appraisal of the fair value of their stock as determined by the Court of Chancery of the State of Delaware.

The foregoing discussion of the information and factors considered and given weight by TPG VI and the Leonard Green Entities in connection with the fairness of the merger agreement and the merger is not intended to be exhaustive but is believed to include all material factors considered by them. TPG VI and the Leonard Green Entities did not find it practicable to, and did not, quantify or otherwise attach relative weights to the foregoing factors in reaching their position as to the fairness of the merger agreement and the merger. Rather, TPG VI and Leonard Green Entities made the fairness determinations after considering all of the foregoing as a whole. TPG VI and the Leonard Green Entities believe these factors provide a reasonable basis upon which to form their belief that the merger is fair to the Company’s unaffiliated stockholders. This belief should not, however, be construed as a recommendation to any Company stockholder to adopt the merger agreement. TPG VI and the Leonard Green Entities do not make any recommendation as to how stockholders of the Company should vote their shares of Company common stock relating to the merger. In addition, TPG VI and the Leonard Green

 

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Entities agree with the analyses, determinations and conclusions of the Board and the special committee described under “Special Factors—Recommendation of Our Board of Directors and Special Committee; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger,” with respect to the reasons for undertaking the merger at this time, as compared with other times in the Company’s operating history, which analysis and resulting conclusions TPG VI and the Leonard Green Entities adopt.

Neither Parent nor Merger Sub participated in the deliberations of the special committee or the Board regarding, or received advice from the Company’s legal advisor or the special committee’s legal or financial advisors as to, the fairness of the merger to the Company’s unaffiliated stockholders. As entities jointly owned by TPG VI and the Leonard Green Entities, Parent and Merger Sub considered the same factors considered by, and adopted the analysis and resulting conclusions of, TPG VI and the Leonard Green Entities, as discussed above in this proxy statement. Based on the information and factors set forth in the foregoing discussion, as well as Parent and Merger Sub’s knowledge and analysis of available information regarding the Company, as well as discussions with members of the Company’s senior management regarding the Company and its business and the factors considered by, and the analysis and resulting conclusions of, the Board and the special committee discussed in this proxy statement in the sections entitled “Special Factors—Recommendation of Our Board of Directors and Special Committee; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger,” Parent and Merger Sub believe that the merger is fair to the Company’s unaffiliated stockholders.

Parent and Merger Sub believe that these factors provide a reasonable basis for their belief that the merger is fair to the Company’s unaffiliated stockholders. This belief should not, however, be construed as a recommendation to any the Company stockholder to adopt the merger agreement. Parent and Merger Sub do not make any recommendation as to how stockholders of the Company should vote their shares of Company common stock relating to the merger. Parent and Merger Sub attempted to negotiate the terms of a transaction that would be most favorable to them, and not to the stockholders of the Company, and, accordingly, did not negotiate the merger agreement with a goal of obtaining terms that were fair to such stockholders. None of TPG VI, the Leonard Green Entities, Parent or Merger Sub believes that it has or had any fiduciary duty to the Company or its stockholders, including with respect to the merger and its terms.

Positions of the MD Parties Regarding the Fairness of the Merger

Under the SEC rules governing “going-private” transactions, each of the MD Parties may be deemed to be affiliates of the Company and required to express their beliefs as to the fairness of the merger to the unaffiliated stockholders of the Company. As described below, each of the MD Parties believes that the merger (which is the Rule 13e-3 transaction for which a Schedule 13E-3 Transaction Statement has been filed with the SEC) is fair to the Company’s unaffiliated stockholders on the basis of the factors described under “Special Factors—Recommendation of Our Board of Directors and Special Committee; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger, —Opinion of Perella Weinberg, Financial Advisor to the Special Committee, —Positions of TPG VI, the Leonard Green Entities, Parent and Merger Sub Regarding the Fairness of the Merger.” None of the MD Parties participated in the deliberations of the special committee or the Board regarding, or received advice from the Company’s legal or financial advisor as to, the fairness of the merger. As disclosed under “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger,” the MD Parties have interests in the merger both the same as those of the unaffiliated stockholders of the Company by virtue of the receipt of the per share merger consideration for a portion of the MD Parties’ equity interests in the Company upon completion of the merger, and different from those of the unaffiliated stockholders of the Company by virtue of the MD Parties’ contribution to Parent of shares of Company common stock and Mr. Drexler’s expectation of a continuing leadership role in the surviving corporation.

The unaffiliated stockholders of the Company were represented by the special committee, which negotiated the terms and conditions of the merger agreement on their behalf, with the assistance of the special committee’s financial and legal advisors. Accordingly, none of the MD Parties has performed, or engaged a financial advisor to perform, any independent valuation or other analysis for the purpose of assessing the fairness of the merger to

 

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the Company’s unaffiliated stockholders. The MD Parties believe, however, that the merger is substantively and procedurally fair to the unaffiliated stockholders of the Company based upon substantially the same factors considered (including, among other factors considered by the MD Parties, the analysis and resulting conclusions of the Board and the special committee discussed in this proxy statement in the section entitled “Special Factors—Recommendation of Our Board of Directors and Special Committee; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger,” which analysis and resulting conclusions the MD Parties adopt) and not considered (including the going concern value of the Company’s common stock as a public company, net book value and liquidation value, among other factors not considered by TPG VI and the Leonard Green Entities), by TPG VI and the Leonard Green Entities with respect to the substantive and procedural fairness of the proposed merger to such unaffiliated stockholders. See “Special Factors—Positions of TPG VI, the Leonard Green Entities, Parent and Merger Sub Regarding the Fairness of the Merger.” The MD Parties agree with the analyses, determinations and conclusions of the special committee described under “Special Factors—Recommendation of Our Board of Directors and Special Committee; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger,” based on the reasonableness of these analyses, determinations and conclusions, which the MD Parties adopt. In addition, the MD Parties agree with the analyses, determinations and conclusions of the Board and the special committee described under “Special Factors—Recommendation of Our Board of Directors and Special Committee; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger,” with respect to the reasons for undertaking the merger at this time, as compared with other times, in the Company’s operating history, which analysis and resulting conclusions the MD Parties adopt.

While Mr. Drexler is an officer and director of the Company, because of his participation in the transaction as described under the section captioned “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger,” he did not serve on the special committee, nor did he participate in, or vote in connection with, the special committee’s evaluation of the merger agreement and the merger or of the Board’s evaluation or approval of the merger agreement and the merger. For these reasons, Mr. Drexler does not believe that his or any other MD Party’s interests in the merger influenced the decision of the special committee or the Board with respect to the merger agreement or the merger.

The foregoing discussion of the information and factors considered and given weight by the MD Parties in connection with the fairness of the merger agreement and the merger is not intended to be exhaustive but is believed to include all material factors considered by them. The MD Parties did not find it practicable to, and did not, quantify or otherwise attach relative weights to the foregoing factors in reaching their position as to the fairness of the merger agreement and the merger. Rather, the MD Parties made the fairness determinations after considering all of the foregoing as a whole. The MD Parties believe these factors provide a reasonable basis upon which to form their belief that the merger is fair to the Company’s unaffiliated stockholders. This belief should not, however, be construed as a recommendation to any Company stockholder to adopt the merger agreement. The MD Parties do not make any recommendation as to how stockholders of the Company should vote their shares of Company common stock relating to the merger.

Analysis of Goldman Sachs, Financial Advisor to Parent

TPG initially identified Goldman Sachs as a potential source of debt financing for a potential transaction involving the Company based on Goldman Sachs’s qualifications, expertise and reputation as a provider of debt financing and ancillary financial advisory services. Goldman Sachs is not serving, and has not served, in a financial advisory capacity to Leonard Green or the Leonard Green Entities in connection with this transaction. The Investment Banking division of Goldman Sachs will receive upon consummation of this transaction aggregate fees of approximately $30 million for its financial advisory and financing services to TPG and its affiliates in connection with this transaction. During the past two years, in connection with unrelated matters, the Investment Banking division of Goldman Sachs has received aggregate fees of approximately $150 million for its investment banking services for TPG and its affiliates and affiliated portfolio companies (including instances where such affiliated portfolio companies, and not necessarily TPG, determined to retain and compensated Goldman Sachs).

 

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In light of the limited nature of the advisory role of Goldman Sachs, TPG did not intend to rely on analyses produced by Goldman Sachs, but did from time to time meet with Goldman Sachs to discuss the transaction. On a conference call on October 4, 2010 with senior executives of TPG, Goldman Sachs provided certain financial analyses to TPG regarding such potential transaction (the “Goldman Sachs Preliminary Analyses”). Goldman Sachs was not requested to, and did not, render an opinion with respect to the fairness of the consideration to be paid pursuant to the merger. The following is a summary of the Goldman Sachs Preliminary Analyses.

In connection with preparing the Goldman Sachs Preliminary Analyses and performing its related financial analyses, Goldman Sachs reviewed, among other things:

 

   

certain publicly available business and financial information relating to the Company and certain other companies believed by Goldman Sachs to be generally relevant;

 

   

income statement items from the Company’s September target model, including revised fiscal year 2010 figures based on certain of TPG’s then-current reactions to the Company’s September target model and certain other estimated information relating to the Company (the “Adjusted September target model”); and

 

   

then-current forecasts for the Company prepared by TPG based on the Company’s September target model (“TPG’s Preliminary Forecast”).

The Company’s September target model, including the income statement information therein reviewed by Goldman Sachs in preparation for the Goldman Sachs Preliminary Analyses, was later superseded by the October five year projections and the November five year projections. None of Parent, TPG, TPG VI, Leonard Green or the Leonard Green Entities relied on any of the analyses utilizing the Adjusted September target model contained in the Goldman Sachs Preliminary Analyses given that the Company’s September target model and the Adjusted September target model (i) reflected a targeted growth in EBITDA from fiscal year 2010 to fiscal year 2013 that, if achieved, would be nearly double the Company’s EBITDA growth from fiscal year 2007 to fiscal year 2010, on an absolute dollar basis, (ii) reflected sales, margin, expense and capital expenditure targets that supported the target growth level, without necessarily addressing the feasibility of the targets contained therein and (iii) did not reflect the weakening in the Company’s performance that began late in the second quarter of 2010. None of the Company, the special committee or Perella Weinberg were provided a copy of TPG’s Preliminary Forecast until after the merger agreement was executed on November 23, 2010 (and so necessarily did not rely on TPG’s Preliminary Forecast), and none of TPG, TPG VI, Leonard Green, the Leonard Green Entities, Parent, Merger Sub or the Rollover Investors relied on TPG’s Preliminary Forecast given that such forecast was based on the September target model. Additionally, the November five year projections were used by Perella Weinberg in the presentation described under “Special Factors—Opinion of Perella Weinberg, Financial Advisor to the Special Committee” and, together with the financial advice and financial analyses of Perella Weinberg, were used by the special committee and the Board in considering whether to approve and recommend the merger.

                  Goldman Sachs relied upon and assumed, without assuming any responsibility for independent verification, the accuracy and completeness of all of the financial, accounting, legal, tax and other information provided to, discussed with or reviewed by it and assumed such accuracy and completeness for purposes of preparing the Goldman Sachs Preliminary Analyses. In addition, Goldman Sachs did not make an independent evaluation or appraisal of the assets and liabilities (including any contingent, derivative or off-balance-sheet assets and liabilities) of the Company or any of its subsidiaries and Goldman Sachs was not furnished with any such evaluation or appraisal.

The order of the analyses described and the results of these analyses do not represent relative importance or weight given to those analyses by Goldman Sachs. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before September 30, 2010, did not take into account the more current financial information and other methodologies and factors reflected in the October five year projections or the November five year projections and is not necessarily indicative of current market conditions.

 

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Historical Stock Trading Analysis

Goldman Sachs reviewed the historical trading prices for shares of the Company’s common stock for the period since the Company’s initial public offering in June 2006 and for the period since January 1, 2010. In addition, Goldman Sachs reviewed the historical trading prices for shares of the Company’s common stock for the 52-week period ended September 30, 2010. In that period, the Company’s common stock closing price ranged between $30.23 and $50.00 per share.

Analyst Price Target Analysis

As of September 30, 2010, Goldman Sachs reviewed and analyzed the most recent publicly available research analyst price targets for shares of the Company’s common stock prepared and published by 16 selected equity research analysts prior to September 30, 2010. Goldman Sachs noted that the range, excluding two outliers above the range of other analyst price targets, of recent equity analyst price targets for shares of the Company’s common stock prior to September 30, 2010 was $28.00 to $42.00 per share.

The public market trading price targets published by equity research analysts do not necessarily reflect current market trading prices for shares of the Company’s common stock and these estimates are subject to uncertainties, including the future financial performance of the Company and future financial market conditions. Furthermore, the public market trading price targets published by equity research analysts typically represent price targets to be achieved over a six to twelve month period.

Selected Companies Analysis

Goldman Sachs reviewed and compared certain financial information for the Company to corresponding financial information, ratios and public market multiples for the following specialty retail apparel companies: Abercrombie & Fitch Co.; Aéropostale, Inc.; American Eagle Outfitters, Inc.; AnnTaylor Stores Corporation; The Buckle, Inc.; Coach, Inc.; The Gap, Inc.; Guess?, Inc.; Limited Brands, Inc.; lululemon athletica inc.; Polo Ralph Lauren Corporation; rue21, Inc.; and Urban Outfitters, Inc..

Although none of the selected companies is directly comparable to the Company, the companies included were chosen because they are publicly traded companies with operations that, for purposes of analysis, may be considered similar to certain operations of the Company.

Goldman Sachs calculated and compared various financial multiples and ratios based on recent financial data it obtained from SEC filings, other public sources and I/B/E/S estimates. I/B/E/S compiles forward-looking financial estimates made by equity research analysts for U.S. publicly traded companies.

In particular, with respect to the selected companies, Goldman Sachs calculated the following ratios and applied them to certain financial targets set forth in the Adjusted September target model and certain financial projections set forth in TPG’s Preliminary Forecast to determine implied prices for the Company’s common stock:

 

   

enterprise value as a multiple of projected fiscal year 2010 EBITDA, or EV/2010 EBITDA; and

 

   

share price to projected fiscal year 2011 earnings per share, or 2011 P/E, using the closing price as of September 30, 2010.

The range of EV/2010 EBITDA multiples for the selected companies was 4.0x to 18.1x, with the median being 6.6x. Based on this analysis, Goldman Sachs applied a range of EV/2010 EBITDA multiples of 5.0x to 9.0x to the Company’s projected fiscal year 2010 EBITDA. This analysis resulted in a range of implied prices per share of Company’s common stock equal to $27.00 to $44.00 utilizing TPG’s Preliminary Forecast (which projected fiscal year 2010 EBITDA of $293 million) and equal to $28.00 to $46.00 utilizing the Adjusted September target model (which projected fiscal year 2010 EBITDA of $303 million). The range of 2011 P/E

 

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multiples for the selected companies was 8.2x to 30.4x, with the median being 14.7x. Based on this analysis, Goldman Sachs applied a range of 2011 P/E multiples of 12.0x to 18.0x to the Company’s estimated fiscal year 2011 earnings per share. This analysis resulted in a range of implied prices per share of Company’s common stock equal to $29.00 to $44.00 utilizing TPG’s Preliminary Forecast and equal to $36.00 to $54.00 utilizing the Adjusted September target model.

Present Value of Future Stock Price Analysis

Goldman Sachs performed illustrative analyses of the implied present values of the future stock price of the Company, which are designed to provide an indication of the present value of a theoretical future value of a company’s equity as a function of such company’s estimated future earnings per share and its assumed price to future earnings multiple. In this analysis, Goldman Sachs applied a range of price to forward earnings multiples of 11.0x to 15.0x to projected earnings per share of the Company’s fiscal years 2010 to 2014 and projected earnings per share of the Company for fiscal years 2010 to 2014 utilizing TPG’s Preliminary Forecast (which projected earnings per share of $2.19, $2.45, $2.79, $3.15 and $3.52, in each respective fiscal year) and the Adjusted September target model (which projected earnings per share of $2.27, $3.02, $3.67, $4.44 and $5.32, in each respective fiscal year), respectively. Goldman Sachs then discounted those values using a discount rate of 15.0%, reflecting an estimate of the Company’s cost of equity. The analysis resulted in a range of implied present values per share of the Company’s common stock of $24.60 to $36.76 utilizing TPG’s Preliminary Forecast and $33.23 to $54.53 utilizing the Adjusted September target model.

Discounted Cash Flow Analysis

Goldman Sachs performed illustrative discounted cash flow analyses to determine a range of implied present values per share of the Company’s common stock. Goldman Sachs performed the analysis utilizing TPG’s Preliminary Forecast, TPG’s Preliminary Forecast sensitized to apply a range of (2.0)% to 2.0% change in the annual sales growth assumptions and a range of (2.0)% to 2.0% change in EBITDA margin assumption contained in TPG’s Preliminary Forecast, the Adjusted September target model and the Adjusted September target model sensitized to apply a range of (4.0)% to 0.0% change in the annual sales growth assumptions and a range of (4.0)% to 0.0% change in EBITDA margin assumption contained in the Adjusted September target model, respectively. All figures purporting to show cash flows were discounted to January 1, 2011, and terminal values were calculated utilizing perpetuity growth rates ranging from 3.0% to 5.0%. Goldman Sachs applied discount rates ranging from 13.0% to 15.0%, reflecting estimates of the weighted average cost of capital of the Company. This analysis resulted in a range of implied present values per share of the Company’s common stock of $32.76 to $43.90 utilizing TPG’s Preliminary Forecast (which projected fiscal year 2010-15 (x) EBITDA of $293 million, $327 million, $369 million $412 million, $455 million and $500 million, respectively, (y) capital expenditures of $52 million, $75 million, $85 million, $59 million, $58 million and $65 million, respectively and (z) total free cash flow of $146 million, $139 million, $164 million, $216 million, $242 million and $262 million, respectively), $31.25 to $43.99 utilizing TPG’s Preliminary Forecast sensitized as described above, $49.70 to $68.54 utilizing the Adjusted September target model (which projected fiscal year 2010-15 (x) EBITDA of $303 million, $394 million, $474 million, $567 million, $672 million and $793 million, respectively, (y) capital expenditures of $52 million, $54 million, $59 million, $59 million, $58 million and $65 million, respectively and (z) total free cash flow of $152 million, $193 million, $269 million, $326 million, $392 million and $452 million, respectively), and $41.45 to $57.25 utilizing the Adjusted September target model sensitized as described above.

Recapitalization Analysis

Goldman Sachs analyzed certain illustrative recapitalization transactions involving the Company and the theoretical value the Company’s stockholders could receive in such transactions. In this illustrative recapitalization analysis, Goldman Sachs assumed that the Company used $250 million in available cash held by the Company plus net proceeds from new bank loans at a LIBOR-based interest rate (subject to a floor of 1.75%) plus 4.25%, resulting in total repurchase amounts of $250 million, $400 million, $500 million and $600 million,

 

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respectively, to fund a cash tender offer for shares at prices of $35.30, $36.98, $36.98 and $38.66, respectively, per share of the Company’s common stock. Goldman Sachs then calculated the illustrative post-recapitalization trading value of shares of the Company’s common stock not purchased in a tender offer based upon a range of price to projected 2011 earnings per share multiples of 11.0x to 13.0x and projected 2011 earnings per share of the Company utilizing TPG’s Preliminary Forecast and the Adjusted September target model, respectively, after giving effect to the incremental interest expense and post-recapitalization fully diluted share count in each scenario. This analysis resulted in a range of illustrative post-recapitalization trading values of shares of the Company’s common stock of $29.99 to $38.22 per share of the Company’s common stock utilizing TPG’s Preliminary Forecast and $37.01 to $48.12 per share of the Company’s common stock utilizing the Adjusted September target model.

Leveraged Buyout Analysis

Goldman Sachs performed an illustrative analysis of the range of the price per share of the Company’s common stock that an acquirer theoretically would pay to acquire the Company in a leveraged buyout transaction that closed at the end of 2010. Goldman Sachs performed the analysis utilizing TPG’s Preliminary Forecast which assumed cash held by the Company of $375 million, bank debt of $1.1 billion at a LIBOR-based interest rate (subject to a floor of 1.75%) plus 4.50%, and senior notes totaling $485 million at an interest rate of 9.5%, TPG’s Preliminary Forecast sensitized to apply a range of (2.0)% to 2.0% change in the annual sales growth assumptions and (2.0)% to 2.0% change in EBITDA margin assumption contained in TPG’s Preliminary Forecast, the Adjusted September target model which assumed cash held by the Company of $375 million, bank debt of $1.1 billion at a LIBOR-based interest rate (subject to a floor of 1.75%) plus 4.50%, and senior notes totaling $545 million at an interest rate of 9.5%, and the Adjusted September target model sensitized to apply a range of (4.0)% to 0.0% change in the annual sales growth assumptions and (4.0)% to 0.0% change in EBITDA margin assumption contained in the Adjusted September target model, respectively. Except as noted below, the analysis also assumed that the acquirer resells the Company at the end of fiscal year 2015 at an exit price equal to 7.5x to 9.5x estimated 2015 EBITDA and assumed an acquirer targeted internal rate of return on equity of 25.0%. This analysis resulted in a range of implied values per share of the Company’s common stock of $39.00 to $44.00 utilizing TPG’s Preliminary Forecast, (which projected fiscal year 2015 EBITDA of $500 million), $40.82 to $50.31 utilizing TPG’s Preliminary Forecast sensitized as described above and using an exit price equal to 8.5x estimated 2015 EBITDA and an internal rate of return on equity of 20%, $53.00 to $60.00 utilizing the Adjusted September target model (which projected fiscal year 2015 EBITDA of $793 million), and $46.89 to $56.45 utilizing the Adjusted September target model sensitized as described above and using an exit price equal to 8.5x estimated 2015 EBITDA and an internal rate of return on equity of 25%.

Illustrative Premiums Paid Analysis

Goldman Sachs analyzed the premiums paid in 100% cash acquisitions of publicly traded companies in the United States from January 2001 to October 2010 with transaction values larger than $1 billion. For each year, based on publicly available information, Goldman Sachs calculated the median premiums of the price paid in the transactions to the target company’s closing stock price one day prior to the announcement of the transaction. This analysis indicated median premiums paid of: 40.3% for 2001; 43.8% for 2002; 25.4% for 2003; 27.8% for 2004; 26.5% for 2005; 25.0% for 2006; 22.7% for 2007; 31.1% for 2008; 37.8% for 2009; and 37.8% for 2010. Based on this analysis, Goldman Sachs applied a range of illustrative premiums of 25% to 35% to the closing price per share of the Company’s common stock on September 30, 2010. This analysis resulted in a range of implied values between $42.00 to $45.00 per share of the Company’s common stock.

Selected Transactions Analysis

Goldman Sachs reviewed the financial terms of selected recent business combinations in the specialty retail industry, calculating and comparing for each of the selected transactions the enterprise value of the target company as a multiple of the target company’s LTM EBITDA, calculated based on public information. The

 

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transactions reviewed were: Dress Barn/Tween Brands; Golden Gate Capital/Eddie Bauer; Advent/Charlotte Russe; Apax/Tommy Hilfiger; PVH/Tommy Hilfiger; Bain/Burlington Coat Factory; Payless/Stride Rite; Limited/La Senza; Sun Capital and Golden Gate Capital/Eddie Bauer; M1 Group/Facconable. The range of enterprise value to LTM EBITDA multiples for the transactions reviewed was 5.6x to 13.8x and the median was 10.2x. Based on this analysis, Goldman Sachs applied a range of multiples of enterprise value to LTM EBITDA of 7.0x to 11.0x to the LTM EBITDA of the Company. The analysis resulted in a range of implied values of $36.00 to $53.00 per share of the Company’s common stock utilizing TPG’s Preliminary Forecast and $37.00 to $55.00 per share of the Company’s common stock utilizing the Adjusted September target model.

In addition to the Goldman Sachs Preliminary Analyses provided to TPG on October 4, 2010 that is described above, Goldman Sachs also prepared and provided an illustrative analysis to TPG on September 27, 2010. This illustrative analysis was a preliminary draft of and substantially similar to the Goldman Sachs Preliminary Analyses.

The preparation of financial analyses is a complex process and is not necessarily susceptible to summary description. No company used in the above analyses as a comparison is directly comparable to the Company, and no transaction used is directly comparable to the transactions contemplated by the merger agreement.

Goldman Sachs also made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of TPG and the Company. Goldman Sachs’s analyses were necessarily based on market, industry and other conditions as in effect on, and the information made available to Goldman Sachs as of, the date of the such analyses. Any estimates contained in the analyses performed by Goldman Sachs and described above are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than suggested by such analyses. The analyses prepared by Goldman Sachs were based upon the Adjusted September target model, which TPG believed to be goal-oriented and aspirational in nature and which did not reflect the weakening in the Company’s performance that began late in the second quarter of 2010. The November five year projections were used by Perella Weinberg in the presentation described under “Special Factors—Opinion of Perella Weinberg, Financial Advisor to the Special Committee” and, together with the financial advice and financial analyses of Perella Weinberg, were used by the special committee and the Board in considering whether to approve and recommend the merger. In addition, analyses relating to the value of the Company do not purport to be appraisals or to reflect the prices at which the Company may actually be sold. Because such estimates are inherently subject to uncertainty, neither TPG VI, TPG, the Company, Goldman Sachs nor any other person assumes responsibility for their accuracy.

Goldman Sachs prepared the analyses in an advisory role supplemental to its capacity as a potential debt financing source to TPG for the information and assistance of TPG in connection with its preliminary consideration of a possible transaction involving the Company, though, as described above, none of Parent, TPG, TPG VI, Leonard Green or Leonard Green Entities relied on any of the analyses utilizing the Adjusted September target model contained in the Goldman Sachs Preliminary Analyses. Goldman Sachs did not make, and its financial analyses do not constitute, a recommendation to the Board or a recommendation as to how any shareholder of the Company should vote with respect to the merger or any other matter. The analyses of Goldman Sachs should not be viewed as material to the decisions of Parent, TPG, TPG VI, Leonard Green or the Leonard Green Entities to enter into the merger agreement.

The summary set forth above does not purport to be a complete description of the analyses prepared by Goldman Sachs. A copy of the Goldman Sachs Preliminary Analyses is attached as exhibit (c)(3) to the statement on Schedule 13E-3 filed by the Company and the filing persons listed thereon with the SEC on December 29, 2010. A copy of the financial analyses prepared by Goldman Sachs on September 27, 2010 is attached as exhibit (c)(18) to the statement on Schedule 13E-3 filed by the Company and the filing persons listed thereon with the SEC on January 20, 2011.

 

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Goldman Sachs is a full service securities firm engaged, either directly or through its affiliates, in securities trading, investment management, financial planning and benefits counseling, financing and brokerage activities for both companies and individuals. In the ordinary course of their trading, investment management, financing and brokerage activities, Goldman Sachs and its affiliates may actively trade the debt and equity securities of the Company (or related derivative securities) for their own account and for the accounts of their customers and may at any time hold long and short positions of such securities.

Certain Effects of the Merger

If the merger is completed, all of our equity interests will be owned by Parent. Except for the Rollover Investors and any members of our management term who may have the opportunity to invest in Parent and who choose to make this investment, through their interest in Parent, none of our current stockholders will have any ownership interest in, or be a stockholder of, the Company after the completion of the merger. As a result, our current stockholders (other than the Rollover Investors and any members of our management term who may have the opportunity to invest in Parent and who choose to make this investment) will no longer benefit from any increase in our value, nor will they bear the risk of any decrease in our value. Following the merger, Parent will benefit from any increase in our value and also will bear the risk of any decrease in our value.

Upon completion of the merger, each share of Company common stock issued and outstanding immediately prior to the closing (other than treasury shares owned by the Company, shares owned by Parent Affiliates, including shares contributed to Parent by the Rollover Investors and any members of our management team who may have the opportunity to invest in Parent and who choose to make this investment prior to the closing, and shares owned by stockholders who have exercised, perfected and not withdrawn a demand for, or lost the right to, appraisal rights under the DGCL) will convert into the right to receive the per share merger consideration.

Except as otherwise agreed by Parent and a holder of an outstanding option to purchase a share of Company common stock (other than statutory options granted under the ESPP (as defined below)) (each, a “Stock Option”), immediately prior to the effective time each outstanding Stock Option (whether vested or unvested) will fully vest contingent on the occurrence of the closing of the merger and will be canceled as of the effective time of the merger and converted into the right to receive, within three business days after the completion of the merger, an amount in cash equal to the excess, if any, of the per share merger consideration ($43.50) over the exercise price per share of such Stock Option, without interest and less any required withholding taxes. See “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger—Treatment of Outstanding Stock Options” beginning on page 81; “Merger Agreement—Treatment of Common Stock, Options, Restricted Shares and Other Equity Awards” beginning on page 107.

Except as otherwise agreed by Parent and a holder of an outstanding share of Company common stock that is subject to vesting or forfeiture conditions (whether time-based or performance-based) (each, a “Restricted Share”), immediately prior to the effective time each outstanding Restricted Share will become fully vested immediately prior to and contingent on the occurrence of closing of the merger. Upon closing, each Restricted Share will be treated as a share of Company common stock and as such will be entitled to receive the per share merger consideration ($43.50), without interest and less applicable withholding taxes. See “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger—Treatment of Restricted Shares” beginning on page 82; Merger Agreement—Treatment of Common Stock, Options, Restricted Shares and Other Equity Awards” beginning on page 107.

Following the merger, shares of Company common stock will no longer be traded on The New York Stock Exchange or any other public market.

Our common stock is registered as a class of equity security under the Exchange Act. Registration of our common stock under the Exchange Act may be terminated upon the Company’s application to the SEC if our common stock is not listed on a national securities exchange and there are fewer than 300 record holders of the

 

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outstanding shares. Termination of registration of our common stock under the Exchange Act will substantially reduce the information required to be furnished by the Company to our stockholders and the SEC, and would make certain provisions of the Exchange Act, such as the short-swing trading provisions of Section 16(b) of the Exchange Act and the requirement of furnishing a proxy statement in connection with stockholders’ meetings pursuant to Section 14(a) of the Exchange Act, no longer applicable to the Company. If the Company (as the entity surviving the merger) completed a registered exchange or public offering of debt securities, however, we would be required to file periodic reports with the SEC under the Exchange Act for a period of time following that transaction.

Parent and Merger Sub expect that following completion of the merger, our operations will be conducted substantially as they are currently being conducted. However, following completion of the merger, the Company will have significantly more debt than it currently has. Parent and Merger Sub have informed us that they have no current plans or proposals or negotiations which relate to or would result in an extraordinary corporate transaction involving our corporate structure, business or management, such as a merger, reorganization, liquidation, relocation of any operations, or sale or transfer of a material amount of assets except as described in this proxy statement. Parent may initiate from time to time reviews of the Company and our assets, corporate structure, capitalization, operations, properties, management and personnel to determine what changes, if any, would be desirable following the merger. Parent expressly reserves the right to make any changes that it deems necessary or appropriate in the light of its review or in the light of future developments.

Parent does not currently own any interest in the Company. Following consummation of the merger, Parent will directly or indirectly own 100% of our outstanding common stock and will have a corresponding interest in our net book value and net earnings. Our net income for the fiscal year ended January 30, 2010 was approximately $123.4 million and our net book value as of January 30, 2010 was approximately $375.9 million.

TPG VI, GEI V and GEI Side V agreed to contribute $845.0 million, $216.9 million and $65.1 million, respectively, to Parent, subject to TPG VI’s, GEI V’s and GEI Side V’s respective equity commitment being reduced by any amounts actually contributed to Parent (and not returned) at or prior to the effective time by persons or entities to which TPG VI, GEI V or GEI Side V allocates all or a portion of its equity commitment for the purpose of funding a portion of the per share merger consideration, any other amounts required to be paid pursuant to the merger agreement and related fees and expenses pursuant to the merger agreement. In addition, the MD Parties have agreed to contribute 2,287,545 shares of Company common stock to Parent (the equivalent of an approximately $99.5 million investment based upon the per share merger consideration of $43.50) immediately prior to the merger in exchange for equity interests of Parent.

Each stockholder of Parent will have an interest in our net book value and net earnings in proportion to such stockholder’s ownership interest in Parent.

The table below sets forth the interests in our voting shares and the interest in our net book value and net earnings for TPG VI, the Leonard Green Entities, the MD Parties and Parent before and after the merger, based on our historical net book value as of January 30, 2010 of $375.9 million and our historical net earnings for the year ended January 30, 2010 of $123.4 million. All dollar figures are in the thousands and rounded to the nearest dollar amount.

 

     Ownership of the Company Prior to the
Merger
     Fully Diluted Ownership of the Company
After the Merger(1)
 
     %
Ownership
    Net earnings
for the fiscal
year ended
January 30,
2010
     Net book
value as of
January 30,
2010
     %
Ownership
    Net earnings
for the fiscal
year ended
January 30,
2010
     Net book
value as of
January 30,
2010
 

TPG VI(2)(4)

     0   $ 0       $ 0         0   $ 0       $ 0   

Leonard Green Entities(2)

     0        0         0         0        0         0   

MD Parties(3)

     11.8        14,556         44,354         0        0         0   

Parent(6)

     0        0         0         100.0        123,360         375,878   

Total

     11.8   $ 14,556       $ 44,354         100.0   $ 123,360       $ 375,878   

 

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     Fully Diluted Ownership of Parent After the  Merger(1)(2)(5)  
     %
Ownership
of Class L
Common
Stock
    %
Ownership
of Class A
Common
Stock
    Net earnings
for the fiscal
year ended
January 30,
2010
     Net book
value as of
January 30,
2010
 

TPG VI(2)(4)

     67.2     67.2   $ 82,872       $ 252,511   

Leonard Green Entities(2)

     25.0        25.0        30,817         93,895   

MD Parties(3)

     7.8        7.8        9,672         29,472   

Total

     100.0 %(4)      100.0 %(4)    $ 123,360       $ 375,878   

 

(1) Interest in net earnings and net book value of the Company after the merger does not take into account the effect of the transaction (other than the change in ownership percentage) and does not take into account any additional debt that may be incurred by the Company or any resulting interest expense, which would have the effect of decreasing net earnings and net book value of the Company after the merger.
(2) Following the merger, (i) Parent will directly or indirectly own 100% of the capital stock of the Company, (ii) TPG VI will own approximately 67.2% of Parent, (iii) GEI V will own approximately 19.2% of Parent and GEI Side V will own approximately 5.8% of Parent and (iv) the MD Parties will own approximately 7.8% of Parent. These ownership percentages are subject to change as a result of each of TPG VI’s, GEI V’s and GEI Side V’s respective equity commitment being reduced by any amounts actually contributed to Parent (and not returned) at or prior to the effective date of the merger by persons or entities to which TPG VI, GEI V or GEI Side V allocates all or a portion of its equity commitment for the purpose of funding a portion of the per share merger consideration, any other amounts required to be paid pursuant to the merger agreement and related fees and expenses pursuant to the merger agreement.
(3) The aggregate number of shares of Company common stock beneficially owned by the MD Parties as of January 21, 2011, the record date, includes (i) 4,100,019 shares that may be acquired pursuant to stock options that are exercisable within 60 days of January 21, 2011, (ii) 30,000 unvested shares of restricted stock, which shares will vest on April 15, 2011 or immediately prior to completion of the merger, if earlier, (iii) 1,662,818 shares owned by The Drexler Family Revocable Trust, for which Mr. Drexler is a trustee, (iv) 874,500 shares owned by The Millard S. Drexler 2009 Grantor Retained Annuity Trust #1, for which Mr. Drexler is a trustee, (v) 864,000 shares owned by The Millard S. Drexler 2009 Grantor Retained Annuity Trust #2, for which Mr. Drexler is a trustee, (vi) 7,113 shares owned by the 2008 Family Trust FBO AD, for which Peggy Fishman Drexler, Mr. Drexler’s wife, is the sole trustee and (vii) 7,114 shares owned by the 2008 Family Trust FBO KD, for which Mrs. Drexler is the sole trustee. The aggregate share ownership percentage of the MD Parties prior to the merger is based on the 63,907,720 shares outstanding as of the record date.
(4) Certain members of our management team may have the opportunity to invest in Parent at or prior to the closing. At the date of this proxy statement, we do not know which members of our management will choose to make this investment because the special committee has not yet permitted Parent and its affiliates to present any such opportunity to, or discuss any such opportunity with, our management. As a result, the ownership reflected in the table above is subject to change as a result of amounts that may be invested in Parent by members of our management team and TPG VI’s, the Leonard Green Entities’ and/or the MD Parties’ equity or rollover commitment, as applicable, being reduced by amounts invested by members of our management team.
(5)

It is currently contemplated that there will be two series of common stock of Parent: Class A and Class L. TPG VI, the Leonard Green Entities, each Rollover Investor and each member of our management team who has an opportunity to invest in Parent and chooses to make such investment at or prior to closing (see note 4 above) will receive the same proportion of Class A and Class L common stock of Parent in connection with their investment into Parent. It is currently contemplated that approximately one third of each such person or entity’s investment will be used to purchase Class L common stock of Parent and approximately two thirds of each such person or entity’s investment will be used to purchase Class A common stock of Parent. Additionally, there will be a new management incentive plan under which shares of Class A common stock are currently expected to be reserved for issuance as described in the section entitled “Special FactorsInterests of the Company’s Directors and Executive Officers in the MergerNew Management Incentive Plan and Management Co-Investment Opportunities.

(6) Following the merger, Parent will directly or indirectly own 100% of the capital stock of the Company.

 

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Alternatives to Merger

The Board did not independently determine to initiate a process for the sale of the Company. As noted above, the special committee was formed on October 15, 2010 and was mandated on October 22, 2010, in response to receipt of a preliminary indication of interest from representatives of TPG. However, following receipt of the proposal from TPG and Leonard Green on November 9, 2010, the special committee determined the price offered by TPG and Leonard Green represented an attractive valuation for stockholders, as a result of which the special committee determined that the proposal merited further consideration. As further noted above, while exploring the proposal the special committee considered the potential benefits to the Company and its stockholders of possible alternatives to a sale to TPG and Leonard Green, including an alternative sales process or continuing as a stand-alone company and conducting a stock repurchase, implementing a dividend or undertaking a recapitalization. In considering these alternatives, the special committee took into account all information that was available to the special committee, including the Company’s third quarter financial results and management’s views on guidance for fourth quarter and full year performance, the Company’s long term projections, as well as the special committee’s knowledge and understanding of the business, operations, management, financial condition, earnings and prospects of the Company, including the prospects of the Company as an independent entity. After evaluating such information with the assistance of Perella Weinberg, the special committee determined that, given the weakening in the Company’s financial performance, 2010 outlook and November five year projections, including the impact such weakening could have on the Company’s stock price, remaining as a stand-alone company and conducting a stock repurchase, implementing a dividend, undertaking a recapitalization or taking some combination of the foregoing actions was less favorable to the Company’s stockholders than the merger given the potential risks, rewards and uncertainties associated with such alternatives. As noted above, the special committee also considered an alternative sales process, but given all information that was available to the special committee as set forth above, and after consideration of the potential negative impact the weakening of the Company’s financial performance, 2010 outlook and November five year projections could have on the Company’s stock price, the special committee determined that pursuing the opportunity to conclude a sale agreement prior to November 23, 2010, which was when the Company was scheduled to release its third quarter earnings results and fourth quarter outlook, would be in the best interests of the Company’s stockholders. Given the proximity of November 23, 2010, as well as the prior familiarity between TPG and the Company, the special committee decided that the best way to achieve an announcement by November 23, 2010 of the sale of the Company at an attractive valuation would be to explore a potential transaction with TPG and Leonard Green and to not engage with other potential bidders, instead utilizing a meaningful post-signing “go shop” period to permit the Company to solicit and consider alternative transaction proposals. In electing to approve the merger agreement and the proposed merger with Parent and to not take any of the alternative actions discussed above, the special committee determined (and the Board, TPG VI, the Leonard Green Entities, Parent and Merger Sub adopted the special committee’s determination) that the merger represents the best value reasonably obtainable for the Company’s unaffiliated stockholders. For more information on the process behind the special committee’s determination and the Board’s adoption of such determination, see “Special FactorsBackground of the Merger” and “Special FactorsRecommendation of Our Board of Directors and Special Committee; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger.” The firm proposals discussed above from TPG and Leonard Green and the initial expression of interest received from each of Party A and Party B represent the only proposals received by the Company from such parties. Other than the proposals from TPG and Leonard Green, we are not aware of any firm offer by any other person during the prior two years for (i) a merger or consolidation of us with another company, (ii) the sale or transfer of all or substantially all of the Company’s assets or (iii) a purchase of the Company’s securities that would enable such person to exercise control of the Company. The MD Parties believe pursuing the merger transaction is preferable to the alternatives considered by the special committee as described

 

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above for substantially the same reasons as presented by the special committee, which reasons the MD Parties adopt. In addition, the merger transaction provides the MD Parties the best opportunity to achieve the purposes described above under the section captioned “Special FactorsPurposes and Reasons of TPG VI, the Leonard Green Entities, Parent, Merger Sub and the MD Parties for the Merger.

Effects on the Company if Merger is not Completed

If our stockholders do not adopt the merger agreement or if the merger is not completed for any other reason, our stockholders will not receive any payment for their shares of Company common stock unless the Company is sold to a third party. Instead, unless the Company is sold to a third party, we will remain an independent public company, our common stock will continue to be listed and traded on the NYSE, and our stockholders will continue to be subject to similar risks and opportunities as they currently are with respect to their ownership of our common stock. If the merger is not completed, there is no assurance as to the effect of these risks and opportunities on the future value of your shares of Company common stock, including the risk that the market price of our common stock may decline to the extent that the current market price of our stock reflects a market assumption that the merger will be completed. From time to time, the Board will evaluate and review the business operations, properties, dividend policy and capitalization of the Company and, among other things, make such changes as are deemed appropriate and continue to seek to maximize stockholder value. If our stockholders do not adopt the merger agreement or if the merger is not completed for any other reason, there is no assurance that any other transaction acceptable to the Company will be offered or that the business, prospects or results of operations of the Company will not be adversely impacted. Pursuant to the merger agreement, under certain circumstances the Company is permitted to terminate the merger agreement and recommend an alternative transaction. See “The Merger Agreement—Termination.”

Under certain circumstances, if the merger is not completed, the Company may be obligated to pay to Parent a termination fee and reimburse certain of Parent’s expenses. See “The Merger Agreement—Termination Fees Reimbursement of and Expenses.”

Plans for the Company

After the effective time of the merger, Parent anticipates that the Company will continue its current operations, except that it will (i) cease to be an independent public company and will instead be a wholly owned subsidiary of Parent and (ii) have substantially more debt than it currently has. There are no current plans to repay the debt taken out to finance the merger. After the effective time of the merger, the directors of Merger Sub immediately prior to the effective time of the merger will become the directors of the Company, and the officers of the Company immediately prior to the effective time of the merger will remain the officers of the Company, in each case until the earlier of their resignation or removal or until their respective successors are duly elected or appointed and qualified, as the case may be.

Prospective Financial Information

The Company provided TPG VI and the Leonard Green Entities certain prospective financial information concerning the Company, including projected revenues, gross profit margin, earnings per share, capital expenditures, earnings before interest and taxes (EBIT) and earnings before interest, taxes, depreciation and amortization (EBITDA). TPG VI and the Leonard Green Entities received the following prospective financial information:

 

   

September target model, a long range model necessary to achieve a preliminary goal of approximately 20% year-over-year profit growth over the next three years;

 

   

October five year projections, five year projections for the Company prepared by management as of October 20, 2010; and

 

   

November five year projections, five year projections for the Company prepared by management as of November 17, 2010.

 

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The summary of the prospective financial information set forth below, is included solely to give stockholders access to the information that was made available to TPG VI and the Leonard Green Entities and is not included in this proxy statement in order to influence any stockholder to make any investment decision with respect to the merger or any other purpose, including whether or not to seek appraisal rights with respect to the shares of Company common stock. Certain of TPG’s Preliminary Forecasts as well as the Adjusted September target model are set forth under the section entitled “Analysis of Goldman Sachs, Financial Advisor to Parent.” TPG’s Preliminary Forecast and the Adjusted September target model are included in the Goldman Sachs Preliminary Analyses attached as exhibit (c)(3) to the statement on Schedule 13E-3 filed by the Company and the filing persons listed thereon with the SEC on December 29, 2010.

The prospective financial information was not prepared with a view toward public disclosure, or with a view toward compliance with published guidelines of the SEC, the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of financial forecasts, or GAAP. Neither the Company’s independent registered public accounting firm, nor any other independent accountants, have compiled, examined or performed any procedures with respect to the prospective financial information included below, or expressed any opinion or any other form of assurance on such information or its achievability. Further, the September target model was not prepared by management for the purpose of setting forth management’s best estimate of the Company’s performance, rather the September target model was prepared as the initial step in the Company’s annual budget planning process to assist the Board in establishing performance targets for the 2011 fiscal year. Finally, the October five year projections were subsequently superseded by the November five year projections, which reflect the Company’s updated sales projections, and updated expense and margin projections and which were the projections used by Perella Weinberg in the presentation described under “Special Factors—Opinion of Perella Weinberg, Financial Advisor to the Special Committee—Summary of Material Financial Analyses.”

The prospective financial information reflects numerous estimates and assumptions made by the Company with respect to industry performance, general business, economic, regulatory, market and financial conditions and other future events, as well as matters specific to the Company’s business, all of which are difficult to predict and many of which are beyond the Company’s control. The prospective financial information reflects subjective judgment in many respects and thus is susceptible to multiple interpretations and periodic revisions based on actual experience and business developments. As such, the prospective financial information constitutes forward-looking information and is subject to risks and uncertainties that could cause actual results to differ materially from the results forecasted in such prospective information, including, but not limited to, the Company’s performance, industry performance, general business and economic conditions, customer requirements, competition, adverse changes in applicable laws, regulations or rules, and the various risks set forth in the Company’s reports filed with the SEC. There can be no assurance that the prospective financial information will be realized or that actual results will not be significantly higher or lower than as set forth in the prospective financial information.

The prospective financial information covers multiple years and such information by its nature becomes less reliable with each successive year. In addition, the prospective financial information will be affected by the Company’s ability to achieve strategic goals, objectives and targets over the applicable periods. The assumptions upon which the prospective financial information is based necessarily involve judgments as of the time of their preparation with respect to, among other things, future economic, competitive and regulatory conditions and financial market conditions, all of which are difficult or impossible to predict accurately and many of which are beyond the Company’s control. The prospective financial information also reflects assumptions as of the time of their preparation as to certain business decisions that are subject to change. Such prospective information cannot, therefore, be considered a guaranty of future operating results, and this information should not be relied on as such. The inclusion of this information should not be regarded as an indication that the Company, TPG VI, the Leonard Green Entities, the special committee, any of their respective financial advisors or anyone who received this information then considered, or now considers, it a reliable prediction of future events, and this information should not be relied upon as such. None of TPG VI, the Leonard Green Entities, the special committee or any of

 

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their financial advisors or any of their affiliates assumes any responsibility for the validity, reasonableness, accuracy or completeness of the prospective financial information described below. None of the Company, TPG VI, the Leonard Green Entities, the special committee or any of their financial advisors or any of their affiliates intends to, and each of them disclaims any obligation to, update, revise or correct the prospective financial information if any of it is or becomes inaccurate (even in the short term).

The prospective financial information does not take into account any circumstances or events occurring after the date they were prepared, including the transactions contemplated by the merger agreement. Further, the prospective financial information does not take into account the effect of any failure of the merger to occur and should not be viewed as accurate or continuing in that context.

The inclusion of the prospective financial information herein should not be deemed an admission or representation by the Company, TPG VI, the Leonard Green Entities or the special committee that they are viewed by the Company or TPG VI, the Leonard Green Entities or the special committee as material information of the Company, and in fact the Company, TPG VI, the Leonard Green Entities and the special committee view the prospective financial information as non-material because of the inherent risks and uncertainties associated with such long range forecasts. The prospective financial information should be evaluated, if at all, in conjunction with the historical financial statements and other information regarding the Company contained in the Company’s public filings with the SEC. Stockholders should be aware that the September target model was prepared for different purposes than, and as a result, is not directly comparable to either the October five year projections or the November five year projections. Stockholders should also be aware that the October five year projections were subsequently superseded by the November five year projections. In light of the foregoing factors and the uncertainties inherent in the Company’s prospective information, stockholders are cautioned not to place undue, if any, reliance on the prospective information included in this proxy statement.

Certain of the prospective financial information set forth herein, including non-GAAP revenue, gross profit margin, earnings per share, EBIT and EBITDA, may be considered non-GAAP financial measures. The Company provided this information to TPG VI and the Leonard Green Entities because the Company believed it could be useful in evaluating, on a prospective basis, the Company’s potential operating performance and cash flow. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP, and non-GAAP financial measures as used by the Company may not be comparable to similarly titled amounts used by other companies.

September target model

As the initial step in the Company’s annual budget planning process, management of the Company prepared a long range model necessary to achieve a preliminary goal of approximately 20% year-over-year profit growth over the next three years, which we refer to in this proxy statement as the “September target model”. The September target model reflected sales, margin, expense and capital expenditure targets that supported the target growth level, without necessarily addressing the feasibility of the targets contained therein.

The September target model, including its preliminary 20% year-over-year profit growth target, was the initial step in the Company’s regular annual budget planning process, and was based upon methodologies and factors customarily used by the Company in preparing target setting documents for the Board’s consideration at the initial Board meeting relating to this process, including expected future performance of the Company’s competitors, conversations with the Company’s suppliers and the Company’s sales projections prepared in mid-July (which was prior to the weakening in the Company’s performance that began late in the second quarter of 2010).

 

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The following is a summary of the September target model:

 

     2010
FY
    2011
FY
    2012
FY
    2013
FY
    2014
FY
    2015
FY
 
     (amounts in millions, except per share amounts)  

Revenue

   $ 1,805      $ 2,034      $ 2,356      $ 2,709      $ 3,087      $ 3,481   

Gross Profit Margin

     45.9     46.1     46.3     46.5     46.8     47.2

Earnings Per Share

   $ 2.50      $ 3.02      $ 3.67      $ 4.44      $ 5.32      $ 6.36   

Capital Expenditures

   $ 54      $ 75      $ 94      $ 67      $ 67      $ 65   

EBITDA

   $ 329      $ 394      $ 474      $ 567      $ 672      $ 793   

EBIT

   $ 280      $ 338      $ 412      $ 501      $ 603      $ 724   

Total Free Cash Flow

   $ 158      $ 187      $ 237      $ 322      $ 386      $ 461   

October five year projections

Although management does not ordinarily prepare an interim budget at this time in its annual budget planning process, management of the Company prepared five year projections for the Company as of October 20, 2010, which we refer to in this proxy statement as the “October five year projections,” in order to provide the special committee with an interim update for consideration in connection with its evaluation of strategic alternatives. Unlike the September target model, the October five year projections were not based on a pre-set goal of achieving a particular year-over-year profit growth target. They were instead based upon methodologies and factors customarily used by the Company in preparing projections for the Board’s consideration at the Board’s December meeting in connection with the annual budget planning process. These methodologies and factors included the Company’s most recently updated sales projections, which reflected the Company’s weaker operating performance since the sales projections that had been prepared in mid-July and that had been used in preparing the September target model, updated projected margins and actual division level expense projections prepared by management with input from division level managers, rather than the target expense levels used in the September target model. As a result, the October five year projections included estimates of year-over-year profit growth that were lower than the profit growth rate targets in the September target model.

The following is a summary of the October five year projections:

 

     2010
FY
    2011
FY
    2012
FY
    2013
FY
    2014
FY
    2015
FY
 
     (amounts in millions, except per share amounts)  

Revenue

   $ 1,753      $ 1,955      $ 2,208      $ 2,487      $ 2,783      $ 3,096   

Gross Profit Margin

     44.1     44.4     44.5     44.5     44.7     45.1

Earnings Per Share

   $ 2.18      $ 2.50      $ 2.81      $ 3.20      $ 3.64      $ 4.14   

Capital Expenditures

   $ 55      $ 85      $ 101      $ 68      $ 68      $ 66   

EBITDA

   $ 293      $ 335      $ 381      $ 434      $ 495      $ 563   

EBIT

   $ 243      $ 279      $ 319      $ 369      $ 427      $ 494   

Total Free Cash Flow

   $ 127      $ 150      $ 175      $ 244      $ 282      $ 326   

November five year projections

Management of the Company prepared revised five year projections for the Company as of November 17, 2010, which we refer to in this proxy statement as the “November five year projections.” The November five year projections were prepared using the Company’s most recently updated sales projections at such time, which reflected the Company’s continuing weakening operating performance since the prior sales projections that had been used in preparing the October five year projections, as well as updated expense and margin projections from the Company’s ongoing regular annual budget planning process.

 

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The November five year projections, as summarized below, superseded the October five year projections, were provided to TPG VI and the Leonard Green Entities and were also the projections used by Perella Weinberg in the presentation described under “Special Factors—Opinion of Perella Weinberg, Financial Advisor to the Special Committee—Summary of Material Financial Analyses.”

 

     2010
FY
    2011
FY
    2012
FY
    2013
FY
    2014
FY
    2015
FY
 
     (amounts in millions, except per share amounts)  

Revenue

   $ 1,731      $ 1,914      $ 2,148      $ 2,425      $ 2,719      $ 3,031   

Gross Profit Margin

     43.4     44.8     44.7     44.7     45.0     45.3

Earnings Per Share

   $ 2.07      $ 2.43      $ 2.72      $ 3.09      $ 3.48      $ 3.89   

Capital Expenditures

   $ 55      $ 90      $ 103      $ 69      $ 69      $ 67   

EBITDA

   $ 281      $ 326      $ 372      $ 423      $ 478      $ 535   

EBIT

   $ 232      $ 270      $ 308      $ 356      $ 408      $ 463   

Total Free Cash Flow

   $ 120      $ 139      $ 171      $ 237      $ 272      $ 309   

Financing of the Merger

The Company and Parent estimate that the total amount of funds required to complete the merger and related transactions and pay related fees and expenses will be approximately $3 billion. Parent expects this amount to be provided through a combination of the proceeds of:

 

   

cash equity investments by TPG VI (up to approximately $853.0 million), and by GEI V and GEI Side V (up to approximately $317.0 million combined) (or such investment funds together with their respective co-investors and assignees), which are described elsewhere in this section under the subheading “Equity Financing”;

 

   

the contribution of shares of Company common stock to Parent (2,287,545 shares, the equivalent of an approximately $99.5 million investment based upon the per share merger consideration of $43.50) immediately prior to the merger by the MD Parties, which is described elsewhere in this section under the subheading “Rollover Financing”;

 

   

debt financing (expecting to draw on approximately $1.6 billion of the available $1.85 billion), which is described elsewhere in this section under the subheading “Debt Financing”; and

 

   

cash of the Company (approximately $311.7 million).

Equity Financing

On November 23, 2010, TPG VI entered into an equity commitment letter with Parent pursuant to which TPG VI committed to purchase, at or prior to the consummation of the merger, $845.0 million of certain equity securities of Parent. TPG VI may, but is under no obligation to, further invest up to a total of $8.0 million in additional equity securities of Parent. In addition, on November 23, 2010, GEI V and GEI Side V entered into an equity commitment letter with Parent pursuant to which GEI V and GEI Side V committed to purchase, severally and not jointly, at or prior to the consummation of the merger, $216.9 million and $65.1 million, respectively, of certain equity securities of Parent. GEI V and GEI Side V may, but are under no obligation to, further invest up to a total of $35.0 million in additional equity securities of Parent. The equity commitment of each of TPG VI, GEI V and GEI Side V is conditioned upon the contemporaneous purchase of securities of Parent pursuant to the other equity commitment letter, the contribution of shares of Company common stock by the MD Parties described below and the funding of the debt financing described below (or alternative debt financing being obtained in accordance with the merger agreement). Each of the equity commitments described above is further conditioned upon the satisfaction or waiver of the conditions to the obligations of Parent to complete the merger contained in the merger agreement and upon the substantially simultaneous consummation of the merger. Each of the equity commitments is subject to reduction by any amounts actually contributed to Parent (and not returned) at or prior to the effective time by persons or entities to which TPG VI, GEI V or GEI Side V allocates all or a

 

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portion of its equity commitment for the purpose of funding a portion of the per share merger consideration, any other amounts required to be paid pursuant to the merger agreement and related fees and expenses pursuant to the merger agreement. Each of the equity commitments will terminate upon the earliest to occur of (i) consummation of the merger, (ii) termination of the merger agreement (unless the Company has commenced litigation prior to termination to require Parent to enforce the equity commitments, in which case the equity commitments will terminate when TPG VI, GEI V and GEI Side V have satisfied any obligations finally determined or agreed to be owed by them under the equity commitment letters), (iii) the Company, or any person claiming by, through or for its benefit, accepting any portion of the reverse termination fee or any payment under the limited guaranty in respect of such obligations and (iv) the Company or any of its affiliates, or any person claiming by, through or for the benefit of the Company, making any claim against TPG VI, GEI V, GEI Side V or certain of their affiliates other than claims expressly permitted under the limited guaranty. The Company is an express third-party beneficiary of each of the equity commitment letters and has the right to seek specific performance of each of the equity commitments under the circumstances in which the Company would be permitted by the merger agreement to obtain specific performance requiring Parent to enforce the equity commitments.

Rollover Financing

On November 23, 2010, the MD Parties entered into a letter agreement with Parent pursuant to which the MD Parties collectively committed to contribute, immediately prior to the consummation of the merger, an aggregate amount of 2,287,545 shares of Company common stock to Parent (the equivalent of a $99,508,207.50 investment based upon the per share merger consideration of $43.50) in exchange for certain equity securities of Parent as further described under the headings titled “Special Factors—Certain Effects of the Merger” and “Common Stock Ownership of Management and Certain Beneficial Owners.” The MD Parties’ commitments pursuant to such letter agreement are conditioned upon the contemporaneous purchase of securities of Parent pursuant to the equity commitments of TPG VI, GEI V and GEI Side V described above and the funding of the debt financing described below (or alternative debt financing being obtained in accordance with the merger agreement). Such commitments are further conditioned upon the satisfaction or waiver of the conditions to the obligations of Parent to complete the merger contained in the merger agreement (as determined by TPG VI, GEI V and GEI Side V or as determined by a court enforcing such entities’ equity commitments pursuant to the Company’s specific performance remedy under the merger agreement), the condition that the interim investors agreement described below is not terminated (other than by mutual written consent of the parties thereto) and upon the substantially simultaneous consummation of the merger. The Company is an express third-party beneficiary of such letter agreement and has the right to seek specific performance of the commitments of the MD Parties under such letter agreement under the circumstances in which the Company would be permitted by the merger agreement to obtain specific performance requiring Parent to enforce such commitments.

Debt Financing

In connection with Parent’s entry into the merger agreement, Merger Sub received a debt commitment letter (the “Debt Commitment Letter”), dated November 23, 2010, from Bank of America, N.A. (“Bank of America”), Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPFS”) and Goldman Sachs Bank USA (together with Bank of America and MLPFS, the “Debt Commitment Parties”). The Debt Commitment Letter provides an aggregate of $1,850,000,000 in debt financing to Merger Sub, consisting of a $1,000,000,000 senior secured term loan facility, a $600,000,000 senior unsecured bridge facility and a $250,000,000 asset-based revolving facility, of which, subject to the then-applicable borrowing base, no more than $75,000,000 may be drawn at the closing of the merger (i) to fund any original issue discount or upfront fees with respect to the debt financing and (ii) for working capital needs.

The Debt Commitment Parties may invite other banks, financial institutions and institutional lenders to participate in the debt financing described in the Debt Commitment Letter and to undertake a portion of the commitments to provide such debt financing.

 

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Senior Secured Facilities. Interest under the asset-based revolving facility will be payable either at a base rate (based on the higher of the prime rate, the Federal Funds Effective Rate plus 0.50% and adjusted LIBOR for interest periods of 1 month plus 1.00%) plus 1.50% or a LIBOR-based rate plus 2.50% at the option of Merger Sub (with both the margin over the base rate and the margin over the LIBOR-based rate being subject to adjustments based on average historical borrowing availability), or as otherwise agreed, and will be payable at the end of each interest period set forth in the credit agreement (but at least every three months). Interest under the senior secured term loan facility will be payable either at a base rate (based on the higher of the prime rate and the Federal Funds Effective Rate plus 0.50%, subject to a floor of 2.50%) plus 3.50% or a LIBOR-based rate (subject to a floor of 1.50%) plus 4.50% at the option of Merger Sub, or as otherwise agreed, and will be payable at the end of each interest period set forth in the credit agreement (but at least every three months).

The borrower under the senior secured facilities will be Merger Sub, and upon consummation of the merger, the rights and obligations under the senior secured facilities will be assumed by the Company. The senior secured facilities will be guaranteed on a joint and several basis by Parent or a wholly owned subsidiary of Parent and by all of the existing and future direct and indirect domestic subsidiaries of Merger Sub (which will include, after the merger, all of the existing and future direct and indirect domestic subsidiaries of the Company) other than certain immaterial and other subsidiaries. The asset-based revolving facility will be secured, subject to permitted liens and other agreed upon exceptions, by substantially all the assets of Parent, Merger Sub and each subsidiary guarantor, including a first-priority security interest in all personal property consisting of accounts receivable, inventory, cash and deposit accounts and the proceeds therefrom (the “ABL Collateral”) and a second-priority security interest in, and mortgages on, substantially all of the owned real property and equipment, other personal property, and pledges of all the capital held by Parent, Merger Sub or any subsidiary guarantor, including the stock of Merger Sub with certain exceptions, including limitations on the pledge of capital stock of foreign subsidiaries (the “Term Loan Collateral”). The senior secured term loan facility will be secured, subject to permitted liens and other agreed upon exceptions, by substantially all the assets of Parent, Merger Sub and each subsidiary guarantor, including a first-priority security interest in the Term Loan Collateral and a second-priority security interest in the ABL Collateral.

Senior Unsecured Bridge Facility. The Debt Commitment Letter contemplates that either (i) Merger Sub will issue and sell senior unsecured notes in a Rule 144A or other private placement on or prior to the closing date yielding at least $600,000,000 in gross proceeds, or (ii) to the extent Merger Sub does not so issue senior unsecured notes on or prior to the closing date, Merger Sub will borrow up to $600,000,000 (less the gross proceeds of any offering of senior unsecured notes) under the senior unsecured bridge facility.

The borrower under the senior unsecured bridge facility will be Merger Sub, and upon consummation of the merger, the rights and obligations under the senior unsecured bridge facility will be assumed by the Company. Interest under the senior unsecured bridge facility shall initially equal a LIBOR-based rate (subject to a 1.50% floor) plus 8.00% increasing to a specified cap. The senior unsecured bridge facility will be guaranteed on a joint and several basis by the guarantors of the senior secured facilities on a senior unsecured basis with the guarantee of each such guarantor under the senior unsecured bridge facility being pari passu in right of payment with all obligations under the senior facilities.

If the senior unsecured bridge facility is not paid in full on or before the first anniversary of the merger, then subject to a specified condition, the maturity of the senior unsecured bridge facility shall be extended to eight years after the closing date of the merger. After such extension, the holders of the outstanding senior bridge loans may choose to exchange such loans for senior exchange notes that mature eight years after the closing date of the merger that the Company would be required to register for public sale under a registration statement in compliance with applicable securities laws.

 

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Conditions:

The facilities contemplated by the Debt Commitment Letter are subject to certain closing conditions, including, without limitation:

 

   

a condition that, since January 31, 2010, except (i) as set forth in the company disclosure schedule (as defined in the merger agreement) or (ii) disclosed in any filed SEC document (as defined in the merger agreement), other than disclosures in such filed SEC documents contained in the “Risk Factors” and “Forward-Looking Statements” sections thereof or any other disclosures in the filed SEC documents which are forward-looking in nature, there shall not have been any effect, change, event or occurrence that has had or would reasonably be expected to have a Material Adverse Effect (defined in the Debt Commitment Letter in a manner substantially similar to the definition of “Material Adverse Effect” in the merger agreement);

 

   

the execution and delivery of definitive documentation with respect to the applicable debt facilities consistent with the Debt Commitment Letter;

 

   

the accuracy of certain representations and warranties in the merger agreement and specified representations and warranties in the loan documents;

 

   

the consummation of the equity contribution by TPG VI, GEI V and GEI Side V substantially concurrently with the initial borrowing under the debt facilities;

 

   

the repayment, including the termination and release of all commitments, security interests and guaranties in connection therewith of the Company’s existing Second Amended and Restated Credit Agreement, dated as of May 4, 2007, among the Company, CitiCorp USA, Inc., as administrative agent, and the lenders party thereto, substantially concurrently with the initial borrowing under the debt facilities;

 

   

after giving effect to the refinancing referred to in the immediately preceding bullet, neither the immediate parent company of Merger Sub, the borrower or any of their subsidiaries shall have any material indebtedness for borrowed money other than the senior unsecured notes and debt facilities provided under the Debt Commitment Letter, indebtedness permitted to be incurred or outstanding under the merger agreement and other limited indebtedness to be agreed upon;

 

   

the consummation of the merger (without any amendments to the merger agreement or any waivers thereof in any material respect by Merger Sub that are materially adverse to the lenders or the joint lead arrangers without the consent of the joint lead arrangers (such consent not to be unreasonably withheld or delayed)) substantially concurrently with the initial borrowing under the debt facilities;

 

   

the delivery of certain customary closing documents (including, among others, a solvency certificate, legal opinions, evidence of insurance and customary lien searches), documentation required under anti-money laundering laws and the taking of certain actions necessary to establish and perfect a security interest in certain items of collateral;

 

   

delivery of certain audited, unaudited and pro forma financial statements;

 

   

the payment of applicable fees and expenses;

 

   

the receipt of a customary offering memorandum with respect to the senior unsecured notes offering and a confidential information memorandum for each of the asset-based revolving facility and term loan facility and other customary marketing materials to be used for the purpose of syndication;

 

   

as a condition to the availability of the senior secured credit facilities, the expiration of a marketing period of 15 consecutive business days following receipt of the confidential information memorandum referred to in the immediately preceding bullet for use in the syndication of the senior secured credit facilities;

 

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as a condition to the availability of the senior unsecured bridge facility, the expiration of a marketing period of 15 consecutive business days following receipt of such offering memorandum for use in the placement of the senior unsecured notes; and

 

   

as a condition to the availability of the asset-based revolving facility, commercially reasonable efforts to deliver inventory appraisals.

The final termination date for the Debt Commitment Letter is the earliest of (a) May 18, 2011, (b) the date on which the merger is consummated and (c) the date on which the merger agreement is validly terminated in accordance with its terms.

Subject to the terms and conditions of the merger agreement, each of Parent and Merger Sub shall use its reasonable best efforts to obtain the Financing (as defined in the merger agreement) on the terms and conditions described in the Financing Letters (as defined in the merger agreement), and the contribution contemplated by the Rollover Letter (as defined in the merger agreement) pursuant to the terms thereof, and shall not permit any amendment or modification to be made to, or any waiver of any provision under, the Financing Letters or Rollover Letter if such amendment, modification or waiver (i) reduces (or could have the effect of reducing) the aggregate amount of the Financing and amount of Company common stock to be contributed, or (ii) impose new or additional conditions or otherwise expand, amend or modify any of the conditions to the Financing or contribution contemplated by the Rollover Letter that would reasonably be expected to, in any material respect, (a) delay or prevent or make less likely the funding of the Financing or contribution contemplated by the Rollover Letter (or satisfaction of the conditions to the Financing or contribution contemplated by the Rollover Letter) on the closing date or (b) adversely impact the ability of Parent, Merger Sub or the Company, as applicable, to enforce its rights against the other parties to the Financing Letters or the Rollover Letter.

Although the debt financing described in this proxy statement is not subject to due diligence or a “market out” provision, which would have allowed lenders not to fund their commitments if certain conditions in the financial markets prevail, there is still a risk that such debt financing may not be funded when required. As of the date of this proxy statement, no alternative financing arrangements or alternative financing plans have been made in the event the debt financing described in this proxy statement is not available as anticipated.

Limited Guaranty

TPG VI, GEI V and GEI Side V, severally and not jointly, have agreed to guarantee their respective percentages (determined based upon the relative size of their equity commitments to Parent) of the obligations of Parent under the merger agreement to pay, under certain circumstances, a reverse termination fee and reimburse certain expenses. The limited guaranty will terminate on the earliest of (i) the effective time of the merger, (ii) the termination of the merger agreement under circumstances in which Parent would not be obligated to pay the reverse termination fee and (iii) the eighteen-month anniversary of November 23, 2010 (unless, with respect to clauses (ii) and (iii) above, the Company has commenced litigation under the limited guaranty on or prior to such termination, in which case the limited guaranty will terminate when TPG VI, GEI V and GEI Side V have satisfied any obligations finally determined or agreed to be owed by them under the limited guaranty). However, if the Company or any of its affiliates asserts a claim other than as permitted under the limited guaranty, including a claim against certain specified non-recourse parties or a claim in excess of the guaranteed amounts, the limited guaranty will immediately terminate and become null and void by its terms, all payments previously made pursuant to the limited guaranty must be returned and neither TPG VI, GEI V and GEI Side V nor certain of their related parties will have any liability under the limited guaranty, the merger agreement or any related documents.

Interests of the Company’s Directors and Executive Officers in the Merger

In considering the recommendation of the Board with respect to the merger agreement, you should be aware that certain of the Company’s directors and executive officers have interests in the merger that are different from,

 

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or in addition to, the interests of our stockholders generally, as more fully described below. The Board and the special committee were aware of these interests and considered them, among other matters, in reaching the decision to approve the merger agreement and recommend that the Company’s stockholders vote in favor of adopting the merger agreement. See “Special Factors—Background of the Merger” and “Special FactorsRecommendation of our Board of Directors and Special Committee; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger” for a further discussion of these matters.

Special Committee Compensation

In consideration of the expected time and effort that would be required of the members of the special committee in evaluating the proposed merger, including negotiating the terms and conditions of the merger agreement, the Board determined that the chairman of the special committee shall receive a retainer of $30,000 per month and that each other member of the special committee shall receive a retainer of $25,000 per month for the duration of their service on the special committee. Such fees are payable whether or not the merger is completed and were approved by the Board prior to our receipt of Parent’s proposal. No other meeting fees or other compensation (other than reimbursement for out-of-pocket expenses in connection with attending special committee meetings) will be paid to the members of the special committee in connection with their service on the special committee.

Treatment of Outstanding Stock Options

As described in “The Merger Agreement—Treatment of Common Stock, Options, Restricted Shares and Other Equity Awards” beginning on page 107, the merger agreement provides that, except as otherwise agreed by Parent and a Stock Option holder, immediately prior to the effective time each outstanding Stock Option (whether vested or unvested) will fully vest contingent on the occurrence of the closing of the merger and will be canceled as of the effective time of the merger and converted into the right to receive, within three business days after the completion of the merger, an amount in cash equal to the excess, if any, of the per share merger consideration ($43.50) over the exercise price per share of such Stock Option, without interest and less any required withholding taxes.

The following table sets forth, for each of our directors and executive officers holding Stock Options as of January 21, 2011, (a) the aggregate number of shares of Company common stock subject to vested Stock Options, (b) the value of such vested Stock Options on a pre-tax basis, calculated by multiplying (i) the excess, if any, of the $43.50 per share merger consideration over the respective per share exercise prices of those Stock Options by (ii) the number of shares of Company common stock subject to those Stock Options, (c) the aggregate number of unvested Stock Options that will vest as of the effective time of the merger, assuming the director or executive officer remains employed by the Company at that date, (d) the value of those unvested Stock Options on a pre-tax basis, calculated by multiplying (i) the excess, if any, of the $43.50 per share merger consideration over the respective per share exercise prices of those Stock Options by (ii) the number of shares of Company common stock subject to those Stock Options, (e) the aggregate number of shares of Company common stock subject to vested Stock Options and unvested Stock Options for such individual as of the effective time of the merger, assuming the director or executive officer remains employed by the Company at that date, and (f) the aggregate amount of consideration that we expect to offer for all such Stock Options in connection with the merger.

 

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Please note that the table below includes shares of Company common stock subject to outstanding vested and unvested Stock Options that do not have a corresponding “value” for purposes of the disclosure in this proxy statement due to the per share exercise price of such Stock Options exceeding the $43.50 per share merger consideration.

 

     Vested Stock Options      Unvested Stock Options
That Will Vest as a Result
of the Merger
     Aggregate Offer
Consideration for All
Stock Options
 

Name

   Shares      Value      Shares      Value      Shares      Value  

Executive Officers(1)

                 

Trish Donnelly

     4,375       $ 70,619         81,250       $ 1,091,744         85,625       $ 1,162,363   

Millard Drexler

     4,100,019         138,289,339         971,250         13,167,219         5,071,269         151,456,558   

Tracy Gardner

     0         0         0         0         0         0   

Jenna Lyons

     184,108         4,722,881         448,000         6,688,863         632,108         11,411,744   

Lynda Markoe

     37,857         1,023,360         84,000         1,239,338         121,857         2,262,698   

James Scully

     44,514         858,229         191,250         2,974,838         235,764         3,833,067   

Libby Wadle

     80,000         1,483,281         273,750         4,527,531         353,750         6,010,812   

Non-Employee Directors(2)

                 

Mary Ann Casati

     21,139       $ 159,520         2,589       $ 7,948         23,728       $ 167,468   

James Coulter

     0         0         2,589         7,948         2,589         7,948   

Steven Grand-Jean

     81,631         2,196,988         2,589         7,948         84,220         2,204,936   

David House

     16,130         134,403         2,589         7,948         18,719         142,351   

Heather Reisman

     18,880         134,403         2,589         7,948         21,469         142,351   

Sukhinder Singh Cassidy

     0         0         0         0         0         0   

Stuart Sloan

     96,148         2,777,233         2,589         7,948         98,737         2,785,181   

Stephen Squeri

     0         0         6,542         55,476         6,542         55,476   

Josh Weston

     28,398         184,636         2,589         7,948         30,987         192,584   

All Executive Officers and Directors holding Stock Options as a group

     4,713,199       $ 152,034,892         2,074,165       $ 29,800,645         6,787,364       $ 181,835,537   

 

(1) Ms. Donnelly became an executive officer on September 1, 2010. Ms. Gardner resigned voluntarily on July 13, 2010.
(2) Ms. Singh Cassidy resigned from the Board effective March 2, 2010. On July 19, 2010, the Board unanimously voted to appoint Mr. Squeri as a director, effective September 15, 2010.

Treatment of Restricted Shares

As described in “The Merger Agreement—Treatment of Common Stock, Options, Restricted Shares and Other Equity Awards” beginning on page 107, except as otherwise agreed by Parent and a holder of an outstanding Restricted Share, immediately prior to the effective time each outstanding Restricted Share will become fully vested contingent on the occurrence of closing of the merger. Upon closing, each Restricted Share will be treated as a share of Company common stock and as such will be entitled to receive the $43.50 per share merger consideration, without interest and less applicable withholding taxes. For a discussion of the treatment of certain Restricted Shares held by Mr. Drexler, see “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger—Drexler Rollover Agreement” beginning on page 89.

 

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The following table identifies, for each of our directors and executive officers holding Restricted Shares, the aggregate number of Restricted Shares as of January 21, 2011, and the pre-tax value of such Restricted Shares that will become fully vested in connection with the merger as calculated by multiplying the $43.50 per share merger consideration by the number of Restricted Shares.

 

Name

   Aggregate
Number of
Restricted
Shares
    Value of
Restricted
Shares
 

Executive Officers(1)

    

Trish Donnelly

     24,500      $ 1,065,750   

Millard Drexler

     10,000 (2)      435,000   

Tracy Gardner

     0        0   

Jenna Lyons

     50,000        2,175,000   

Lynda Markoe

     12,000        522,000   

James Scully

     32,500        1,413,750   

Libby Wadle

     34,000        1,479,000   

Non-Employee Directors(3)

    

Mary Ann Casati

     1,236      $ 53,766   

James Coulter

     1,236        53,766   

Steven Grand-Jean

     1,236        53,766   

David House

     1,236        53,766   

Heather Reisman

     1,236        53,766   

Sukhinder Singh Cassidy

     0        0   

Stuart Sloan

     1,236        53,766   

Stephen Squeri

     713        31,016   

Josh Weston

     1,236        53,766   

All Executive Officers and Directors holding Restricted Shares as a group

     172,365      $ 7,497,878   

 

(1) Ms. Donnelly became an executive officer on September 1, 2010. Ms. Gardner resigned voluntarily on July 13, 2010.
(2) Excludes 20,000 Restricted Shares to be rolled over by Mr. Drexler, as described in “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger—Drexler Rollover Agreement” beginning on page 89.
(3) Ms. Singh Cassidy resigned from the Board of the Company effective March 2, 2010. On July 19, 2010, the Board unanimously voted to appoint Mr. Squeri as a director, effective September 15, 2010.

Severance Arrangements

We have employment agreements with Messrs. Drexler and Scully and Ms. Lyons and non-disclosure, non-solicitation and non-competition agreements with Ms. Wadle and Ms. Donnelly. Under each of these agreements, we are required to pay severance benefits in connection with certain terminations of employment. With the exception of Mr. Drexler’s Section 280G tax gross up described below, none of the agreements provide for special termination benefits if the termination occurs in connection with a change in control. Certain of the agreements do provide for special accelerated vesting of certain outstanding equity awards which would not be applicable in connection with a termination of employment in connection with the merger since all outstanding equity awards will become vested and cashed out in connection with the closing of the merger as described above.

Trish Donnelly. Pursuant to the Non-Disclosure, Non-Solicitation and Non-Competition agreement between us and Ms. Donnelly, executed on November 16, 2009 (the “Donnelly Agreement”), we have agreed to provide certain payments and benefits to Ms. Donnelly on a termination of her employment without cause provided that (i) we do not waive any of the post-employment non-competition restrictions in the Donnelly

 

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Agreement and (ii) Ms. Donnelly executes and delivers to us a separation agreement and release in a form acceptable to us and does not revoke such separation agreement and release.

Pursuant to the Donnelly Agreement, we may terminate Ms. Donnelly’s employment with us for cause (as defined in the Donnelly Agreement) or at any time without cause. Ms. Donnelly may terminate her employment with us for any reason.

If Ms. Donnelly’s employment with us is terminated by us without cause and we do not waive any of the post-employment non-competition restrictions in the Donnelly Agreement, then Ms. Donnelly will be entitled to, subject to the execution of a valid separation agreement, (i) the pro-rated amount of any annual cash incentive award that she would have otherwise received, based on actual performance, for the fiscal year in which she was terminated, and (ii) continued payment of base salary and continued medical benefits for period of one (1) year following her termination date, except that Ms. Donnelly will forfeit any right to the foregoing upon commencing subsequent employment. In addition, if Ms. Donnelly’s employment with us is terminated for any reason Ms. Donnelly will be entitled to any earned but unpaid base salary.

Millard Drexler. Pursuant to the Third Amended and Restated Employment Agreement between us and Mr. Drexler, executed on July 13, 2010 and effective October 20, 2005 (the “Drexler Agreement”), the payments and/or benefits we have agreed to pay or provide to Mr. Drexler upon a termination of his employment vary depending on the reason for such termination. We may terminate Mr. Drexler’s employment with us upon his disability, for cause or at any time without cause (in each case as defined in the Drexler Agreement). Mr. Drexler may terminate his employment with us for good reason (as defined in the Drexler Agreement) (provided that we have thirty (30) days to remedy the situation resulting in good reason) or, upon at least three (3) months’ advance written notice, without good reason. In addition, Mr. Drexler’s employment will terminate upon his death or in the event either party provides notice to the other party not to renew the Drexler Agreement at least ninety (90) days prior to the expiration of its term.

If we terminate Mr. Drexler’s employment without cause or he terminates his employment for good reason, Mr. Drexler will be entitled to receive (i) a payment of his earned but unpaid annual base salary through the termination date, any accrued vacation pay and any un-reimbursed expenses, and (ii) subject to Mr. Drexler’s execution of a valid general release and waiver of claims against us, as well as his compliance with the non-competition, non-solicitation and confidential information restrictions, (a) a payment equal to his annual base salary and target annual bonus and (b) a payment equal to the pro-rated annual bonus that Mr. Drexler would have earned for the year in which his termination occurs, based on the actual achievement of applicable performance objectives in the performance year in which the termination date occurs.

Upon any termination of Mr. Drexler’s employment with us for any reason, Mr. Drexler will be entitled to any accrued but unpaid salary, accrued but unused vacation, and any un-reimbursed expenses, in each case through the date of his termination, as well as any benefit or right under the Company employee benefit plans in which he is vested (except for any additional severance or termination payments).

In addition, in the event that any payment or benefit provided to Mr. Drexler under the Drexler Agreement or under any other plan, program or arrangement of ours in connection with a change in control (as defined in Section 280G of the Code) becomes subject to the excise taxes imposed by Section 4999 of the Code, Mr. Drexler will be entitled to receive a “gross up” payment in connection with any such excise taxes.

Jenna Lyons. Pursuant to the amended and restated employment agreement between us and Ms. Lyons, dated July 15, 2010 (the “Lyons Agreement”), the payments and/or benefits we have agreed to pay or provide Ms. Lyons on a termination of her employment vary depending on the reason for such termination.

Pursuant to the Lyons Agreement, we may terminate Ms. Lyons’s employment with us upon her disability, for cause or at any time without cause (in each case as defined in the Lyons Agreement). Ms. Lyons may

 

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terminate her employment with us for good reason (as defined in the Lyons Agreement) (provided that we have thirty (30) days to remedy the situation resulting in good reason) or at any time, upon at least two (2) months’ advance notice, without good reason.

If Ms. Lyons’s employment with us is terminated (i) by us without cause or (ii) by Ms. Lyons for good reason, then Ms. Lyons will be entitled to, subject to her execution of a valid general release and waiver of any claims she may have against us, (a) continued payment of base salary and continued medical benefits for a period of one (1) year following her termination date, and (b) a lump sum amount equal to the annual cash incentive award that she received for the fiscal year prior to her termination. Ms. Lyons’s right to receive salary continuation will be reduced to the extent of compensation paid by a subsequent employer. Ms. Lyon’s right to continuation of medical benefits will terminate upon her eligibility for medical benefits with a subsequent employer. In addition, if Ms. Lyons’s employment with us is terminated for any reason, Ms. Lyons will also be entitled to any earned but unpaid base salary.

James Scully. Pursuant to the amended and restated employment agreement between us and Mr. Scully, dated September 10, 2008 (the “Scully Agreement”), the payments and/or benefits we have agreed to pay or provide Mr. Scully on a termination of his employment vary depending on the reason for such termination.

Pursuant to the Scully Agreement, we may terminate Mr. Scully’s employment with us upon his disability, for cause or at any time without cause (in each case as defined in the Scully Agreement). Mr. Scully may terminate his employment with us for good reason (as defined in the Scully Agreement) (provided that we have thirty (30) days to remedy the situation resulting in good reason) or at any time, upon at least two (2) months’ advance notice, without good reason.

If Mr. Scully’s employment with us is terminated (i) by us without cause or (ii) by Mr. Scully for good reason, then Mr. Scully will be entitled to, subject to his execution of a valid general release and waiver of any claims he may have against us, (a) continued payment of base salary and continued medical benefits (which may consist of our reimbursement of COBRA payments) for a period of eighteen (18) months following his termination date and (b) the pro-rated amount of any annual cash incentive award that he would have otherwise received, based on actual performance, for the fiscal year in which he was terminated. Mr. Scully’s right to receive salary continuation will be reduced to the extent of compensation paid by a subsequent employer. Mr. Scully’s rights to continuation of medical benefits will terminate upon his eligibility for medical benefits with a subsequent employer. In addition, if Mr. Scully’s employment with us is terminated for any reason, Mr. Scully will also be entitled to any earned but unpaid salary.

Libby Wadle. Pursuant to the Amended and Restated Non-Disclosure, Non-Solicitation and Non-Competition agreement between us and Ms. Wadle, dated December 29, 2008 (the “Wadle Agreement”), we have agreed to provide certain payments and benefits to Ms. Wadle on a termination of her employment without cause or for good reason provided that (i) we do not waive any of the post-employment non-competition restrictions in the Wadle Agreement and (ii) Ms. Wadle executes and delivers to us a separation agreement and release in a form acceptable to us and does not revoke such separation agreement and release.

Pursuant to the Wadle Agreement, we may terminate Ms. Wadle’s employment with us for cause (as defined in the Wadle Agreement) or at any time without cause. Ms. Wadle may terminate her employment with us for good reason (as defined in the Wadle Agreement), provided that we will have at least 30 days to remedy the situation resulting in the good reason.

If Ms. Wadle’s employment with us is terminated (i) by us without cause or (ii) by Ms. Wadle for good reason and we do not waive any post-employment non-competition restrictions in the Wadle Agreement, then Ms. Wadle will be entitled to, subject to her execution of a valid separation agreement and release in a form acceptable to us, (a) the pro-rated amount of any annual cash incentive award that she would have otherwise received, based on actual performance, for the fiscal year in which she was terminated, and (b) continued

 

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payment of base salary and continued medical benefits for period of one (1) year following her termination date, except that Ms. Wadle will forfeit any right to the foregoing upon commencing subsequent employment. In addition, if Ms. Wadle’s employment with us is terminated for any reason, Ms. Wadle will also be entitled to any earned but unpaid base salary.

Lynda Markoe. Ms. Markoe is not currently a party to any employment agreement or Non-Disclosure, Non-Solicitation and Non-Competition agreement with the Company. However, upon a termination of employment without cause, Ms. Markoe may be entitled to severance benefits under the standard severance policies of the Company.

Though it is not currently expected that the employment of any of the executive officers will be terminated in connection with the completion of the merger, the following table sets forth an estimate of the potential cash severance payments that would be payable as described above in the event that the employment of an executive officer was terminated without cause or the executive officer resigned for good reason (where applicable) in connection with the merger (assuming, for illustrative purposes, that (1) the executive officer’s employment is terminated on January 29, 2011 (the last day of the Company’s fiscal year), (2) base salaries remain at current levels, and (3) the Company achieves its performance targets for the fiscal year ended January 29, 2011). The value of any accelerated vesting of equity awards to which any executive officer would otherwise be entitled is not included since all outstanding equity awards, with limited exceptions described below, will become fully vested and be cashed out in connection with the closing of the merger as described above.

 

Executive Officer(1)

   Cash Severance Payment     Other
Benefits
 

Trish Donnelly

   $ 750,000 (2)    $ 16,173 (6) 

Millard Drexler

     1,800,000 (3)      N/A   

Tracy Gardner

     N/A        N/A   

Jenna Lyons

     1,000,000 (4)      13,210 (6) 

Lynda Markoe

     153,462 (5)      2,246 (6) 

James Scully

     1,575,000 (2)      24,260 (6) 

Libby Wadle

     1,050,000 (2)      16,173 (6) 

 

(1) Ms. Donnelly became an executive officer on September 1, 2010. Ms. Gardner resigned voluntarily on July 13, 2010.
(2) Represents amount equal to (i) continued payment of base salary for the periods listed below following termination assuming, where applicable, that the executive does not obtain other paid employment during that period and (ii) pro-rated lump sum payment of any annual cash incentive award that the executive would otherwise have received for fiscal year 2010 (assuming target cash incentive award).

 

Executive Officer

   Salary Continuation Period

Trish Donnelly

   One (1) year

James Scully

   Eighteen (18) months

Libby Wadle

   One (1) year

 

(3) Represents amount equal to (i) Mr. Drexler’s base salary and target cash incentive award and (ii) a pro-rated lump sum payment of any annual cash bonus that Mr. Drexler would otherwise have received for fiscal year 2010 based on actual achievement of applicable performance objectives. We have assumed for this purpose that the applicable performance objectives will have been achieved at target levels. Does not include any 280G tax gross up payments provided to Mr. Drexler. For a description of Mr. Drexler’s 280G payments, see “—280G Payments to be Received by Mr. Drexler” beginning on page 87.
(4) Represents amount equal to (i) continued payment of base salary for one (1) year following termination assuming that Ms. Lyons does not obtain other paid employment during that period and (ii) a lump sum payment equal to the annual cash incentive award that she received for the fiscal year ended prior to the fiscal year which includes the assumed termination date ($0). Ms. Lyons did not receive an annual cash incentive award in fiscal year 2009.

 

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(5) Ms. Markoe does not have an employment agreement or other written severance arrangement with the Company. The amount in the table represents a payment of twenty-one (21) weeks of Ms. Markoe’s base salary, determined based upon the Company’s standard discretionary severance policy.
(6) Represents an amount equal to the Company’s total COBRA cost to executive officers to continue coverage under the Company’s health insurance plan for one (1) year in the case of Mss. Donnelly, Lyons and Wadle, for eighteen (18) months in the case of Mr. Scully, and for five (5) months in the case of Ms. Markoe (assuming, in each case, that the executive did not obtain other employment during that period).

280G Payments to be Received by Mr. Drexler

As described above, Mr. Drexler is entitled to receive a gross up in the event that any payment or benefit provided to him in connection with a change in control (as defined in Section 280G of the Code) becomes subject to the excise taxes imposed by Section 4999 of the Code. While other executive officers may also have excess parachute payments that are subject to the excise taxes, no such other executive officer is entitled to a tax gross up from the Company.

Sections 280G and 4999 of the Code impose a 20% non-deductible excise tax on certain employees in connection with change in control payments. Generally, Section 280G applies to any employee, director or independent contractor of a company who is also (i) a 1% or greater stockholder of the company, (ii) one of the 50 highest compensated officers of the company or (iii) a highly compensated individual (an individual whose annual compensation equals or exceeds a threshold ($110,000 for 2010) and who is also a member of the smaller of the following two groups: (1) the highest paid 1% of individuals performing services for the company and (2) the highest paid 250 employees of the company) who receive compensation above specified levels in connection with a change in control of their employer. The excise tax applies if the amounts received by an employee in connection with the change in control (the “parachute payments”) (including any value attributed to the accelerated vesting of options in connection with a change in control) exceed three times such employee’s average W-2 compensation for the five years prior to the year in which the change in control occurs. Amounts subject to the excise tax are also not permitted to be deducted as compensation for federal income tax purposes by the employer.

Based on an analysis performed on December 2, 2010 by a third party advisor to the Company, the value of the gross up to Mr. Drexler is estimated to range between approximately $0 and $3,206,851 depending upon whether or not Mr. Drexler is terminated within one year of the completion of the merger and whether or not the Company is able to rebut certain presumptions regarding the equity granted to Mr. Drexler within one year prior to the completion of the merger. The analysis considered potential severance amounts due to Mr. Drexler upon a qualifying termination, as well as the value to Mr. Drexler of the accelerated vesting of unvested equity awards in connection with the merger. It also made certain basic assumptions in performing its analysis, including, a closing date of the merger of March 15, 2011 and a per share merger price of $43.50. Since the analysis under Section 280G of the Code depends on the facts and circumstances at the time of the completion of the merger, the actual value of the Section 280G tax gross up to Mr. Drexler, if any, may fall outside of the estimated range provided above.

New Employment Arrangements with Mr. Drexler

Effective as of the closing of the merger, Mr. Drexler has agreed to enter into a new employment agreement with Parent and the surviving corporation on the terms set forth in the interim investors agreement. The principal terms of the proposed employment arrangement with Mr. Drexler are set forth below:

 

   

Title. Mr. Drexler will serve as the surviving corporation’s chief executive officer and will also serve as chairman of the board of directors of Parent.

 

   

Term. Mr. Drexler’s initial term of employment will be four years from the closing of the merger, subject to automatic extension for successive one-year periods thereafter unless either Parent or the

 

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surviving corporation, on the one hand, or Mr. Drexler, on the other hand, provides a notice of non-renewal at least 90 days before the expiration of the initial four-year term or any subsequent one-year extension term.

 

   

Base Salary; Annual Bonus. Mr. Drexler will be entitled to receive a base salary of $200,000, and will have an opportunity to earn an annual bonus award based on the achievement of certain performance metrics. The performance metrics associated with Mr. Drexler’s annual bonus will be determined by the board of directors of Parent or a committee thereof on an annual basis. Mr. Drexler’s target annual bonus opportunity will be $800,000.

 

   

Severance. In the event that Mr. Drexler’s employment is terminated prior to the end of the initial four-year term or any subsequent one-year extension term without cause or by Mr. Drexler for good reason, Mr. Drexler will receive, among other things:

 

   

a payment equal to any accrued but unpaid base salary as of the date of termination, the value of any accrued vacation pay, and the amount of any expenses properly incurred by Mr. Drexler prior to the termination date and not yet reimbursed;

 

   

a payment equal to one year’s base salary plus Mr. Drexler’s target bonus;

 

   

a payment equal to the pro-rated annual bonus that Mr. Drexler would have earned for the year in which his termination occurs, based on the actual achievement of applicable performance objectives in the performance year in which the termination date occurs; and

 

   

the immediate vesting of all equity awards previously granted to Mr. Drexler that remain outstanding as of the termination date.

 

   

Section 280G Tax Gross Up. Following the completion of the merger, Mr Drexler will continue to be entitled to a full gross up for excise taxes incurred under Sections 280G and 4999 of the Code in connection with any change in control occurring after the Parent’s equity securities become publicly traded.

 

   

Additional Equity. Mr. Drexler will be granted options to purchase Parent equity interests representing an aggregate of 40% of the equity interests reserved for issuance under an equity incentive plan to be established by Parent in connection with the closing of the merger. These options will vest in four consecutive equal annual installments, in each case based on Mr. Drexler’s continued employment with the surviving corporation, and will vest in full upon the occurrence of a change in control of the surviving corporation or, as described above, a termination of his employment by the surviving corporation without cause or by him for good reason. See “New Management Incentive Plan and Management Co-Investment Opportunities” below.

 

   

Restrictive Covenants. Mr. Drexler will be subject to non-solicitation and non-competition covenants during his employment and for a period of two years and one year, respectively, following the termination of his employment, regardless of the reason for such termination.

Pursuant to the terms of the memorandum of understanding described in “Special Factors—Litigation Relating to the Merger”, Mr. Drexler has agreed to amend the Drexler Agreement to provide that in the event (i) a third party other than Parent and Merger Sub acquires the Company, (ii) such third party offers Mr. Drexler employment on the same or better terms and conditions to Mr. Drexler (including with respect to equity grants) than the terms and conditions contemplated in connection with the merger, and (iii) Mr. Drexler elects not to enter into an employment relationship with such third party, he shall not compete with the Company for the two-year period following the termination of his employment with the Company (other than as a holder of a passive investment not in excess of 5% of the outstanding shares of any publicly traded company).

 

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Drexler Rollover Agreement

Pursuant to a rollover letter agreement dated November 23, 2010, between the MD Parties and Parent, the MD Parties collectively committed to contribute, immediately prior to the consummation of the merger, an aggregate amount of 2,287,545 shares of Company common stock (including 20,000 Restricted Shares held by Mr. Drexler) to Parent (the equivalent of a $99,508,207.50 investment based upon the per share merger consideration of $43.50) in exchange for certain equity securities of Parent. The MD Parties’ commitments pursuant to such letter agreement are conditioned upon the contemporaneous purchase of securities of Parent pursuant to the equity commitments of TPG VI and GEI V and GEI Side V described under the subheading “Financing of the Merger—Equity Financing” and the funding of the debt financing under the subheading “Financing of the Merger—Debt Financing” (or alternative debt financing being obtained in accordance with the merger agreement). Such commitments are further conditioned upon the satisfaction or waiver of the conditions to the obligations of Parent to complete the merger contained in the merger agreement (as determined by TPG VI, GEI V and GEI Side V or as determined by a court enforcing such entities’ equity commitments pursuant to the Company’s specific performance remedy under the merger agreement), the condition that the interim investors agreement described below under the subheading “Interim Investors Agreement” is not terminated (other than by mutual written consent of the parties thereto) and upon the substantially simultaneous consummation of the merger. The Company is an express third-party beneficiary of such letter agreement and has the right to seek specific performance of the commitments of the MD Parties under such letter agreement under the circumstances in which the Company would be permitted by the merger agreement to obtain specific performance requiring Parent to enforce such commitments.

New Management Incentive Plan and Management Co-Investment Opportunities

Pursuant to the interim investors agreement described below under the subheading “Interim Investors Agreement,” TPG agreed with Mr. Drexler to cause Parent to adopt a new management incentive plan in connection with the consummation of the merger with the following terms:

 

   

10% of the shares of Class A common stock of Parent, calculated on a fully diluted basis immediately following the consummation of the merger, will be reserved for issuance under such plan and will be available for issuance to senior management and other employees of the surviving corporation;

 

   

Mr. Drexler will receive option awards with respect to 40% of the shares reserved for issuance under such plan, and options to purchase approximately 45% of the shares reserved for issuance under such plan will be granted to other senior management and key employees, in each case, as soon as practicable after consummation of the merger and the remaining shares reserved for issuance under such plan will be reserved for issuance at a later date; and

 

   

Although no definitive arrangements have been entered into to date, certain members of our management team and other key employees may be invited to invest in the equity of Parent at the same price as Mr. Drexler.

Interim Investors Agreement

TPG and the MD Parties entered into an interim investors agreement on November 23, 2010. The interim investors agreement provides for, among other things, the following:

 

   

Transfer Restrictions. Each of the MD Parties has agreed, and has agreed to cause its affiliates, not to, among other things, transfer prior to the termination date of the interim investors agreement any shares of Company common stock they beneficially own, or enter into any contract, option or other agreement or understanding with respect to any such transfer or with respect to the voting of such shares, subject to exceptions for certain permitted transfers.

 

   

Consent Triggering Rights. Each of the MD Parties and TPG has agreed to pursue the transactions contemplated by the merger agreement until the termination date of the interim investors agreement, provided that this obligation does not restrict Mr. Drexler from taking, or require him to take, any

 

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action in his capacity as an officer or director of the Company, nor does it prevent him from complying with his obligations under the cooperation agreement described below or from engaging or entering into any discussions, agreements, understandings or arrangements with any third party regarding his or his affiliates’ direct or indirect equity participation, investment or reinvestment in any competing proposal (as defined below under “Restrictions on Certain Actions”). TPG must obtain Mr. Drexler’s prior written consent before agreeing to any amendment, modification or waiver of any terms of the merger agreement (i) the effect of which decreases the merger consideration or purchase price, or changes the form of such consideration, (ii) that changes the structure of the transaction or (iii) that could reasonably be expected to adversely affect any MD Party in any material manner. In this section we refer to any such actions taken without the prior written consent of Mr. Drexler as a “consent triggering event.”

 

   

Employment Arrangements. The interim investors agreement provides that, if the transactions contemplated by the merger agreement are consummated, TPG will cause the surviving corporation to, and Mr. Drexler will, enter into an employment agreement with Mr. Drexler on the terms described elsewhere in this section under the subheading “New Employment Arrangements with Mr. Drexler.” In addition, in connection with the consummation of the merger, TPG has agreed to cause Parent to adopt a new management incentive plan on the terms described above under the subheading “New Management Incentive Plan and Management Co-Investment Opportunities.” The interim investors agreement also provides that, if any person proposes to employ Mr. Drexler in connection with any competing proposal, Mr. Drexler must promptly notify TPG of such proposal and, if written, provide an unredacted copy of such proposal to TPG.

 

   

Restrictions on Certain Actions. TPG has agreed that the interim investors agreement will not restrict or prevent any MD Party from engaging or entering into any discussions, agreements, understandings or arrangements with any third person regarding its or its affiliates’ direct or indirect equity participation, investment or reinvestment in any proposal made by any person other than TPG or its affiliates that was initiated in opposition to or in competition with the transactions contemplated by the merger agreement (each, a “competing proposal”), provided that prior to the termination date of the interim investors agreement, such MD Party will not directly or indirectly invest or reinvest in the Company or in any person that acquires or is seeking to acquire the Company or in any direct or indirect successor to the Company’s business. The interim investors agreement further provides that, subject to certain exceptions, no MD Party will directly or indirectly solicit or seek offers, inquiries or proposals for a competing proposal except to the extent the Company is permitted to do so pursuant to the merger agreement. However, this obligation does not restrict Mr. Drexler from taking, or require him to take, any action in his capacity as an officer or director of the Company, nor does it prevent him from complying with his obligations under the cooperation agreement described below or from taking the permitted actions described in the first sentence of this paragraph.

 

   

Fees and Expenses. TPG will cause Parent or Merger Sub to pay the fees and expenses incurred by the MD Parties in connection with the negotiation, interpretation and execution of the interim investors agreement, the merger agreement and any agreements or other matters relating thereto, regardless of whether or not the merger is consummated.

 

   

Rollover Commitment. At closing, shares of Company common stock beneficially owned by Mr. Drexler having an aggregate value of approximately $100 million (based upon the per share merger consideration of $43.50) will be converted into shares of Class A common stock and shares of Class L common stock of Parent in the same proportion that TPG VI and the Leonard Green Entities purchase shares of Class A common stock and Class L common stock of Parent. Shares of Class L common stock of Parent will have a preference that will initially be approximately equal to the greater of $415 million and one-third of the total equity capitalization of Parent and will increase at a 12.5% annual return. The Class L common stock of Parent will also participate in approximately 10% of any additional equity proceeds. Shares of Class A common stock of Parent will represent the right to receive the balance of additional proceeds.

 

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Termination. Subject to certain exceptions, the interim investors agreement will automatically terminate on the earliest of (i) the date the transactions contemplated by the merger agreement are consummated, (ii) the date that the merger agreement is validly terminated in accordance with its terms or (iii) the occurrence of a consent triggering event that is not subsequently cured by TPG within three business days after Mr. Drexler notifies TPG of the consent triggering event.

Cooperation Agreement

On November 23, 2010, we entered into a cooperation agreement with Mr. Drexler. Under the cooperation agreement, Mr. Drexler has agreed to cooperate with, and not take any action intended to frustrate, delay, interfere with or impede, the special committee’s efforts to initiate or solicit takeover proposals and any discussions or negotiations in connection therewith in accordance with the merger agreement. Such cooperation includes:

 

   

participation in meetings, presentations, due diligence sessions and other sessions with persons interested in making a takeover proposal;

 

   

assistance in the preparation of solicitation materials, offering documents and similar documents to be used in connection with such efforts; and

 

   

cooperation and assistance in obtaining any consents, waivers, approvals and authorizations for and in connection with any takeover proposal.

The cooperation agreement also provides that, in the event that the merger agreement is terminated by Parent in certain circumstances or by the Company in accordance with the terms thereof in order for the Company to enter into an acquisition agreement with a third party, Mr. Drexler will, in his capacity as an officer and director of the Company, cooperate with and support and not take any action intended to frustrate, delay or impede the Company’s and such third party’s efforts to consummate the transactions contemplated by such agreement. Such cooperation includes, among other things:

 

   

participation in meetings, presentations, road shows, due diligence sessions and sessions with rating agencies;

 

   

assistance with the preparation of materials for rating agency presentations, offering documents and similar documents required in connection with any financing;

 

   

cooperation and assistance in obtaining any consents, waivers, approvals and authorizations for and in connection with such transactions; and

 

   

cooperation in connection with any filing or submission and in connection with any investigation or other inquiry.

The cooperation agreement will terminate on November 23, 2011.

Employee Benefits

The merger agreement requires Parent or the surviving corporation to continue to provide certain compensation and benefits for a period of one year from the consummation of the merger, as well as take certain actions in respect of employee benefits provided to the Company’s employees, including its executive officers. For a more detailed description of these requirements, please see “The Merger Agreement—Employee Benefit Matters” beginning on page 119.

New Management Arrangements with Other J.Crew Executive Officers

Other than as described above, as of the date of this proxy statement, none of the Company’s executive officers or directors has entered into any amendments or modifications to his or her existing employment arrangements with the Company in connection with the merger, nor has any entered into any employment or other agreement with Parent or its affiliates.

 

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Parent has indicated that it or its affiliates may pursue agreements, arrangements or understandings with the Company’s executive officers, which may include cash, stock and co-investment opportunities. Prior to the effective time of the merger and with the prior consent of the special committee, Parent may initiate negotiations of these agreements, arrangements and understandings, and may enter into definitive agreements regarding employment with, or the right to participate in the equity of, the surviving corporation or Parent on a going-forward basis following the completion of the merger.

Indemnification of Directors and Officers

The Company is organized under the laws of the State of Delaware. Section 145 of the DGCL permits a corporation to include in its charter documents, and in agreements between the corporation and its directors and officers, provisions expanding the scope of indemnification beyond that specifically provided by current law. The Company’s Certificate of Incorporation provides for the indemnification of the Company’s directors to the fullest extent permissible under the DGCL. Consequently, no director will be personally liable to the Company or its stockholders for monetary damages for any breach of fiduciary duties as a director, except liability for:

 

   

any breach of the director’s duty of loyalty to the Company or its stockholders;

 

   

any act or omission not in good faith or which involves intentional misconduct or a knowing violation of law;

 

   

unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the DGCL; or

 

   

any transaction from which the director derived an improper personal benefit.

In addition, the Company’s bylaws provide that the Company is required to indemnify its directors, officers, employees and agents, in each case to the fullest extent permitted by the DGCL. The Company’s bylaws also provide that the Company shall advance expenses incurred by a director, officer, employee or certain agents in advance of the final disposition of any action or proceeding, and permit the Company to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in that capacity regardless of whether the Company would otherwise be permitted to indemnify him or her under the provisions of the DGCL.

The Company has entered into agreements to indemnify its directors, officers and other employees as determined by the Board. These agreements generally provide for indemnification for related expenses including, among other things, attorneys’ fees, judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding. The Company also maintains directors’ and officers’ liability insurance that insures its directors and officers against certain losses and insures the Company with respect to its obligations to indemnify its directors and officers.

The merger agreement provides that Parent and the surviving corporation will honor and fulfill in all respects the indemnification obligations of the Company, including the advancement of expenses incurred in the defense of any action or suit, incurred prior to the effective time of the merger. The certificate of incorporation and by-laws of the surviving corporation will contain provisions no less favorable to the indemnified parties with respect to the limitation of liabilities of directors and officers and indemnification than are set forth in the Company’s organizational documents in effect on November 23, 2010. Furthermore, until the sixth anniversary of the effective time of the merger, the surviving corporation will maintain in effect directors’ and officers’ liability insurance with benefits and coverage levels that are no less favorable than the Company’s existing policies in respect of acts or omissions occurring at or prior to the effective time of the merger, provided that in satisfying such obligations, Parent and the surviving corporation will not be obligated to pay annual premiums in excess of 300% of the amount paid by the Company for coverage for its last full fiscal year (the “Maximum Annual Premium”). If the annual premiums of such insurance coverage exceed such amount, Parent and the surviving corporation will obtain a policy with the greatest coverage available for a cost not exceeding the Maximum Annual Premium.

 

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Intent to Vote in Favor of the Merger.

As of January 21, 2011, the record date for the special meeting, our directors (including Mr. Drexler) and current executive officers owned, in the aggregate, 3,906,178 shares of Company common stock and restricted shares entitled to vote at the special meeting, or collectively approximately 6.11% of the outstanding shares of Company common stock entitled to vote at the special meeting. Our directors and current executive officers have informed us that, as of the date hereof, they intend to vote all of their shares of Company common stock in favor of the adoption of the merger agreement because they believe that the merger is in the best interests of the Company and its unaffiliated stockholders.

Relationship Between Us and Leonard Green and TPG

Relationship with Mr. Coulter

Mr. Coulter is a founding partner of TPG, a director and officer of Parent and Merger Sub and a director and officer in TPG VI’s ultimate general partner, TPG Group Holdings (SBS) Advisors, Inc. As such, Mr. Coulter and his affiliates will have direct and indirect interests in the Company after the merger. Mr. Coulter has also been a member of the Board since 1997 and currently serves as the lead outside director on the Board. For fiscal year 2010, Mr. Coulter received compensation for his services as a director of the Company that is consistent with the compensation received by the other non-employee directors of the Board. Mr. Coulter recused himself from the deliberations and the Board’s determination with respect to the merger agreement and the proposed merger.

Other Relationships

Mr. Drexler, Mr. Scully and Mr. Sloan each has a passive investment interest in certain investment funds affiliated with TPG VI, to which Mr. Drexler has contributed approximately $1.3 million in the aggregate and additionally committed to contribute approximately $170,000, Mr. Scully has contributed approximately $220,000 and additionally committed to contribute approximately $280,000 and Mr. Sloan has contributed approximately $9.2 million and additionally committed to contribute approximately $2.3 million. In addition, in the ordinary course of business Mr. Grand-Jean provides financial advisory and investment services to certain TPG employees.

Except as set forth above and elsewhere in this proxy statement, none of TPG VI, the Leonard Green Entities, Parent or Merger Sub nor any of their respective directors, executive officers or other affiliates had any transactions with us or any of our directors, executive officers or other affiliates that would require disclosure under the rules and regulations of the SEC applicable to this proxy statement. Except as set forth in this proxy statement, neither we nor any of our directors, executive officers or other affiliates had any transactions with Parent, Merger Sub or any of their directors, executive officers or other affiliates that would require disclosure under the rules and regulations of the SEC applicable to this proxy statement.

Negotiations, Transactions, or Material Contacts

Except as set forth above or elsewhere in this proxy statement, none of TPG VI, the Leonard Green Entities, Parent or Merger Sub, nor any of their respective directors, executive officers or other affiliates had any negotiations, transactions or material contacts with us or any of our directors, executive officers or other affiliates during the past two years that would require disclosure under the rules and regulations of the SEC applicable to this proxy statement.

Dividends

Pursuant to the merger agreement, we are prohibited from declaring any dividends following execution of the merger agreement on November 23, 2010.

 

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Determination of the Per Share Merger Consideration

The per share merger consideration was determined through arm’s-length negotiations between Parent, Merger Sub and the Company (acting through the special committee).

Regulatory Matters

In connection with the merger, we are required to make certain filings with, and comply with certain laws of, various federal and state governmental agencies, including:

 

   

filing the certificate of merger with the Secretary of State of the State of Delaware in accordance with the DGCL after the adoption of the merger agreement by our stockholders; and

 

   

complying with U.S. federal securities laws.

In addition, under the HSR Act, and the related rules and regulations that have been issued by the Federal Trade Commission (“FTC”), certain transactions having a value above specified thresholds may not be consummated until specified information and documentary material have been furnished to the FTC and the Antitrust Division of the Department of Justice and certain waiting period requirements have been satisfied. The requirements of the HSR Act apply to the acquisition of shares of Company common stock in the offer and the merger.

The parties were granted early termination of the waiting period under the HSR Act on January 7, 2011.

At any time before or after consummation of the merger, notwithstanding the early termination of the waiting period under the HSR Act, the Antitrust Division of the DOJ, the FTC or state or foreign antitrust and competition authorities could take such action under applicable antitrust laws as each deems necessary or desirable in the public interest, including seeking to enjoin the consummation of the merger or seeking divestiture of substantial assets of the Company or Parent. Private parties may also seek to take legal action under the antitrust laws under certain circumstances.

None of the parties is aware of any other required regulatory approvals.

Fees and Expenses

 

Description

   Amount (in thousands)  

SEC Filing Fees

   $ 213   

Financial advisory and legal fees and expenses

   $ 31,730   

Printing, proxy solicitation and mailing costs

   $ 270   

Miscellaneous

   $ 220   

For information on fees payable to the special committee, see “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger—Special Committee Compensation.”

Certain Material United States Federal Income Tax Consequences

The following is a general summary of certain material U.S. federal income tax consequences to holders of shares of Company common stock upon the exchange of shares of Company common stock for cash pursuant to the merger. This summary does not purport to be a comprehensive description of all of the tax consequences that may be relevant to a decision to dispose of shares of Company common stock in the merger, including tax considerations that arise from rules of general application to all taxpayers or to certain classes of investors or that are generally assumed to be known by investors. This summary is based on the Internal Revenue Code of 1986,

 

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as amended (the “Code”), Treasury regulations, administrative rulings and court decisions, all as in effect as of the date hereof and all of which are subject to differing interpretations and/or change at any time (possibly with retroactive effect). In addition, this summary is not a complete description of all the tax consequences of the merger and, in particular, may not address U.S. federal income tax considerations for holders of shares of Company common stock received in connection with the exercise of employee stock options or otherwise as compensation, holders that validly exercise their rights under Delaware law to object to the merger, or holders subject to special treatment under U.S. federal income tax law (such as insurance companies, banks, tax-exempt entities, financial institutions, broker-dealers, partnerships, S corporations or other pass-through entities, mutual funds, traders in securities who elect the mark-to-market method of accounting, tax-deferred or other retirement accounts, holders subject to the alternative minimum tax, U.S. persons that have a functional currency other than the U.S. dollar, certain former citizens or residents of the United States or holders that hold shares of Company common stock as part of a hedge, straddle, integration, constructive sale or conversion transaction). In addition, this summary does not discuss any consequences to shareholders of the Company that will directly or indirectly hold an ownership interest in Parent or the Company after the merger (except as specifically described below), to holders of options or warrants to purchase shares of Company common stock, any aspect of state, local or foreign tax law that may be applicable to any holder of shares of Company common stock, or any U.S. federal tax considerations other than U.S. federal income tax considerations. This summary assumes that holders own shares of Company common stock as capital assets.

We have not sought and will not seek any opinion of counsel or any ruling from the Internal Revenue Service with respect to the matters discussed herein. We urge holders of shares of Company common stock to consult their own tax advisors with respect to the specific tax consequences to them in connection with the offer and the merger in light of their own particular circumstances, including the tax consequences under state, local, foreign and other tax laws.

Characterization of the Merger

For U.S. federal income tax purposes, Merger Sub should be disregarded as a transitory entity, and the merger of Merger Sub with and into the Company should be treated as a taxable transaction to holders of our common stock and should not be treated as a taxable transaction to the Company. We intend to take the position that, as a result of the merger, holders of our common stock should be treated for U.S. federal income tax purposes as if they (a) sold a portion of their stock for cash and (b) had a portion of their stock redeemed by the Company for cash.

Due to the lack of legislative, judicial or other interpretive authority on this matter, it is unclear how the allocation of proceeds between the deemed sale and deemed redemption portions of the transaction should be determined. We intend to take the position that (a) the portion of our common stock that is converted, by reason of the merger, into the cash proceeds provided directly or indirectly by Parent is being sold for cash and (b) we are redeeming that portion of our common stock that is converted, by reason of the merger, into the cash proceeds of indebtedness incurred by Merger Sub and assumed by us in connection with the merger. There can be no assurance, however, that the Internal Revenue Service will agree with such allocation.

TPG VI and the Leonard Green Entities are not expected to recognize gain or loss for federal income tax purposes as a result of the merger.

U.S. Holders

Except as otherwise set forth below, the following discussion is limited to the U.S. federal income tax consequences relevant to a beneficial owner of shares of Company common stock that is a citizen or resident of the United States, a domestic corporation (or any other entity or arrangement treated as a corporation for U.S. federal income tax purposes), any estate (other than a foreign estate), and any trust if (i) a court within the United States is able to exercise primary supervision over the administration of the trust, and (ii) one or more U.S. persons have the authority to control all substantial decisions of the trust (a “U.S. Holder”).

 

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If a partnership (including any entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds shares of Company common stock , the tax treatment of a holder that is a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership. Such holders should consult their own tax advisors regarding the tax consequences of exchanging the shares of Company common stock pursuant to the offer or pursuant to the merger.

Payments with Respect to Shares of Company Common Stock

The exchange of shares of Company common stock for cash pursuant to the merger will be a taxable transaction for U.S. federal income tax purposes, and a U.S. Holder who receives cash for shares of Company common stock pursuant to the merger will generally recognize gain or loss, if any, equal to the difference between the amount of cash received and the holder’s adjusted tax basis in the shares of Company common stock. Gain or loss must be determined separately for each block of shares (i.e., shares acquired at the same cost in a single transaction). Such gain or loss will be capital gain or loss, and will be long-term capital gain or loss if such U.S. Holder’s holding period for the shares of Company common stock is more than one year at the time of the exchange of such holder’s shares of Company common stock for cash. Long-term capital gains recognized by an individual holder generally are subject to tax at a lower rate than short-term capital gains or ordinary income. There are limitations on the deductibility of capital losses. Holders of our common stock should consult their tax advisors regarding the determination and allocation of their tax basis in their stock surrendered in the merger.

Rollover Investors

Parent, the Company and the Rollover Investors expect to take the position that, with respect to shares of Company common stock owned by the Rollover Investors that are not Rollover Shares, the U.S. federal income tax consequences to the Rollover Investors of the merger will generally be the same as the tax consequences to U.S. Holders, and that the Rollover Investors will generally not recognize gain or loss with respect to their contribution of the Rollover Shares to Parent, in which case the Rollover Investors’ tax basis in their Parent shares will generally equal their tax basis in the Rollover Shares contributed to Parent and their holding period in the Parent shares received will generally include the holding period of the Rollover Shares. Alternative tax treatments of the Rollover Investors are possible, which may in part depend on the particular circumstances of the Rollover Investors, and there can be no assurance that the Internal Revenue Service will agree with the expected treatment described above. If, however, there is any vesting in connection with the merger of restricted Rollover Shares (or an exchange of any restricted Rollover Shares for unrestricted Parent shares), the Rollover Investors will recognize income with respect to such Rollover Shares.

Backup Withholding Tax and Information Reporting

Payments made with respect to shares of Company common stock exchanged for cash in the merger may be subject to information reporting, and such payments will be subject to U.S. federal backup withholding tax unless the U.S. Holder (i) furnishes an accurate tax identification number or otherwise complies with applicable U.S. information reporting or certification requirements (typically, by completing and signing an IRS Form W-9) or (ii) is a corporation or other exempt recipient and, when required, demonstrates such fact. Backup withholding is not an additional tax and any amounts withheld under the backup withholding rules may be refunded or credited against a U.S. Holder’s United States federal income tax liability, if any, provided that such U.S. Holder furnishes the required information to the Internal Revenue Service in a timely manner.

Non-U.S. Holders

The following is a summary of certain U.S. federal income tax consequences that will apply to a Non-U.S. Holder of shares of Company common stock. The term “Non-U.S. Holder” means a beneficial owner, other than a partnership, of shares of Company common stock that is not a U.S. Holder.

Non-U.S. Holders should consult their own tax advisors to determine the specific U.S. federal, state, local and foreign tax consequences that may be relevant to them.

 

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Payments with Respect to Shares of Company Common Stock

Payments made to a Non-U.S. Holder with respect to shares of Company common stock exchanged for cash pursuant to the merger generally will be exempt from U.S. federal income tax, unless:

 

  (a) the gain on shares of Company common stock, if any, is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States (and, if certain income tax treaties apply, is attributable to the Non-U.S. Holder’s permanent establishment in the United States) in which event (i) the Non-U.S. Holder will be subject to U.S. federal income tax as described under “U.S. Holders,” but such Non-U.S. Holder should provide an IRS Form W-8ECI instead of an IRS Form W-9, and (ii) if the Non-U.S. Holder is a corporation, it may be subject to branch profits tax on such gain at a 30 percent rate (or such lower rate as may be specified under an applicable income tax treaty);

(b) the Non-U.S. Holder is an individual who was present in the United States for 183 days or more in the taxable year and certain other conditions are met, in which event the Non-U.S. Holder will be subject to tax at a flat rate of 30 percent (or such lower rate as may be specified under an applicable income tax treaty) on the gain from the exchange of the shares of Company common stock net of applicable U.S. losses from sales or exchanges of other capital assets recognized during the year; or

(c) the Non-U.S. Holder is an individual subject to tax pursuant to U.S. tax rules applicable to certain expatriates.

Backup Withholding Tax and Information Reporting

In general, a Non-U.S. Holder will not be subject to backup withholding and information reporting with respect to a payment made with respect to shares of Company common stock exchanged for cash in the merger if the Non-U.S. Holder has provided an IRS Form W-8BEN (or an IRS Form W-8ECI if the Non-U.S. Holder’s gain is effectively connected with the conduct of a U.S. trade or business). If shares are held through a foreign partnership or other flow-through entity, certain documentation requirements also apply to the partnership or other flow-through entity. Backup withholding is not an additional tax and any amounts withheld under the backup withholding rules may be refunded or credited against a Non-U.S. Holder’s United States federal income tax liability, if any, provided that such Non-U.S. Holder furnishes the required information to the Internal Revenue Service in a timely manner.

Delisting and Deregistration of the Company’s Common Shares

If the merger is completed, the shares of Company common stock will be delisted from the NYSE and deregistered under the Exchange Act of 1934, as amended, and shares of Company common stock will no longer be publicly traded.

Litigation Relating to the Merger

Between November 24, 2010 and December 16, 2010, sixteen purported class action complaints related to the merger (the “Stockholder Actions”) were filed against some or all of the following: the Company, certain officers of the Company, the members of the Board, Parent, Merger Sub, TPG, TPG VI, Leonard Green and the Leonard Green Entities.

On November 24, 2010, one of the Stockholder Actions was filed in the Court of Chancery of the State of Delaware, captioned New Orleans Employees’ Retirement System v. J. Crew Group, Inc., et al., C.A. No. 6016 (the “NOERS Complaint”). The plaintiff in the NOERS Complaint alleges, among other things, (1) that the Company and the members of the Board breached their fiduciary duties to the Company’s public stockholders by authorizing the merger for inadequate consideration and pursuant to an inadequate process, and (2) that TPG and

 

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Leonard Green aided and abetted the other defendants’ alleged breaches of fiduciary duty. The NOERS Complaint seeks, among other things, an order enjoining the defendants from placing their interests ahead of those of the Company and its stockholders, an order enjoining the defendants from initiating any defensive measures that would inhibit the Board’s ability to maximize value for the Company’s stockholders, an award of compensatory damages and an award of fees, expenses and costs.

From December 2, 2010, to December 8, 2010, six additional complaints were filed in the Court of Chancery of the State of Delaware, seeking substantially the same relief and making substantially the same allegations as the NOERS Complaint. The additional complaints have the following captions: Local 542 International Union of Operating Engineers Pension Fund of Eastern Pennsylvania and Delaware v. J. Crew Group., Inc., et al., C.A. No. 6035 (filed December 2, 2010); City of Orlando Police Pension Fund v. Drexler, et al., C.A. No. 6038 (filed December 2, 2010); Southeastern Pennsylvania Transportation Authority v. Casati, et al., C.A. No. 6043 (filed December 3, 2010); Vogel v. J.Crew Group, Inc., et al., C.A. No. 6045 (filed December 3, 2010); City of Orlando Firefighters’ Pension Fund v. Drexler, et al., C.A. No. 6052 (filed December 7, 2010); and Westco Fruit & Nuts, Inc. v. J.Crew Group, Inc., et al., C.A. No. 6057 (filed December 8, 2010) (together with the NOERS Complaint, the “Delaware Actions”). Certain of the Delaware Actions additionally allege (1) that certain officers of the Company will be unjustly enriched as a consequence of the merger, and (2) that the members of the Board breached their fiduciary duties to the Company’s public stockholders by, among other things, failing to disclose all material information about the merger to the Company’s stockholders. Certain of the Delaware Actions additionally seek (1) an order requiring the defendants to disclose all material information relating to the merger, (2) an order canceling or voiding any shares or options vested by operation of the merger agreement, and (3) an order eliminating or modifying certain provisions of the merger agreement.

On November 24, 2010, one of the Stockholder Actions was filed in the Supreme Court of the State of New York, captioned Church v. J.Crew Group, Inc., et al., No. 652101-2010 (the “Church Complaint”). The plaintiff in the Church Complaint alleges, among other things, (1) that certain officers and the Board breached their fiduciary duties to the Company’s public stockholders by authorizing the merger for inadequate consideration and pursuant to an inadequate process, and (2) that the Company, TPG, and Leonard Green aided and abetted the other defendants’ alleged breaches of fiduciary duty. The Church Complaint seeks, among other things, an order enjoining the defendants from completing the merger, an order rescinding the merger to the extent already implemented, the imposition of a constructive trust in favor of the plaintiff and the members of the purported class upon any benefits received by the defendants as a result of the allegedly wrongful conduct and an award of fees, expenses and costs.

From November 30, 2010 to December 16, 2010, six additional complaints were filed in the Supreme Court of the State of New York, seeking substantially the same relief and making substantially the same allegations as the Church Complaint. The additional complaints have the following captions: Taki v. J. Crew Group, Inc., et al., No. 652125-2010 (filed November 30, 2010); Weisenberg v. J. Crew Group, Inc., et al., No. 10115564-2010 (filed November 30, 2010) (the “Weisenberg Complaint”); Hekstra v. J.Crew Group Inc., et al., No. 652175-2010 (filed December 3, 2010); St. Louis v. J. Crew Group, Inc., et al., No. 652201-2010 (filed December 7, 2010); Peoria Police Pension Fund v. Drexler, et al., No. 652239-2010 (filed December 10, 2010); and KBC Asset Management NV v. J. Crew Group, Inc., et al., No. 652287-2010 (filed December 16, 2010) (together with the Church Complaint, the “New York Actions”). Certain of the New York Actions additionally allege that the members of the Board breached their fiduciary duties to the Company’s public stockholders by, among other things, failing to disclose all material information about the merger to the Company’s stockholders. On December 14, 2010, the plaintiff in the Weisenberg Complaint filed an amended complaint.

From December 1, 2010 to December 14, 2010, two of the Stockholder Actions were filed in the United States District Court for the Southern District of New York (the “Federal Actions”), captioned Brazin v. J Crew Group, Inc., et al., No. 10 Civ. 8988 (filed December 1, 2010) (the “Brazin Complaint”) and Caywood v. Drexler, et al., No. 10 Civ. 9328 (filed December 14, 2010) (the “Caywood Complaint”). The Federal Actions

 

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seek substantially the same relief and make substantially the same allegations as the other Stockholder Actions. The plaintiff in the Caywood Complaint additionally alleges that the members of the Board breached their fiduciary duties to the Company’s public stockholders by, among other things, failing to disclose all material information about the merger to the Company’s stockholders, and that the Board’s failure to disclose such information violated federal securities laws. On December 28, 2010, the plaintiff in the Brazin Complaint filed an amended complaint (the “Amended Brazin Complaint”). The Amended Brazin Complaint additionally alleges that the Company and the Board failed to disclose all material information about the merger to the Company’s stockholders, and that the failure to disclose such information violated federal securities laws. The Amended Brazin Complaint additionally seeks an order enjoining the defendants from completing the merger unless and until the Company makes a full and complete disclosure of all material facts regarding the merger.

By order of December 9, 2010, the Delaware Actions were consolidated into In re J.Crew Group, Inc. Shareholders Litigation, C.A. No. 6043 (the “Consolidated Delaware Action”). The parties in the Consolidated Delaware Action have begun discovery and the court has entered a stipulated scheduling order. A preliminary injunction hearing is scheduled to be held in the Consolidated Delaware Action on February 24, 2011. On January 14, 2011, the plaintiffs in the Consolidated Delaware Action filed a consolidated amended complaint.

The defendants have moved to stay and/or dismiss the New York Actions and Federal Actions in favor of the Consolidated Delaware Action. On January 13, 2011, the court in the New York Actions held that the New York Actions will be stayed.

On January 16, 2011, the parties to the Consolidated Delaware Action entered into a memorandum of understanding providing for a settlement of the Consolidated Delaware Action (the “memorandum of understanding”), subject to the approval of the Board and the special committee, and pending execution of a more formal settlement agreement, which will be subject to court approval. The memorandum of understanding, which is an agreement among the parties to the Consolidated Delaware Action, has not been submitted to the court for review and approval. A more formal settlement agreement implementing the memorandum of understanding, along with related settlement papers, will be submitted to the court at a later date for approval. Pursuant to the memorandum of understanding, the Company, Parent and Merger Sub agreed to amend the Agreement and Plan of Merger, dated November 23, 2010, to incorporate the following terms:

 

   

The extension of the go shop period by 31 days through February 15, 2011.

 

   

The reduction of the termination fee payable by the Company in certain circumstances to $20 million, plus up to $5 million for reimbursement of expenses.

 

   

If the Company receives a third party acquisition proposal pursuant to which the stockholders of the Company would be entitled to receive consideration having a value of $45.50 or more per share that the Board (acting through the special committee) determines is a superior proposal, Parent’s right to match the third party acquisition proposal is eliminated.

 

   

If the Company receives a third party acquisition proposal that would entitle the stockholders of the Company to receive consideration having a value of between $44.00 and $45.49 per share that the Board (acting through the special committee) determines is a superior proposal and the third party fails to acquire the Company because of a subsequent superior proposal, the third party is entitled to reimbursement of its reasonable and documented expenses up to $3 million.

 

   

Parent does not have the contractual right to receive certain information regarding the results of the go shop period until the expiration of the extension of the go shop period on February 15, 2011.

 

   

The closing of any transaction with Parent and Merger Sub is conditioned on a majority of the Company’s unaffiliated stockholders voting in favor of the transaction.

 

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For more information regarding Amendment No. 1 to the Agreement and Plan of Merger, see “The Merger Agreement.”

The memorandum of understanding also contemplates the following terms:

 

   

When and if the merger closes, the Company (or its insurers) will make a one-time settlement payment of $10 million to members of a class of the Company’s stockholders (which shall exclude the defendants in the Consolidated Delaware Action and certain other persons). The $10 million settlement payment will be distributed pro rata based on share holdings at the closing to each member of the class. Neither the Company nor its insurers will deduct legal fees from this payment. The definition of the class will be determined at a later time in the court proceedings. As noted above, the settlement payment is a part of the memorandum of understanding that is subject to the pending execution of a settlement agreement amongst the parties and will require court review and approval.

 

   

In the event that (i) a third party other than Parent and Merger Sub acquires the Company, (ii) such third party offers Mr. Drexler employment on the same or better terms and conditions to Mr. Drexler (including with respect to equity grants) than the terms and conditions contemplated in connection with the merger, and (iii) Mr. Drexler elects not to enter into an employment relationship with such third party, Mr. Drexler agreed that for the two-year period following the termination of his employment with the Company, he shall not compete with the Company (other than as a holder of a passive investment not in excess of 5% of the outstanding shares of any publicly traded company).

 

   

The special committee agreed to consider in good faith comments made by the plaintiffs in the Consolidated Delaware Action on the form confidentiality agreement provided to potential bidders during the go shop process, any changes to which would also be made to the existing confidentiality agreement among the Company, TPG and Leonard Green. Among other things, the special committee agreed to limit any standstill agreement in such confidentiality agreements to six months.

 

   

The Company represented and confirmed that any third parties that sign the confidentiality agreement will have access to the same information that TPG and Leonard Green received, except that the Company’s competitors may receive a more limited set of information.

 

   

The Company agreed to amend the proxy statement to address certain disclosure requests made by the plaintiffs in the Consolidated Delaware Action, which specific requests will be considered by the Company in good faith.

 

   

The plaintiffs in the Consolidated Delaware Action agreed to provide the defendants and their affiliates a full and appropriate release of all claims that were asserted or that could have been asserted in the Consolidated Delaware Action, the specific wording of which would be negotiated in good faith.

The defendants have denied and continue to deny any wrongdoing or liability with respect to all claims, events, and transactions complained of in Consolidated Delaware Action or that they have engaged in any wrongdoing. The defendants have entered into the settlement to eliminate the uncertainty, burden, risk, expense and distraction of further litigation.

As discussed under “Special Factors—Recommendation of Our Board of Directors and Special Committee; Reasons for Recommending the Adoption of the Merger Agreement; Fairness of the Merger,” the special committee and the Board approved the memorandum of understanding and Amendment No. 1 on January 17, 2011, and the Company, Parent and Merger Sub entered into Amendment No. 1 on January 18, 2011.

The Company and the Board believe that the claims in the Stockholder Actions are without merit and are defending against all pending claims vigorously.

 

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THE SPECIAL MEETING

We are furnishing this proxy statement to the Company’s stockholders as part of the solicitation of proxies by the Board for use at the special meeting.

Date, Time and Place

We will hold the special meeting at 10:00 a.m., local time, on March 1, 2011, at The New Museum, 235 Bowery, New York, New York 10002. Seating will be limited to stockholders. Admission to the special meeting will be on a first-come, first-served basis. If you plan to attend the special meeting, please note that you may be asked to present valid photo identification, such as a driver’s license or passport. Stockholders owning stock in brokerage accounts must bring a copy of a brokerage statement reflecting stock ownership as of the record date. Cameras, recording devices and other electronic devices will not be permitted at the meeting.

Purpose of the Special Meeting

The special meeting is being held for the following purposes:

 

   

To adopt the merger agreement (see “The Merger Agreement” beginning on page 105); and

 

   

To approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement.

A copy of the Agreement and Plan of Merger and Amendment No.  1 to the Agreement and Plan of Merger are attached as Annex A and Annex B to this proxy statement, respectively.

Recommendation of Our Board of Directors and Special Committee

The Board, after careful consideration and acting on the unanimous recommendation of the special committee composed entirely of independent directors, deemed it advisable and in the best interests of the Company and its unaffiliated stockholders that the Company enter into the merger agreement, determined that the merger agreement and the transactions contemplated by the merger agreement, including the merger, are advisable, fair (both substantively and procedurally) to and in the best interests of the Company and its unaffiliated stockholders and recommended that the Company’s stockholders adopt the merger agreement at the special meeting. The Board recommends that our stockholders vote “FOR” the adoption of the merger agreement. In connection with the approval of the merger agreement by the Board, Messrs. Coulter and Drexler recused themselves and Ms. Reisman was unavailable.

Record Date; Stockholders Entitled to Vote; Quorum

Only holders of record of Company common stock at the close of business on January 21, 2011, the record date, are entitled to notice of and to vote at the special meeting. On the record date, 63,907,720 shares of Company common stock were issued and outstanding and held by 77 holders of record. Holders of record of shares of Company common stock on the record date are entitled to one vote per share of Company common stock at the special meeting on each proposal. For ten days prior to the meeting, a complete list of stockholders entitled to vote at the meeting will be available for examination by any stockholder, for any purpose relating to the meeting, during ordinary business hours at our offices located at 770 Broadway, New York, New York 10003.

Shares of Company common stock represented by proxies reflecting abstentions and properly executed broker non-votes will be counted as present and entitled to vote for purposes of determining a quorum. A broker non-vote occurs when a broker, dealer, commercial bank, trust company or other nominee does not vote on a particular matter because such broker, dealer, commercial bank, trust company or other nominee does not have

 

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the discretionary voting power with respect to that proposal and has not received voting instructions from the beneficial owner. Brokers, dealers, commercial banks, trust companies and other nominees will not have discretionary voting power with respect to the proposal to adopt the merger agreement. A quorum will be present at the special meeting if the holders of a majority of the shares of Company common stock outstanding and entitled to vote on the record date are present, in person or by proxy. In the event that a quorum is not present, or if there are insufficient votes to adopt the merger agreement at the time of the special meeting, it is expected that the meeting will be adjourned or postponed to solicit additional proxies.

Vote Required

Adoption of the Merger Agreement

The adoption of the merger agreement by our stockholders requires the affirmative vote of (i) stockholders holding at least a majority of the outstanding shares of the Company’s common stock at the close of business on the record date and (ii) stockholders holding at least a majority of the outstanding shares of the Company’s common stock at the close of business on the record date other than shares owned, directly or indirectly, by Parent, Merger Sub, the Rollover Investors, any other officers or directors of the Company or any of their respective affiliates or associates (as defined under Section 12b-2 of the Exchange Act).

Failure to vote your shares of Company common stock will have the same effect as a vote “AGAINST” the proposal to adopt the merger agreement.

Approval of the Adjournment of the Special Meeting

The approval of the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement requires the affirmative vote of the holders of at least of a majority of the shares of Company common stock present and entitled to vote at the special meeting as of the record date, whether or not a quorum is present.

Stock Ownership and Interests of Certain Persons

As of January 21, 2011, the record date for the special meeting, our directors (including Mr. Drexler) and current executive officers owned, in the aggregate, 3,906,178 shares of Company common stock and restricted shares entitled to vote at the special meeting, or collectively approximately 6.11% of the outstanding shares of Company common stock entitled to vote at the special meeting. Our directors and current executive officers have informed us that they intend, as of the date hereof, to vote all of their shares of Company common stock in favor of the adoption of the merger agreement.

Certain members of our management and the Board have interests that may be different from, or in addition to, those of our stockholders generally. Mr. Drexler has agreed to enter into a new employment agreement, effective as of the closing of the merger, with Parent and the surviving corporation. For more information, please read “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger” beginning on page 80.

Voting Procedures

Ensure that your shares of Company common stock can be voted at the special meeting by submitting your proxy or contacting your broker, dealer, commercial bank, trust company or other nominee.

If your shares of Company common stock are registered in the name of a broker, dealer, commercial bank, trust company or other nominee: check the voting instruction card forwarded by your broker, dealer, commercial bank, trust company or other nominee to see which voting options are available or contact your broker, dealer, commercial bank, trust company or other nominee in order to obtain directions as to how to ensure that your shares of Company common stock are voted at the special meeting.

 

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If your shares of Company common stock are registered in your name: submit your proxy as soon as possible by telephone, via the Internet or by signing, dating and returning the enclosed proxy card in the enclosed postage-paid envelope, so that your shares of Company common stock can be voted at the special meeting.

Instructions regarding telephone and Internet voting are included on the proxy card.

The failure to vote will have the same effect as a vote against the proposal to adopt the merger agreement. If you sign, date and mail your proxy card without indicating how you wish to vote, your proxy will be voted in favor of the proposal to adopt the merger agreement and the proposal to adjourn the special meeting, if necessary and appropriate, to solicit additional proxies.

For additional questions about the merger, assistance in submitting proxies or voting shares of Company common stock, or to request additional copies of the proxy statement or the enclosed proxy card, please contact:

MacKenzie Partners, Inc.

105 Madison Avenue

New York, New York 10016

Toll-Free: 800-322-2885

Collect: 212-929-5500

Email: jcrewproxy@mackenziepartners.com

Voting by Proxy or in Person at the Special Meeting

Holders of record can ensure that their shares of Company common stock are voted at the special meeting by completing, signing, dating and delivering the enclosed proxy card in the enclosed postage-paid envelope. Submitting by this method or voting by telephone or the Internet as described below will not affect your right to attend the special meeting and to vote in person. If you plan to attend the special meeting and wish to vote in person, you will be given a ballot at the special meeting. Please note, however, that if your shares of Company common stock are held in “street name” by a broker, dealer, commercial bank, trust company or other nominee and you wish to vote at the special meeting, you must bring to the special meeting a proxy from the record holder of those shares of Company common stock authorizing you to vote at the special meeting.

If you vote your shares of Company common stock by submitting a proxy, your shares will be voted at the special meeting as you indicated on your proxy card or Internet or telephone proxy. If no instructions are indicated on your signed proxy card, all of your shares of Company common stock will be voted “FOR” the adoption of the merger agreement and approval to postpone or adjourn the special meeting, if necessary or appropriate, to solicit additional proxies in the event there are not sufficient votes at the time of the special meeting to approve the proposal to adopt the merger agreement. You should return a proxy by mail, by telephone or via the Internet even if you plan to attend the special meeting in person.

Electronic Voting

Our holders of record and many stockholders who hold their shares of Company common stock through a broker, dealer, commercial bank, trust company or other nominee will have the option to submit their proxy cards or voting instruction cards electronically by telephone or the Internet. Please note that there are separate arrangements for voting by telephone and Internet depending on whether your shares of Company common stock are registered in our records in your name or in the name of a broker, dealer, commercial bank, trust company or other nominee. If you hold your shares of Company common stock through a broker, bank or other nominee, you should check your voting instruction card forwarded by your broker, dealer, commercial bank, trust company or other nominee to see which options are available.

Please read and follow the instructions on your proxy card or voting instruction card carefully.

 

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Other Business

We do not expect that any matter other than the (a) proposal to adopt the merger agreement and (b) the approval of the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement, will be brought before the special meeting. If, however, other matters are properly presented at the special meeting, the persons named as proxies will vote in accordance with their best judgment with respect to those matters.

Revocation of Proxies

Submitting a proxy on the enclosed form does not preclude a stockholder from voting in person at the special meeting. A stockholder of record may revoke a proxy at any time before it is voted by filing with our corporate secretary a duly executed revocation of proxy, by properly submitting a proxy by mail, the Internet or telephone with a later date or by appearing at the special meeting and voting in person. A stockholder of record may revoke a proxy by any of these methods, regardless of the method used to deliver the stockholder’s previous proxy. Attendance at the special meeting without voting will not itself revoke a proxy. If your shares of Company common stock are held in street name, you must contact your broker, dealer, commercial bank, trust company or other nominee to revoke your proxy.

Rights of Stockholders Who Object to the Merger

Stockholders are entitled to statutory appraisal rights under Delaware law in connection with the merger. This means that you are entitled to have the value of your shares of Company common stock determined by the Court of Chancery of the State of Delaware, and to receive payment based on that valuation instead of receiving the merger consideration. The ultimate amount you would receive in an appraisal proceeding may be more than, the same as or less than the amount you would have received under the merger agreement.

To exercise your appraisal rights, you must submit a written demand for appraisal to us before the vote is taken on the merger agreement and you must NOT vote in favor of the adoption of the merger agreement. Your failure to follow exactly the procedures specified under Delaware law will result in the loss of your appraisal rights. See “Appraisal Rights” beginning on page 132 and the text of the Delaware appraisal rights statute, Section 262 of the General Corporation Law of the State of Delaware, which is reproduced in its entirety as Annex D to this proxy statement.

Solicitation of Proxies

This proxy solicitation is being made by the Company on behalf of the Board and will be paid for by the Company. The Company’s directors, officers and employees may also solicit proxies by personal interview, mail, e-mail, telephone, facsimile or other means of communication. These persons will not be paid additional remuneration for their efforts. The Company will also request brokers, dealers, commercial banks, trust companies and other nominees to forward proxy solicitation material to the beneficial owners of shares of Company common stock that the brokers, dealers, commercial banks, trust companies and other nominees hold of record. Upon request, the Company will reimburse them for their reasonable out-of-pocket expenses.

Assistance

If you need assistance in completing your proxy card or have questions regarding the special meeting, please contact MacKenzie Partners toll-free at 800-322-2885, collect at 212-929-5500, by email at jcrewproxy@mackenziepartners.com or at 105 Madison Avenue, New York, New York 10016.

 

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THE MERGER AGREEMENT

The following is a summary of the material terms and conditions of the merger agreement. The description in this section and elsewhere in this proxy statement is qualified in its entirety by reference to the complete text of the Agreement and Plan of Merger, dated as of November 23, 2010, and Amendment No. 1 to the Agreement and Plan of Merger, dated as of January 18, 2011, copies of which are attached as Annex A and Annex B, respectively, and are incorporated by reference into this proxy statement. This summary does not purport to be complete and may not contain all of the information about the merger agreement that is important to you. We encourage you to read the merger agreement carefully and in its entirety because it is the legal document that governs this merger.

Explanatory Note Regarding the Merger Agreement

The merger agreement and this summary of its terms have been included to provide you with information regarding the terms of the merger agreement. Factual disclosures about the Company contained in this proxy statement or in the Company’s public reports filed with the SEC may supplement, update or modify the factual disclosures about the Company contained in the merger agreement and described in this summary. The representations, warranties and covenants made in the merger agreement by the Company, Parent and Merger Sub were qualified and subject to important limitations agreed to by the Company, Parent and Merger Sub in connection with negotiating the terms of the merger agreement. In particular, in your review of the representations and warranties contained in the merger agreement and described in this summary, it is important to bear in mind that the representations and warranties were negotiated with the principal purposes of establishing the circumstances in which a party to the merger agreement may have the right not to close the merger if the representations and warranties of the other party prove to be untrue due to a change in circumstance or otherwise, and allocating risk between the parties to the merger agreement, rather than establishing matters as facts. The representations and warranties may also be subject to a contractual standard of materiality different from those generally applicable to stockholders and reports and documents filed with the SEC and in some cases were qualified by disclosures that were made by each party to the other, which disclosures are not reflected in the merger agreement. Moreover, information concerning the subject matter of the representations and warranties, which do not purport to be accurate as of the date of this proxy statement, may have changed since the date of the merger agreement and subsequent developments or new information qualifying a representation or warranty may have been included in this proxy statement.

Effects of the Merger; Directors and Officers; Certificate of Incorporation; Bylaws

The merger agreement provides for the merger of Merger Sub with and into the Company upon the terms, and subject to the conditions, set forth in the merger agreement. As the surviving corporation, the Company will continue to exist following the merger.

The board of directors of the surviving corporation will, from and after the effective time, consist of the directors of Merger Sub until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal. The officers of the surviving corporation will, from and after the effective time, be the officers of the Company until their successors have been duly appointed and qualified or until their earlier death, resignation or removal.

At the effective time, the certificate of incorporation and bylaws of the surviving corporation will be in the form of the certificate of incorporation and bylaws of Merger Sub (except with respect to the name of the Company), until amended in accordance with their terms or by applicable law.

Closing and Effective Time of the Merger; Marketing Period

The closing of the merger (which we refer to as the “closing”) will take place no later than the third business day following the date on which the last of the conditions to closing (described under “The Merger Agreement—

 

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Conditions to the Merger”) have been satisfied or waived (to the extent permitted by applicable law) (other than the conditions that by their nature are to be satisfied at the closing, but subject to the satisfaction or waiver of those conditions). However, if the marketing period (as summarized below) has not ended at such time, the closing will instead take place (a) on the date following the satisfaction or waiver of such conditions that is the earliest to occur of (i) a business day during the marketing period specified by Parent on no less than three business days’ prior written notice to the Company and (ii) the next business day after the final day of the marketing period (subject, in each case, to the satisfaction or waiver (to the extent permitted by applicable law) of the conditions to closing (other than the conditions that by their nature are to be satisfied at the closing, but subject to the satisfaction or waiver of those conditions) on such date), or (b) at such other date as agreed to in writing by Parent, Merger Sub and the Company.

The effective time will occur as soon as practicable on the date of the closing upon the filing of a certificate of merger with the Secretary of State of the State of Delaware (or at such later date as the Company, Parent and Merger Sub may agree and specify in the certificate of merger).

The marketing period is the first period of 16 consecutive business days following the date of the merger agreement beginning on the later of (A) the seventh business day following the date on which Parent shall have received certain customary and pertinent business information that is reasonably available to the Company and certain financial statements, pro forma financial statements, and other financial data and financial information relating to the Company and its subsidiaries, in each case to the extent reasonably requested by Parent in connection with the offering of debt securities and the arrangement of loans (which information we refer to as the “required information”) and such required information does not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make such required information not misleading, complies with the applicable SEC requirements for offerings of debt securities on a registration statement on Form S-1 (other than such provisions for which compliance is not customary in a Rule 144A offering of high yield debt securities) and meets certain other requirements, and (B) the first day on which the closing conditions to the obligations of Parent and Merger Sub (described under “The Merger Agreement—Conditions to the Merger”) have been satisfied (other than the condition relating to the stockholder approvals, which must be satisfied no later than five business days prior to the end of the marketing period, and conditions that by their nature are to be satisfied at the closing, but subject to the satisfaction or waiver of those conditions) and nothing has occurred and no condition exists that would cause any of such conditions not to be satisfied if the closing were to occur at any time during such 16 business day period. If the Company in good faith reasonably believes it has delivered the required information and that such required information complies with the relevant requirements, it may deliver to Parent a written notice to that effect (stating when it believes it completed such delivery), in which case the Company will be deemed to have complied with clause (A) above unless Parent in good faith reasonably believes the Company has not satisfied such requirements and, within four business days after the delivery of such notice by the Company, delivers a written notice to the Company to that effect (stating with specificity what required information the Company has not delivered or does not otherwise meet the requirements). The marketing period will not commence and will not be deemed to have commenced (i) prior to 12:00 a.m. (New York City time) on February 16, 2011, (ii) prior to the mailing of this proxy statement to stockholders or (iii) if before the completion of the marketing period, (x) the Company publicly announces any intention to restate any material financial information included in the required information or that any such restatement is under consideration, in which case the marketing period will be deemed not to commence until the first day on which such restatement has been completed and the relevant reports have been amended or the Company has determined that no restatement is required, and the conditions described in (A) and (B) above are fulfilled or (y) the required information would not comply with the relevant requirements at any time during the marketing period, in which case the marketing period will be deemed not to commence until the required information is compliant with such requirements, and the conditions described in (A) and (B) above are fulfilled. In addition, if the marketing period would end after the last day prior to the filing of the Company’s annual report on Form 10-K for the fiscal year ending January 29, 2011 on which the auditors would be willing to deliver comfort letters with negative assurance and before the day that the Company files such Form 10-K, then the marketing period will not begin prior to the filing of such Form 10-K.

 

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Treatment of Common Stock, Options, Restricted Shares and Other Equity Awards

Common Stock

At the effective time, each share of the Company’s common stock issued and outstanding immediately prior thereto (other than excluded shares described in this subsection) will convert into the right to receive the per share merger consideration. Common stock owned by the Company as treasury stock or owned by Parent, Merger Sub or any other direct or indirect wholly owned subsidiary of Parent (including shares contributed to Parent by the Rollover Investors and any members of the Company’s management team who may have the opportunity to invest in Parent and who choose to make this investment prior to the closing) will be canceled without payment of consideration. Common stock owned by any of the Company’s wholly owned subsidiaries will, at the election of Parent, either convert into stock of the surviving corporation or be canceled without payment of consideration. Common stock owned by stockholders who have exercised, perfected and not withdrawn a demand for, or lost the right to, appraisal rights under the DGCL will be canceled without payment of consideration and such stockholders will instead be entitled to the appraisal rights provided under the DGCL as described under “Appraisal Rights.” For a discussion of the treatment of shares of common stock held by Mr. Drexler, see “Interests of the Company’s Directors and Executive Officers in the Merger—Drexler Rollover Agreement” beginning on page 89.

Options

Except as otherwise agreed by Parent and a holder of a Stock Option, immediately prior to the effective time each outstanding Stock Option (whether vested or unvested) will fully vest contingent on the occurrence of closing of the merger and be canceled as of the effective time of the merger and converted into the right to receive, within three business days after completion of the merger, an amount in cash equal to the excess, if any, of the per share merger consideration over the exercise price per share of such Stock Option, without interest and less any required withholding taxes.

Restricted Shares

Except as otherwise agreed by Parent and a holder of a Restricted Share, immediately prior to the effective time each outstanding Restricted Share will become fully vested contingent on the occurrence of closing of the merger. Upon closing, each Restricted Share will be treated as a share of Company common stock and as such will be entitled to receive the $43.50 per share merger consideration, without interest and less applicable withholding taxes. For a discussion of the treatment of Restricted Shares held by Mr. Drexler, see “Interests of the Company’s Directors and Executive Officers in the Merger—Drexler Rollover Agreement” beginning on page 89.

Associate Stock Purchase Plan

The Company will ensure that no new offering period with respect to the Company’s 2007 Associate Stock Purchase Plan, referred to herein as the “ESPP”, may be commenced on or after the date of the merger agreement. To the extent that the closing occurs prior to January 31, 2011, the Company will establish a new exercise date with respect to the ESPP for the current offering period thereunder, which will be the business day immediately prior to the anticipated closing date. The Company will terminate the ESPP effective as of immediately prior to the closing date.

Exchange and Payment Procedures

Prior to the effective time, Parent will designate a bank or trust company reasonably acceptable to the Company to act as the paying agent for the per share merger consideration (which we refer to as the “paying agent”). At or prior to the effective time, Parent will deposit, or will cause to be deposited, with the paying agent an amount in cash sufficient for the paying agent to make payment of the aggregate per share merger consideration to the holders of shares of Company common stock.

 

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Promptly (but in any event within three business days) after the effective time, each record holder of shares of common stock will be sent a letter of transmittal describing how it may exchange its shares of common stock for the per share merger consideration.

You should not return your stock certificates with the enclosed proxy card, and you should not forward your stock certificates to the paying agent without a letter of transmittal.

You will not be entitled to receive the per share merger consideration until you surrender your stock certificate or certificates along with a duly completed and executed letter of transmittal to the paying agent. If ownership of your shares is not registered in the transfer records of the Company, a check for any cash to be delivered will only be issued if the certificate is properly endorsed and the applicable letter of transmittal is accompanied by all documents reasonably required to evidence and effect transfer and to evidence that any applicable stock transfer taxes have been paid or are not applicable.

No interest will be paid or accrued on the cash payable as the per share merger consideration as provided above. Parent, the surviving corporation and the paying agent will be entitled to deduct and withhold any applicable taxes from the per share merger consideration. Any sum that is withheld will be deemed to have been paid to the person with regard to whom it is withheld.

From and after the effective time, there will be no transfers on the stock transfer books of the surviving corporation of shares of Company common stock that were outstanding immediately prior to the effective time. If, after the effective time, any person presents to the surviving corporation, Parent or the paying agent any certificates or any transfer instructions relating to shares canceled in the merger, such person will be given a copy of the letter of transmittal and told to comply with the instructions in that letter of transmittal in order to receive the cash to which such person is entitled.

Any portion of the per share merger consideration deposited with the paying agent that remains unclaimed by former record holders of common stock for one year after the effective time may be delivered to the surviving corporation. Record holders of common stock who have not complied with the above-described exchange and payment procedures will thereafter only look to the surviving corporation for payment of the per share merger consideration. None of the surviving corporation, Parent, the paying agent or any other person will be liable to any former record holders of common stock for any cash delivered to a public official pursuant to any applicable abandoned property, escheat or similar laws.

If you have lost a certificate, or if it has been stolen or destroyed, then before you will be entitled to receive the per share merger consideration, you will have to make an affidavit of the loss, theft or destruction, and if required by the surviving corporation, post a bond in a customary amount as indemnity against any claim that may be made against it with respect to such certificate. These procedures will be described in the letter of transmittal that you will receive, which you should read carefully in its entirety.

Financing Covenant; Company Cooperation

Parent and Merger Sub will use their reasonable best efforts to obtain the equity and debt financing for the merger on the terms and conditions described in the equity commitment letters and the Debt Commitment Letter and to obtain the equity rollover contribution by the Rollover Investors on the terms of the equity rollover letter and will not permit any amendment or modification to be made thereto, or any waiver of any provision or remedy thereunder, if such amendment, modification or waiver (A) reduces the aggregate amount of the financing or, with respect to the equity rollover contribution by the Rollover Investors, reduces the amount of the Company’s common stock to be contributed, unless the amount of financing is increased by a corresponding amount in a manner that does not affect Parent and Merger Sub’s representation regarding the solvency of Parent and the surviving corporation immediately following consummation of the Merger or (B) imposes new or additional conditions or otherwise expands, amends or modifies any of the conditions to the financing or the equity rollover

 

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contribution, or otherwise expands, amends or modifies any other provision of the equity commitment letter, the Debt Commitment Letter or the equity rollover letter, in a manner that would reasonably be expected to (x) delay or prevent or make less likely the funding of the financing or the equity rollover contribution (or the satisfaction of the conditions thereto) on the date of the closing or (y) adversely impact the ability of Parent, Merger Sub or the Company, as applicable, to enforce its rights against other parties to the equity commitment letter, the Debt Commitment Letter or the definitive agreements with respect thereto or the equity rollover letter, in each of clauses (x) and (y) in any material respect.

Parent and Merger Sub will use their reasonable best efforts to:

 

   

maintain in effect the equity commitment letter, the Debt Commitment Letter and the equity rollover letter;

 

   

negotiate and enter into definitive agreements with respect to the Debt Commitment Letter on the terms and conditions contained therein (or on terms no less favorable to Parent or Merger Sub);

 

   

satisfy on a timely basis all conditions to funding in the Debt Commitment Letter and the definitive agreements related thereto (other than where the failure to be satisfied is the direct result of the Company’s failure to furnish the required information), the equity commitment letters and the equity rollover letter and consummate the financing and the equity rollover contribution at or prior to the closing, including using reasonable best efforts to cause the lenders and the other persons committing to fund the financing or make the equity rollover contribution to fund the financing and make the equity rollover contribution (including, other than with respect to the providers of the equity financing, through litigation pursued in good faith);

 

   

enforce its rights (including, other than with respect to the providers of the equity financing, through litigation pursued in good faith) under the equity commitment letters, the Debt Commitment Letter and the equity rollover letter; and

 

   

comply with their obligations under the equity commitment letter, the Debt Commitment Letter and the equity rollover letter.

Parent and Merger Sub have agreed to keep the Company informed on a current basis and in reasonable detail with respect to the status of the debt financing and to give the Company prompt notice (i) of any breach or default by any party to the equity or debt commitment letters, the equity rollover letter or any definitive agreements related to the financing, (ii) of the receipt of any written notice or other written communication from a financing source with respect to any actual or potential breach or material dispute or disagreement among the parties thereto or (iii) if at any time for any reason, Parent and Merger Sub believe in good faith that it will not be able to obtain all or any portion of the financing or the equity rollover contribution on the terms and conditions, in the manner or from the sources contemplated by the equity and debt commitment letters, or the definitive agreements related thereto, or the equity rollover letter. Subject to limited exceptions, if any of the events described above occur, or if any portion of the debt financing or the equity rollover contribution becomes unavailable, Parent and Merger Sub will use their reasonable best efforts to arrange and obtain alternative financing in an amount sufficient to consummate the merger with terms and conditions not materially less favorable to Parent and Merger Sub (or their affiliates) as promptly as reasonably practicable following such occurrence.