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

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.    )

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 Pursuant to §240.14a-12

BJ’s Wholesale Club, Inc.

 

 

(Name of Registrant as Specified In Its Charter)

 

 

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

¨ No fee required.

 

x 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: Common stock, $0.01 par value per share

  

 

 

  (2) Aggregate number of securities to which transaction applies: As of July 13, 2011, 54,945,969 shares of common stock outstanding and 544,953 shares of common stock subject to options

  

 

 

  (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): Solely for purposes of calculating the registration fee, the maximum aggregate value of the transaction was calculated as the sum of (A) 54,945,969 shares of common stock, par value $0.01 per share, at $51.25 per share, and (B) 544,953 shares of common stock underlying outstanding stock options with exercise prices less than $51.25 per share multiplied by $21.43 (which is the difference between $51.25 per share and the weighted average exercise price per share). In accordance with Section 14(g) of the Securities Exchange Act of 1934, as amended, the filing fee was determined by multiplying 0.0001161 by the maximum aggregate value of the transaction.

  

 

 

  (4) Proposed maximum aggregate value of transaction: $2,827,659,746

  

 

 

  (5) Total fee paid: $328,291

  

 

 

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

August 3, 2011

Dear Stockholder:

We cordially invite you to attend a special meeting of the stockholders of BJ’s Wholesale Club, Inc., a Delaware corporation, which we refer to as the Company, to be held on September 9, 2011, at 9:00 a.m. Eastern time, at the Doubletree Hotel, 5400 Computer Drive, Westborough, Massachusetts.

On June 28, 2011, the Company entered into an agreement and plan of merger, which we refer to as the merger agreement, with Beacon Holding Inc., a Delaware corporation, which we refer to as Buyer, and Beacon Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Buyer, which we refer to as Transitory Subsidiary, providing for the merger of Transitory Subsidiary with and into the Company, with the Company surviving the merger as a wholly-owned subsidiary of Buyer. Buyer and Transitory Subsidiary are affiliates of Leonard Green & Partners, L.P., a private equity firm based in Los Angeles, California, which we refer to as Leonard Green, and CVC Capital Partners, a private equity firm with a network of 20 offices throughout Europe, Asia and the United States, which we refer to as CVC. At the special meeting, you will be asked to consider and vote on the following matters:

 

   

a proposal to adopt the merger agreement;

 

   

a proposal to approve, on a nonbinding advisory basis, the “golden parachute” compensation that may be payable to the Company’s named executive officers in connection with the merger as reported on the Golden Parachute Compensation table on page 67; and

 

   

a proposal to approve one or more adjournments of the special meeting, if necessary or appropriate, to solicit additional proxies to approve the proposal to adopt the merger agreement.

Stockholders will also act on any other business that may properly come before the meeting.

If the merger is consummated, each share of Company common stock issued and outstanding immediately prior to the effective time of the merger, other than as provided below, will be converted into the right to receive $51.25 in cash, without interest and less any applicable withholding taxes. We refer to this consideration per share of Company common stock to be paid in the merger as the merger consideration. The following shares of Company common stock will not be converted into the right to receive the merger consideration in connection with the merger: (a) shares held by any of our stockholders who are entitled to and who properly exercise, and do not withdraw or lose, appraisal rights under Section 262 of the General Corporation Law of the State of Delaware, which we refer to as the DGCL, (b) shares held by us as treasury stock or by any of our wholly owned subsidiaries and (c) shares held by Buyer or any of its wholly owned subsidiaries. The merger consideration of $51.25 per share of Company common stock represents a premium of approximately 38% to the closing price of the shares on June 30, 2010, the day before Leonard Green announced a 9.5% ownership stake in the Company, and an approximately 7% premium to the closing price of the shares on June 28, 2011, the last day prior to the public announcement of the execution of the merger agreement.

The board of directors of the Company, which we refer to as the board of directors or the board, upon the recommendation of its committee of independent directors and following a process that was publicly announced in February 2011, in which it explored and evaluated strategic alternatives, has unanimously approved the merger agreement and recommends that all Company stockholders vote in favor of the proposal to adopt the merger agreement. The board of directors made its determination after consultation with its legal and financial advisors and consideration of a number of factors. The board of directors recommends that you vote “FOR” approval of the proposal to adopt the merger agreement, “FOR” approval of the nonbinding advisory proposal regarding “golden parachute” compensation and “FOR” approval of the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

Approval of the proposal to adopt the merger agreement requires the affirmative vote of holders of a majority of the outstanding shares of Company common stock entitled to vote at the special meeting.


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Your vote is very important. Whether or not you plan to attend the special meeting, please complete, date, sign and return, as promptly as possible, the enclosed proxy card in the accompanying prepaid reply envelope, or submit your proxy by telephone or the internet. If you properly sign your proxy card but do not mark the boxes showing how your shares should be voted on a matter, the shares represented by your properly signed proxy will be voted “FOR” approval of the proposal to adopt the merger agreement, “FOR” approval of the nonbinding advisory proposal regarding “golden parachute” compensation and “FOR” approval of the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies. You may revoke your proxy at any time before it is exercised at the special meeting by delivering a properly executed proxy card bearing a later date or a written revocation of your proxy to the Company’s Secretary before the start of the special meeting, submitting a later-dated proxy electronically via the internet or telephonically, or by attending the special meeting and voting in person. Attending the special meeting will not, in itself, revoke a previously submitted proxy. To revoke a proxy in person at the special meeting, you must obtain a ballot and vote in person at the special meeting. The failure to vote your shares of Company common stock will have the same effect as a vote “AGAINST” approval of the proposal to adopt the merger agreement.

If your shares of Company common stock are held in nominee or “street name” by your bank, brokerage firm or other nominee, your bank, brokerage firm or other nominee will be unable to vote your shares of Company common stock without instructions from you. You should instruct your bank, brokerage firm or other nominee to vote your shares of Company common stock in accordance with the procedures provided by your bank, brokerage firm or other nominee. The failure to instruct your bank, brokerage firm or other nominee to vote your shares of Company common stock “FOR” approval of the proposal to adopt the merger agreement will have the same effect as voting “AGAINST” the proposal to adopt the merger agreement.

Under Delaware law, if the merger is completed, holders of Company common stock who do not vote in favor of adoption of the merger agreement and satisfy other conditions will have the right to seek appraisal of the fair value of their shares as determined by the Delaware Court of Chancery. In order to exercise your appraisal rights, you must submit a written demand for an appraisal of your shares prior to the stockholder vote on the merger agreement, you must not vote in favor of adoption of the merger agreement and you must comply with other Delaware law procedures explained in the accompanying proxy statement. See “Appraisal Rights” beginning on page 101 of the proxy statement and Annex C to the proxy statement.

The accompanying proxy statement provides you with detailed information about the special meeting, the merger agreement and the merger. A copy of the merger agreement is attached as Annex A to this proxy statement. We encourage you to carefully read the entire proxy statement and its annexes, including the merger agreement. You also may obtain additional information about the Company from documents we have filed with the Securities and Exchange Commission by following the instructions listed in the section of the accompanying proxy statement entitled “Where You Can Find More Information.”

If you have any questions or need assistance voting your shares of Company common stock, please call Georgeson, the Company’s proxy solicitor, toll-free at 1-888-654-1722.

Thank you in advance for your cooperation and continued support.

Sincerely,

 

LOGO

  

LOGO

Laura J. Sen

   Herbert J Zarkin

President and Chief Executive Officer

   Chairman of the Board

This proxy statement is dated August 3, 2011, and is first being mailed to our stockholders on August 3, 2011.


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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE MERGER, PASSED UPON THE MERITS OR FAIRNESS OF THE MERGER AGREEMENT OR THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE PROPOSED MERGER, OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

YOUR VOTE IS IMPORTANT. PLEASE SUBMIT YOUR PROXY ELECTRONICALLY VIA THE INTERNET OR TELEPHONICALLY OR BY COMPLETING, SIGNING, DATING AND PROMPTLY RETURNING THE ENCLOSED PROXY CARD, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING. PLEASE DO NOT SEND IN ANY CERTIFICATES FOR YOUR SHARES OF COMPANY COMMON STOCK AT THIS TIME. IF THE MERGER IS APPROVED, YOU WILL RECEIVE A LETTER OF TRANSMITTAL AND RELATED INSTRUCTIONS TO SURRENDER YOUR SHARE CERTIFICATES.


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LOGO

25 Research Drive

Westborough, Massachusetts 01581

 

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON SEPTEMBER 9, 2011

 

 

 

TIME:

9:00 a.m. Eastern time

 

PLACE:

The Doubletree Hotel, 5400 Computer Drive, Westborough, Massachusetts

 

ITEMS OF BUSINESS:

1. To consider and vote on a proposal to adopt the agreement and plan of merger, dated as of June 28, 2011, as it may be amended from time to time, which we refer to as the merger agreement, by and among BJ’s Wholesale Club, Inc., a Delaware corporation, which we refer to as the Company, Beacon Holding Inc., a Delaware corporation, which we refer to as Buyer, and Beacon Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Buyer, which we refer to as Transitory Subsidiary. A copy of the merger agreement is attached as Annex A to the accompanying proxy statement.

 

  2. To approve, on a nonbinding advisory basis, the “golden parachute” compensation that may be payable to the Company’s named executive officers in connection with the merger as reported on the Golden Parachute Compensation table on page 67.

 

  3. To consider and vote on a proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to adopt the merger agreement.

 

RECORD DATE:

Only stockholders of record as of the close of business on July 29, 2011 are entitled to notice of, and to vote at, the special meeting. All stockholders of record are cordially invited to attend the special meeting in person.

 

PROXY VOTING:

Your vote is very important, regardless of the number of shares of Company common stock you own. The merger cannot be consummated unless the merger agreement is adopted by the affirmative vote of the holders of a majority of the outstanding shares of Company common stock entitled to vote thereon. Even if you plan to attend the special meeting in person, we request that you complete, sign, date and return, as promptly as possible, the enclosed proxy card in the accompanying prepaid reply envelope or submit your proxy by telephone or the internet prior to the special meeting to ensure that your shares of Company common stock will be represented at the special meeting if you are unable to attend. If you do not attend the special meeting and fail to return your proxy card or fail to submit your proxy by phone or the internet, your shares of Company common stock will not be counted for purposes of determining whether a quorum is present at the special meeting and will have the same effect as a vote “AGAINST” the proposal to adopt the merger agreement.


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  If you are a stockholder of record, voting in person at the special meeting will revoke any proxy previously submitted. If you hold your shares of Company common stock through a bank, brokerage firm or other nominee, you should follow the procedures provided by your bank, brokerage firm or other nominee in order to vote. As a beneficial owner of shares of Company common stock held in nominee or “street name,” you have the right to direct your broker or other agent on how to vote the shares in your account. You are also invited to attend the special meeting. However, because you are not the stockholder of record, you may not vote your shares in person at the special meeting unless you request and obtain a valid proxy from your bank, brokerage firm or other nominee.

 

RECOMMENDATION:

The board of directors of the Company, which we refer to as the board of directors or the board, upon the recommendation of its committee of independent directors and following a process that was publicly announced in February 2011, in which it explored and evaluated strategic alternatives, has unanimously approved the merger agreement and recommends that all Company stockholders vote in favor of the proposal to adopt the merger agreement. The board of directors made its determination after consultation with its legal and financial advisors and consideration of a number of factors. The board of directors recommends that you vote “FOR” approval of the proposal to adopt the merger agreement, “FOR” approval of the nonbinding advisory proposal regarding “golden parachute” compensation and “FOR” approval of the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

ATTENDANCE:

Only stockholders of record or their duly authorized proxies have the right to attend the special meeting. If your shares of Company common stock are held through a bank, brokerage firm or other nominee, please bring to the special meeting a copy of your brokerage statement evidencing your beneficial ownership of Company common stock. If you are the representative of a corporate or institutional stockholder, you must present proof that you are the representative of such stockholder. Please note that cameras, recording devices and other electronic devices will not be permitted at the special meeting.

 

APPRAISAL RIGHTS:

Under Delaware law, if the merger is completed, holders of Company common stock who do not vote in favor of adoption of the merger agreement and satisfy other conditions will have the right to seek appraisal of the fair value of their shares as determined by the Delaware Court of Chancery. In order to exercise your appraisal rights, you must submit a written demand for an appraisal of your shares prior to the stockholder vote on the merger agreement, you must not vote in favor of adoption of the merger agreement and you must comply with other Delaware law procedures explained in the accompanying proxy statement. See “Appraisal Rights” beginning on page 101 and Annex C.


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WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN, AS PROMPTLY AS POSSIBLE, THE ENCLOSED PROXY CARD IN THE ACCOMPANYING PREPAID REPLY ENVELOPE, OR SUBMIT YOUR PROXY BY TELEPHONE OR THE INTERNET. IF YOU ATTEND THE SPECIAL MEETING AND VOTE IN PERSON, YOUR VOTE BY BALLOT WILL REVOKE ANY PROXY PREVIOUSLY SUBMITTED.

By Order of the Board of Directors,

LOGO

Lon F. Povich

Secretary

Westborough, Massachusetts

August 3, 2011


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PROXY STATEMENT

TABLE OF CONTENTS

 

     Page  

SUMMARY

     1   

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

     13   

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION

     20   

THE SPECIAL MEETING

     21   

Time, Place and Purpose of the Special Meeting

     21   

Record Date and Quorum

     21   

Attendance

     21   

Vote Required

     21   

Proxies and Revocation

     24   

Adjournments and Recesses

     24   

Anticipated Date of Completion of the Merger

     24   

Appraisal Rights

     24   

Solicitation of Proxies; Payment of Solicitation Expenses

     25   

Questions and Additional Information

     25   

PARTIES TO THE MERGER

     26   

THE MERGER

     28   

Overview of the Merger

     28   

Directors and Officers of the Surviving Corporation

     28   

Background of the Merger

     28   

Reasons for the Merger; Recommendation of the Board of Directors and the Independent Committee

     40   

Opinion of Morgan Stanley & Co. LLC

     45   

Financial Forecasts

     51   

Financing of the Merger

     53   

Limited Guarantee

     57   

Closing and Effective Time of Merger

     58   

Payment of Merger Consideration and Surrender of Stock Certificates

     58   

Interests of Certain Persons in the Merger

     59   

Golden Parachute Compensation

     66   

Accounting Treatment

     69   

Material U.S. Federal Income Tax Consequences of the Merger

     69   

Regulatory Approvals and Notices

     72   

Litigation Relating to the Merger

     72   

THE MERGER AGREEMENT

     76   

Explanatory Note Regarding the Merger Agreement

     76   

The Merger

     76   

Effective Time of the Merger

     76   

Marketing Period

     77   

Merger Consideration

     78   

Payment Procedures

     78   

Appraisal Rights

     79   

Treatment of Options

     79   

Treatment of Restricted Shares

     80   

Representations and Warranties

     80   

Definition of Company Material Adverse Effect

     81   

 

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Definition of Buyer Material Adverse Effect

     82   

Equity Financing Covenant

     83   

Debt Financing Covenant; Company Cooperation

     83   

Covenants Relating to the Conduct of Our Business

     86   

Conditions to Closing the Merger

     88   

Restrictions on Solicitation of Other Offers

     89   

Restrictions on Change of Recommendation to Stockholders

     90   

Termination

     92   

Termination Fees

     93   

Expense Reimbursement

     94   

Limitation on Remedies and Liability Cap

     94   

Further Actions and Agreements

     95   

Employee Benefits

     96   

Amendment and Waiver

     96   

COMPANY STOCKHOLDER AGREEMENT

     97   

MARKET PRICE OF COMPANY COMMON STOCK

     98   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     99   

APPRAISAL RIGHTS

     101   

DELISTING AND DEREGISTRATION OF COMPANY COMMON STOCK

     105   

OTHER MATTERS

     105   

WHERE YOU CAN FIND MORE INFORMATION

     106   

ANNEX A — Agreement and Plan of Merger

     A-1   

ANNEX B — Opinion of Morgan Stanley & Co. LLC

     B-1   

ANNEX C — Section 262 of the General Corporation Law of the State of Delaware

     C-1   

 

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We are furnishing this proxy statement to our stockholders as part of the solicitation of proxies by the Company’s board of directors for use at the special meeting. This proxy statement and the enclosed proxy card or voting instruction form are first being mailed on August 3, 2011 to our stockholders who owned shares of Company common stock as of the close of business on July 29, 2011.

SUMMARY

The following summary highlights selected information in this proxy statement and may not contain all the information that may be important to you. Accordingly, we encourage you to read carefully this entire proxy statement, its annexes and the documents referred to in this proxy statement. Each item in this summary includes a page reference directing you to a more complete description of that topic. You may obtain the information incorporated by reference in this proxy statement without charge by following the instructions under “Where You Can Find More Information” beginning on page 106.

Parties to the Merger (Page 26)

In this proxy statement, we refer to the agreement and plan of merger, dated June 28, 2011, as it may be amended from time to time, among Buyer, Transitory Subsidiary and the Company, as the merger agreement, and the merger of Transitory Subsidiary with and into the Company, as the merger. The parties to the merger agreement and the merger are:

BJ’s Wholesale Club, Inc., which we refer to as the Company, we or us, is a Delaware corporation headquartered in Westborough, Massachusetts. We introduced the warehouse club concept to New England in 1984 and have since expanded to become a leading warehouse club operator in the eastern United States.

Beacon Holding Inc., which we refer to as Buyer, is a Delaware corporation that was formed by Leonard Green & Partners, L.P., which we refer to as Leonard Green, and CVC Capital Partners, which we refer to as CVC, solely for the purpose of entering into the merger agreement and completing the transactions contemplated by the merger agreement and the related financing transactions. Leonard Green is a private equity firm based in Los Angeles, California. CVC is a private equity firm with a network of 20 offices throughout Europe, Asia and the United States. Upon completion of the merger, the Company will be a direct wholly-owned subsidiary of Buyer.

Beacon Merger Sub Inc., which we refer to as Transitory Subsidiary, is a Delaware corporation that was formed by Buyer solely for the purpose of entering into the merger agreement and completing the transactions contemplated by the merger agreement and the related financing transactions. Upon the completion of the merger, Transitory Subsidiary will cease to exist and the Company will continue as the surviving corporation of the merger, which we refer to as the surviving corporation.

The Special Meeting (Page 21)

Time, Place and Purpose of the Special Meeting (Page 21)

The special meeting of the stockholders of the Company, which we refer to as the special meeting, will be held on September 9, 2011, starting at 9:00 a.m. Eastern time, at the Doubletree Hotel, 5400 Computer Drive, Westborough, Massachusetts.

At the special meeting, holders, which we refer to as stockholders, of common stock of the Company, $0.01 par value per share, which we refer to as Company common stock, will be asked to:

 

   

adopt the merger agreement;

 

   

approve, on a nonbinding advisory basis, the “golden parachute” compensation that may be payable to the Company’s named executive officers in connection with the merger as reported on the Golden Parachute Compensation table on page 67; and

 

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approve one or more adjournments of the special meeting, if necessary or appropriate, to solicit additional proxies to approve the proposal to adopt the merger agreement.

Record Date and Quorum (Page 21)

You are entitled to receive notice of, and to vote at, the special meeting if you owned shares of Company common stock as of the close of business on July 29, 2011, which date the Company has set as the record date for the special meeting, and which we refer to as the record date. You will have one vote for each share of Company common stock that you owned on the record date. As of the record date, there were 54,941,516 shares of Company common stock outstanding and entitled to vote at the special meeting. A quorum is necessary to adopt the merger agreement and approve the nonbinding advisory proposal regarding “golden parachute” compensation at the special meeting. A majority of the shares of Company common stock outstanding at the close of business on the record date and entitled to vote, present in person or represented by proxy, at the special meeting constitutes a quorum for the purposes of the special meeting. The meeting may be adjourned whether or not a quorum is present.

Vote Required (Page 21)

Approval of the proposal to adopt the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of Company common stock entitled to vote thereon.

Under the Company’s by-laws, approval of the nonbinding advisory proposal regarding “golden parachute” compensation and approval of the proposal to adjourn the special meeting, if necessary or appropriate, for the purpose of soliciting additional proxies, require a majority of the votes properly cast upon each of these proposals.

As of the record date, the directors and executive officers of the Company beneficially owned and were entitled to vote, in the aggregate, 670,472 shares of Company common stock (including restricted shares of Company common stock, but not including any shares of Company common stock deliverable upon exercise or conversion of any options to purchase shares of Company common stock), representing 1.2% of the outstanding shares of Company common stock on the record date. The directors and executive officers have informed the Company that they currently intend to vote all of their shares of Company common stock “FOR” the proposal to adopt the merger agreement, “FOR” approval of the advisory proposal regarding “golden parachute” compensation and “FOR” the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

Proxies and Revocation (Page 24)

Any stockholder of record entitled to vote at the special meeting may submit a proxy by telephone, over the internet, or by returning the enclosed proxy card in the accompanying prepaid reply envelope, or may vote in person by appearing at the special meeting. If your shares of Company common stock are held in nominee or “street name” through a bank, brokerage firm or other nominee, you should instruct your bank, brokerage firm or other nominee on how to vote your shares of Company common stock using the instructions provided by your bank, brokerage firm or other nominee. If you hold your shares of Company common stock in nominee or “street name,” please contact your bank, brokerage firm or other nominee for their instructions on how to vote your shares. Please note that if you are a beneficial owner of shares of Company common stock held in nominee or “street name” and wish to vote in person at the special meeting, you must provide a legal proxy from your bank, brokerage firm or other nominee at the special meeting.

If you fail to submit a proxy or to vote in person at the special meeting, or if you do not provide your bank, brokerage firm or other nominee with voting instructions, your shares of Company common stock will not be voted on the proposal to adopt the merger agreement, which will have the same effect as a vote “AGAINST” the proposal to adopt the merger agreement, and your shares of Company common stock will not have no effect on approval of the advisory proposal regarding “golden parachute” compensation or the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

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You have the right to revoke a proxy, whether delivered over the internet, by telephone or by mail, at any time before it is exercised, by submitting a later-dated proxy through any of the methods available to you, by giving written notice of revocation to our Secretary, which must be filed with the Secretary by the time the special meeting begins, or by attending the special meeting and voting in person.

The Merger (Page 28)

The merger agreement provides that Transitory Subsidiary will merge with and into the Company. The Company will be the surviving corporation in the merger and will continue to do business following the merger. As a result of the merger, the Company will cease to be a publicly traded company. If the merger is consummated, you will not own any shares of the capital stock of the surviving corporation.

Merger Consideration (Page 28)

In the merger, each share of Company common stock, other than as provided below, will be converted into the right to receive $51.25 in cash, without interest and less any applicable withholding taxes. We refer to this consideration per share of Company common stock to be paid in the merger as the merger consideration. The following shares of Company common stock will not be converted into the right to receive the merger consideration in connection with the merger: (a) shares held by any of our stockholders who are entitled to and who properly exercise, and do not withdraw or lose, appraisal rights under Section 262 of the General Corporation Law of the State of Delaware, which we refer to as the DGCL, (b) shares held by us as treasury stock or by any of our wholly owned subsidiaries and (c) shares held by Buyer or any of its wholly owned subsidiaries. We sometimes refer to the shares described in the foregoing sentence, collectively, as the excluded shares.

Reasons for the Merger; Recommendation of the Board of Directors and the Independent Committee (Page 40)

After careful consideration of various factors described in the section entitled “The Merger — Reasons for the Merger; Recommendation of the Board of Directors and the Independent Committee,” the board of directors of the Company, which we refer to as the board of directors or the board, upon the recommendation of its committee of independent directors, which we refer to as the independent committee, by a unanimous vote of all directors, determined that the merger agreement and the terms and conditions of the merger and the merger agreement are fair to, advisable and in the best interests of the Company and its stockholders, approved the merger agreement and the merger, approved the execution, delivery and performance by the Company of its obligations under the merger agreement, resolved that the merger agreement be submitted for consideration by the stockholders at the special meeting and recommended that our stockholders vote to adopt the merger agreement.

In considering the recommendation of the board of directors with respect to the proposal to adopt the merger agreement, you should be aware that our directors and executive officers may have interests in the merger that are different from, or in addition to, yours. The independent committee and the board of directors were aware of and considered these interests, among other matters, in evaluating and negotiating the merger agreement and the merger, and in their recommendations with respect to the merger agreement. See the section entitled “The Merger — Interests of Certain Persons in the Merger” beginning on page 59.

The board of directors recommends that you vote “FOR” approval of the proposal to adopt the merger agreement, “FOR” approval of the nonbinding advisory proposal regarding “golden parachute” compensation and “FOR” approval of the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

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Opinion of Morgan Stanley & Co. LLC (Page 45)

The independent committee retained Morgan Stanley & Co. LLC, which we refer to as Morgan Stanley, to provide it with financial advisory services and a financial opinion in connection with the proposed merger. The independent committee selected Morgan Stanley to act as its financial advisor based on Morgan Stanley’s qualifications, expertise and reputation and its knowledge of the business and affairs of the Company. At the meeting of the independent committee on June 28, 2011, Morgan Stanley rendered its oral opinion, subsequently confirmed in writing, that as of June 28, 2011, and based upon and subject to the various considerations set forth in the opinion, the consideration to be received by holders of Company common stock pursuant to the merger agreement was fair from a financial point of view to such holders.

The full text of the written opinion of Morgan Stanley, dated as of June 28, 2011, is attached hereto as Annex B. The opinion sets forth, among other things, the assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken by Morgan Stanley in rendering its opinion. We encourage you to read the entire opinion carefully and in its entirety. Morgan Stanley’s opinion is directed to the independent committee and addresses only the fairness from a financial point of view of the consideration to be received by holders of Company common stock pursuant to the merger agreement as of the date of the opinion. It does not address any other aspects of the merger and does not constitute a recommendation as to whether or not any holder of Company common stock should vote at any stockholder’s meeting held in connection with the merger or whether to take any other action with respect to the merger. The summary of the opinion of Morgan Stanley set forth below under “The Merger — Opinion of Morgan Stanley & Co. LLC” is qualified in its entirety by reference to the full text of the opinion.

Financing of the Merger (Page 53)

Buyer has obtained the equity commitment letters and the debt commitment letter described below, which we refer to collectively as the financing letters. The funding under the financing letters is subject to certain conditions, including conditions that do not relate directly to the merger agreement. We believe the amounts committed under the financing letters will be sufficient to complete the transactions contemplated by the merger agreement, but we cannot be assured that the full amount of the financing will be available or that the committed financing will be sufficient to complete the transactions contemplated by the merger agreement. The amounts committed might be insufficient if, among other things, one or more of the parties to the financing letters fails to fund the committed amounts in breach of such financing letters or if the conditions to the commitments to fund the amounts set forth in such financing letters are not met. The failure of Buyer and Transitory Subsidiary to obtain any portion of the committed financing (or any alternate financing) is likely to result in the failure of the merger to be consummated. In that case, Buyer may be obligated to pay a termination fee to the Company, which we refer to as the reverse termination fee, as described under “The Merger Agreement — Termination Fees” beginning on page 93. Buyer’s obligation to pay the reverse termination fee is guaranteed pursuant to the guarantee (as described further below).

Equity Financing (Page 54)

Buyer has entered into a letter agreement, dated June 28, 2011, which we refer to as the LGP equity commitment letter, with Green Equity Investors V, L.P. and Green Equity Investors Side V, L.P., which we refer to as the LGP funds, pursuant to which the LGP funds have committed, on a several (not joint and several) basis, to purchase, and/or through one or more of their affiliated entities or co-investors, cause the purchase of equity securities of Buyer, at or prior to the closing of the merger, for an amount equal to $320 million in the aggregate, which we refer to collectively as the LGP equity financing. Each LGP fund may allocate all or a portion of its equity commitment to other investors. However, the allocation of any portion of the LGP equity commitment to other investors will reduce such LGP fund’s commitment to make or secure capital contributions pursuant to the LGP equity commitment letter only by the amount actually contributed to Buyer by such other investors at or prior to the closing of the merger for the purpose of funding a portion of the merger consideration and that is so applied.

 

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Buyer has also entered into a letter agreement, dated June 28, 2011, which we refer to as the CVC equity commitment letter and, together with the LGP equity commitment letter, the equity commitment letters, with CVC European Equity Partners V (A) L.P., CVC European Equity Partners V (B) L.P., CVC European Equity Partners V (C) L.P., CVC European Equity Partners V (D) L.P. and CVC European Equity Partners V (E) L.P., which we refer to as the CVC funds, and, together with the LGP funds, the funds, pursuant to which the CVC funds have committed, on a several (not joint and several) basis, to purchase, and/or through one or more of their affiliated entities or co-investors, cause the purchase of equity securities of Buyer, at or prior to the closing of the merger, for an amount equal to $320 million in the aggregate, which we refer to collectively as the CVC equity financing. Each CVC fund may allocate all or a portion of its equity commitment to other investors. However, the allocation of any portion of the CVC equity commitment to other investors will reduce such CVC fund’s commitment to make or secure capital contributions pursuant to the CVC equity commitment letter only by the amount actually contributed to Buyer by such other investors at or prior to the closing of the merger for the purpose of funding a portion of the merger consideration and that is so applied.

The funds’ obligations to fund the equity financing contemplated by the equity commitments are generally subject to:

 

   

the execution and delivery of the merger agreement (which took place on June 28, 2011);

 

   

the satisfaction or waiver of each of the conditions to Buyer’s and Transitory Subsidiary’s obligations to effect the closing of the merger;

 

   

the substantially simultaneous closing of the equity investment contemplated by each of the CVC and LGP commitment letters, respectively;

 

   

the debt financing or any alternate financing that Buyer and Transitory Subsidiary accept from alternate sources in accordance with the merger agreement has been funded or will be funded in accordance with the terms thereof if the equity financing is funded at closing; and

 

   

the substantially simultaneous consummation of the merger in accordance with the terms and conditions of the merger agreement.

Debt Financing (Page 55)

In connection with the entry into the merger agreement, Buyer received a commitment letter, dated June 28, 2011, which, along with the related fee letter, we refer to as the debt commitment letter, from Deutsche Bank AG New York Branch, Deutsche Bank Securities Inc., Citigroup Global Markets Inc., GE Capital Markets, Inc., General Electric Capital Corporation, Wells Fargo Bank, National Association, Wells Fargo Capital Finance, LLC, Barclays Bank PLC and Jefferies Finance LLC, which we refer to as the commitment parties. Pursuant to the debt commitment letter, Deutsche Bank AG New York Branch, Citigroup Global Markets Inc., General Electric Capital Corporation, Wells Fargo Bank, National Association, Barclays Capital, Barclays Bank PLC and Jefferies Finance LLC, which we refer to as the lenders, have committed to provide an aggregate of $2.575 billion in debt financing to Buyer and Transitory Subsidiary, consisting of (i) a senior secured first lien asset-based facility with a maximum availability of $900 million, (ii) a senior secured first lien term facility in an aggregate principal amount of $1.250 billion and (iii) a senior secured second lien term facility in an aggregate principal amount of $425 million, which we refer to collectively as the debt facilities, on the terms and subject to the conditions set forth in the debt commitment letter.

The debt commitment letter is not subject to due diligence or a “market out” condition, which would allow the lenders not to fund their respective commitments if the financial markets are materially adversely affected. There is a risk that the conditions to the debt financing will not be satisfied and the debt financing may not be funded when required or that the lenders will default on their commitments. 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.

 

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Limited Guarantee (Page 57)

Pursuant to a guarantee, dated June 28, 2011, which we refer to as the guarantee, delivered by the funds in favor of the Company, each fund has agreed to, severally but not jointly, guarantee the due and punctual performance and discharge of such fund’s respective percentage of:

 

   

the payment obligations of Buyer under the merger agreement to pay the reverse termination fee to the Company as and when due; and

 

   

certain expense reimbursement and indemnification obligations of Buyer to the Company as and when due.

See “The Merger Agreement — Termination Fees” beginning on page 93 and “The Merger Agreement — Expense Reimbursement” beginning on page 94.

Interests of Certain Persons in the Merger (Page 59)

In considering the recommendation of our board of directors with respect to the merger agreement, you should be aware that the Company’s directors and executive officers have interests in the merger that may be different from, or in addition to, the interests of our stockholders generally, as more fully described below. Our board of directors and the independent committee were aware of these interests and considered them, among other matters, in reaching the determination that the terms and conditions of the merger and the merger agreement were fair to, advisable and in the best interests of the Company and its stockholders and in making their recommendations regarding approval and adoption of the merger and the merger agreement as described in “The Merger — Reasons for the Merger; Recommendation of the Board of Directors and the Independent Committee” beginning on page 40. These interests include the following:

 

   

Additional cash compensation payable to the members of the independent committee, as well as non-management directors;

 

   

Accelerated vesting of stock options and cash payments with respect to stock options that have an exercise price of less than $51.25 per share;

 

   

Accelerated vesting of restricted shares and cash payments of $51.25 with respect to each restricted share;

 

   

Cash payments payable to executive officers of the Company pursuant to change of control severance arrangements between the Company and such executive officers including a prorated payout within 30 days of closing based on the target incentive award under the Company’s management incentive plan, and additional cash payments in the event of a qualified termination of employment;

 

   

Accelerated vesting of all benefits accrued under the Company’s executive retirement plan and a contribution under the executive retirement plan for the current year equal to 5% of a participant’s annualized compensation for the current plan year (which amounts are subject to a tax gross-up);

 

   

Lump sum payment of the entire amount credited to each participant in the Company’s deferred compensation plan;

 

   

Credit for prior service with us for purposes of eligibility, vesting and other determinations under Buyer benefit plans in which our employees may become eligible to participate;

 

   

Continuation of the Company’s management incentive plan, on its existing terms, for the current fiscal year, with payout after year end based on actual results for the full year, less the prorated payout referred to in the fourth bullet point above;

 

   

The ability of Leonard Green and CVC to negotiate and enter into new employment and/or equity participation agreements with members of our senior management team for the period following the closing of the merger; and

 

   

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

See “The Merger — Interests of Certain Persons in the Merger” beginning on page 59 for additional information.

 

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Approval of “Golden Parachute” Compensation (page 66)

In accordance with Section 14A of the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act, and Rule 14a-21(c) under the Exchange Act, we are providing stockholders with the opportunity to cast a nonbinding advisory vote with respect to certain payments that may be made to the Company’s named executive officers in connection with the merger, or “golden parachute” compensation, as reported on the Golden Parachute Compensation table on page 67. The board of directors recommends that you vote “FOR” approval of the nonbinding advisory proposal regarding “golden parachute” compensation.

Approval of the proposal regarding “golden parachute” compensation requires the approval of a majority of the votes properly cast upon this proposal. Approval of this proposal is not a condition to completion of the merger. The vote with respect to “golden parachute” compensation is an advisory vote and will not be binding on the Company. Therefore, regardless of whether stockholders approve the “golden parachute” compensation, if the merger is approved by the stockholders and completed, the “golden parachute” compensation will still be paid to the Company’s named executive officers to the extent payable in accordance with the terms of such compensation.

Material U.S. Federal Income Tax Consequences of the Merger (Page 69)

The exchange of shares of Company common stock for cash in the merger will generally be a taxable transaction to U.S. holders for U.S. federal income tax purposes. In general, a U.S. holder whose shares of Company common stock are converted into the right to receive cash in the merger will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference, if any, between the amount of cash received with respect to such shares (determined before the deduction of any applicable withholding taxes) and its adjusted tax basis in such shares. The merger will generally not be a taxable transaction to non-U.S. holders under U.S. federal income tax laws unless the non-U.S. holder has certain connections to the United States, but may be a taxable transaction under foreign tax laws. Backup withholding may also apply to the cash payments made pursuant to the merger unless the holder or other payee complies with the backup withholding rules. You should read “The Merger Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 69 for the definition of “U.S. holder” and “non-U.S, holder” and a more detailed discussion of the U.S. federal income tax consequences of the merger. You should also consult your tax advisor for a complete analysis of the effect of the merger on your federal, state and local and/or foreign taxes.

Regulatory Approvals and Notices (Page 72)

Under the terms of the merger agreement, the merger cannot be consummated until the waiting period applicable to the consummation of the merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which we refer to as the HSR Act, has expired or been terminated.

Under the HSR Act and the rules promulgated thereunder by the Federal Trade Commission, or the FTC, the merger cannot be consummated until each of the Company and Buyer files a notification and report form with the FTC and the Antitrust Division of the Department of Justice, or the DOJ, under the HSR Act and the applicable waiting period has expired or been terminated. Each of the Company and Buyer filed such a notification and report form on July 15, 2011 and requested early termination of the waiting period. There can be no assurance as to the outcome of the review.

Litigation Relating to the Merger (Page 72)

We, our directors, Buyer, Transitory Subsidiary, Leonard Green and CVC have been named as defendants in twelve putative class actions filed in the Court of Chancery of the State of Delaware between June 29, 2011 and July 13, 2011. On July 26, 2011, these cases were consolidated, and on July 28, 2011 the plaintiffs filed a consolidated complaint. This action, purportedly brought as a class action on behalf of all of our stockholders (other than the defendants), alleges that our directors breached their fiduciary duties in connection with the proposed acquisition by, among other things, failing to fully inform themselves of the Company’s market value, issue complete and accurate

 

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disclosures relating to the merger, maximize stockholder value, obtain the best financial and other terms and act in the best interests of public stockholders, and by seeking to benefit themselves improperly. The complaint further alleges that the non-Company defendants aided and abetted the directors’ purported breaches. The plaintiffs are seeking injunctive and other equitable relief, including to enjoin us from consummating the merger, damages and fees and costs. In addition, the Company, our directors, Buyer, Transitory Subsidiary, Leonard Green, and CVC have been named as defendants in a putative class action filed in the United States District Court for the District of Massachusetts. In addition to the allegations contained in the consolidated litigation described above, the Massachusetts action alleges that the defendants violated federal securities laws in connection with the filing of the preliminary proxy. The plaintiffs also seek injunctive and other equitable relief, including to enjoin us from consummating the merger and to impose a constructive trust, in addition to fees and costs.

The Merger Agreement (Page 76)

Merger Consideration (Page 78)

If the merger is completed, each share of Company common stock, other than the excluded shares, will be converted into the right to receive $51.25 in cash, without interest and less any applicable withholding taxes.

Treatment of Options (Page 79)

Upon consummation of the merger, each outstanding option to purchase shares of Company common stock will be fully vested, to the extent not already fully vested, and cancelled, and thereafter will represent solely the right to receive from Buyer or the surviving corporation in consideration of such option, as soon as practicable (but in any event not later than three business days) following the effective time of the merger, a cash payment equal to the product of (i) the number of shares of Company common stock subject to such option immediately prior to the effective time of the merger, multiplied by (ii) the excess, if any, of the merger consideration of $51.25 per share of Company common stock over the exercise price per share of the Company common stock subject to such option, without interest and less any applicable withholding taxes. Regardless of the terms of the merger agreement, certain Company employees may, however, be given the opportunity, at the discretion of Leonard Green and CVC, to roll over options to purchase shares of Company common stock currently held by such employees into options to purchase shares of Buyer common stock. See “The Merger — Interests of Certain Persons in the Merger — Discussions with Leonard Green and CVC” beginning on page 65.

Treatment of Restricted Shares (Page 80)

Upon consummation of the merger, each restricted share of Company common stock that is outstanding immediately prior to the effective time of the merger will automatically vest, and our reacquisition right with respect thereto shall lapse, and the holder thereof will be entitled to receive the merger consideration of $51.25 with respect to each such share, without interest and less any applicable withholding taxes.

Conditions to Closing the Merger (Page 88).

The obligations of the parties to consummate the merger is subject to the satisfaction or waiver of a number of conditions, including the following:

 

   

the adoption of the merger agreement by the affirmative vote of the holders of a majority of the outstanding shares of our common stock entitled to vote thereon;

 

   

the expiration or termination of the waiting period applicable to the merger under the HSR Act;

 

   

other than the filing of the certificate of merger, all authorizations of, filings with, or expirations of waiting periods imposed by, any governmental entity in connection with the merger having been obtained, filed or occurred except for failures which would not have a “Buyer Material Adverse Effect” or a “Company Material Adverse Effect” (each as defined in the merger agreement);

 

   

the absence of an order suspending the use of this proxy statement or a proceeding for that purpose initiated or threatened in writing by the Securities and Exchange Commission, which we refer to as the SEC, or its staff;

 

   

the absence of any governmental orders or injunctions or statutes, rules, or regulations that have the effect of making the merger illegal or otherwise preventing the consummation of the merger;

 

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each party’s respective representations and warranties in the merger agreement being true and correct as of the closing date of the merger in the manner described in “The Merger Agreement — Conditions to Closing the Merger;”

 

   

each party’s performance in all material respects of its obligations required to be performed under the merger agreement on or prior to the closing date of the merger; and

 

   

the absence of a “Company Material Adverse Effect” since the date of the merger agreement.

Restrictions on Solicitation of Other Offers (Page 89) or Restrictions on Change of Recommendation to Stockholders (Page 90).

We generally have agreed not to:

 

   

solicit, initiate or knowingly encourage any inquiries or the making of any proposal or offer that constitutes, or could reasonably be expected to lead to, any acquisition proposal;

 

   

amend, or grant a waiver or release under, any standstill or similar agreement; or

 

   

enter into, continue or otherwise participate in any discussions or negotiations regarding, or furnish to any person any non-public information for the purpose of encouraging or facilitating, any acquisition proposal.

We have agreed to promptly (and in any event within 48 hours) advise Buyer of our receipt of any written acquisition proposal and the material terms and conditions of any such acquisition proposal.

If an unsolicited acquisition proposal is made, we may contact the person making such acquisition proposal to clarify the terms and conditions thereof, and we may furnish information with respect to the Company to, engage in discussions or negotiations with (including solicitations of revised acquisition proposals), or amend, or grant a waiver or release under, any standstill or similar agreement of the person who has made such acquisition proposal, but only if our board of directors determines in good faith, after consultation with outside counsel and its financial advisors, that such acquisition proposal constitutes or could reasonably be expected to lead to a superior proposal.

We have agreed that our board of directors will not (a) fail to recommend adoption of the merger agreement in the proxy statement or otherwise withdraw its recommendation that our stockholders adopt the merger agreement, (b) cause or permit us to enter into an agreement concerning another acquisition proposal or (c) adopt, approve or recommend another acquisition proposal, except that our board of directors may take such an action in certain circumstances if it determines in good faith, after consultation with outside counsel and its financial advisors, that another acquisition proposal constitutes a superior proposal after giving effect to all adjustments to the merger agreement offered by Buyer and the failure to take such action could be inconsistent with its fiduciary obligations under applicable law. In addition, our board of directors may withdraw its recommendation that our stockholders adopt the merger agreement, other than in response to another acquisition proposal, if it determines in good faith, after consultation with outside counsel, that a failure to take such action could be inconsistent with its fiduciary obligations under applicable law.

Termination (Page 92)

The Company and Buyer may mutually agree to terminate the merger agreement at any time prior to the effective time of the merger, even after our stockholders have adopted the merger agreement. The merger agreement may also be terminated in certain other circumstances, including:

 

   

by either the Company or Buyer, if:

 

   

the merger has not been consummated by December 15, 2011, except that this termination right will not be available to any party whose failure to fulfill any obligation under the merger agreement has been a principal cause of or resulted in the failure of the merger to occur on or before such date;

 

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a governmental entity of competent jurisdiction has issued a nonappealable final order, decree or ruling or taken any other nonappealable final action, in each case having the effect of permanently restraining, enjoining or otherwise prohibiting the merger, except that this termination right will not be available to any party whose failure to fulfill any obligation under the merger agreement has been a principal cause of or resulted in such order, decree, ruling or other action; or

 

   

our stockholders do not vote to adopt the merger agreement at the special meeting.

 

   

by Buyer, if:

 

   

(a) our board of directors fails to recommend adoption of the merger agreement in the proxy statement or otherwise withdraws its recommendation that our stockholders adopt the merger agreement, (b) our board of directors causes or permits us to enter into an agreement concerning another acquisition proposal or (c) our board of directors adopts, approves or recommends another acquisition proposal, (d) a tender offer or exchange offer for our outstanding common stock is commenced and our board of directors recommends that our stockholders tender their shares in such tender or exchange offer or, within ten business days after the commencement of such tender or exchange offer, fails to recommend against acceptance of such offer, (e) we fail to publicly recommend adoption of the merger agreement within five business days of a written request from Buyer for us to do so if such request follows the making of an alternative acquisition proposal other than a tender or exchange offer, (f) we fail to hold the special meeting within 10 business days prior to December 15, 2011 or (g) we breach our “no solicitation” obligations under the merger agreement in any material respect; or

 

   

we breach or fail to perform any of our representations, warranties, covenants or agreements in the merger agreement and such breach or failure to perform would cause the conditions to the obligations of Buyer and Transitory Subsidiary to consummate the closing not to be satisfied and such breach or failure to perform is not timely cured or is not capable of being cured.

 

   

by the Company, if:

 

   

our board of directors pursuant to and in compliance with our non-solicitation obligations under the merger agreement enters into an alternative acquisition agreement for a superior proposal and prior to or simultaneously with such termination we pay to Buyer in cash an $80 million termination fee;

 

   

Buyer or Transitory Subsidiary breach or fail to perform any of their representations, warranties, covenants or agreements in the merger agreement and such breach or failure to perform would cause the conditions to our obligation to consummate the closing not to be satisfied and such breach or failure to perform is not timely cured or is not capable of being cured; or

 

   

the marketing period has ended and all of the conditions to the obligations of Buyer and Transitory Subsidiary to consummate the merger have been satisfied and we have notified Buyer in writing after the end of the marketing period that we are ready and willing to consummate the merger, and Buyer and Transitory Subsidiary fail to consummate the merger within three business days following delivery of such notice.

Termination Fees (Page 93) and Expense Reimbursement (Page 94)

If the merger agreement is terminated, depending upon the circumstances under which such termination occurs:

 

   

we may be obligated to pay Buyer a termination fee of $80 million (subject to a credit for any Buyer expenses previously paid);

 

   

we may be obligated to reimburse Buyer for expenses actually incurred related to the transactions contemplated by the merger agreement, up to a total cap of $7.5 million; or

 

   

Buyer may be obligated to pay us a reverse termination fee of $175 million.

 

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Limitations on Remedies and Liability Cap (Page 93)

 

   

The parties are entitled to an injunction or injunctions to prevent breaches of the merger agreement and to enforce specifically the terms and provisions thereof, this being in addition to any other remedy to which they are entitled. However, we can enforce specifically the obligations of Buyer and Transitory Subsidiary to cause the equity financing to be funded and to consummate the closing of the merger only if (1) the marketing period has ended and all conditions to the obligations of Buyer and Transitory Subsidiary to effect the merger have been satisfied at the time the merger agreement contemplated the closing to occur, (2) the debt financing has been funded or the commitment parties have confirmed in writing that the debt financing will be funded at the closing if the equity financing is funded at the closing and (3) we have irrevocably confirmed that if specific performance is granted and the equity financing and debt financing are funded, then we would take such actions required of us by the merger agreement to cause the closing of the merger to occur.

 

   

Buyer’s liability relating to the merger agreement is limited to the $175 million reverse termination fee, any indemnification or reimbursement owed to us in connection with cooperation we provide for Buyer’s efforts to arrange the financing for the merger, and interest (at the prime rate) and reimbursement of reasonable costs and expenses we may incur in enforcing our right to payment of such reverse termination fee. However, such liability limitation will in no way limit our rights to an injunction to prevent breaches by Buyer or Transitory Subsidiary of the merger agreement and to enforce specifically the terms of the merger agreement.

 

   

Our liability relating to the merger agreement is limited to the $80 million termination fee, reimbursement for expenses of up to $7.5 million incurred by Buyer in relation to the transactions contemplated by the merger agreement plus interest (at the prime rate) and reimbursement of reasonable costs and expenses Buyer may incur in enforcing its right to payment of such termination fee and expense reimbursement. However, such liability limitation will in no way limit the rights of Buyer or Transitory Subsidiary to an injunction to prevent breaches by us of the merger agreement and to enforce specifically the terms of the merger agreement.

Market Price of Company Common Stock (Page 98)

The closing price of Company common stock on the New York Stock Exchange, or NYSE, on June 28, 2011, the last trading day prior to the public announcement of the merger agreement, was $48.08 per share of Company common stock. On August 2, 2011 the closing price for Company common stock on the NYSE was $50.13 per share of Company common stock. You are encouraged to obtain current market quotations for Company common stock in connection with voting your shares of Company common stock.

Appraisal Rights (Page 101)

Record holders of Company common stock as of the record date who do not vote in favor of the adoption of the merger agreement may elect to pursue their appraisal rights to receive the judicially determined “fair value” of their shares, which could be more or less than, or the same as, the per share merger consideration for the common stock, but only if they comply with the procedures required under Delaware law. For a summary of these Delaware law procedures, see “Appraisal Rights” beginning on page 101. An executed proxy that is not marked “AGAINST” or “ABSTAIN” with respect to the adoption of the merger agreement will be voted “FOR” the adoption of the merger agreement and will disqualify the stockholder submitting that proxy from demanding appraisal rights.

A copy of Section 262 of the General Corporation Law of the State of Delaware, or DGCL, is included as Annex C to this proxy statement. Failure to follow the procedures set forth in Section 262 of the DGCL will result in the loss of appraisal rights. We encourage you to read these provisions carefully and in their entirety.

 

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ANY COMPANY STOCKHOLDER WHO WISHES TO EXERCISE APPRAISAL RIGHTS OR WHO WISHES TO PRESERVE HIS, HER OR ITS RIGHT TO DO SO SHOULD REVIEW ANNEX C CAREFULLY AND SHOULD CONSULT HIS, HER OR ITS LEGAL ADVISOR, SINCE FAILURE TO TIMELY AND FULLY COMPLY WITH THE PROCEDURES SET FORTH THEREIN WILL RESULT IN THE LOSS OF SUCH RIGHTS.

Delisting and Deregistration of Company Common Stock (Page 105)

If the merger is consummated, the Company common stock will be delisted from the NYSE and deregistered under the Exchange Act. Accordingly, following the consummation of the merger, we would no longer file periodic reports with the SEC on account of the Company common stock.

 

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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

The following questions and answers are intended to address briefly some commonly asked questions regarding the merger, the merger agreement and the special meeting. These questions and answers may not address all questions that may be important to you as a Company stockholder. Please refer to the “Summary” and the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to in this proxy statement, which you should read carefully and in their entirety. You may obtain the information incorporated by reference in this proxy statement without charge by following the instructions under “Where You Can Find More Information” beginning on page 106.

 

Q. What is the proposed transaction and what effects will it have on the Company?

 

A. The proposed transaction is the acquisition of the Company by Buyer pursuant to the merger agreement. If the proposal to adopt the merger agreement is approved by our stockholders and the other closing conditions under the merger agreement are satisfied or waived, Transitory Subsidiary will merge with and into the Company, with the Company being the surviving corporation. As a result of the merger, the Company will become a subsidiary of Buyer and will no longer be a publicly held corporation, and you will no longer have any interest in our future earnings or growth. In addition, the Company common stock will be delisted from the NYSE and deregistered under the Exchange Act, and we will no longer file periodic reports with the SEC on account of Company common stock.

 

Q. What will I receive if the merger is consummated?

 

A. Upon completion of the merger, you will be entitled to receive the per share merger consideration of $51.25 in cash, without interest, less any applicable withholding taxes, for each share of Company common stock that you own, unless you are entitled to and have properly demanded appraisal under Section 262 of the DGCL. For example, if you own 100 shares of Company common stock, you will receive $5,125 in cash in exchange for your shares of Company common stock, less any applicable withholding taxes. You will not own any shares of the capital stock in the surviving corporation.

 

Q. How does the per share merger consideration compare to the market price of Company common stock prior to announcement of the merger?

 

A. The merger consideration of $51.25 per share of Company common stock represents a premium of approximately 38% to the closing price of the shares on June 30, 2010, the day before Leonard Green announced a 9.5% ownership stake in the Company, and an approximately 7% premium to the closing price of the shares on June 28, 2011, the last day prior to the public announcement of the execution of the merger agreement.

 

Q. How does the board of directors recommend that I vote?

 

A. The board of directors recommends that you vote “FOR” approval of the proposal to adopt the merger agreement, “FOR” approval of the nonbinding advisory proposal regarding “golden parachute” compensation and “FOR” approval of the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

Q. When do you expect the merger to be consummated?

 

A. We are working towards completing the merger as soon as possible. Assuming timely satisfaction of necessary closing conditions, including the approval by our stockholders of the proposal to adopt the merger agreement, we currently anticipate that the merger will be consummated at the end of September 2011.

 

Q. What happens if the merger is not consummated?

 

A.

If the merger agreement is not adopted by the stockholders of the Company or if the merger is not consummated for any other reason, the stockholders of the Company would not receive any payment for

 

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  their shares of Company common stock in connection with the merger. Instead, the Company would remain an independent public company, and the Company common stock would continue to be listed and traded on the NYSE. Under specified circumstances, the Company may be required to pay to Buyer, or may be entitled to receive from Buyer, a fee or expense reimbursement with respect to the termination of the merger agreement, as described under “The Merger Agreement — Termination Fees” beginning on page 93 and “The Merger Agreement — Expense Reimbursement” beginning on page 94.

 

Q. Is the merger expected to be taxable to me?

 

A. The exchange of shares of Company common stock for cash pursuant to the merger will generally be a taxable transaction to U.S. holders for U.S. federal income tax purposes. If you are a U.S. holder and your shares of Company common stock are converted into the right to receive cash in the merger, you will generally recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference, if any, between the amount of cash received with respect to such shares (determined before deduction of any applicable withholding taxes) and your adjusted tax basis in your shares of Company common stock. If you are a non-U.S. holder, the merger will generally not be a taxable transaction to you under U.S. federal income tax laws unless you have certain connections to the United States, but may be a taxable transaction to you under foreign tax laws, and you are encouraged to seek tax advice regarding such matters. Backup withholding may also apply to the cash payments made pursuant to the merger unless the holder or other payee complies with the backup withholding rules. You should read “The Merger — Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 69 for the definition of “U.S. holder” and “non-U.S. holder” and a more detailed discussion of the U.S. federal income tax consequences of the merger. You should also consult your tax advisor for a complete analysis of the effect of the merger on your federal, state and local and/or foreign taxes.

 

Q. Do any of the Company’s directors or officers have interests in the merger that may differ from or be in addition to my interests as a stockholder?

 

A. Yes. In considering the recommendation of the board of directors with respect to the proposal to adopt the merger agreement, you should be aware that our directors and executive officers have interests in the merger that may be different from, or in addition to, the interests of our stockholders generally. The independent committee and the board of directors were aware of and considered these interests, among other matters, in evaluating and negotiating the merger agreement and the merger, and in recommending that the merger agreement be adopted by the stockholders of the Company. See “The Merger — Interests of Certain Persons in the Merger” beginning on page 59.

 

Q. Why am I receiving this proxy statement and proxy card or voting instruction form?

 

A. You are receiving this proxy statement and proxy card or voting instruction form in connection with the solicitation of proxies by the board of directors for use at the special meeting because you owned shares of Company common stock as of the record date for the special meeting. This proxy statement describes matters on which we urge you to vote and is intended to assist you in deciding how to vote your shares of Company common stock with respect to such matters.

 

Q. When and where is the special meeting?

 

A. The special meeting of stockholders of the Company will be held on September 9, 2011 at 9:00 a.m. Eastern time, at the Doubletree Hotel, 5400 Computer Drive, Westborough, Massachusetts.

 

Q. What am I being asked to vote on at the special meeting?

 

A. You are being asked to consider and vote on a proposal to adopt the merger agreement that provides for the acquisition of the Company by Buyer, to approve, on an advisory basis, the “golden parachute” compensation that may be payable to the Company’s named executive officers in connection with the merger as reported on the Golden Parachute Compensation table on page 67, and to approve a proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to adopt the merger agreement.

 

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Q. What vote is required for the Company’s stockholders to approve the proposal to adopt the merger agreement?

 

A. The adoption of the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of Company common stock entitled to vote thereon.

Because the affirmative vote required to approve the proposal to adopt the merger agreement is based upon the total number of outstanding shares of Company common stock, if you fail to submit a proxy or to vote in person at the special meeting, or if you vote “ABSTAIN”, or if you do not provide your bank, brokerage firm or other nominee with voting instructions, it will have the same effect as a vote “AGAINST” the proposal to adopt the merger agreement.

 

Q. What vote is required for the Company’s stockholders to approve the proposal regarding “golden parachute” compensation and the proposal to adjourn the special meeting, if necessary or appropriate?

 

A. Approval of the proposals regarding “golden parachute” compensation and adjournment of the special meeting, if necessary or appropriate, require the approval of a majority of the votes properly cast upon each of these proposals.

If you vote “ABSTAIN” on the proposal regarding “golden parachute” compensation or the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies, this will have no effect on these proposals. If you fail to submit a proxy or to vote in person at the special meeting, or if you do not provide your bank, brokerage firm or other nominee with voting instructions, your shares of Company common stock will not be voted on these proposals, and this will have no effect on these proposals.

 

Q. Why am I being asked to cast a nonbinding advisory vote to approve “golden parachute” compensation that the Company’s named executive officers will receive in connection with the merger?

 

A. The Securities and Exchange Commission’s recently adopted new rules require us to seek a nonbinding advisory vote with respect to certain payments that will be made to the Company’s named executive officers in connection with the merger, or “golden parachute” compensation.

 

Q. What will happen if stockholders do not approve the “golden parachute” compensation at the special meeting?

 

A. Approval of “golden parachute” compensation payable under existing agreements that the Company’s named executive officers may receive in connection with the merger is not a condition to completion of the merger. The vote with respect to “golden parachute” compensation is an advisory vote and will not be binding on the Company. Therefore, regardless of whether stockholders approve the “golden parachute” compensation, if the merger agreement is adopted by the stockholders and the merger is completed, the “golden parachute” compensation will still be paid to the Company’s named executive officers to the extent payable in accordance with the terms of such compensation.

 

Q. Who can vote at the special meeting?

 

A. All of our holders of Company common stock of record as of the close of business on July 29, 2011, the record date for the special meeting, are entitled to receive notice of, and to vote at, the special meeting. Each holder of Company common stock is entitled to cast one vote on each matter properly brought before the special meeting for each share of Company common stock that such holder owned as of the record date.

 

Q. What constitutes a quorum for the special meeting?

 

A.

A quorum is necessary to adopt the merger agreement and approve the proposal regarding “golden parachute” compensation at the special meeting. The presence at the special meeting, in person or by proxy, of the holders of a majority of the shares of Company common stock outstanding at the close of business on

 

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  the record date and entitled to vote constitutes a quorum for the purposes of the special meeting. Abstentions and broker non-votes will be counted as present for the purpose of determining whether a quorum is present. The meeting may be adjourned whether or not a quorum is present.

 

Q. How do I vote?

 

A. If you are a stockholder of record, you may vote your shares of Company common stock on matters presented at the special meeting in any of the following ways:

 

   

in person — you may attend the special meeting and cast your vote there;

 

   

by proxy — stockholders of record have a choice of voting by proxy:

 

   

over the internet — the website for internet proxy submission is on your proxy card;

 

   

by using a toll-free telephone number noted on your proxy card; or

 

   

by signing, dating and returning the enclosed proxy card in the accompanying prepaid reply envelope.

If you hold your shares of Company common stock in nominee or “street name,” please refer to the instructions provided by your bank, brokerage firm or other nominee to see which of the above choices are available to you. Please note that if you are a beneficial owner of shares of Company common stock held in nominee or “street name” and wish to vote in person at the special meeting, you must provide a legal proxy from your bank, brokerage firm or other nominee at the special meeting.

A control number, located on your proxy card, is designed to verify your identity and allow you to submit a proxy for your shares of Company common stock, and to confirm that your voting instructions have been properly recorded when submitting a proxy over the internet or by telephone. Please be aware that, though there is no charge for voting your shares, if you submit a proxy over the internet, you may incur costs such as telephone and internet access charges for which you will be responsible.

 

Q. What is the difference between holding shares as a stockholder of record and in nominee or “street name”?

 

A. If your shares of Company common stock are registered directly in your name with our transfer agent, BNY Mellon, you are considered, with respect to those shares of Company common stock, as the “stockholder of record.” This proxy statement, and your proxy card, have been sent directly to you by the Company.

If your shares of Company common stock are held through a bank, brokerage firm or other nominee, you are considered the beneficial owner of shares of Company common stock held in nominee or “street name.” In that case, this proxy statement has been forwarded to you by your bank, brokerage firm or other nominee who is considered, with respect to those shares of Company common stock, the stockholder of record. As the beneficial owner of shares of Company common stock held in nominee or “street name,” you have the right to direct your bank, brokerage firm or other nominee how to vote your shares of Company common stock by following their instructions for voting.

 

Q. If my shares of Company common stock are held in nominee or “street name” by my bank, brokerage firm or other nominee, will my bank, brokerage firm or other nominee vote my shares of Company common stock for me?

 

A. Your bank, brokerage firm or other nominee will only be permitted to vote your shares of Company common stock if you instruct your bank, brokerage firm or other nominee how to vote. You should follow the procedures provided by your bank, brokerage firm or other nominee regarding the voting of your shares of Company common stock. If you do not instruct your bank, brokerage firm or other nominee to vote your shares of Company common stock, your shares of Company common stock will not be voted and the effect will be the same as a vote “AGAINST” the proposal to adopt the merger agreement and your shares of Company common stock will not have an effect on approval of the advisory proposal regarding “golden parachute” compensation or the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

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Q. How do I vote the shares of Company common stock that I hold through the Company 401(k) Savings Plans?

 

A. If you participate in either the BJ’s Wholesale Club, Inc. 401(k) Savings Plan for Salaried Employees or the BJ’s Wholesale Club, Inc. 401(k) Savings Plan for Hourly Employees and hold Company common stock in your account, you may vote an amount of shares of Company common stock equivalent to the interest in the Company common stock credited to your account as of the record date. You may vote these shares by instructing Fidelity Management Trust Company, which we refer to as the trustee, pursuant to the directions on the enclosed proxy card. The trustee will vote your shares in accordance with your duly executed instructions. If you do not send instructions on how to vote your shares, the share equivalents credited to your account will be voted by the trustee in the same proportion that the trustee votes share equivalents for which it did receive instructions. To allow sufficient time for voting by the trustee, your voting instructions must be received by 5:00 p.m. Eastern time on September 6, 2011.

 

Q. How can I change or revoke my proxy?

 

A. You have the right to revoke a proxy, whether delivered over the internet, by telephone or by mail, at any time before it is exercised, by submitting a later-dated proxy through any of the methods available to you, by giving written notice of revocation to our Secretary, at 25 Research Drive, Westborough, Massachusetts 01581, or by attending the special meeting and voting in person.

 

Q. What is a proxy?

 

A. A proxy is your legal designation of another person, referred to as a “proxy,” to vote your shares of Company common stock. The written document describing the matters to be considered and voted on at the special meeting is called a “proxy statement.” The document used to designate a proxy to vote your shares of Company common stock is called a “proxy card.” Our board of directors has designated Robert W. Eddy, Thomas J. Shields and Lon F. Povich, and each of them singly, with full power of substitution, as proxies for the special meeting.

 

Q. If a stockholder gives a proxy, how will its shares of Company common stock be voted?

 

A. Regardless of the method you choose to submit your proxy, the individuals named on the enclosed proxy card, as your proxies, will vote your shares of Company common stock in the way that you indicate. When completing the internet or telephone proxy processes or the enclosed proxy card, you may specify whether

your shares of Company common stock should be voted for or against or to abstain from voting on all, some or none of the specific items of business to come before the special meeting.

If you properly sign your proxy card but do not mark the boxes showing how your shares of Company common stock should be voted on a matter, the shares represented by your properly signed proxy will be voted “FOR” the proposal to adopt the merger agreement, “FOR” approval of the nonbinding advisory proposal regarding “golden parachute” compensation and “FOR” the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

Q. How are votes counted?

 

A. With respect to the proposal to adopt the merger agreement, you may vote “FOR”, “AGAINST” or “ABSTAIN”. Abstentions and broker non-votes will have the same effect as votes “AGAINST” the proposal to adopt the merger agreement.

With respect to the proposal regarding “golden parachute” compensation and the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies, you may vote “FOR”, “AGAINST” or “ABSTAIN”. Abstentions and broker non-votes will have no effect on these proposals.

 

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Q. What do I do if I receive more than one proxy or set of voting instructions?

 

A. If you hold shares of Company common stock in more than one account, you may receive more than one proxy or set of voting instructions relating to the special meeting. These should each be voted or returned separately in accordance with the instructions provided in this proxy statement in order to ensure that all of your shares of Company common stock are voted.

 

Q. What happens if I sell my shares of Company common stock before the special meeting?

 

A. The record date for stockholders entitled to vote at the special meeting is earlier than both the date of the special meeting and the consummation of the merger. If you transfer your shares of Company common stock after the record date but before the special meeting, unless special arrangements (such as provision of a proxy) are made between you and the person to whom you transfer your shares and each of you notifies the Company in writing of such special arrangements, you will retain your right to vote such shares at the special meeting but will transfer the right to receive the per share merger consideration to the person to whom you transfer your shares.

 

Q. Who will solicit and pay the cost of soliciting proxies?

 

A. The Company has engaged Georgeson, Inc. to assist in the solicitation of proxies for the special meeting. The Company estimates that it will pay Georgeson a fee of approximately $15,000, plus $6.00 per call made to or received from stockholders of the Company. The Company will reimburse Georgeson for reasonable out-of-pocket expenses and will indemnify Georgeson and its affiliates against certain claims, liabilities, losses, damages and expenses. The Company may also reimburse brokers, banks and other custodians, nominees and fiduciaries representing beneficial owners of shares of Company common stock for their expenses in forwarding soliciting materials to beneficial owners of Company common stock and in obtaining voting instructions from those owners. Our directors, officers and employees may also solicit proxies by telephone, by facsimile, by mail, on the internet or in person. They will not be paid any additional amounts for soliciting proxies.

 

Q. What do I need to do now?

 

A. Even if you plan to attend the special meeting, after carefully reading and considering the information contained in this proxy statement, please submit your proxy promptly to ensure that your shares are represented at the special meeting. If you hold your shares of Company common stock in your own name as the stockholder of record, please submit a proxy for your shares of Company common stock by (i)

completing, signing, dating and returning the enclosed proxy card in the accompanying prepaid reply envelope, (ii) using the telephone number printed on your proxy card or (iii) using the internet proxy instructions printed on your proxy card. If you decide to attend the special meeting and vote in person, your vote by ballot will revoke any proxy previously submitted. If you are a beneficial owner of shares of Company common stock held in nominee or “street name,” please refer to the instructions provided by your bank, brokerage firm or other nominee to see which of the above choices are available to you.

 

Q. Should I send in my stock certificates now?

 

A. No. A letter of transmittal will be mailed to you promptly, and in any event within three business days, after the effective time of the merger, describing how you should surrender your shares of Company common stock for the per share merger consideration. If your shares of Company common stock are held in nominee or “street name” by your bank, brokerage firm or other nominee, you will receive instructions from your bank, brokerage firm or other nominee as to how to effect the surrender of your nominee or “street name” shares of Company common stock in exchange for the per share merger consideration. Please do NOT return your stock certificate(s) with your proxy.

 

Q. What rights do I have if I oppose the merger?

 

A.

Stockholders of record as of the record date are entitled to exercise appraisal rights under Delaware law by following the procedures and satisfying the requirements specified in Section 262 of the General

 

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  Corporation Law of the State of Delaware. A copy of Section 262 is attached as Annex C to this proxy statement. See “Appraisal Rights” beginning on page 101.

 

Q. Who can help answer my other questions?

 

A. If you have additional questions about the merger, need assistance in submitting your proxy or voting your shares of Company common stock, or need additional copies of this proxy statement or the enclosed proxy card, please call Georgeson, our proxy solicitor, toll-free at 1-888-654-1722.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION

This proxy statement, and the documents to which we refer you in this proxy statement, as well as information included in oral statements or other written statements made or to be made by us, contain a number of “forward-looking statements,” including all statements relating directly or indirectly to the timing or likelihood of completing the merger to which this proxy statement relates, financing sources, planned capital expenditures, planned club openings, expected provision for income taxes, litigation, lease obligations in connection with closed BJ’s and ProFoods clubs, and other information with respect to our plans and strategies. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “intends,” “anticipates,” “plans,” “estimates,” “expects” and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause actual events or our actual results to differ materially from those indicated by such forward-looking statements, including, without limitation, the risks detailed in our filings with the SEC, including our most recent filings on Forms 10-K and 10-Q and factors and matters contained or incorporated by reference in this document. In addition, any forward-looking statements represent our estimates only as of the date they were made and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. In addition to other factors and matters contained in or incorporated by reference in this proxy statement, we believe the following factors could cause actual results to differ materially from those discussed in the forward-looking statements:

 

   

the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement, including a termination under circumstances that could require us to pay a termination fee;

 

   

Buyer’s failure to obtain the necessary equity and debt financing or the failure of that financing to be sufficient to complete the merger and the transactions contemplated thereby;

 

   

the inability to complete the merger due to the failure to obtain the Company stockholder approval or the failure to satisfy other conditions to completion of the merger, including the receipt of required regulatory approvals;

 

   

the failure of the merger to close for any other reason;

 

   

the possibility that alternative takeover proposals will or will not be made;

 

   

risks that the proposed transaction disrupts current plans and operations and the potential difficulties in employee retention as a result of the merger;

 

   

the outcome of any legal proceedings, regulatory proceedings or enforcement matters that have been or may be instituted against the Company or others relating to the merger agreement;

 

   

diversion of management’s attention from ongoing business concerns;

 

   

the merger agreement’s contractual restrictions on the conduct of our business prior to the completion of the merger;

 

   

the possible adverse effect on our business and the price of the Company common stock if the merger is not consummated in a timely manner or at all;

 

   

the effect of the announcement of the merger on our business relationships, operating results and business generally, including our ability to retain key employees; and

 

   

the amount of the costs, fees, expenses and charges related to the merger.

 

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THE SPECIAL MEETING

Time, Place and Purpose of the Special Meeting

This proxy statement is being furnished to our stockholders as part of the solicitation of proxies by the board of directors for use at the special meeting to be held on September 9, 2011, starting at 9:00 a.m., Eastern time, at the Doubletree Hotel, 5400 Computer Drive, Westborough, Massachusetts, or at any adjournment thereof. At the special meeting, holders of Company common stock will be asked to approve the proposal to adopt the merger agreement, to approve the nonbinding advisory proposal regarding “golden parachute” compensation and to approve the proposal to adjourn the special meeting, if necessary or appropriate, for the purpose of soliciting additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to adopt the merger agreement.

Our stockholders must approve the proposal to adopt the merger agreement in order for the merger to be consummated. If our stockholders fail to approve the proposal to adopt the merger agreement, the merger will not be consummated. A copy of the merger agreement is attached as Annex A to this proxy statement, which we encourage you to read carefully in its entirety.

Record Date and Quorum

We have fixed the close of business on July 29, 2011 as the record date for the special meeting, and only holders of record of Company common stock on the record date are entitled to vote at the special meeting. You are entitled to receive notice of, and to vote at, the special meeting if you owned shares of Company common stock at the close of business on the record date. On the record date, there were 54,941,516 shares of Company common stock outstanding and entitled to vote. Each share of Company common stock entitles its holder to one vote on all matters properly coming before the special meeting.

A majority of the shares of Company common stock outstanding at the close of business on the record date and entitled to vote, present in person or represented by proxy, at the special meeting constitutes a quorum for the purposes of the special meeting. Shares of Company common stock represented at the special meeting but not voted, including shares of Company common stock for which a stockholder directs voting “ABSTAIN”, as well as “broker non-votes” (as described below), will be counted for purposes of establishing a quorum. A quorum is necessary to adopt the merger agreement and approve the proposal regarding “golden parachute” compensation at the special meeting. Once a share of Company common stock is represented at the special meeting, it will be counted for the purpose of determining a quorum at the special meeting and any recess or adjournment of the special meeting. However, if a new record date is set for the adjourned special meeting, then a new quorum will have to be established. In the event that a quorum is not present at the special meeting, it is expected that the special meeting will be adjourned or recessed.

Attendance

Only stockholders of record or their duly authorized proxies have the right to attend the special meeting. If your shares of Company common stock are held through a bank, brokerage firm or other nominee, please bring to the special meeting a copy of your brokerage statement evidencing your beneficial ownership of Company common stock. If you are the representative of a corporate or institutional stockholder, you must present proof that you are the representative of such stockholder. Please note that cameras, recording devices and other electronic devices will not be permitted at the special meeting.

Vote Required

Approval of the proposal to adopt the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of Company common stock entitled to vote thereon. For the proposal to adopt the merger agreement, you may vote “FOR”, “AGAINST” or “ABSTAIN”. Voting “ABSTAIN” will not be

 

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counted as a vote cast in favor of the proposal to adopt the merger agreement but will count for the purpose of determining whether a quorum is present. If you fail to submit a proxy or to vote in person at the special meeting, or if you vote “ABSTAIN”, it will have the same effect as a vote “AGAINST” the proposal to adopt the merger agreement.

If your shares of Company common stock are registered directly in your name with our transfer agent, BNY Mellon, you are considered, with respect to those shares of Company common stock, the “stockholder of record.” This proxy statement and proxy card have been sent directly to you by the Company.

If your shares of Company common stock are held through a bank, brokerage firm or other nominee, you are considered the beneficial owner of shares of Company common stock held in nominee or “street name.” In that case, this proxy statement has been forwarded to you by your bank, brokerage firm or other nominee who is considered, with respect to those shares of Company common stock, the stockholder of record. As the beneficial owner of shares of Company common stock held in nominee or “street name,” you have the right to direct your bank, brokerage firm or other nominee how to vote your shares by following their instructions for voting. If you hold your shares of Company common stock in nominee or “street name,” please contact your bank, brokerage firm or other nominee for their instructions on how to vote your shares. Please note that if you are a beneficial owner of shares of Company common stock held in nominee or “street name” and wish to vote in person at the special meeting, you must provide a legal proxy from your bank, brokerage firm or other nominee at the special meeting.

Under the rules of the NYSE, banks, brokerage firms or other nominees who hold shares in nominee or “street name” for customers have the authority to vote on “routine” proposals when they have not received instructions from beneficial owners. However, banks, brokerage firms or other nominees are precluded from exercising their voting discretion with respect to approving non-routine matters, such as the proposal to adopt the merger agreement, the proposal to approve the nonbinding advisory proposal regarding “golden parachute” compensation and the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies, and, as a result, absent specific instructions from the beneficial owner of such shares of Company common stock, banks, brokerage firms or other nominees are not empowered to vote those shares of Company common stock on non-routine matters, which we refer to generally as broker non-votes.” These broker non-votes will be counted for purposes of determining a quorum, but will have the same effect as a vote “AGAINST” the proposal to adopt the merger agreement.

Approval of the advisory proposal regarding “golden parachute” compensation and approval of the proposal to adjourn the special meeting, if necessary or appropriate, for the purpose of soliciting additional proxies, require a majority of the votes properly cast upon each of these proposals. For the nonbinding advisory proposal regarding “golden parachute” compensation and the proposal to adjourn the special meeting, if necessary or appropriate, you may vote “FOR”, “AGAINST” or “ABSTAIN”. For purposes of each of these proposals, if you fail to submit a proxy or to vote in person at the special meeting, or if you have given a proxy and vote “ABSTAIN”, the shares of Company common stock will not be counted in respect of, and will not have an effect on, the proposal.

If you are a stockholder of record, you may vote your shares of Company common stock on matters presented at the special meeting in any of the following ways:

 

   

in person — you may attend the special meeting and cast your vote there;

 

   

by proxy — stockholders of record have a choice of voting by proxy;

 

   

over the internet — the website for internet proxy submission is on your proxy card;

 

   

by using a toll-free telephone number noted on your proxy card; or

 

   

by signing and dating the enclosed proxy card you receive and returning it in the enclosed prepaid reply envelope.

 

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If you are a beneficial owner of Company common stock held in nominee or “street name,” you will receive instructions from your bank, brokerage firm or other nominee that you must follow in order to have your shares of Company common stock voted. Those instructions will identify which of the above choices are available to you in order to have your shares voted. Please note that if you are a beneficial owner of Company common stock held in nominee or “street name” and wish to vote in person at the special meeting, you must provide a legal proxy from your bank, brokerage firm or other nominee.

A control number, located on your proxy card, is designed to verify your identity and allow you to submit a proxy for your shares of Company common stock, and to confirm that your voting instructions have been properly recorded when submitting a proxy over the internet or by telephone. Please be aware that, though there is no charge for voting your shares, if you submit a proxy over the internet, you may incur costs such as telephone and internet access charges for which you will be responsible.

Please refer to the instructions on your proxy or voting instruction card to determine the deadlines for submitting a proxy over the internet or by telephone. If you choose to submit your proxy by mailing a proxy card, your proxy card must be received by our Secretary by the time the special meeting begins. Please do not send in your stock certificates with your proxy card. When the merger is consummated, a separate letter of transmittal will be mailed to you that will enable you to surrender your stock certificates and receive the per share merger consideration.

If you vote by proxy, regardless of the method you choose to submit a proxy, the individuals named as your proxies on the enclosed proxy card, and each of them, with full power of substitution, will vote your shares of Company common stock in the way that you indicate. When completing the internet or telephone proxy processes or the enclosed proxy card, you may specify whether your shares of Company common stock should be voted for or against or to abstain from voting on all, some or none of the specific items of business to come before the special meeting.

If you properly sign your proxy card but do not mark the boxes showing how your shares of Company common stock should be voted on a matter, the shares of Company common stock represented by your properly signed proxy will be voted “FOR” the proposal to adopt the merger agreement, “FOR” approval of the nonbinding advisory proposal regarding “golden parachute” compensation and “FOR” the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

If you have any questions or need assistance voting your shares, please call Georgeson, our proxy solicitor, toll-free at 1-888-654-1722.

IT IS IMPORTANT THAT YOU SUBMIT A PROXY FOR YOUR SHARES OF COMPANY COMMON STOCK PROMPTLY. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN, AS PROMPTLY AS POSSIBLE, THE ENCLOSED PROXY CARD IN THE ACCOMPANYING PREPAID REPLY ENVELOPE, OR SUBMIT YOUR PROXY BY TELEPHONE OR THE INTERNET. STOCKHOLDERS WHO ATTEND THE SPECIAL MEETING MAY REVOKE THEIR PROXIES BY VOTING IN PERSON.

If you participate in either the BJ’s Wholesale Club, Inc. 401(k) Savings Plan for Salaried Employees or the BJ’s Wholesale Club, Inc. 401(k) Savings Plan for Hourly Employees and hold Company common stock in your account, you may vote an amount of shares of Company common stock equivalent to the interest in the Company common stock credited to your account as of the record date. You may vote these shares by instructing the trustee pursuant to the directions on the enclosed proxy card. The trustee will vote your shares in accordance with your duly executed instructions. If you do not send instructions on how to vote your shares, the share equivalents credited to your account will be voted by the trustee in the same proportion that the trustee votes share equivalents for which it did receive instructions. To allow sufficient time for voting by the trustee, your voting instructions must be received by 5:00 p.m. Eastern time on September 6, 2011.

 

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As of the record date, the directors and executive officers of the Company beneficially owned and were entitled to vote, in the aggregate, 670,472 shares of Company common stock (including restricted shares of Company common stock, but not including any shares of Company common stock deliverable upon exercise or conversion of any options to purchase shares of Company common stock), representing 1.2% of the outstanding shares of Company common stock on the record date. The directors and executive officers have informed the Company that they currently intend to vote all of their shares of Company common stock “FOR” the proposal to adopt the merger agreement, “FOR” approval of the nonbinding advisory proposal regarding “golden parachute” compensation and “FOR” the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies. In addition, pursuant to a Company Stockholder Agreement among the LGP funds and the Company, the LGP funds have agreed to vote all shares of Company common stock held by them in favor of the adoption of the merger agreement and in favor of any actions necessary to consummate the merger and any of the other transactions contemplated by the merger agreement. See “Company Stockholder Agreement” beginning on page 97.

Proxies and Revocation

Any stockholder of record entitled to vote at the special meeting may submit a proxy by telephone, over the internet, or by returning the enclosed proxy card in the accompanying prepaid reply envelope, or may vote in person at the special meeting. If your shares of Company common stock are held in nominee or “street name” by your bank, brokerage firm or other nominee, you should instruct your bank, brokerage firm or other nominee on how to vote your shares of Company common stock using the instructions provided by your bank, brokerage firm or other nominee. If you fail to submit a proxy or to vote in person at the special meeting, or if you vote “ABSTAIN”, or if you do not provide your bank, brokerage firm or other nominee with voting instructions, your shares of Company common stock will not be voted on the proposal to adopt the merger agreement, which will have the same effect as a vote “AGAINST” the proposal to adopt the merger agreement.

You have the right to revoke a proxy, whether delivered over the internet, by telephone or by mail, at any time before it is exercised, by submitting a later-dated proxy through any of the methods available to you, by giving written notice of revocation to our Secretary, which must be received by the Company at 25 Research Drive, Westborough, Massachusetts 01581 by the time the special meeting begins, or by attending the special meeting and voting in person.

Adjournments and Recesses

Although it is not currently expected, the special meeting may be adjourned or recessed, including for the purpose of soliciting additional proxies, if there are insufficient votes at the time of the special meeting to approve the proposal to adopt the merger agreement or if a quorum is not present at the special meeting. Other than an announcement to be made at the special meeting of the time, date and place of an adjourned meeting, an adjournment generally may be made without notice. Any adjournment or recess of the special meeting for the purpose of soliciting additional proxies will allow the Company’s stockholders who have already sent in their proxies to revoke them at any time prior to their use at the special meeting as adjourned or recessed.

Anticipated Date of Completion of the Merger

We are working towards completing the merger as soon as possible. Assuming timely satisfaction of necessary closing conditions, including the approval by our stockholders of the proposal to adopt the merger agreement, we currently anticipate that the merger will be consummated at the end of September 2011.

Appraisal Rights

Record holders of our common stock as of the record date who do not vote in favor of the proposal to adopt the merger agreement may elect to exercise their appraisal rights to receive the judicially determined “fair value” of their shares, which could be more or less than, or the same as, the per share merger consideration for the

 

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common stock, but only if they comply with the procedures required under Delaware law. For a summary of these Delaware law procedures, see “Appraisal Rights” beginning on page 101. An executed proxy that is not marked “AGAINST” or “ABSTAIN” will be voted “FOR” the adoption of the merger agreement and will disqualify the stockholder submitting that proxy from demanding appraisal rights.

A copy of Section 262 of the General Corporation Law of the State of Delaware, or DGCL, is included as Annex C to this proxy statement. Failure to follow the procedures set forth in Section 262 of the DGCL will result in the loss of appraisal rights. We encourage you to read these provisions carefully and in their entirety.

ANY COMPANY STOCKHOLDER WHO WISHES TO EXERCISE APPRAISAL RIGHTS OR WHO WISHES TO PRESERVE HIS, HER OR ITS RIGHT TO DO SO SHOULD REVIEW ANNEX C CAREFULLY AND SHOULD CONSULT HIS, HER OR ITS LEGAL ADVISOR, SINCE FAILURE TO TIMELY AND FULLY COMPLY WITH THE PROCEDURES SET FORTH THEREIN WILL RESULT IN THE LOSS OF SUCH RIGHTS.

Solicitation of Proxies; Payment of Solicitation Expenses

The Company has engaged Georgeson, Inc. to assist in the solicitation of proxies for the special meeting. The Company estimates that it will pay Georgeson a fee of approximately $15,000, plus $6.00 per call made to or received from stockholders of the Company. The Company will reimburse Georgeson for reasonable out-of-pocket expenses and will indemnify Georgeson and its affiliates against certain claims, liabilities, losses, damages and expenses. The Company may also reimburse brokers, banks and other custodians, nominees and fiduciaries representing beneficial owners of shares of Company common stock for their expenses in forwarding soliciting materials to beneficial owners of Company common stock and in obtaining voting instructions from those owners. Our directors, officers and employees may also solicit proxies by telephone, by facsimile, by mail, on the internet or in person. They will not be paid any additional amounts for soliciting proxies.

Questions and Additional Information

If you have more 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 or voting instructions, please call Georgeson, our proxy solicitor, toll-free at 1-888-654-1722.

 

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PARTIES TO THE MERGER

THE COMPANY

BJ’s Wholesale Club, Inc.

25 Research Drive

Westborough, Massachusetts 01581

(774) 512-7400

The Company is a Delaware corporation with its headquarters in Westborough, Massachusetts. The Company introduced the warehouse club concept to New England in 1984 and has since expanded to become a leading warehouse club operator in the eastern United States. The Company operates 190 warehouse clubs in 15 states. For more information about the Company, see “Where You Can Find More Information” beginning on page 106. The Company common stock is publicly traded on the NYSE under the symbol “BJ.”

BUYER

Beacon Holding Inc.

c/o Leonard Green & Partners, L.P.

11111 Santa Monica Blvd., #2000

Los Angeles, California 90025

(310) 954-0444

c/o CVC Capital Partners Advisory (U.S.), Inc.

712 Fifth Avenue, 43rd Floor

New York, NY 10019

(212) 265-6222

Beacon Holding Inc., or Buyer, is a Delaware corporation that was formed by affiliates of Leonard Green and CVC solely for the purpose of entering into the merger agreement and completing the transactions contemplated by the merger agreement and the related financing transactions. Buyer has not engaged in any business except for activities incidental to its formation and as contemplated by the merger agreement. Buyer is currently controlled by investment funds affiliated with Leonard Green and CVC. Upon completion of the merger, the Company will be a direct wholly-owned subsidiary of Buyer.

Leonard Green is a private equity firm with approximately $9 billion in equity commitments under management. Based in Los Angeles, Leonard Green invests in market leading companies across a range of industries. Significant current retail investments include J. Crew, Jo-Ann Stores, Whole Foods Market, PETCO Animal Supplies, Leslie’s Poolmart, Sports Authority, The Container Store, Tourneau, David’s Bridal, Neiman Marcus Group, Jetro Cash & Carry and Tire Rack.

CVC is a private equity and investment advisory firm with approximately $44 billion of capital under management and a network of 20 offices throughout Europe, Asia and the United States. Since its founding in 1981, CVC has completed over 280 investments in a wide range of industries and countries. CVC’s current investments in the U.S. include Univar, Pilot Flying J, and Leslie’s Poolmart.

 

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TRANSITORY SUBSIDIARY

Beacon Merger Sub Inc.

c/o Leonard Green & Partners, L.P.

11111 Santa Monica Blvd., #2000

Los Angeles, California 90025

(310) 954-0444

c/o CVC Capital Partners Advisory (U.S.), Inc.

712 Fifth Avenue, 43rd Floor

New York, NY 10019

(212) 265-6222

Beacon Merger Sub Inc., or Transitory Subsidiary, is a Delaware corporation that was formed solely for the purpose of entering into the merger agreement and completing the transactions contemplated by the merger agreement and the related financing transactions. Transitory Subsidiary is a wholly-owned subsidiary of Buyer and has not engaged in any business except for activities incidental to its formation and as contemplated by the merger agreement and the related financing transactions. Upon the completion of the merger, Transitory Subsidiary will cease to exist and the Company will continue as the surviving corporation.

 

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THE MERGER

This discussion of the merger is qualified in its entirety by reference to the merger agreement, which is attached to this proxy statement as Annex A. You should read the entire merger agreement carefully as it is the legal document that governs the merger.

The merger agreement provides that Transitory Subsidiary will merge with and into the Company. The Company will be the surviving corporation in the merger and will continue to do business following the merger. As a result of the merger, the Company will cease to be a publicly traded company. You will not own any shares of the capital stock of the surviving corporation.

Overview of the Merger

The Company, Buyer and Transitory Subsidiary entered into the merger agreement on June 28, 2011. Under the terms of the merger agreement, Transitory Subsidiary will be merged with and into the Company, with the Company surviving the merger as a wholly-owned subsidiary of Buyer. Buyer and Transitory Subsidiary are beneficially owned by investment funds affiliated with Leonard Green and CVC. The following will occur in connection with the merger:

 

   

each share of Company common stock issued and outstanding immediately prior to the effective time (other than the excluded shares) will be converted into the right to receive the per share merger consideration, without interest and less any applicable withholding taxes;

 

   

each outstanding option to purchase shares of Company common stock will be fully vested, to the extent not already fully vested, and cancelled, and thereafter will represent the right to receive a cash payment equal to the product of (i) the number of shares of our common stock subject to such option immediately prior to the effective time of the merger, multiplied by (ii) the excess, if any, of the merger consideration of $51.25 per share of Company common stock over the exercise price per share of Company common stock subject to such option, without interest and less any applicable withholding taxes; provided that certain Company employees may be given the opportunity, at the discretion of Leonard Green and CVC, to roll over options to purchase shares of Company common stock currently held by such employees into options to purchase shares of Buyer common stock as described in “The Merger — Interests of Certain Persons in the Merger — Discussions with Leonard Green and CVC” beginning on page 65; and

 

   

each restricted share of Company common stock that is outstanding immediately prior to the effective time will automatically vest, and our reacquisition right with respect thereto shall lapse, and the holder thereof will be entitled to receive the merger consideration of $51.25 with respect to each such share, without interest and less any applicable withholding taxes.

Following and as a result of the merger:

 

   

Company stockholders 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.

Directors and Officers of the Surviving Corporation

The directors of Transitory Subsidiary immediately prior to the effective time of the merger shall be the initial directors of the surviving corporation. The officers of the Company immediately prior to the effective time of the merger shall be the initial officers of the surviving corporation.

Background of the Merger

As part of their ongoing oversight and management of the Company’s business, our board of directors and management regularly evaluate our business and operations and periodically review and assess strategic alternatives available to enhance value to our stockholders.

 

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On July 1, 2010, Leonard Green filed a Schedule 13D with the SEC disclosing that affiliates of Leonard Green beneficially owned approximately 9.5% of the outstanding Company common stock, and that Leonard Green acquired such securities in the belief that they were undervalued. Leonard Green further disclosed that it intended to contact representatives of the Company to engage in a dialogue regarding potential options for enhancing shareholder value, and that these discussions may include a “going-private” transaction, new financings (potentially through mortgage financings or sale leaseback transactions) or other similar transactions. In the filing, Leonard Green also noted that it looked forward to working with management of the Company in the future.

Later on July 1, 2010, Mr. Jonathan Sokoloff, a Managing Partner of Leonard Green, called Mr. Herbert Zarkin, Chairman of the Board of the Company, to inform him that Leonard Green had filed the Schedule 13D earlier that day. Mr. Sokoloff described Leonard Green’s interest in the Company, as reflected in the Schedule 13D, and indicated that he would like to arrange a meeting between the Company and representatives of Leonard Green.

On July 6, 2010, the board held a meeting. At the meeting, Mr. Zarkin reported on his conversation with Leonard Green. Also in attendance were representatives of Wilmer Cutler Pickering Hale and Dorr LLP, or WilmerHale, outside legal counsel to the Company, who advised the board as to its fiduciary responsibilities. There was also discussion as to the role that an investment bank might play in advising the Company with respect to strategic alternatives.

On July 7, 2010, the Company engaged Greenhill & Co., Inc. as a financial advisor to assist the Company in considering strategic alternatives.

On July 8, 2010, Mr. Sokoloff called Mr. Zarkin and requested an initial meeting between representatives of Leonard Green and members of management of the Company to discuss publicly available information regarding the Company. Mr. Zarkin informed Thomas Shields, the Company’s lead director, who advised Mr. Zarkin to proceed with this initial meeting.

On July 20, 2010, Mr. Zarkin, Laura Sen, the President and Chief Executive Officer of the Company, and Frank Forward, the then Chief Financial Officer of the Company, met with Mr. Sokoloff, Jonathan Seiffer, Michael Solomon and Kristofer Galashan of Leonard Green. Management of the Company gave a presentation to the representatives of Leonard Green regarding the business of the Company and the participants asked follow-up questions. The materials and information provided to Leonard Green at this meeting were the same as those used and provided by the Company at investor conference presentations, and no material non-public information was provided by the Company to the representatives of Leonard Green during this meeting.

On July 20, 2010, the board held a telephonic meeting. At the meeting, Mr. Zarkin reviewed the discussions that had taken place between members of management and representatives of Leonard Green earlier during the day.

On July 29, 2010, Mr. Seiffer called Mr. Zarkin and expressed the view that the Company should commence a process to enhance shareholder value, including a formal process soliciting proposals to acquire the Company by third parties, in which Leonard Green would be interested in participating.

On August 4, 2010, the board held a meeting. At the meeting, the directors reviewed the Company’s five-year plan and possible additional opportunities for future growth. After the review of the plan, representatives of Greenhill and WilmerHale joined the meeting. Mr. Zarkin reviewed the potential interest of Leonard Green in exploring a sale transaction with the Company, as well as the interest of other private equity firms that had approached Mr. Zarkin to discuss potential transactions since the filing of the Schedule 13D by Leonard Green. Representatives of Greenhill discussed potential strategic alternatives that the Company might consider exploring, including continued operation as an independent public company, share repurchases and dividends,

 

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sale-leaseback transactions, spinoffs of real estate and a sale of the Company. The directors then met in executive session, with only non-management directors present, and discussed the possibility of establishing a committee of non-management directors in order to address any potential, actual or perceived conflicts of interest that might arise in responding to any acquisition proposal that might be made by Leonard Green. Representatives of WilmerHale reviewed the fiduciary responsibilities of directors in the context of evaluating a potential sale transaction. The board determined that it would continue to act as a full board in responding to Leonard Green and that it would revisit establishing a committee of non-management directors if and as circumstances changed. The directors instructed Mr. Zarkin to contact Leonard Green and seek to determine Leonard Green’s level of interest in participating in a potential sales process of the Company.

On August 4, 2010, Mr. Zarkin called Mr. Sokoloff and inquired about Leonard Green’s level of interest in acquiring the Company.

On August 16, 2010, the board held a telephonic meeting. Joining the meeting were representatives of WilmerHale and Greenhill. Mr. Zarkin reported that he had had no further discussions with representatives of Leonard Green since he had inquired about their level of interest. At the meeting, management updated the board on the results of its second quarter of fiscal 2011, which included a shortfall in earnings per share as compared to the Company’s prior earnings guidance, and also reported that the Company would need to update its guidance for the remainder of the fiscal year on its earning conference call scheduled for August 18, 2010.

On August 17, 2010, Mr. Sokoloff called Mr. Zarkin and indicated that Leonard Green desired to have the board commence a process to enhance shareholder value as soon as possible, including a formal process soliciting proposals to acquire the Company by third parties, and that if a sales process commenced, Leonard Green believed that the Company could realize a price of at least $45 per share.

On August 17, 2010, the board held a telephonic meeting. Mr. Zarkin reported on the conversations with Leonard Green. The board determined that a further meeting should be convened to discuss Leonard Green’s suggestion that the board commence a sales process.

On August 24, 2010, the board held a meeting. Joining the meeting were representatives of Greenhill and WilmerHale. The directors reviewed the different types of processes that might be followed if the board were to determine to explore strategic alternatives for the Company. The Company reviewed a list of potential private equity and strategic buyers, and there was discussion concerning the likely interest and financial capability of such potential buyers. There was also discussion regarding the antitrust risks that would be raised by a combination with certain potential strategic buyers in the Company’s industry. Representatives of WilmerHale reviewed the fiduciary responsibilities of the board. The directors then reviewed the possible advantages of establishing a committee of independent directors to review, evaluate and negotiate the terms of any possible acquisition of the Company. The board determined that it would be advisable to establish such a committee in order to efficiently manage the process of evaluating strategic alternatives available to it and also to address any potential, actual or perceived conflicts of interest that might arise in the future with respect to any particular potential transaction. Accordingly, the board established an independent committee, comprised of Mr. Shields (Chairman), Ms. Christine Cournoyer, Dr. Helen Frame Peters, Mr. Leonard Schlesinger and Mr. Michael Sheehan, and delegated to the independent committee the power and authority to review, evaluate and recommend to the board any potential transaction with Leonard Green or any other strategic alternative that the independent committee believed would enhance the value of the stockholders’ interest in the Company. The board also authorized the independent committee to engage its own advisors, including legal counsel and financial advisors, and determined that it would not recommend any transaction with Leonard Green or any other alternative transaction for approval by the Company’s stockholders without a prior favorable recommendation by the independent committee. The directors comprising the independent committee determined that Mr. Shields, as Chair, should interview and select a law firm as counsel to the independent committee and should interview one or more potential financial advisors to the independent committee.

 

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On August 27, 2010, Mr. Shields selected Potter, Anderson & Corroon LLP as legal counsel to the independent committee.

On September 1, 2010, the independent committee held a telephonic meeting. Joining the meeting were non-management directors, representatives of Potter Anderson and, for a portion, representatives of WilmerHale, Ms. Sen and Mr. Zarkin. At the meeting, the independent committee confirmed the engagement of Potter Anderson. Representatives of Potter Anderson reviewed the fiduciary duties of the directors and the role of the independent committee. The independent directors then discussed the process for engaging a financial advisor to assist the independent committee. The independent committee determined to interview two or three other investment banking firms, in addition to Greenhill, and then make a decision on the appropriate firm, or firms, to retain to assist the independent committee in its evaluation of strategic alternatives and its consideration of whether to engage in a sales process. It was also determined that the independent committee should notify members of management that all communications with Leonard Green should take place subject to the direction of the independent committee and that there should be no discussions between management and Leonard Green with respect to the employment, compensation or equity participation of management in connection with any possible transaction until the independent committee determined that such discussions were appropriate. Mr. Shields subsequently conveyed this message to Mr. Zarkin and Ms. Sen. The Committee also determined that Dr. Danos and Mr. English, as independent members of the board, would be free to attend meetings of the independent committee.

On September 13, 2010, Mr. Zarkin had a conversation with Mr. Sokoloff, during which Mr. Zarkin informed Mr. Sokoloff that the independent committee would respond in due course to Leonard Green’s suggestion that the board commence a formal process soliciting proposals to acquire the Company by third parties.

On September 16, 2010, the independent committee held a telephonic meeting. Joining the meeting were other non-management directors, representatives of Potter Anderson and, at the request of the Committee, for a portion of the meeting, Ms. Sen and Mr. Zarkin. Representatives of Potter Anderson provided an overview of the fiduciary duties of the directors. There was then discussion concerning the potential engagement of a financial advisor and the timing of any such engagement. The independent committee delegated to Messrs. Shields, Schlesinger and Sheehan the responsibility to interview potential financial advisors and, following such interviews, to engage one or more financial advisors for the independent committee.

On September 23, 2010, Mr. Zarkin called Mr. Sokoloff and informed him that the independent committee was making progress in evaluating plans to enhance shareholder value.

From late September through early October, members of the independent committee, with the assistance of their legal advisors, solicited information from potential financial advisors concerning their qualifications and experience. On October 15 and 19, 2010, members of the independent committee interviewed three investment banking firms. During the interview process, the members of the independent committee discussed with each investment banking firm the potential timeline for any sales process and whether it would be advisable to delay the commencement of any sales process until after the holiday shopping season, both to avoid disruptions to the Company’s business and to have the opportunity to present the results of the holiday season to prospective bidders.

On October 26, 2010, Mr. Sokoloff called Mr. Zarkin and expressed Leonard Green’s view that the Company should proceed more quickly in commencing a formal process to solicit proposals to acquire the Company.

On October 28, 2010, the independent committee held a telephonic meeting. Joining the meeting were other management and non-management directors, as well as representatives from Potter Anderson and WilmerHale. Mr. Zarkin provided the directors with an update on his recent discussion with Leonard Green. Mr. Shields

 

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provided an update on interviews of various investment bankers. He indicated that those directors who had been delegated the task of interviewing bankers expected to recommend that the Committee engage Morgan Stanley.

On October 29, 2010, Mr. Zarkin called Mr. Sokoloff and informed him that the independent committee anticipated retaining a financial advisor, which would contact Leonard Green after it was retained.

On November 1, 2010, the board held a meeting. There was discussion as to the Company’s five-year planning process and adjustments made to the Company’s assumptions based on the then current economic environment. In particular, it was noted that the Company’s current assumptions were that the macro economy would experience a long, slow recovery, that the Company would continue to grow its square footage at approximately 3% to 4% per year and that significant additional investments would be needed in information technology, repairs and maintenance, and payroll. The board directed management to continue to consider growth initiatives that might improve future operating results.

On November 10, 2010, the independent committee engaged Morgan Stanley as its financial advisor.

On November 12, 2010, the board held a telephonic meeting. Also present were representatives of Morgan Stanley, Potter Anderson and WilmerHale. Representatives of Morgan Stanley described the steps being undertaken by Morgan Stanley to facilitate Morgan Stanley’s review of the Company’s business. It was determined at the meeting that future communications with Leonard Green should proceed through Morgan Stanley.

On November 19, 2010, a representative of Leonard Green and a representative of Morgan Stanley had a telephone conversation in which Morgan Stanley informed Leonard Green that Morgan Stanley had been engaged as financial advisor and was in the process of evaluating the Company’s business. The representatives of Leonard Green stated that Leonard Green remained interested in participating in a formal sales process to acquire the Company, subject to conducting customary business accounting, legal and tax due diligence, and continued to be interested in meeting with the Company to express its views to the board relating to enhancing shareholder value.

On December 2, 2010, the independent committee held a telephonic meeting. Also in attendance, at the invitation of the independent committee, were the other members of the board and representatives of Morgan Stanley, Potter Anderson and WilmerHale. Representatives of Morgan Stanley discussed the Company’s historical share price performance, an analysis of the Company’s current stockholders, and preliminary valuation ranges based on public market trading benchmarks, a preliminary discounted cash flow analysis, a preliminary hypothetical future stock price analysis, a preliminary leveraged buyout analysis and a preliminary precedent change of control transaction analysis. Morgan Stanley also reviewed various strategic alternatives, including, a recurring or special dividend, leveraged share repurchase, sale-leaseback transaction, acquisitions and sale of the Company. Representatives of Morgan Stanley also reported that no strategic buyers had expressed interest to them with respect to a possible transaction with the Company since Leonard Green had filed its Schedule 13D.

On December 9, 2010, the board held a meeting. At the meeting, management reviewed the Company’s financial results for the third quarter of fiscal 2011, as well as initiatives being undertaken to improve the Company’s sales during the upcoming holiday season. At the conclusion of the meeting, the directors met in executive session, together with representatives of Morgan Stanley, Potter Anderson and WilmerHale, and continued their discussion as to whether to engage in a sales process.

On December 17, 2010, the board held a telephonic meeting. In attendance were representatives of Morgan Stanley, Potter Anderson and WilmerHale. There was continued discussion of the preliminary valuation analyses prepared by Morgan Stanley. The directors also discussed the advisability of meeting with representatives of Leonard Green.

 

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On December 27, 2010, a representative of Morgan Stanley called a representative of Leonard Green to discuss Leonard Green’s request for a meeting with the Company.

On December 27, 2010, the board held a telephonic meeting. In attendance were representatives of Morgan Stanley, Potter Anderson and WilmerHale. After representatives of Morgan Stanley updated the board on their recent discussions with representatives of Leonard Green, the board engaged in a discussion regarding various alternatives that the Company might pursue, including continued operation as an independent public company, potential stock repurchases, commencement of negotiations with representatives of Leonard Green and commencement of a broader sales process. The directors discussed Leonard Green’s request for a meeting and determined that a meeting should be held in early January with representatives of Leonard Green to provide them with an opportunity to share their perspectives on the Company and possible future courses of action.

On January 4, 2011, the board held a telephonic meeting. At the meeting, the board approved certain restructuring measures, including the closing of five club locations, financial impairments of seven clubs and reductions in force at the Company’s home office and distribution centers.

On January 5, 2011, the Company issued a press release announcing its restructuring actions described above.

On January 14, 2011, a meeting was held among Messrs. Sokoloff, Seiffer and Galashan from Leonard Green, a representative of Latham & Watkins LLP, counsel to Leonard Green, Mr. Zarkin, Ms. Sen, Mr. Forward and Mr. Robert Eddy, at that time Senior Vice President of Finance, from the Company, Mr. Shields, on behalf of the independent committee, and representatives of Morgan Stanley and WilmerHale. At the outset of the meeting, Leonard Green indicated that the purpose of the meeting was to discuss the merits of a “going-private” sale transaction and why Leonard Green believed the board should pursue a sale of the Company to enhance shareholder value. Leonard Green stated that it was not making any proposal with respect to an acquisition of the Company or any similar transaction. At the meeting, management responded to questions from Leonard Green regarding the business of the Company, including its recently announced restructuring actions. No material non-public information was provided by the Company to Leonard Green. Representatives of Leonard Green presented an overview of the firm and its prior investments. In response to questions from the board, Leonard Green indicated that if it were to participate in the formal sales process to acquire the Company, it would consider potentially partnering with one or more other equity investors to fund the equity required to acquire the Company, and it would likely seek to retain current management and focus on implementation of management’s business plan. Leonard Green also presented an illustrative financing model that suggested that the Company could incur, and service, significant additional indebtedness in connection with a sale transaction at a hypothetical $48 per share acquisition price. Leonard Green also expressed the view that a publicly-announced sale process would attract significant interest.

On January 17, 2011, the independent committee held a telephonic meeting. In attendance were other non-management directors, representatives of Morgan Stanley, Potter Anderson and WilmerHale and, for a portion, Ms. Sen and Mr. Zarkin. The members of the independent committee discussed the meeting that had taken place on January 14th with representatives of Leonard Green and discussed possible responses to Leonard Green and actions that Leonard Green might take if the Company were to determine not to commence a process to enhance shareholder value. Members of management then left the meeting, and the members of the independent committee, together with other non-management directors, met in executive session to discuss possible responses to Leonard Green. At the conclusion of that discussion, the independent committee determined to recommend to the full board that the board begin a process to explore the possible sale of the Company. It was determined that the independent committee should meet formally prior to the next board meeting and that the board should consider the independent committee’s recommendation at that meeting.

On January 25, 2011, the independent committee held a meeting. Also participating in the meeting were the other directors and, for a portion of the meeting, representatives of Morgan Stanley, Potter Anderson and

 

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WilmerHale. Representatives of Potter Anderson reviewed the fiduciary duties of the directors. Representatives of Morgan Stanley presented financial analyses of the Company, updated to account for recent market data. The directors reviewed a list of possible financial and strategic buyers. Morgan Stanley noted that no strategic buyers had expressed any interest to date and expressed its view that there was likely to be limited interest on the part of strategic buyers in acquiring the Company. The members of the independent committee discussed the antitrust risks that were likely to arise in the event that certain strategic buyers were to express an interest in acquiring the Company and the advisability of a public disclosure if the board were to determine to commence a process to explore strategic alternatives, including a possible sale of the Company. It was the consensus of the directors that a public disclosure would be advisable because it would serve to attract interest from any potentially interested bidders. In addition, in view of Leonard Green having filed a Schedule 13D with the SEC, the directors concluded that it would be difficult to conduct a sales process that included Leonard Green without making a public disclosure of the process.

On February 1, 2011, at a meeting of the independent committee, the independent committee further discussed the advisability of commencing an exploration of strategic alternatives and, after discussion, adopted a resolution recommending that the board engage in a full review of its strategic alternatives, including the possible sale of the Company.

On February 1, 2011, following the meeting of the independent committee, the board held a meeting. At the meeting, the board adopted a resolution authorizing the Company, through the independent committee, to engage in a full review of strategic alternatives, including the possible sale of the Company.

On February 3, 2011, the Company issued a press release announcing that the board, upon the recommendation of the independent committee, had decided to commence a process to explore strategic alternatives, including a possible sale of the Company, and that the independent committee had engaged Morgan Stanley as its financial advisor to assist with the process.

From February 9 to March 16, 2011, management and representatives of Morgan Stanley worked to prepare a confidential offering memorandum to be sent to prospective bidders.

From February 11 to February 15, 2011, Morgan Stanley received unsolicited emails and telephone calls from a representative of a strategic buyer expressing interest in a potential transaction involving certain assets of the Company.

On February 28, 2011, the independent committee held a telephonic meeting. In attendance were representatives of Potter Anderson. At the meeting, Mr. Shields reported on the expression of interest received by Morgan Stanley with respect to a potential transaction involving certain assets of the Company. The directors discussed the contents of the confidentiality and standstill agreement to be presented to prospective buyers. There was also discussion concerning the content of a letter to be sent by the independent committee to members of senior management confirming that there should be no discussions between any prospective bidder and members of management as to equity compensation, employment arrangements or equity participation until approved by the independent committee and that the independent committee should be informed of all contacts by prospective buyers. Representatives of Potter Anderson reviewed the fiduciary duties of directors in the context of a sales process.

On March 7, 2011, the board held a telephonic meeting. In attendance were representatives of Morgan Stanley, Potter Anderson and WilmerHale. Representatives of Morgan Stanley reviewed the confidential offering memorandum to be circulated to potential participants in the sales process. Morgan Stanley also reviewed a list of private equity firms that had expressed an interest in receiving the confidential materials, and a list of additional private equity firms whose interest Morgan Stanley might solicit. After discussion of the materials and the list of potential buyers, the board determined that Morgan Stanley should solicit interest only from well-capitalized private equity firms that would be able to provide the equity financing necessary to acquire the

 

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Company. After reviewing a list of possible strategic buyers, the board also determined that no strategic buyers should be solicited in view of the low likelihood that any of them would be interested in pursuing an acquisition of the Company, the fact that the Company’s public announcement of its strategic review process had elicited no indications of interest from strategic buyers to acquire the entire Company and the likelihood of antitrust issues with regard to any acquisition of the Company by certain strategic buyers in the Company’s industry.

From March 8 to March 10, 2011, Morgan Stanley sent confidentiality and standstill agreements, which we refer to as NDAs, to 23 private equity firms and invited them to review the Company’s confidential offering memorandum after an NDA had been signed.

From March 9 to April 27, 2011, the Company negotiated and signed NDAs with the 13 prospective bidders who were willing to sign NDAs, including an NDA with Leonard Green executed on March 21, 2011 and an NDA with CVC executed on April 1, 2011.

From March 18 to April 27, 2011, Morgan Stanley distributed the confidential offering memorandum and request for preliminary indications of interest to 13 parties.

On March 22, 2011, Leonard Green filed an amendment to its Schedule 13D filing with the SEC disclosing that Leonard Green and the Company entered into an NDA, pursuant to which the Company agreed to provide Leonard Green with certain confidential information concerning the business and properties of Company, and that Leonard Green intended to participate in the sales process to be conducted by the Company, to review the confidential information provided by the Company, and to evaluate a potential acquisition of the Company, or any related transaction.

Following execution of the NDA by Leonard Green, Leonard Green and its accounting, legal and tax advisors conducted extensive due diligence on the Company for approximately three months.

On March 24, 2011, at a meeting of the board, management provided the board with an update on the process to explore strategic alternatives.

From April 12 to April 25, 2011, Morgan Stanley received preliminary expressions of interest in acquiring the Company from three prospective bidders (including one joint bid from two firms that had not agreed to sign a confidentiality and standstill agreement) at prices that ranged from $50 to $54 per share. Morgan Stanley also received an expression of interest from a fourth private equity firm to undertake a recapitalization of the Company combined with an acquisition by the Company of a portfolio company of such firm.

In early April the financial advisor to a potential strategic buyer, whom we refer to as Party A, called Morgan Stanley and communicated that Party A would be sending a letter expressing interest in acquiring the Company. The advisor also said that the President of Party A would be interested in meeting with the Company to discuss Party A’s interest.

On April 8, 2011, Morgan Stanley received a letter from Party A expressing interest in acquiring the Company at a price ranging from $55 to $60 per share. The letter suggested there be a meeting between Party A’s legal counsel and the Company’s legal counsel to exchange views on the potential implications of the antitrust laws on any combination between Party A and the Company.

On April 14, 2011, the board held a meeting. Joining portions of the meeting were representatives of Morgan Stanley, Potter Anderson and WilmerHale. In an effort to keep the board fully informed of the process, Morgan Stanley reviewed with the board the four preliminary indications of interest received from prospective bidders, as well as its discussions with representatives of each of the private equity firms submitting bids. Morgan Stanley also discussed structural issues with the recapitalization/acquisition proposal and updated the board on the status of discussions with other private equity firms that had signed NDAs but not submitted

 

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expressions of interest. Morgan Stanley then reviewed the expression of interest from a potential strategic bidder, Party A. At the request of the board, representatives of WilmerHale presented their preliminary views on the antitrust issues likely to arise from any combination between the Company and Party A, based on the preliminary antitrust analysis undertaken by WilmerHale in the Fall of 2010. The board discussed the antitrust review process, its likely effect on the timing of any transaction, its impact on the certainty of closing any negotiated transaction with Party A and the manner in which the antitrust risks might be addressed in any merger agreement. There was also discussion of the potential adverse effects on the Company’s business if competitively sensitive information were shared or if an acquisition by Party A were to be announced but not closed. After discussion, the board determined that WilmerHale should engage in a conversation with Party A’s legal counsel to better understand Party A’s analysis of the antitrust risks, but that such conversation should take place only after putting in place a confidentiality agreement between counsel sufficient to protect the confidentiality of the competitively sensitive information of both parties. The board also authorized WilmerHale to engage an economic consulting firm to assist it in its analysis. The independent committee also determined to arrange a meeting early the following week between the President of Party A and senior management of the Company, with certain members of the independent committee and board to be in attendance, in order to better assess the expression of interest of Party A.

On April 14, 2011, WilmerHale engaged an economic consulting firm to assist in its antitrust analysis. On April 14 and 15, legal counsel to Party A and WilmerHale negotiated and executed a confidentiality agreement.

On April 15, 2011, representatives of WilmerHale and the economic consulting firm engaged by it held a telephonic meeting with legal counsel to Party A and two economic consultants to Party A. The representatives of Party A discussed their assessment of the risks associated with obtaining antitrust approval for any combination between Party A and the Company and responded to questions from WilmerHale and the economic consulting firm engaged by it. From April 15 until April 18, WilmerHale and the economic consulting firm engaged by it continued their analysis of such antitrust risks.

On April 18, 2011, Ms. Sen and Messrs. Zarkin, Shields, English and Schlesinger of the Company met with the President of Party A. At the meeting, the participants discussed, among other things, their views as to the competitive overlaps between the two companies. The President of Party A stated that Party A was not prepared to agree to significant divestitures if necessary to achieve antitrust clearance for a combination of the Company and Party A. There was no negotiation as to price or other terms of a combination between the Company and Party A.

On April 18, 2011, the board held a telephonic meeting. Also participating were Mr. Eddy, now Chief Financial Officer, Mr. Lon Povich, the Company’s General Counsel, and representatives of Morgan Stanley, WilmerHale and Potter Anderson. Representatives of WilmerHale reviewed the competitive overlap of Party A and the Company and discussed their analysis, and that of their economic consulting firm, as to the antitrust risks associated with any combination of the Company and Party A. WilmerHale reviewed the process associated with antitrust approval, including its likely effect on timing and certainty of closing. There was also discussion among the directors as to the potential harm that would be caused to the Company if competitively-sensitive information were shared with Party A or if a combination between the parties were to be announced but not closed. Representatives of Morgan Stanley reviewed the preliminary indications of interest from the four private equity firms making proposals. There was discussion concerning the price at which the shares of the Company’s common stock might trade if the Company were to announce that it was not going to engage in a strategic transaction at this time, and Morgan Stanley note that, based on various relative price performance and historical valuation metrics, the unaffected share price range of the Company’s common stock could be approximately $40 to $45 per share. There was also discussion concerning the strategic alternative of a leveraged share repurchase program, and representatives of Morgan Stanley noted that a leveraged share repurchase program involving $450 million in fiscal 2012 and $100 million in fiscal 2013 and fiscal 2014 could result in a present value of future stock price of between approximately $44 and $47 per share.

 

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On April 18, 2011, following the meeting of the board, the independent committee held a meeting. Joining the meeting were non-management directors and representatives of Potter Anderson. The directors discussed the preliminary indications of interest from the private equity firms, as well as the alternative of a leveraged share repurchase program. The directors determined that further analysis and discussion would be needed before making any final determination as to whether to pursue negotiations with the private equity firms that had participated in the initial round of bidding or to pursue a leveraged share repurchase program. The directors also discussed the expression of interest by Party A and the associated antitrust risks. After discussion of the antitrust and business risks, the directors determined that it would not be in the best interests of the Company and its stockholders to pursue the expression of interest by Party A.

On April 20, 2011, the independent committee held a telephonic meeting. Joining the meeting were non-management directors, as well as representatives of Morgan Stanley and Potter Anderson. The purpose of the meeting was to allow members of the independent committee to consider whether it was in the best interest of stockholders to continue to further pursue the initial expressions of interest received from private equity firms or to pursue a leveraged share repurchase program. The members of the independent committee discussed possible strategic growth initiatives for the Company, but concluded that, since those initiatives were still preliminary, it would be appropriate to consider them further at a later date. The directors then discussed with representatives of Morgan Stanley the process to be followed for soliciting a second round of proposals from the private equity firms that had submitted initial expressions of interest. The directors determined that any private equity firms that desired to partner with another firm to make a further proposal should enter into a revised NDA specifically authorizing such a partnership. There was further discussion concerning the expression of interest from Party A, and the independent committee reaffirmed its position that it did not believe that pursuing a possible transaction with Party A was in the best interests of the Company and its stockholders in view of the significant antitrust and business risks. After consideration of the alternatives, the independent committee directed representatives of Morgan Stanley to commence a second round of bidding with the private equity firms that had expressed an interest in the Company and to contact representatives of Party A to communicate the Company’s determination not to pursue further a possible transaction between Party A and the Company.

On April 21, 2011, Morgan Stanley contacted the three private equity firms that had submitted all-cash expressions of interest and discussed the process for a second round of bidding. In addition, Morgan Stanley responded to the fourth private equity firm that had proposed a recapitalization/acquisition transaction and requested that they submit an all-cash proposal. On April 25, 2011, such private equity firm submitted an expression of interest to acquire the Company for a cash price within the range of $50 to $53 per share.

In late April a representative of Morgan Stanley called the financial advisor to Party A and informed them that, based on the significant antitrust and business risks, the independent committee had determined not to pursue the possible sale of the Company to Party A.

On April 28, 2011, Morgan Stanley invited the four private equity bidders to attend management presentations.

On April 29, 2011, the Company provided the four private equity bidders with access to an electronic data room containing business, legal and financial information concerning the Company.

From May 3 to May 11, 2011, members of management, together with representatives of Morgan Stanley, made presentations concerning the Company’s business to representatives of the four private equity bidders, and responded to questions and requests for additional information from such firms.

On May 8, 2011, Leonard Green asked Morgan Stanley for approval, in the event that Leonard Green were to submit a final acquisition proposal, to submit a joint acquisition proposal with CVC, which had previously signed an NDA but not submitted an expression of interest, in the bidding process. Morgan Stanley approved this arrangement on May 9, 2011 after a discussion with Mr. Shields, where it was determined that this arrangement was in the Company’s best interests.

 

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On May 12 and May 13, 2011, two of the private equity bidders notified Morgan Stanley that they were no longer interested in pursuing an acquisition of the Company.

Throughout the period from May 11 to June 28, 2011, representatives of the Company continued to respond to requests for information from the remaining private equity bidders.

On May 17, 2011, a telephonic meeting of the board was held. Also present were Mr. Eddy and Mr. Povich and representatives of Morgan Stanley. The directors reviewed the status of the outstanding bids and the next steps and timeline for the process.

On May 26, 2011, the board held a meeting. Joining the meeting were representatives of Morgan Stanley, Potter Anderson and WilmerHale. Representatives of Morgan Stanley updated the board on the status of the sale process, including the status of the due diligence reviews of the private equity firms that remained potential bidders for the Company. At the meeting, Ms. Sen presented possible strategic growth initiatives, including contiguous and remote geographic expansion, new retail formats and acquisitions, which might be considered to enhance the Company’s long-term growth. The directors discussed the possible upside benefits and downside risks of such initiatives and concluded that there was at this time too much uncertainty associated with the identified possible growth initiatives to revise the Company’s five-year plan to reflect these initiatives.

On May 26, 2011, following the meeting of the board, the independent committee held a meeting. Joining the meeting were non-management directors, as well as representatives of Morgan Stanley, Potter Anderson and WilmerHale. The directors discussed the ongoing due diligence process by the private equity bidders, particularly insofar as it related to the bidders’ access to highly sensitive business information, and the directors determined that, subject to reasonable precautions to protect the most sensitive information, all requested information should be provided to the private equity bidders.

On May 27, 2011, Morgan Stanley sent final bid invitation letters to Leonard Green/CVC and the other remaining private equity bidder.

On June 3, 2011, Morgan Stanley sent to Leonard Green/CVC and the one other remaining private equity bidder a draft merger agreement prepared by WilmerHale.

On June 8, 2011, the other remaining private equity bidder indicated to Morgan Stanley that it was unlikely to submit a bid to acquire the Company.

On June 16, 2011, Morgan Stanley received a final proposal from Leonard Green/CVC to acquire the Company for $50 per share in an all cash transaction. The Leonard Green/CVC proposal did not contain the receipt of financing as a condition of closing and included the debt commitment letter and equity commitment letters pursuant to which Leonard Green/CVC would secure the funds necessary to consummate the acquisition of the Company. In addition, the proposal contained a detailed and extensive mark-up of the draft merger agreement indicating their position on certain key terms, including provisions relating to termination rights, interim operating covenants, representations and warranties, specific performance rights and termination fees, including a Company termination fee and a reverse termination fee, each in the amount of $125,000,000, and an expense reimbursement for Buyer of up to $10,000,000 (not creditable toward the Company termination fee).

On June 17, 2011, Leonard Green filed an amendment to its Schedule 13D filing with the SEC disclosing that Leonard Green and CVC had submitted a joint proposal to acquire the Company.

On June 20, 2011, the board held a meeting during which representatives of Morgan Stanley reviewed the principal terms of the Leonard Green/CVC proposal of $50.00 per share, including the terms of its committed financing. It was determined that the full board should meet, rather than the independent committee alone, so that all directors could be informed of the Leonard Green/CVC offer. Joining the meeting were representatives of Morgan Stanley, Potter Anderson and WilmerHale. Representatives of Morgan Stanley reviewed the principal terms of the Leonard Green/CVC proposal of $50.00 per share, including the terms of its committed financing. Representatives of Morgan Stanley noted that representatives of Leonard Green had indicated to them that their current proposal was at the low end of their initial expression of interest primarily due to their assessment, after

 

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diligence, of the risks associated with the future growth of the Company and the significant amount of information technology, or IT, investment required to upgrade the Company’s current systems. Morgan Stanley also reviewed its financial analyses previously provided to the board, updated to reflect current market data. Representatives of WilmerHale reviewed the key issues presented by Leonard Green/CVC’s mark-up of the merger agreement, including provisions relating to the ability of the Company, post-signing, to respond to superior proposals and the amounts of the termination fees payable by each party under certain circumstances. At this point, the board meeting adjourned, Mr. Zarkin and Ms. Sen left the meeting and the independent committee, with non-management directors present, held a meeting of the independent committee to discuss how to respond to Leonard Green/CVC’s offer. After discussion, it was the consensus of the independent committee that Morgan Stanley should communicate to Leonard Green/CVC that $50.00 was insufficient and that all directors would support an acquisition at a price of $55.00 per share.

On June 22, 2011, a representative of Morgan Stanley called representatives of Leonard Green and CVC and conveyed the independent committee’s $55.00 per share proposal.

On June 23, 2011, the board held a telephonic meeting. Joining the meeting were representatives of Morgan Stanley, Potter Anderson and WilmerHale. Representatives of Morgan Stanley reported that Leonard Green and CVC had not reacted favorably to the independent committee’s proposal.

Later on June 23, 2011, representatives of Leonard Green and CVC called a representative of Morgan Stanley and increased their offer to $50.75 per share.

On June 24, 2011, independent committee held a meeting. Joining in the meeting were non-management and management directors, and, for a portion of the meeting, representatives of Morgan Stanley, Potter Anderson and WilmerHale. Representatives of Morgan Stanley provided an update regarding discussions with Leonard Green and CVC and reported that they had increased their proposal to buy the Company from $50.00 to $50.75 per share. There was discussion among the directors as to the sufficiency of the $50.75 per share offer. The members of the independent committee, joined by the other non-management directors, then met in executive session. The non-management directors discussed with representatives of Morgan Stanley the financial analyses previously prepared by Morgan Stanley. It was the consensus of the independent committee that the Company should seek to obtain an increased price from Leonard Green and CVC. After further discussion, the independent committee instructed representatives of Morgan Stanley to reject the offer of $50.75 and propose a price of $52.50 per share.

On June 24, 2011, representatives of Morgan Stanley called representatives of Leonard Green and CVC and communicated the determination of the independent committee to reject the $50.75 per share offer and proposed a price of $52.50 per share.

Later on June 24, 2011, representatives of Leonard Green and CVC called Morgan Stanley and stated that they would increase their offer to $51.25 per share. They also stated this was their “best and final” offer.

Subsequently on June 24, 2011, the independent committee held a telephonic meeting. Joining the meeting were other non-management and management directors and representatives of Morgan Stanley, Potter Anderson and WilmerHale. Representatives of Morgan Stanley reviewed the increase in price offered by Leonard Green/CVC, and, after discussion, the independent committee authorized Morgan Stanley to communicate to Leonard Green/CVC that the $51.25 price per share would be acceptable in principle, subject to satisfactory negotiation of a definitive merger agreement.

From June 24 to June 28, 2011, representatives of WilmerHale and Latham & Watkins negotiated the terms of the definitive merger agreement, including the terms relating to the ability of the Company to respond to superior proposals and the amounts of the termination fees payable by each party under certain circumstances. During these negotiations, it was agreed that the reverse termination fee would be $175,000,000, the Company

 

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termination fee would be $80,000,000 and that Buyer would be entitled to expense reimbursement of up to $7,500,000 (and such expense reimbursement would be credited against the Company termination fee). They also negotiated the terms of a related company stockholders agreement, debt and equity financing commitments and guarantee.

On June 27, 2011, upon authorization from the independent committee, representatives of Leonard Green and CVC had a dinner meeting with Ms. Sen and Mr. Eddy of the Company, together with a representative of Morgan Stanley, to discuss generally the expected roles of management following the closing. The representatives of Leonard Green and CVC communicated to Ms. Sen and Mr. Eddy that upon the closing of the merger they were prepared to create an equity incentive plan at Buyer and they would offer management as a group the opportunity to roll-over a portion of their equity in the Company into equity of Buyer or to invest directly in the equity of Buyer. No specific proposals were made to management, and there was no negotiation or agreement with respect to any of these matters.

On June 28, 2011, the independent committee held a telephonic meeting. Joining the meeting were other non-management and management directors, and representatives of Morgan Stanley, Potter Anderson and WilmerHale. Representatives of WilmerHale summarized the principal terms and conditions of the definitive merger agreement between the Company and Buyer, as well as the equity commitment letters, debt commitment letter and guarantee furnished by Leonard Green and CVC. Representatives of Potter Anderson then reviewed the directors’ fiduciary duties in connection with the sale of the Company. Representatives of Morgan Stanley then reviewed Morgan Stanley’s financial analyses of the proposed transaction, which are described under “The Merger — Opinion of Morgan Stanley & Co. LLC” below, and delivered Morgan Stanley’s oral opinion that, as of the date of the opinion, and based upon and subject to the various customary assumptions and limitations to be set forth in the written opinion, that the $51.25 per share merger consideration to be paid in cash to the holders of shares of Company common stock pursuant to the merger agreement was fair, from a financial point of view, to such holders. Morgan Stanley subsequently delivered its written opinion, dated June 28, 2011, confirming its oral opinion. The full text of the written opinion of Morgan Stanley, which describes, among other things, the assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with its opinion, is attached as Annex B.

The independent committee then resolved, by unanimous vote, to recommend to the board that the board determine that the merger is in the best interest of the Company and its stockholders, approve the merger agreement and the merger, recommend that the stockholders vote their shares of Company common stock in favor of adoption of the merger agreement and direct that the merger agreement be submitted to the stockholders for their adoption at a stockholders meeting.

Following the meeting of the independent committee, at a meeting of the full board, the board resolved, by unanimous vote, on the recommendation of the independent committee, that the merger is in the best interests of the Company and its stockholders and the board approved the merger agreement and the merger and the other transactions contemplated thereby. The board also recommended that the stockholders adopt the merger agreement and resolved that the merger agreement be submitted for consideration by the stockholders of the Company at a special meeting of stockholders.

On June 28, 2011, the Company, Buyer and Transitory Subsidiary executed and delivered the merger agreement, Leonard Green and CVC executed and delivered the equity commitment letters and guarantee, and the commitment parties executed and delivered the debt commitment letter.

In the morning on June 29, 2011, the parties issued a joint press release announcing the merger.

Reasons for the Merger; Recommendation of the Board of Directors and the Independent Committee

At a meeting held on June 28, 2011, the independent committee, by a unanimous vote of all of its members, determined that the merger agreement as well as the terms and conditions of the merger and the merger

 

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agreement are fair to, advisable and in the best interests of the Company and its stockholders, recommended that the board of directors approve the merger agreement and the merger, and the execution, delivery and performance by the Company of its obligations under the merger agreement, and recommended that the board of directors submit the merger agreement to the stockholders for their consideration at the special meeting and recommend that our stockholders vote to adopt the merger agreement.

At a meeting held immediately thereafter on June 28, 2011, the board of directors, acting upon the recommendation of the independent committee, by a unanimous vote of all directors, determined that the merger agreement and the terms and conditions of the merger and the merger agreement are fair to, advisable and in the best interests of the Company and its stockholders, approved the merger agreement and the merger, approved the execution, delivery and performance by the Company of its obligations under the merger agreement, resolved that the merger agreement be submitted for consideration by the stockholders at the special meeting and recommended that our stockholders vote to adopt the merger agreement.

Before making its recommendation, the board of directors considered the recommendation of the independent committee and consulted with the independent committee and its outside legal and financial advisors, with the board’s outside legal advisors and with our senior management team. In reaching their recommendations, the board and the independent committee each considered the following material factors that the board of directors and the independent committee believe support such determinations, recommendations, approvals, and resolutions:

 

   

the directors’ knowledge of the Company’s business, financial condition and results of operations, on both a historical and a prospective basis;

 

   

the directors’ evaluation of the possible alternatives to a sale, including continuing as a public company, conducting stock repurchases, implementing dividends or undertaking a recapitalization. The independent committee and the board of directors evaluated each alternative with the assistance of the independent committee’s financial advisor, Morgan Stanley, and determined that such alternatives were likely to be less favorable to the Company’s stockholders than the merger given the potential risks, rewards and uncertainties associated with each such alternative;

 

   

the period of time that it could take before the present value of the future trading price of the Company’s common stock would reach the per share merger consideration value of $51.25, if the Company terminated its exploration of strategic alternatives and continued to operate as an independent public Company; in connection with this factor, the directors considered the historical trading prices of the Company’s common stock, the expectation that the Company would have to make significant investments in information technology in the short-term and then sustain over the long-term investments in information technology at much higher than historical levels, as well as the risks that the Company would not be able to significantly improve its long-term growth initiatives such as geographic expansion without adversely affecting profitability and the market price for the Company’s common stock;

 

   

the fact that the $51.25 per share price to be paid in cash in respect of each share of Company common stock represents:

 

   

an approximately 7% premium to the closing price for the Company common stock on the NYSE on June 28, 2011, the day before the merger was announced; and

 

   

an approximately 38% premium to the closing price for the Company common stock on the NYSE on June 30, 2010, the day before Leonard Green announced a 9.5% ownership stake in the Company;

 

   

the fact that the merger consideration is to be paid in all cash, which provides value certainty to the Company’s stockholders and allows them to monetize their investment in the Company in the near future, while avoiding long-term business risk;

 

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the financial analyses and oral opinion, subsequently confirmed in writing, of Morgan Stanley to the independent committee that, as of June 28, 2011, the $51.25 per share merger consideration to be paid in cash to the holders of shares of Company common stock pursuant to the merger agreement is fair, from a financial point of view, to the holders of Company common stock as more fully described below in “The Merger — Opinion of Morgan Stanley & Co. LLC” beginning on page 45;

 

   

the likelihood that the merger would be completed, based on, among other things:

 

   

the fact that Buyer and Transitory Subsidiary 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 commitment parties and the obligation of Buyer to use its reasonable best efforts to obtain the debt financing;

 

   

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 fact that there were no anticipated substantive issues in connection with HSR Act clearance and that there are no other significant required regulatory approvals that are required to close the merger;

 

   

the fact that the merger agreement provides that, in the event of a failure of the merger to be consummated under certain circumstances, Buyer will pay the Company a $175 million termination fee, as described under “The Merger Agreement — Termination Fees” beginning on page 93, without the Company having to establish any damages, the payment of which is guaranteed by affiliates of Leonard Green and CVC, severally and not jointly, pursuant to the guarantee;

 

   

the Company’s ability, under certain circumstances pursuant to the merger agreement, to seek specific performance to prevent breaches of the merger agreement, as described under “The Merger Agreement — Limitation on Remedies and Liability Cap” beginning on page 94 and to enforce specifically the terms of the merger agreement; and

 

   

the reputation of Leonard Green and CVC and their ability to complete large acquisition transactions.

 

   

the procedural safeguards implemented by the board of directors and the independent committee to permit the independent committee to represent effectively the interests of the Company’s unaffiliated stockholders, including:

 

   

the fact that the independent committee, which consisted of five independent, non-management directors who are not affiliated with Leonard Green, CVC or any entity controlled by either Leonard Green or CVC, met, along with the committee’s financial and legal advisors, 15 times between September 1, 2010 and June 28, 2011, the date the merger agreement was signed (in addition to joint meetings with the board of directors), that the independent committee selected and retained its own financial and legal advisors, that members of the independent committee actively set strategy for and oversaw the negotiation of pricing and other terms with Leonard Green and CVC and did not permit discussions with management as to potential compensation arrangements until after all price negotiations and substantially all merger agreement negotiations had been concluded, and ultimately recommended unanimously to the board of directors that the board of directors approve and adopt the merger agreement and the merger and the execution, delivery and performance by the Company of its obligations under the merger agreement, and recommended that the board of directors submit the merger agreement to the stockholders for their consideration at the special meeting and recommend that our stockholders vote to adopt the merger agreement;

 

   

the fact that the Company engaged in a comprehensive auction process, which was publicly announced by press release on February 3, 2011, and that the joint bid by Leonard Green and CVC was the only formal proposal to acquire the Company;

 

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the fact that, other than their receipt of directors’ fees and their interests described under “The Merger — Interests of Certain Persons in the Merger” beginning on page 59, members of the independent committee do not have interests in the merger different from, or in addition to, those of the Company’s stockholders generally;

 

   

the sales process implemented by the independent committee and its negotiations with Leonard Green and CVC, which, among other things, resulted in an increase from an initial offer of $50.00 per share of Company common stock on June 16, 2011 to $51.25 per share of Company common stock and resulted in better contractual terms than those initially proposed by Leonard Green and CVC, including a significantly larger termination fee payable by Buyer under certain circumstances; and

 

   

the fact that, as of the execution of the merger agreement, members of senior management were not party to any binding agreements or arrangements with Buyer regarding their post-closing employment with or equity participation in the surviving corporation, including with respect to any equity roll-over;

 

   

the other terms and conditions of the merger agreement and the course of negotiations of the merger agreement, including the nature of the parties’ representations, warranties and covenants and provisions regarding deal certainty. The board of directors believed, after reviewing the merger agreement with its legal advisors, that the merger agreement offered reasonable assurances as to the likelihood of consummation of the merger, did not impose unreasonable burdens on the Company and would not preclude another party from submitting a superior proposal. In particular, the board of directors noted:

 

   

that the Company would have the ability to respond to persons submitting takeover proposals to the Company that did not result from a breach by the Company of its obligations relating to the solicitation of takeover proposals to clarify the terms and conditions of such proposals and engage in discussions or negotiations with such persons, and furnish information pursuant to an acceptable confidentiality agreement, if the board of directors determines in its good faith judgment, 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 ability of the board of directors, under certain circumstances, to change, qualify, withhold, withdraw or modify its recommendation that its stockholders vote to adopt the merger agreement;

 

   

the Company’s ability to terminate the merger agreement to enter into a superior proposal, subject to certain conditions (including certain rights of Buyer to have an opportunity to match the superior proposal), provided that the Company concurrently pays a $80 million termination fee, which is approximately 2.8% of the equity value of the Company, as described under “The Merger Agreement — Termination Fees” beginning on page 93;

 

   

that the $175 million termination fee payable by Buyer, which is approximately 6.2% of the equity value of the Company, would become payable in certain circumstances, as described under “The Merger Agreement — Termination Fees” beginning on page 93 and “The Merger Agreement — Limitation on Remedies and Liability Cap” beginning on page 94; and

 

   

the closing conditions to the merger, including the fact that the obligations of Buyer and Transitory Subsidiary under the merger agreement are not subject to a financing condition;

 

   

the rights of stockholders who have perfected and not otherwise waived, withdrawn or lost their appraisal rights, to seek statutory appraisal of their shares of Company common stock under Delaware law.

 

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The independent committee and the board of directors also weighed the factors described above against the following factors and risks that generally weighed against entering into the merger agreement:

 

   

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 Merger — Financing of the Merger” beginning on page 53, is not obtained, even though the merger is not conditioned on the receipt of such financing;

 

   

the fact that Buyer and Transitory Subsidiary are newly formed corporations with essentially no assets other than the equity commitments of funds affiliated with Leonard Green and CVC and that the Company’s remedy in the event of breach of the merger agreement by Buyer or Transitory Subsidiary may be limited to receipt of the $175 million termination fee, which is guaranteed by each of the funds, severally and not jointly, and that under certain circumstances the Company may not be entitled to such termination fee;

 

   

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 potential negative effect of the pendency of the merger, or a failure to complete the merger, could have on the Company’s business and relationships with its employees, vendors, landlords, customers and the communities in which it operates;

 

   

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 vendor, landlord and customer relationships;

 

   

the fact that current stockholders of the Company would not have the opportunity to participate in any possible growth and profits of the Company following the merger;

 

   

the possibility that the amounts that may be 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, including up to $7.5 million in Buyer’s expenses and a termination fee of $80 million (subject to a credit for any Buyer expenses previously paid);

 

   

the fact that the trading prices of the Company’s common stock had exceeded $51.25 in recent trading, including a high of $52.46 on May 18, 2011;

 

   

the fact that if the proposed merger is not completed, the Company will be required to pay its expenses associated with the merger agreement, the merger and the other transactions contemplated by the merger agreement, as well as, under certain circumstances discussed above, Buyer’s expenses and the applicable termination fee; and

 

   

the fact that the merger will be a taxable transaction to the Company’s stockholders that are U.S. holders for U.S. federal income tax purposes.

In considering the recommendation of the board of directors with respect to the proposal to adopt the merger agreement, you should be aware that our directors and executive officers may have interests in the merger that are different from, or in addition to, yours. The independent committee and the board of directors were aware of and considered these interests, among other matters, in evaluating and negotiating the merger agreement and the merger, and in their recommendations with respect to the merger agreement. See the section entitled “The Merger — Interests of Certain Persons in the Merger” beginning on page 59.

The foregoing discussion of the information and factors considered by the independent committee and the board of directors in reaching their conclusions and recommendations is not intended to be exhaustive, but includes the material factors considered by the directors. In view of the wide variety of factors considered in

 

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connection with its evaluation of the merger and the complexity of these matters, the board of directors did not find it practicable to, and did not attempt, to quantify, rank or assign any relative or specific weights to the various factors considered in reaching its determination and making its recommendation. In addition, individual directors may have given different weights to different factors. The board of directors considered all of the foregoing factors as a whole and based its recommendation on the totality of the information presented.

The board of directors recommends that you vote “FOR” approval of the proposal to adopt the merger agreement, “FOR” approval of the nonbinding advisory proposal regarding “golden parachute” compensation and “FOR” approval of the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

Opinion of Morgan Stanley & Co. LLC

The independent committee retained Morgan Stanley to provide it with financial advisory services and a financial opinion in connection with the proposed merger. The independent committee selected Morgan Stanley to act as its financial advisor based on Morgan Stanley’s qualifications, expertise and reputation and its knowledge of the business and affairs of the Company. At the meeting of the Company’s independent committee on June 28, 2011, Morgan Stanley rendered its oral opinion, subsequently confirmed in writing, that as of June 28, 2011, and based upon and subject to the various considerations set forth in the opinion, the consideration to be received by holders of Company common stock pursuant to the merger agreement was fair from a financial point of view to such holders.

The full text of the written opinion of Morgan Stanley, dated as of June 28, 2011, is attached hereto as Annex B. The opinion sets forth, among other things, the assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken by Morgan Stanley in rendering its opinion. We encourage you to read the entire opinion carefully and in its entirety. Morgan Stanley’s opinion is directed to the independent committee and addresses only the fairness from a financial point of view of the consideration to be received by holders of Company common stock pursuant to the merger agreement as of the date of the opinion. It does not address any other aspects of the merger and does not constitute a recommendation as to whether or not any holder of Company common stock should vote at any stockholder’s meeting held in connection with the merger or whether to take any other action with respect to the merger. The summary of the opinion of Morgan Stanley set forth below is qualified in its entirety by reference to the full text of the opinion.

In connection with rendering its opinion, Morgan Stanley, among other things:

 

  1) Reviewed certain publicly available financial statements and other business and financial information of the Company;

 

  2) Reviewed certain internal financial statements and other financial and operating data concerning the Company;

 

  3) Reviewed certain financial projections prepared by the management of the Company;

 

  4) Discussed the past and current operations and financial condition and the prospects of the Company with senior executives of the Company;

 

  5) Reviewed the reported prices and trading activity for the Company common stock;

 

  6) Compared the financial performance of the Company and the prices and trading activity of the Company common stock with that of certain other publicly-traded companies comparable with the Company and its securities;

 

  7) Participated in discussions and negotiations among representatives of the Company and Buyer and their financial and legal advisors;

 

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  8) Reviewed the merger agreement, the draft financing letters substantially in the form of the drafts dated June 16, 2011 and certain related documents; and

 

  9) Performed such other analyses and considered such other factors as Morgan Stanley deemed appropriate.

In arriving at its opinion, Morgan Stanley assumed and relied upon, without independent verification, the accuracy and completeness of the information that was publicly available or supplied or otherwise made available to Morgan Stanley by the Company and formed a substantial basis for its opinion. With respect to the financial projections, Morgan Stanley assumed that they had been reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of the Company of the future financial performance of the Company. In addition, Morgan Stanley assumed that the merger will be consummated in accordance with the terms set forth in the merger agreement without any waiver, amendment or delay of any terms or conditions and that the definitive merger agreement would not differ in any material respect from the draft furnished to Morgan Stanley. Morgan Stanley assumed that in connection with the receipt of all the necessary governmental, regulatory or other approvals and consents required for the proposed merger, no delays, limitations, conditions or restrictions will be imposed that would have a material adverse effect on the benefits expected to be derived in the proposed merger.

As stated in its opinion, Morgan Stanley is not a legal, tax or regulatory advisor. Morgan Stanley is a financial advisor only and relied upon, without independent verification, the assessment of the Company and its legal, tax or regulatory advisors with respect to legal, tax or regulatory matters. Morgan Stanley expressed no view on, and its opinion did not address, any other term or aspect of the merger agreement or the merger or any term or aspect of any other agreement or instrument contemplated by the merger agreement or entered into in connection with the merger, including, without limitation, any consideration received in connection therewith by, the holders of any class of securities or instruments, creditors or other constituencies of the Company. Morgan Stanley also expressed no opinion with respect to the fairness of the amount or nature of the compensation to any of the Company’s officers, directors or employees, or any class of such persons, relative to the consideration to be received by the holders of the Company common stock in the transaction. Morgan Stanley’s opinion did not address the relative merits of the merger as compared to any other alternative business transaction, or other alternatives, or whether or not such alternatives could be achieved or were available. Morgan Stanley did not make any independent valuation or appraisal of the assets or liabilities of the Company nor was Morgan Stanley furnished with any such appraisals. Morgan Stanley’s opinion was necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to Morgan Stanley as of June 28, 2011. Events occurring after June 28, 2011 may affect its opinion and the assumptions used in preparing it, and Morgan Stanley did not assume any obligation to update, revise or reaffirm its opinion.

The following is a brief summary of the material analyses performed by Morgan Stanley in connection with its oral opinion and the preparation of its written opinion letter dated as of June 28, 2011. The various analyses summarized below were based on the closing price of $47.86 per share of the Company common stock as of June 10, 2011. Morgan Stanley did not update its analysis based on the closing price of $47.67 per share of the Company common stock as of June 27, 2011 to be consistent with materials previously shown to the independent committee on June 20, 2011 and considering the takeover speculation present in the Company’s common stock and the relatively immaterial change in price of the Company’s common stock between June 10, 2011 and June 27, 2011. Some of these summaries of financial analyses include information presented in tabular format. In order to fully understand the financial analyses used by Morgan Stanley, 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.

 

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Historical Share Price Analysis

Morgan Stanley reviewed the range of closing prices of the Company common stock for the 52-week periods ending on June 30, 2010 (the day before Leonard Green announced a 9.5% ownership stake in the Company) and June 10, 2011. Morgan Stanley observed the following:

 

52-Week Period Ending

   Range of Prices  

June 30, 2010

   $ 30–41 / Share   

June 10, 2011

   $ 37–52 / Share   

Morgan Stanley noted that the per share merger consideration of $51.25 reflected a 7% premium to the closing price per share of the Company common stock as of June 10, 2011 and a 38% premium to the closing price per share of the Company common stock as of June 30, 2010.

Sell-Side Research Analysts’ Future Price Targets

Morgan Stanley reviewed and analyzed future public market trading price targets for the Company common stock prepared and published by sell-side research analysts prior to June 10, 2011. These one-year forward targets reflected each analyst’s estimate of the future public market trading price of the Company common stock and are not discounted to reflect present values. The range of undiscounted analyst price targets for the Company common stock was $42.00 to $60.00 per share as of June 10, 2011 and Morgan Stanley noted that the median undiscounted analyst price target was $55.00 per share. The range of analyst price targets per share for the Company common stock discounted at 8.5% to reflect the Company’s cost of equity, based on a weighted average cost of capital analysis for the Company, was $39 to $55 per share as of June 10, 2011, and Morgan Stanley noted that the median discounted analyst price target was $51 per share. Morgan Stanley also noted that certain of the sell-side research price targets explicitly took into account the potential for a change of control transaction in arriving at their price targets due to public disclosure of the Company’s review of strategic alternatives. Morgan Stanley observed the following:

 

Sell-Side Research Analysts’ Future Price Targets

   Range of Prices  

As of 6/10/2011 (Undiscounted)

   $ 42–60 / Share   

As of 6/10/2011 (Discounted)

   $ 39–55 / Share   

Public Market Trading Benchmarks

Using publicly available information, Morgan Stanley compared selected financial data of the Company with similar data for selected publicly traded companies engaged in businesses which Morgan Stanley determined to be analogous to the Company. These companies were selected, among other reasons, because they share similar business characteristics to the Company based on operational characteristics and/or financial metrics. These companies were the following:

 

   

Costco

 

   

Wal-Mart

 

   

Target

 

   

Safeway

 

   

Kroger

For purposes of this analysis, Morgan Stanley used two sets of financial forecasts: (1) the “Street Case,” based on estimates of Wall Street analysts; and (2) the “Adjusted Management Case,” based on the estimates provided by the Company which are summarized under “The Merger — Financial Forecasts,” adjusted for share repurchases, which were contemplated by the Company but were not included in their financial forecast. Per the Company’s guidance, Morgan Stanley assumed $200 million of share repurchases in the fiscal year ending 2012 and $100 million of share repurchases in the fiscal year ending 2013 and thereafter.

 

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The following table summarizes Morgan Stanley’s analysis:

 

Diluted Earnings Per Share – Adjusted for Share Repurchases

   $ /Share  

Fiscal year ending 2012

     2.89   

Fiscal year ending 2013

     3.16   

Fiscal year ending 2014

     3.33   

Fiscal year ending 2015

     3.47   

Fiscal year ending 2016

     3.63   

Using the closing price of the Company common stock as of June 10, 2011 and the number of shares of the Company common stock then outstanding, Morgan Stanley calculated, for each of the comparable companies and the Company, the following:

 

   

the ratio of price to estimated earnings per share, or EPS, for calendar year 2011 (in each case, based on publicly available consensus estimates for the comparable companies); and

 

   

the ratio of aggregate value, to estimated earnings before interest, taxes, depreciation and amortization, or EBITDA, for calendar year 2011 (in each case, based on publicly available consensus estimates for the comparable companies).

The following table presents the results of the Morgan Stanley calculations:

 

Comparable Company Analysis

   Range of Prices  

12.0–15.0x CY2011E EPS

  

Adjusted Management Case: $2.86

   $ 34–43 / Share   

Street Case: $2.85

   $ 34–43 / Share   

5.0–6.5x CY2011E EBITDA

  

Adjusted Management Case: $396MM

   $ 40–50 / Share   

Street Case: $396MM

   $ 40–50 / Share   

Morgan Stanley noted that the merger consideration per share to be received by holders of shares of the Company common stock pursuant to the merger agreement was $51.25 per share.

No company utilized in the comparable company analysis is identical to the Company. In evaluating comparable companies, Morgan Stanley made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of the Company, such as the impact of competition on the businesses of the Company and the industry generally, industry growth and the absence of any adverse material change in the financial condition and prospects of the Company or the industry or in the financial markets in general. Mathematical analysis (such as determining the average or median) is not in itself a meaningful method of using peer group data.

Discounted Cash Flow Analysis

Morgan Stanley calculated a range of equity values per share for the Company based on a discounted cash flow analysis which is designed to imply a value of the Company as a standalone entity by calculating the present value of projected unlevered future free cash flows of the Company. Morgan Stanley utilized management projections for fiscal years ending 2012 through 2016 and extrapolated a 2017 EBITDA estimate for purposes of terminal value calculation assuming 5% growth in Net Sales and an EBITDA margin equal to that of 2016. Morgan Stanley calculated the net present value of free cash flows for the Company for the fiscal years ending 2012 through 2016 and calculated terminal values based on the extrapolated 2017 EBITDA and an EBITDA multiple ranging from 5.25x to 6.25x, based on selected publicly traded companies engaged in businesses which Morgan Stanley determined to be analogous to the Company. These companies were selected, among other reasons, because they share similar business characteristics to the Company based on operational characteristics

 

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and/or financial metrics. These values were discounted to present values at a discount rate of 8.5%, based on a weighted average cost of capital analysis for the Company.

No company utilized in the determination of the terminal EBITDA multiple for the discounted cash flow analysis is identical to the Company. In evaluating comparable companies, Morgan Stanley made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of the Company, such as the impact of competition on the businesses of the Company and the industry generally, industry growth and the absence of any adverse material change in the financial condition and prospects of the Company or the industry or in the financial markets in general. Mathematical analysis (such as determining the average or median) is not in itself a meaningful method of using peer group data.

The following table summarizes Morgan Stanley’s analysis:

 

Discounted Cash Flow Analysis

   Range of Prices  

8.5% Discount Rate; 5.25–6.25x EBITDA Terminal Multiple

   $ 47–53 / Share   

Morgan Stanley noted that the merger consideration per share to be received by holders of shares of the Company common stock pursuant to the merger agreement was $51.25 per share.

Hypothetical Future Stock Price Analysis

Morgan Stanley performed a hypothetical future stock price analysis which is designed to provide insight into the estimated future value of the Company common stock based on the Company’s estimated future earnings and potential price to earnings ratios. The resulting values are subsequently discounted to arrive at a present value for the Company’s stock price. In connection with this analysis, Morgan Stanley calculated a range of present equity values per share of the Company common stock on a standalone basis.

Morgan Stanley analyzed the future earnings estimates of the Company based on two financial cases:

 

   

Status Quo: based on the Adjusted Management case; and

 

   

Leveraged Share Repurchase: based on the Adjusted Management Case but assuming an additional $250 million in incremental share repurchases funded through borrowings.

Morgan Stanley used the following price to earnings ratios: (1) 13.8x, which represents the forward price-to-earnings multiple that the Company was trading at on June 30, 2010 (the day before Leonard Green announced a 9.5% ownership stake in the Company); and (2) 15.0x, which represents the three-year average forward price-to-earnings multiple for the Company as of June 10, 2011. For present value calculations, Morgan Stanley utilized a discount rate of 8.5% with respect to the Status Quo scenario and 9.0% with respect to the Leveraged Share Repurchase scenario to reflect the Company’s cost of equity and based on a weighted average cost of capital analysis for the Company.

The following table summarizes Morgan Stanley’s analysis:

 

Discounted Equity Value Analysis

   Range of Prices  
   13.8x NTM P / E      15.0x NTM P / E  

Status Quo Scenario

   $ 39–41 / Share       $ 42–45 / Share   

Leveraged Share Repurchase Scenario

   $ 42–45 / Share       $ 45–49 / Share   

Morgan Stanley noted that the merger consideration per share to be received by holders of shares of the Company common stock pursuant to the merger agreement was $51.25 per share.

 

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Leveraged Buyout Analysis

Morgan Stanley performed an illustrative leveraged buyout analysis to estimate the theoretical prices at which a financial sponsor might effect a leveraged buyout of the Company. For purposes of this analysis, Morgan Stanley assumed that a financial buyer would attempt to realize a return on its investment in fiscal year ending 2016, with a valuation of the Company realized by the financial sponsor in such subsequent exit transaction based on an 6.5x aggregate value to fiscal year 2016 EBITDA multiple based on management estimates. Morgan Stanley utilized management projections in performing its analysis. For purposes of this analysis, Morgan Stanley also assumed an illustrative multiple of lease-adjusted debt to last-twelve-months earnings before interest, taxes, depreciation, amortization and rent, or EBITDAR, at the transaction date of 5.5x. Morgan Stanley then derived a range of theoretical purchase prices based on an assumed required internal rate of return for a financial buyer of between 15% and 20%. This analysis implied a value range of $48 per share to $52 per share using management projections. Morgan Stanley noted that the assumed value of the merger consideration to be received by holders of shares of the Company common stock pursuant to the merger agreement was $51.25.

Precedent Change of Control Premiums Analysis

Morgan Stanley reviewed the premiums paid of selected U.S. public company transactions (including mergers of equals) that were announced since 1990 in which the target company was a publicly traded company and the transaction value was greater than $100 million.

Morgan Stanley selected representative ranges of implied premiums and applied these ranges of premiums to the unaffected price of the Company common stock of $37.01 as of June 30, 2010 (the day before Leonard Green announced a 9.5% ownership stake in the Company). The following summarizes Morgan Stanley’s analysis:

 

Precedent Change of Control Premiums Range

   Range of Prices  

30–40%

   $ 48–52 / Share   

Morgan Stanley noted that the merger consideration per share to be received by holders of shares of the Company common stock pursuant to the merger agreement was $51.25 per share.

General

In connection with the review of the merger by the Company’s independent committee, Morgan Stanley performed a variety of financial and comparative analyses for purposes of rendering its opinion. The preparation of a financial opinion is a complex process and is not necessarily susceptible to a partial analysis or summary description. In arriving at its opinion, Morgan Stanley considered the results of all of its analyses as a whole and did not attribute any particular weight to any analysis or factor it considered. Morgan Stanley believes that selecting any portion of its analyses, without considering all analyses as a whole, would create an incomplete view of the process underlying its analyses and opinion. In addition, Morgan Stanley may have given various analyses and factors more or less weight than other analyses and factors, and may have deemed various assumptions more or less probable than other assumptions. As a result, the ranges of valuations resulting from any particular analysis described above should not be taken to be Morgan Stanley’s view of the actual value of the Company. In performing its analyses, Morgan Stanley made numerous assumptions with respect to industry performance, general business and economic conditions and other matters. Many of these assumptions are beyond the control of the Company. Any estimates contained in Morgan Stanley’s analyses are not necessarily indicative of future results or actual values, which may be significantly more or less favorable than those suggested by such estimates.

Morgan Stanley conducted the analyses described above solely as part of its analysis of the fairness of the consideration pursuant to the merger agreement from a financial point of view to holders of shares of Company

 

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common stock and in connection with the delivery of its opinion, dated June 28, 2011, to the Company’s independent committee. These analyses do not purport to be appraisals or to reflect the prices at which shares of the Company common stock might actually trade.

The per share merger consideration to be received by the holders of shares of the Company common stock was determined through arm’s length negotiations between the Company, Leonard Green and CVC and was recommended by the independent committee and approved by the Company’s board of directors. Morgan Stanley provided advice to the Company’s independent committee during these negotiations. Morgan Stanley did not, however, recommend any specific consideration to the Company or its directors or that any specific consideration constituted the only appropriate consideration for the merger.

Morgan Stanley’s opinion and its presentation to the Company’s independent committee was one of many factors taken into consideration by the Company’s independent committee in resolving, by unanimous vote, to recommend to the board that the board approve the execution of the merger agreement. Consequently, the Morgan Stanley analyses as described above should not be viewed as determinative of the opinion of the Company’s directors with respect to the merger consideration, or of whether the Company’s directors would have been willing to agree to different consideration.

The Company’s independent committee retained Morgan Stanley based upon Morgan Stanley’s qualifications, experience and expertise and its knowledge of the business affairs of the Company. Morgan Stanley is a global financial services firm engaged in the securities, investment management and individual wealth management businesses. Its securities business is engaged in securities underwriting, trading and brokerage activities, foreign exchange, commodities and derivatives trading, prime brokerage, as well as providing investment banking, financing and financial advisory services. Morgan Stanley, its affiliates, directors and officers may at any time invest on a principal basis or manage funds that invest, hold long or short positions, finance positions, and may trade or otherwise structure and effect transactions, for their own account or the accounts of its customers, in debt or equity securities or loans of the Company, or any other company, or any currency or commodity, that may be involved in the merger, or any related derivative instrument.

Under the terms of its engagement letter, Morgan Stanley provided the Company’s independent committee financial advisory services and a financial opinion in connection with the merger, and the Company has agreed to pay Morgan Stanley an aggregate fee of approximately $20,000,000 for its services, all of which is contingent upon the closing of the merger. The Company has also agreed to reimburse Morgan Stanley for its reasonable documented expenses, including fees of outside counsel and other professional advisors, incurred in connection with its services, which expenses shall not exceed $50,000 without the prior consent of the Company, such consent not to be unreasonably withheld. In addition, the Company has agreed to indemnify Morgan Stanley and its affiliates, their respective directors, officers, agents and employees and each person, if any, controlling Morgan Stanley or any of its affiliates against certain liabilities and expenses relating to or arising out of Morgan Stanley’s engagement. In the two years prior to the date of its opinion, Morgan Stanley has provided financial advisory and financing services for Leonard Green and CVC unrelated to the merger and has received fees in connection with such services, aggregating $6,256,000. Morgan Stanley may also seek to provide such services to Leonard Green, CVC and the Company in the future and expects to receive fees for the rendering of these services. Morgan Stanley’s opinion was approved by a committee of Morgan Stanley investment banking and other professionals in accordance with its customary practice.

Financial Forecasts

The Company does not, as a matter of course, publicly disclose financial forecasts as to future financial performance, earnings or other results (other than certain short-term guidance regarding net income and earnings per diluted share and, from time to time, net sales increase, comparable club sales increase, impact of gasoline on comparable club sales, merchandise comparable club sales increase, membership fee growth increase, depreciation expense, preopening expense, income tax rate, and certain longer-term guidance such as store

 

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growth plans) and is especially cautious of making financial forecasts because of unpredictability of the underlying assumptions and estimates. However, in connection with the evaluation of a possible transaction, we provided projections to our directors and their advisors, as well as to prospective bidders and their financing sources in connection with their due diligence review of the Company, which contained certain non-public financial forecasts that were prepared by our management.

A summary of the financial forecasts included in the projections has been included below. This summary is not being included in this document to influence your decision whether to vote for or against the proposal to adopt the merger agreement, but is being included because these financial forecasts were made available to our directors and their advisors, as well as to prospective bidders and their financing sources. The inclusion of this information should not be regarded as an indication that our directors or their advisors, or any other person, considered, or now considers, such financial forecasts to be material or to be necessarily predictive of actual future results, and these forecasts should not be relied upon as such. Our management’s internal financial forecasts, upon which the summary financial forecasts included below were based, are subjective in many respects. There can be no assurance that these financial forecasts will be realized or that actual results will not be significantly higher or lower than forecasted.

In addition, the financial forecasts were not prepared with a view toward public disclosure or toward complying with generally accepted accounting principles, which we refer to as GAAP, the published guidelines of the SEC regarding projections or the use of non-GAAP financial measures or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. Neither our independent registered public accounting firm, nor any other independent accountants, have audited, compiled, examined or performed any procedures with respect to the financial forecasts contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability.

These financial forecasts were based on numerous variables and assumptions that are inherently uncertain and may be beyond our control. We believe the assumptions that our management used as a basis for this projected financial information were reasonable at the time our management prepared these financial forecasts, given the information our management had at the time. Important factors that may affect actual results and cause these financial forecasts not to be achieved include, but are not limited to, risks and uncertainties relating to our business (including its ability to achieve strategic goals, objectives and targets over the applicable periods), industry performance, general business and economic conditions, the regulatory environment and other factors described in or referenced under “Cautionary Statement Concerning Forward-Looking Information” beginning on page 20. In addition, the forecasts also reflect assumptions that are subject to change and do not reflect revised prospects for our business, changes in general business or economic conditions, or any other transaction or event that has occurred or that may occur and that was not anticipated at the time the financial forecasts were prepared. Accordingly, there can be no assurance that these financial forecasts will be realized or that our future financial results will not materially vary from these financial forecasts.

No one has made or makes any representation to any stockholder regarding the information included in the financial forecasts set forth below. We have made no representation to Leonard Green, CVC, Buyer or Transitory Subsidiary in the merger agreement concerning these financial forecasts.

Readers are cautioned not to rely on the forecasted financial information. We have not updated and do not intend to update or otherwise revise the financial forecasts to reflect circumstances existing after the date when made or to reflect the occurrence of future events, even in the event that any or all of the assumptions on which such forecasts were based are shown to be in error.

 

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The following is a summary of the financial forecasts for the Company prepared by our management and provided to our directors and their advisors, as well as to prospective bidders and their financing sources:

 

     FY2012(1)     FY2013(1)     FY2014(1)     FY2015(1)     FY2016(1)  
     (dollars in millions except per share amounts)  

Net sales

   $ 11,431      $ 12,151      $ 13,072      $ 14,049      $ 15,062   

Membership fees

     210        227        240        252        266   

EBIT

     259        270        278        284        292   

EBITDA

     397        422        446        472        498   

EBITDAR

     592        630        670        712        754   

Net income

     152        159        164        168        172   

Capital expenditures

   $ 187      $ 207      $ 209      $ 214      $ 215   

Unlevered free cash flow

   $ 157      $ 100      $ 114      $ 137      $ 160   

Merchandise gross margin

     14.6     14.6     14.7     14.7     14.8

 

(1) Fiscal year forecasts reflect the Company’s fiscal year ending on the last Saturday of January in the year noted.
(2) Unlevered free cash flow is comprised of EBITDA less adjusted taxes, less capital expenditures and less changes in working capital.

In preparing the financial forecasts our management made the following material assumptions:

 

   

7 club openings per year in the Company’s current geography with no expansion into new markets;

 

   

planned capital expenditures for each fiscal year include approximately $50 million of information technology investment;

 

   

no share repurchases and the continued issuance of stock based compensation;

 

   

merchandise sales increase approximately 6.5% to 7.5% per fiscal year with comparable club merchandise sales increases in the 3.5% to 4.0% range;

 

   

membership fees as a percentage of sales increase approximately 9% in both FY2012 and FY2013 due to a $5 fee increase made in January 2011 that is recognized ratably over the 12 month membership term, and this $5 fee increase increases cash by approximately $20 million in FY2012; and

 

   

membership fee growth of 5% to 6% in FY2014 thru FY2016 based on increased membership and no fee increases.

Financing of the Merger

Leonard Green and CVC anticipate that the total funds needed to complete the merger, including the funds needed to:

 

   

pay our stockholders (and holders of our other equity-based interests) the amounts due to them under the merger agreement, which, based upon the shares (and our other equity-based interests) outstanding as of the record date, would be approximately $2.8 billion; and

 

   

pay all fees and expenses related to the merger and the financing of the merger,

will be funded through a combination of:

 

   

up to $320 million of equity financing to be provided or secured by the LGP funds and up to $320 million of equity financing to be provided or secured by the CVC funds, or other parties to whom the LGP funds or the CVC funds allocates a portion of their respective commitment pursuant to the equity commitment letters described below;

 

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a $1.250 billion senior secured first lien term facility, a $425 million senior secured second lien term facility and a senior secured first lien asset-based facility with a maximum availability of $900 million; and

 

   

cash on hand of the Company.

Buyer has obtained the equity commitment letters and the debt commitment letter described below. The funding under those financing letters is subject to certain conditions, including conditions that do not relate directly to the merger agreement. We believe the amounts committed under the financing letters will be sufficient to complete the transaction, but we cannot assure you of that. Those amounts might be insufficient if, among other things, one or more of the parties to the financing letters fails to fund the committed amounts in breach of such financing letters or if the conditions to the commitments to fund the amounts set forth in such financing letters are not met. The failure of Buyer and Transitory Subsidiary to obtain any portion of the committed financing (or alternate financing) is likely to result in the failure of the merger to be consummated. In that case, Buyer may be obligated to pay the reverse termination fee to the Company, as described under “The Merger Agreement — Termination Fees” beginning on page 93. Buyer’s obligation to pay the reverse termination fee is guaranteed by the funds pursuant to the guarantee referred to below.

Equity Financing

Buyer has entered into the equity commitment letters with the funds, dated June 28, 2011, pursuant to which the funds have committed, on a several (not joint and several) basis, to purchase, and/or through one or more of their affiliated entities or co-investors, cause the purchase of, equity securities of Buyer, at or prior to the closing of the merger, for an amount equal to $640 million in the aggregate to fund (i) the merger consideration and any other amounts required to be paid by Buyer, Transitory Subsidiary and the surviving corporation pursuant to the merger agreement and (ii) all related fees and expenses required to be paid by Buyer, Transitory Subsidiary and the surviving corporation pursuant to the merger agreement.

Each fund may allocate all or a portion of its equity commitment to other investors. However, the assignment of any portion of the equity commitment to other investors will reduce such fund’s commitment to make or secure capital contributions pursuant to the equity commitment letters only by the amount actually contributed to Buyer by such other investors at or prior to the closing of the merger for the purpose of funding a portion of the merger consideration and that is so applied.

The funds’ obligations to fund the equity financing contemplated by the equity commitments are generally subject to:

 

   

the execution and delivery of the merger agreement (which took place on June 28, 2011);

 

   

the satisfaction or waiver of each of the conditions to Buyer’s and Transitory Subsidiary’s obligations to effect the closing of the merger;

 

   

the substantially simultaneous closing of the equity investment contemplated by each of the CVC and LGP commitment letters, respectively;

 

   

the debt financing or any alternate financing that Buyer and Transitory Subsidiary accept from alternate sources in accordance with the merger agreement has been funded or will be funded in accordance with the terms thereof if the equity financing is funded at closing; and

 

   

the substantially simultaneous consummation of the merger in accordance with the terms and conditions of the merger agreement.

The Company is a third-party beneficiary of the equity commitment letters to the extent that:

 

   

the Company seeks specific performance of Buyer’s obligation to cause the funds to fund their respective equity commitments in certain circumstances in accordance with the terms of the merger agreement and the equity commitment letters; or

 

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the Company directly seeks specific performance of each fund’s obligation to fund its equity commitment in certain circumstances in accordance with the terms of the merger agreement and the equity commitment letters.

The obligation of each fund to fund its respective equity commitment will terminate upon the earliest to occur of:

 

   

the closing and funding in full of the equity commitment under its equity commitment letter;

 

   

the valid termination of the merger agreement by Buyer pursuant to its terms;

 

   

the valid termination of the merger agreement by the Company pursuant to its terms (unless the Company shall have previously commenced an action seeking specific performance of the fund’s obligations to fund its equity commitment);

 

   

the Company, or any person claiming by, through or for the benefit of the Company, receiving payment in full of the reverse termination fee pursuant to the merger agreement or the guarantee in respect of such obligations; and

 

   

the Company or any of its affiliates, or any person claiming by, through or for the benefit of the Company, asserting a claim against any party expressly excluded by the guarantee or asserting a claim against any of the funds or certain of their affiliates under or in connection with the merger agreement other than claims expressly permitted by the guarantee;

and, in the case of the third bullet point above, if the Company shall have previously commenced an action under the equity commitment letters prior to such date, the equity commitment letters will terminate upon the final, non-appealable resolution of such action and satisfaction by the funds of any obligations finally determined or agreed to be owed by the funds.

Debt Financing

In connection with the entry into the merger agreement, Buyer received the debt commitment letter, dated June 28, 2011, from the commitment parties. Pursuant to the debt commitment letter, the lenders have committed to provide an aggregate of $2.575 billion in debt financing to Buyer and Transitory Subsidiary, consisting of (i) a senior secured first lien asset-based facility with a maximum availability of $900 million, (ii) a senior secured first lien term facility in an aggregate principal amount of $1.250 billion and (iii) a senior secured second lien term facility in an aggregate principal amount of $425 million on the terms and subject to the conditions set forth in the debt commitment letter. Unless otherwise agreed by the parties, the debt commitment letter will terminate at 11:59 p.m., New York City time, on December 15, 2011 or such earlier date which is the earlier of (i) the date on which the merger agreement is terminated in accordance with its terms and (ii) the date of the consummation of the merger.

The debt facilities contemplated by the debt commitment letter are subject to the following closing conditions:

 

   

that, (a) from January 29, 2011 to the date of the debt commitment letter, except as set forth in section 3.7 of the “Company Disclosure Letter” (as defined in the merger agreement) or as disclosed in any “Filed Company SEC Reports” (as defined in the merger agreement) filed on or after February 1, 2010 and prior to the date of the merger agreement (other than disclosure in the Filed Company SEC Reports referred to in the “Risk Factors” and “Forward Looking Statements” sections in such Filed Company SEC Reports that are forward-looking in nature), there shall not have been a “Company Material Adverse Effect” (as defined in the merger agreement) and (b) since the date of the debt commitment letter, there shall not have occurred any Company Material Adverse Effect, in each case in clauses (a) and (b) that would result in the failure of a condition precedent to Buyer’s obligations to consummate the merger under the merger agreement;

 

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the execution and delivery by the borrower under the debt facilities of credit agreements with respect to the debt facilities consistent with the applicable provisions of the debt commitment letter and the “Documentation Principles” (as defined in the debt commitment letter);

 

   

the accuracy of certain representations made by the Company in the merger agreement referred to as the “Merger Agreement Representations” and certain representations made by the borrower in the debt commitment letter referred to as the “Specified Representations” in all material respects;

 

   

the consummation of the merger in accordance with the merger agreement (without giving effect to any amendments or waivers thereto in any material respect by Buyer in a manner materially adverse to the commitment parties, in their capacity as such, without the consent of the commitment parties, (such consent not to be unreasonably withheld or delayed)) concurrently, or substantially concurrently, with the initial funding of the debt facilities contemplated by the debt commitment letter;

 

   

the consummation of the equity contribution by Leonard Green, CVC and/or its affiliates pursuant to the equity commitment letters and by other investors concurrently, or substantially concurrently, with the initial funding of the debt facilities contemplated by the debt commitment letter;

 

   

on the closing date, after giving effect to the merger, the other transactions contemplated by the merger agreement and debt and equity financing, Buyer, the borrower under the debt facilities or any of their subsidiaries will not have any material indebtedness for borrowed money other than (a) the debt facilities contemplated by the debt commitment letter, (b) any indebtedness permitted to be incurred or remain outstanding after the consummation of the merger pursuant to the terms of the merger agreement and (c) other limited indebtedness to be agreed upon;

 

   

the receipt of a pro forma consolidated balance sheet and related pro forma consolidated statement of income of the Company as of and for the twelve-month period ending on the last day of the most recently completed four-fiscal quarter period ended at least 45 days prior to the closing date for which financial statements are available, prepared after giving effect to the merger and other transactions contemplated by the merger agreement and the debt and equity financing, as if such transactions had occurred as of such date (in the case of such balance sheet) or at the beginning of such period (in the case of the statement of income);

 

   

the receipt of the following closing documents (or, in the case of the solvency certificate, the use by Buyer of its commercially reasonable efforts to deliver a solvency certificate): a solvency certificate, customary legal opinions, customary evidence of authority, customary officer’s certificates, good standing certificates (to the extent applicable), a customary payoff letter with respect to the Company’s existing credit agreement, evidence of insurance, customary lien searches requested by the applicable commitment parties no less than 30 days prior to the date the merger is required to be consummated pursuant to the terms of the merger agreement, customary borrowing base certificate and a customary borrowing request;

 

   

the use by Buyer of its commercially reasonable efforts to (a) have made senior management of the Company available to participate in meetings with prospective lenders for a period of at least 15 consecutive business days prior to the closing date and (b) deliver to the applicable commitment parties information customarily delivered by a borrower and necessary for the preparation of a customary confidential information memorandum for senior secured term loan financings if requested by the applicable commitment parties no less than 20 calendar days prior to such 15-business-day period;

 

   

the receipt of all documentation and other information about the borrower and the guarantors under the debt facilities required under applicable “know your customer” and anti-money laundering rules and regulations, including the U.S.A. Patriot Act of 2001, that in each case has been requested in writing at least five business days prior to the closing date;

 

   

subject in each case to the “Certain Funds Provision” (as defined in the debt commitment letter), (a) the execution and delivery by the borrower under the debt facilities of customary security agreements and

 

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customary documentation giving effect to the guarantees in respect of the debt facilities and an intercreditor agreement and (b) in the case of any pledge of stock of the borrower under the debt facilities and/or its wholly-owned U.S. subsidiaries included in the collateral, the delivery of any applicable stock certificates with customary stock powers executed in blank;

 

   

the payment of fees and expenses due to the commitment parties under the debt commitment letter and required to be paid thereunder to the extent invoiced in reasonable detail at least two business days prior to the closing date; and

 

   

with respect to the senior secured asset-based facility, the use by Buyer of its commercially reasonable efforts to deliver to the applicable commitment parties inventory appraisals and field audits prior to the closing date; provided that neither the delivery nor the substance of any such appraisals or field audits, nor the delivery of a borrowing base certificate, is a condition to the initial availability of the senior secured asset-based facility on the closing date.

The debt commitment letter is not subject to due diligence or a “market out” condition, which would allow the lenders not to fund their respective commitments if the financial markets are materially adversely affected. There is a risk that the conditions to the debt financing will not be satisfied and the 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.

Subject to the terms and conditions of the merger agreement, Buyer and Transitory Subsidiary will use their reasonable best efforts to obtain the equity and debt financing for the merger on the terms and conditions described in the financing letters (including any applicable “market flex” provisions) and will not permit any amendment or modification to be made thereto, or any waiver of any material provision, if such amendment, modification or waiver (a) reduces the aggregate amount of the debt financing unless the amount of the equity financing is increased by a corresponding amount or (b) imposes new or additional conditions precedent, or otherwise amends, modifies or expands any conditions precedent, to the receipt of the debt financing in a manner that would reasonably be expected to (i) prevent, delay or impair the closing of the merger, (ii) make the funding of the debt financing less likely to occur or (iii) adversely impact the ability of Buyer or Transitory Subsidiary to consummate the transactions or the likelihood of consummation of the transactions.

The debt commitment letter contemplates the entry by the surviving corporation into certain sale-leaseback transactions as of or shortly following the closing of the merger. The net proceeds of any sale-leaseback financing will reduce the debt financing contemplated to be funded pursuant to the terms of the debt commitment letter.

Limited Guarantee

Pursuant to the guarantee delivered by the funds in favor of the Company, dated June 28, 2011, each fund has agreed to, severally but not jointly, guarantee the due and punctual performance and discharge of such fund’s respective percentage of:

 

   

the payment obligations of Buyer under the merger agreement to pay the reverse termination fee of $175 million to the Company as and when due; and

 

   

the expense reimbursement and indemnification obligations of Buyer (up to an aggregate amount of $5 million) in connection with the costs and expenses incurred by the Company in connection with (x) any suit to enforce the payment of the reverse termination fee and (y) the arrangement of the financing of the merger as and when due.

See “The Merger Agreement — Termination Fees” beginning on page 93 and “The Merger Agreement — Expense Reimbursement” beginning on page 94. However, each fund’s obligations under the guarantee are subject to a cap equal to such fund’s applicable prorated portion of $180 million.

 

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Subject to certain exceptions, the guarantee will terminate upon the earlier of:

 

   

the effective time of the merger if, and only if, the closing occurs and the merger consideration is paid;

 

   

the termination of the merger agreement in accordance with its terms in circumstances where the reverse termination fee does not become payable;

 

   

the first anniversary of the date of the guarantee unless a claim for payment of the funds’ liability thereunder in respect of any of the obligations is brought pursuant to and in accordance with the guarantee prior to such termination, in which case the guarantee shall terminate upon the final, non-appealable resolution of such action and satisfaction by the funds of any obligations finally determined or agreed to be owed by the funds, consistent with the terms thereof; and

 

   

receipt by the Company of the payment in full of the obligations guaranteed under the guarantee.

Closing and Effective Time of Merger

The closing of the merger will occur no later than the second business day following the satisfaction or waiver of all of the closing conditions set forth in the merger agreement (described under “The Merger Agreement — Conditions to Closing the Merger” beginning on page 88) or at such other date as the parties may agree in writing. However, the merger agreement provides that if the marketing period (as summarized under “The Merger Agreement — Marketing Period” beginning on page 77) has not ended at such time, then, subject to the continued satisfaction or waiver of such conditions to closing of the merger at such time, the closing of the merger will instead take place on the earlier of (1) any business day during the marketing period as may be specified by Buyer on no less than three business days’ notice to the Company and (2) the final day of the marketing period. Notwithstanding the defined term “marketing period” in the merger agreement, Buyer may nonetheless seek to market and arrange the debt financing at any time prior to or during the marketing period and if such debt financing is available and the other conditions to the merger have been satisfied, the merger may be consummated prior to the commencement or conclusion of the marketing period.

Assuming timely satisfaction of the necessary closing conditions, we currently anticipate that the merger will be consummated at the end of September 2011. The effective time will occur as soon as practicable on the date of the closing of the merger 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, Buyer and Transitory Subsidiary may agree and specify in the certificate of merger).

Payment of Merger Consideration and Surrender of Stock Certificates

Promptly, and in any event within two business days, after the effective time of the merger, a letter of transmittal will be mailed to each record holder of shares of Company common stock (other than the excluded shares) describing how such holder should surrender its shares of Company 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 exchange agent (described in “The Merger Agreement — Payment Procedures” beginning on page 78) without a letter of transmittal.

You will not be entitled to receive the per share merger consideration until you deliver a duly completed and executed letter of transmittal to the exchange agent. If your shares are certificated, you must also surrender your stock certificate or certificates to the exchange 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 applicable letter of transmittal is accompanied by all documents reasonably required by the Company to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid or are not applicable.

 

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If you have lost a certificate, or if it has been stolen or destroyed, then before you will be entitled to receive the merger consideration, you will have to make an affidavit of the loss, theft or destruction, and if required by Buyer, post a bond, in such reasonable amount as Buyer may direct, as indemnity against any claim that may be made against Buyer 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.

Interests of Certain Persons in the Merger

In considering the recommendation of our board of directors with respect to the merger agreement, you should be aware that the Company’s directors and executive officers have interests in the merger that may be different from, or in addition to, the interests of our stockholders generally, as more fully described below. Our board of directors and the independent committee were aware of these interests and considered them, among other matters, in reaching the determination that the terms and conditions of the merger and the merger agreement were fair to, advisable and in the best interests of the Company and its stockholders and in making their recommendations regarding approval and adoption of the merger and the merger agreement as described in “The Merger — Reasons for the Merger; Recommendation of the Board of Directors and the Independent Committee” beginning on page 40. For the purposes of all the agreements and plans to which the Company is a party described below that contain a change of control provision, the completion of the transactions contemplated by the merger agreement will constitute a change of control.

Please see the section of this proxy statement titled “The Merger — Golden Parachute Compensation” beginning on page 66 for additional information with respect to the compensation that our named executive officers may receive in connection with the merger.

Compensation of Non-Management Directors

The board of directors has approved additional compensation for the members of the independent committee, as well as non-management directors, to compensate them for their time and effort in connection with the Company’s sale process. The compensation is as follows: $120,000 for the chair of the independent committee (Mr. Shields); $60,000 for the other members of the independent committee (Mses. Cournoyer and Peters and Messrs. Schlesinger and Sheehan); and $30,000 to the other non-management directors (Messrs. Danos and English).

Treatment of Stock Options

In connection with the merger and in accordance with the terms of the Company’s stock incentive plans, each option to purchase shares of Company common stock will become fully vested, to the extent not already fully vested, and cancelled at the effective time of the merger and will represent solely the right to receive from Buyer or the surviving corporation in consideration of each such option, at the effective time of the merger or as soon as practicable thereafter (but in any event not later than three business days following the effective time of the merger), a cash payment equal to the product of (i) the number of shares of Company common stock subject to such option immediately prior to the effective time of the merger, multiplied by (ii) the excess, if any, of the merger consideration of $51.25 per share of the Company common stock over the exercise price per share of the Company common stock subject to such option, without interest and less any applicable withholding taxes. Certain Company employees may, however, be given the opportunity, at the discretion of Leonard Green and CVC, to roll over options to purchase shares of Company common stock currently held by such employees into options to purchase shares of Buyer common stock. See “The Merger — Interests of Certain Persons in the Merger — Discussions with Leonard Green and CVC” beginning on page 65.

The following table sets forth, as of July 20, 2011, for each person who has served as a director or executive officer of the Company since the beginning of our last fiscal year and who currently holds stock options: (a) the aggregate number of shares of Company common stock subject to vested stock options and the value of such vested stock options, on a pre-tax basis, at the per share merger consideration; (b) the aggregate number of unvested stock options that will vest in connection with the merger, assuming the director or executive officer remains employed by, or continues serving as a director of, the Company through the effective time of the merger, and the value of those unvested stock options, on a pre-tax basis, at the per share merger consideration;

 

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(c) the aggregate number of shares of Company common stock subject to vested and unvested stock options for each individual, assuming the director or executive officer remains employed by, or continues serving as a director of, the Company at the effective time of the merger; and (d) the aggregate pre-tax amount of consideration that we expect to pay to all such individuals with respect to their stock options in connection with the merger:

 

    Vested Stock Option     Unvested Stock Options     Aggregate Stock Options  
    Shares     Value(1)
($)
          Shares           Value(1)
($)
        Shares         Value(1)
($)
 

Executive Officers

           

Peter Amalfi

    18,900        422,148        —          —          18,900        422,148   

Michael P. Atkinson

    —          —          —          —          —          —     

Cornel Catuna

        2,500        48,850        2,500        48,850   

Robert W. Eddy

    15,000        284,850        5,000        94,950        20,000        379,800   

Frank D. Forward(2)

    —          —          —          —          —          —     

Thomas F. Gallagher(2)

    —          —          —          —          —          —     

Susan Hoffman

    —          —          —          —          —          —     

John J. Mulleady

    —          —          —          —          —          —     

Christina M. Neppl

    55,500        1,232,360        —          —          55,500        1,232,360   

Lon F. Povich

    50,000        952,500        —          —          50,000        952,500   

Laura J. Sen

    100,000        1,905,000        —          —          100,000        1,905,000   

Non-Employee Directors

           

S. James Coppersmith(3)

    —          —          —          —          —          —     

Christine M. Cournoyer

    6,667        113,739        3,333        56,861        10,000        170,600   

Paul Danos

    20,000        501,150        —          —          20,000        501,150   

Edmond J. English

    10,000        220,700        —          —          10,000        220,700   

Helen Frame Peters

    20,000        501,150        —          —          20,000        501,150   

Leonard A. Schlesinger

    3,334        49,510        6,666        98,990        10,000        148,500   

Michael J. Sheehan

    10,000        166,300        —          —          10,000        166,300   

Thomas J. Shields

    25,000        591,000        —          —          25,000        591,000   

Herbert J. Zarkin

    —          —          —          —          —          —     

All Executive Officers and Non-Employee Directors as a Group

    334,401        6,940,407        17,499        299,651        351,900        7,240,058   

 

(1) Calculated for each stock option by multiplying (i) the excess of the $51.25 per share merger consideration over the per share exercise price of the stock option by (ii) the number of shares of Company common stock subject to such stock option. The outstanding options were granted under our 1997 Stock Incentive Plan and 2007 Stock Incentive Plan.
(2) Ceased to be an executive officer of the Company on January 29, 2011.
(3) Ceased to be a director of the Company on May 25, 2010.

Treatment of Restricted Shares

In connection with the merger and in accordance with the restricted share award agreements granted under the Company’s stock incentive plans, each share of Company common stock granted subject to time-based, performance or other vesting or lapse restrictions that is outstanding and subject to such restrictions immediately prior to the effective time of the merger will automatically vest, and the Company’s reacquisition right with respect thereto shall lapse, and the holder thereof will, subject to compliance with the applicable exchange procedures, be entitled to receive the merger consideration of $51.25 with respect to each such share, without interest and less any applicable withholding taxes.

The following table sets forth, as of July 20, 2011, for each person who has served as a director or executive officer of the Company since the beginning of our last fiscal year and who currently holds restricted shares:

 

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(a) the aggregate number of restricted shares subject to vesting based solely on continued service that will vest in connection with the merger; (b) the aggregate number of restricted shares subject to vesting based both on performance hurdles that have not yet been satisfied and continued service that will vest in connection with the merger; (c) the aggregate number of restricted shares that will vest in connection with the merger (which is the sum of the two preceding columns); and (d) the pre-tax value of such restricted shares at the $51.25 per share merger consideration:

 

     Aggregate
Number of
Restricted Shares
Subject to
Continued Service
     Aggregate
Number of
Restricted Shares
Subject to
Performance
Hurdles and
Continued Service
     Aggregate
Number of
Restricted Shares
     Value of
Restricted
Shares(1)

($)
 

Executive Officers

           

Peter Amalfi

     23,487         12,237         35,724         1,830,855   

Michael P. Atkinson

     15,154         10,154         25,308         1,297,035   

Cornel Catuna

     20,491         12,991         33,482         1,715,953   

Robert W. Eddy

     22,556         15,056         37,612         1,927,615   

Frank D. Forward(2)

     —           —           —           —     

Thomas F. Gallagher(2)

     —           —           —           —     

Susan Hoffman

     14,431         9,431         23,862         1,222,928   

John J. Mulleady

     8,677         8,677         17,354         889,393   

Christina M. Neppl

     23,353         23,353         46,706         2,393,683   

Lon F. Povich

     23,353         23,353         46,706         2,393,683   

Laura J. Sen

     108,273         65,311         173,584         8,896,180   

Non-Employee Directors

           

S. James Coppersmith(3)

     —           —           —           —     

Christine M. Cournoyer

     5,025         —           5,025         257,531   

Paul Danos

     11,625         —           11,625         595,781   

Edmond J. English

     5,025         —           5,025         257,531   

Helen Frame Peters

     5,025         —           5,025         257,531   

Leonard A. Schlesinger

     5,025         —           5,025         257,531   

Michael J. Sheehan

     5,025         —           5,025         257,531   

Thomas J. Shields

     7,225         —           7,225         370,281   

Herbert J. Zarkin

     20,025         —           20,025         1,026,281   

All Executive Officers and Non-Employee Directors as a Group

     323,775         180,563         504,338         25,847,323   

 

(1) Calculated by multiplying the $51.25 per share merger consideration by the number of restricted shares.
(2) Ceased to be an executive officer of the Company on January 29, 2011.
(3) Ceased to be a director of the Company on May 25, 2010.

Change of Control Severance Arrangements

We are parties to change of control severance arrangements with each of our current executive officers, consisting of change of control severance agreements with our chief executive officer (Ms. Sen) and each of our executive vice presidents (Mr. Eddy, Mr. Catuna, Ms. Neppl, Mr. Povich and Mr. Amalfi) and a change of control severance benefit plan for the benefit of our current senior vice presidents who are executive officers (Mr. Atkinson, Ms. Hoffman and Mr. Mulleady). Such arrangements provide benefits upon a change of control, including severance benefits if the executive officer is terminated following such event.

 

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Consequences of a Change of Control

The change of control severance arrangements provide for the following benefits upon occurrence of a change of control:

 

   

Within 30 days after the change of control, all executive officers will receive payment of their respective target incentive award under the Company’s Management Incentive Plan, or MIP, prorated for the fiscal year performance period elapsed through the date of the change of control.

 

   

Stock options become immediately exercisable, and all outstanding shares of restricted stock become free of all restrictions (as described above under the heading “Treatment of Stock Options” and “Treatment of Restricted Shares”, all of our outstanding stock options and restricted shares are already subject to accelerated vesting in accordance with the terms of our stock incentive plans and the restricted share agreements granted thereunder).

The following table sets forth the MIP payment payable to each executive officer under the change of control severance arrangements and the estimated total value of the equity acceleration provided for under the Company’s stock incentive plans and the restricted share agreements granted thereunder as a result of the consummation of the merger (assuming the consummation occurred on July 20, 2011):

 

Name

  Prorated MIP
Target Award(1)

($)
    Estimated Total Value of
Equity Acceleration(2)

($)
    Total Change of Control Benefits
Under Change of Control
Severance Arrangements and
Company Stock Incentive Plans
and Agreements

($)
 

Peter Amalfi

    49,471        1,830,855        1,880,326   

Michael P. Atkinson

    34,453        1,297,035        1,331,488   

Cornel Catuna

    49,471        1,764,803        1,814,274   

Robert W. Eddy

    63,606        2,022,565        2,086,171   

Frank D. Forward

    —          —          0   

Thomas F. Gallagher

    —          —          0   

Susan Hoffman

    39,359        1,222,928        1,262,287   

John J. Mulleady

    44,194        889,393        933,587   

Christina M. Neppl

    69,375        2,393,683        2,463,058   

Lon F. Povich

    62,475        2,393,683        2,456,158   

Laura J. Sen

    353,366        8,896,180        9,249,546   

All Executive Officers as a Group

    765,770        22,711,125        23,476,895   

 

(1) The change of control agreements with our chief executive officer and each of our executive vice presidents provide for the prorated MIP target award to be calculated and paid upon the earlier of the date of the change of control or the occurrence of a potential change of control. The signing of the merger agreement constituted a potential change of control, but each of the parties to these agreements has waived that event as a trigger under the change of control agreements. As a result, the prorated MIP target award will be calculated and paid upon the date of the consummation of the merger.
(2) See “Treatment of Stock Options” and “Treatment of Restricted Shares” for details regarding the accelerated equity awards.

Additional Consequences of Certain Terminations Following a Change of Control

The change of control severance arrangements provide that within 30 days following a qualified termination of employment, which is defined as termination by the Company other than for cause (as described in further detail below), by the executive for good reason (as described in further detail below) or by reason of death, incapacity or disability, after a change of control, and only if there is such a qualified termination of employment,

 

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Mr. Amalfi, Mr. Catuna, Mr. Eddy, Ms. Neppl, Mr. Povich and Ms. Sen are entitled to receive three times the following salary, MIP and auto allowance payments, and Mr. Atkinson, Ms. Hoffman and Mr. Mulleady are entitled to receive two times the following salary and auto allowance payments:

 

   

Salary: the executive’s base salary, offset by any payments made under any long-term disability plan for the three years following the termination of employment.

 

   

MIP: in the case of the chief executive officer and executive vice presidents, the executive’s target payment under the MIP.

 

   

Auto Allowance: the executive’s auto allowance.

In connection with the merger, the salary and auto allowance payments will be calculated using the respective highest base salary and auto allowance in effect for each executive immediately prior to (i) the date of termination or (ii) the date of the change of control. The MIP payment is calculated using the executive’s target incentive award for the fiscal year in which the change of control occurred.

In addition, following a qualified termination of employment, Mr. Amalfi, Mr. Catuna, Mr. Eddy, Ms. Neppl, Mr. Povich and Ms. Sen are entitled to receive three years, and Mr. Atkinson, Ms. Hoffman and Mr. Mulleady are entitled to receive two years, of medical and life insurance at the highest level provided to the executive either immediately prior to the change of control or within 180 days before the change of control. In addition, where a qualified termination occurs by reason of disability, the executive officers will continue to receive disability benefits and/or disability insurance at the same level that they received prior to the qualified termination of employment.

The following table sets forth the additional payments and benefits payable to each executive officer as a result of the consummation of the merger (assuming the consummation occurred on July 20, 2011) following a qualified termination of employment:

 

Name

   Salary(1)
($)
     MIP(1)
($)
     Auto  Allowance(1)
($)
     Benefits
Continuation(1)

($)
     Total Additional
Termination Benefits
Under Change in
Control and Severance
Arrangements

($)
 

Peter Amalfi

     1,050,000         315,000         46,121         51,426         1,462,547   

Michael P. Atkinson

     585,000         —           30,748         33,982         649,730   

Cornel Catuna

     1,050,000         315,000         46,121         46,433         1,457,554   

Robert W. Eddy

     1,350,000         405,000         46,121         45,684         1,846,805   

Frank D. Forward

     —           —           —           —           —     

Thomas F. Gallagher

     —           —           —           —           —     

Susan Hoffman

     683,000         —           30,748         32,254         746,002   

John J. Mulleady

     750,400         —           30,748         32,420         813,568   

Christina M. Neppl

     1,500,000         450,000         46,121         50,360         2,046,481   

Lon F. Povich

     1,326,000         397,800         46,121         50,235         1,820,156   

Laura J. Sen

     3,000,000         2,250,000         61,695         49,237         5,360,932   

All Executive Officers as a Group

     11,294,400         4,132,800         384,544         392,031         16,203,775   

 

(1) Salary, MIP and Auto Allowance payments are to be made in one lump-sum within 30 days following a qualified termination occurring after a change of control and benefits are provided over time after such a qualified termination.

 

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The arrangements provide for a reduction of the benefits an executive would receive to the extent such benefits would result in the imposition of an excise tax on the executive by reason of sections 280G and 4999 of the Internal Revenue Code, provided that if an executive would receive at least $25,000 more on an after-tax basis by receiving all of the benefits under the arrangements, then the benefits payable to the executive will not be reduced. In situations where the benefits are not reduced, the executive would be personally liable for payment of the excise tax imposed. The Company is not, under this circumstance, obligated to provide a section 280G tax gross-up payment to any executive. The arrangements also provide for payment by the Company of any taxes and interest imposed on the employee under section 409A of the Internal Revenue Code or any comparable provision of state or local law, grossed up for any income and employment taxes and any additional section 409A taxes and interest by reason of any such payment.

Termination for cause means (a) dishonesty, (b) conviction of a felony, (c) gross neglect of duties (other than as a result of incapacity, death or disability) or (d) conflict of interest. In the case of gross neglect or conflict of interest, the neglect or conflict must continue for 30 days after written notice from the Company to the executive requesting cessation of such neglect or conflict.

Termination for good reason means the voluntary termination by the executive officer of his or her employment within 120 days after (a) a diminution in the executive’s position, authority or responsibilities, (b) a reduction in his or her compensation or benefits, (c) any purported termination for cause in which the Company does not follow the procedure set forth in the change of control severance arrangement, (d) a relocation of the executive of greater than 40 miles and (e) any breach by the Company of the change of control severance arrangement.

Executive Retirement Plan

As a result of the merger and in addition to the amounts payable disclosed above, in accordance with the Company’s executive retirement plan, each participant in the plan will become fully vested in all benefits accrued under the plan and will no longer forfeit such amounts upon a termination of employment. In addition, each participant will receive a contribution under the plan for the current year equal to 5% of the participant’s annualized compensation for the current plan year. Such accelerated benefits and contributions under the plan are subject to a tax gross-up.

The following table sets forth for each person who has served as an executive officer of the Company since the beginning of our last fiscal year and who is currently a participant in the executive retirement plan: (a) the participant’s account balance as of July 20, 2011 that will become vested as a result of consummation of the merger; (b) the current year contribution that will be made in accordance with the terms of the plan; (c) a tax gross-up payment; and (d) the total amount to be received under the plan by each such person as a result of the merger (which is equal to the sum of the preceding columns):

 

     Account Balance
That Will
Accelerate Upon
Consummation
of Merger

($)
     Current Year
Plan
Contribution
Upon
Consummation
of Merger

($)
     Tax  Reimbursement
($)
     Total
($)
 

Peter Amalfi

     —           17,500         11,618         29,118   

Michael P. Atkinson

     —           14,625         9,710         24,335   

Cornel Catuna

     48,622         17,500         43,898         110,020   

Robert W. Eddy

     58,486         22,500         53,767         134,753   

Susan Hoffman

     42,552         16,902         39,472         98,926   

John J. Mulleady

     47,409         18,760         43,930         110,099   

Christina M. Neppl

     —           24,784         16,454         41,238   

Lon F. Povich

     79,642         22,100         67,547         169,289   

Laura J. Sen

     —           50,000         33,195         83,195   

All Executive Officers as a Group

     276,711         204,671         319,591         800,973   

 

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The account balances of the foregoing participants that were fully vested as of July 20, 2011 were as follows: Peter Amalfi: $122,635.46; Michael P. Atkinson: $200,072; Christina M. Neppl: $290,449; and Laura J. Sen: $378,453.

Deferred Compensation Plan

As a result of the merger and in addition to the amounts payable disclosed above, in accordance with the Company’s general deferred compensation plan, the entire amount credited to each participant in the plan will be paid to such participant in a lump sum payment. Other than this acceleration of the payout date, the participants will not receive any enhanced benefit as a result of the transactions contemplated by the merger agreement.

The following sets forth for each person who has served as a director or executive officer of the Company since the beginning of our last fiscal year and who currently has deferred amounts in the plan, the amount, as of July 20, 2011, that such person would receive as a lump-sum payment: Paul Danos, $448,428; Michael J. Sheehan, $160,401; and Frank D. Forward, $191,794.

Employee Benefits

In the merger agreement, Buyer has agreed to use commercially reasonable efforts to continue to provide our employees with full credit for prior service with us for purposes of eligibility, vesting and other determinations under Buyer benefit plans in which our employees may become eligible to participate (but not for purposes of benefit accrual under any defined benefit pension plan), except where such credit would result in a duplication of benefits or was not recognized prior to the merger under our comparable benefit plans. In addition, Buyer has generally agreed to use commercially reasonable efforts to waive pre-existing condition limits to the extent such limits are waived under our comparable benefit plans, and to recognize deductible and out-of-pocket expenses paid by our employees during the calendar year in which the merger closes to the same extent such payments were recognized under any comparable plan of the Company or any of our subsidiaries.

Leonard Green and CVC have advised the Company that they intend to retain the MIP in place, on its existing terms, for the current fiscal year. All executive officers of the Company currently participate in the MIP. Any payment under the MIP will be made following year end based on BJ’s performance against the plan goals. For the current fiscal year, the MIP for executive officers is based 80% upon achievement of BJ’s net income goal and 20% upon achievement of BJ’s merchandise sales goal. As of June 30, 2011, the Company’s performance would have resulted in payment under the plan in excess of the target level. Actual payout under the MIP, if any, will depend upon actual results for the full year. Amounts paid under the MIP will be reduced by the pro rata payments at target that are to be paid upon consummation of the merger, as described above in “Change of Control and Severance Agreements — Consequences of a Change of Control,” but in no event will employees be required to repay any portion of such pro rata payments.

Discussions with Leonard Green and CVC

As described under the “The Merger — Background of the Merger” above, members of the senior management team of the Company held discussions with representatives of Leonard Green and CVC shortly before the execution of the merger agreement (after all price and most other negotiations were completed) regarding employment and equity participation agreements for the period following the closing of the merger. Following execution of the merger agreement, representatives of Leonard Green and CVC have held additional discussions with members of the senior management of the Company regarding equity incentive and related compensation plans that would be implemented upon the closing of the merger for the benefit of Company employees. To date such discussions have included the following proposals: (a) the Company’s existing stock incentive plans will be terminated, (b) the Buyer would implement a stock option plan upon the closing of the merger, (c) certain Company employees may be given the opportunity, at the discretion of Leonard Green and CVC, to roll over their existing options to purchase shares of Company common stock into options to purchase shares of common stock of Buyer and (d) certain members of the management group would be permitted to invest directly in common stock of Buyer. No definitive arrangements or agreements have been negotiated or entered into regarding such matters as of the date of this proxy statement, however. Leonard Green and CVC have requested the ability to negotiate and enter into employment and equity participation agreements with members of our senior management team, and are permitted under the merger agreement to do so (subject to providing notice thereof and copies of any such agreements to the Company).

 

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Indemnification of Directors and Officers

For a period of six years following the effective time of the merger, the surviving corporation has agreed to indemnify, to the fullest extent permitted by law, the directors and officers of the Company or any of our subsidiaries, against all claims, losses, liabilities, damages, judgments, fines and reasonable fees, costs and expenses (and to advance funds for expenses) incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to the fact that such officer or director is or was an officer, director, employee or agent of the Company or any of our subsidiaries, or, while a director or officer of the Company or any of our subsidiaries, is or was serving at the request of the Company or any of its subsidiaries as director, officer, employee or agent of another person.

The surviving corporation has an obligation to maintain our directors’ and officers’ liability insurance after the effective time of the merger for a period of six years; provided that Buyer shall not be required to pay annual premiums for such insurance in excess of 300% of the current annual premiums paid by us for such insurance. We may purchase a six-year prepaid “tail” policy on terms and conditions providing substantially equivalent benefits as the policies of directors’ and officers’ liability insurance we currently maintain with respect to matters arising at or before the effective time of the merger; provided that the annual premium therefor would not be in excess of 300% of the last annual premium paid prior to the merger.

For a more detailed description of these provisions of the merger agreement, please see the section of this proxy statement titled “The Merger Agreement — Further Actions and Agreements — Directors’ and Officers’ Indemnification and Insurance” on page 95.

Intent to Vote in Favor of the Merger

As of the record date, the directors and executive officers of the Company beneficially owned and were entitled to vote, in the aggregate, 670,472 shares of Company common stock (including restricted shares of Company common stock, but not including any shares of Company common stock deliverable upon exercise or conversion of any options to purchase shares of Company common stock), representing 1.2% of the outstanding shares of Company common stock on the record date. The directors and executive officers have informed the Company that they currently intend to vote all of their shares of Company common stock “FOR” the proposal to adopt the merger agreement, “FOR” approval of the nonbinding advisory proposal regarding “golden parachute” compensation and “FOR” the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

In addition, pursuant to a Company Stockholder Agreement among the LGP funds and the Company, the LGP funds have agreed to vote all shares of Company common stock held by them in favor of the adoption of the merger agreement and in favor of any actions necessary to consummate the merger and any of the other transactions contemplated by the merger agreement. See “Company Stockholder Agreement.”

Golden Parachute Compensation

Golden Parachute Compensation Table

The following table sets forth the information required by Item 402(t) of Regulation S-K regarding the compensation for each of our named executive officers that is based on or otherwise relates to the merger, assuming the following:

 

   

the price per share of common stock of the Company is $51.25;

 

   

the merger closed on July 20, 2011, which is the latest practicable date prior to the filing of this proxy statement; and

 

   

the named executive officers of the Company were terminated without cause immediately following a change in control on July 20, 2011, which is the latest practicable date prior to the filing of this proxy statement.

 

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Golden Parachute Compensation

 

Name

  Cash(1)
($)
    Equity
($)
    Pension/
NQDC
($)
    Perquisites/
Benefits(2)
($)
    Tax
Reimbursement(3)
($)
    Other
($)
    Total
($)
 

Laura J. Sen,

President and Chief Executive Officer(4)

    5,603,366        8,896,180        —          110,932        33,195        50,000        14,693,673   

Robert W. Eddy,

Executive Vice President and Chief Financial Officer(5)

    1,818,606        2,022,565        —          91,805        53,767        80,986        4,067,729   

Frank D. Forward,

Executive Vice President and Chief Financial Officer(6)

    —          —          —          —          —          —          —     

Thomas G. Gallagher,

Executive Vice President, Club Operations(7)

    —          —          —          —          —          —          —     

Christina M. Neppl,

Executive Vice President, Merchandising and Logistics(8)

    2,019,375        2,393,683        —          96,481        16,454        24,784        4,550,777   

Lon F. Povich,

Executive Vice President, General Counsel(9)

    1,786,275        2,393,683        —          96,356        67,547        101,742        4,445,603   

 

(1) Consists of (i) the executive’s target incentive award under the MIP, prorated for the performance period to July 20, 2011 and (ii) the product of three multiplied by each of (x) a cash severance award and (y) the executive’s target incentive award under the MIP. The prorated target incentive award under the MIP is payable upon a single trigger (that is, consummation of the merger). The cash severance award and full target payment under the MIP are payable only upon a double trigger (that is, a qualified termination of the executive’s employment within 24 months following consummation of the merger).
(2) Consists of the product of three times (i) the highest of the executive’s auto allowance in effect (x) immediately prior to the date of termination or (y) immediately prior to the change of control and (ii) medical and life insurance at the highest level provided to the executive either immediately prior to the change of control or within 180 days before the change of control. Such benefits are payable only upon a double trigger (that is, a qualified termination of the executive’s employment within 24 months following consummation of the merger). The cost of providing continued group health benefits is estimated based on costs currently paid by the Company for similar benefits.
(3) The tax reimbursement column consists of a tax gross-up to the executive’s accelerated employee retirement plan account balance, if any, and the current year employee retirement plan contribution. See “The Merger — Interests of Certain Persons in the Merger — Executive Retirement Plan” on page 64.
(4) For Ms. Sen, the cash column consists of (i) a prorated target incentive award under the MIP of $353,366, (ii) a cash severance award of $3,000,000 and (iii) a target incentive award under the MIP of $2,250,000. Equity column consists of (x) accelerated restricted stock awards subject to continued service valued at $5,548,991 and (y) accelerated restricted stock awards subject to performance hurdles valued at $3,347,189. Perquisites and benefits column consists of auto allowance of $61,695 and continuation of medical and life insurance benefits valued at $49,237. The other column consists of a fiscal year 2011 executive retirement plan contribution of $50,000.
(5)

Mr. Eddy has served as Executive Vice President and Chief Financial Officer of the Company since January 30, 2011. Cash column consists of (i) a prorated target incentive award under the MIP of $63,606, (ii) a cash severance award of $1,350,000 and (iii) a target incentive award under the MIP of $405,000. Equity column consists of (i) accelerated restricted stock awards subject to continued service valued at $1,155,995, (ii) accelerated restricted stock awards subject to performance hurdles valued at $771,620 and

 

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  (iii) accelerated option awards valued at $94,950. Perquisites and benefits column consists of (i) auto allowance of $46,121 and (ii) continuation of medical and life insurance benefits valued at $45,684. The other column consists of accelerated executive retirement plan balances of $58,486 and a fiscal year 2011 executive retirement plan contribution of $22,500.
(6) Mr. Forward ceased to be an executive officer of the Company on January 29, 2011 and will receive no compensation that is based on or otherwise related to the merger.
(7) Mr. Gallagher ceased to be an executive officer of the Company on January 29, 2011 and will receive no compensation that is based on or otherwise related to the merger.
(8) For Ms. Neppl, the cash column consists of (i) a prorated target incentive award under the MIP of $69,375, (ii) a cash severance award of $1,500,000 and (iii) a target incentive award under the MIP of $450,000. Equity column consists of (x) accelerated restricted stock awards subject to continued service valued at $1,196,841 and (y) accelerated restricted stock awards subject to performance hurdles valued at $1,196,841. Perquisites and benefits column consists of auto allowance of $46,121 and continuation of medical and life insurance benefits valued at $50,360. The other column consists of a fiscal year 2011 executive retirement plan contribution of $24,784.
(9) For Mr. Povich, the cash column consists of (i) a prorated target incentive award under the MIP of $62,475, (ii) a cash severance award of $1,326,000 and (iii) a target incentive award under the MIP of $397,800. Equity column consists of (x) accelerated restricted stock awards subject to continued service valued at $1,196,841 and (y) accelerated restricted stock awards subject to performance hurdles valued at $1,196,841. Perquisites and benefits column consists of auto allowance of $46,121 and continuation of medical and life insurance benefits valued at $50,235. The other column consists of accelerated executive retirement plan balances of $79,642 and a fiscal year 2011 executive retirement plan contribution of $22,100.

Any changes in the assumptions or estimates above would affect the amounts shown in the table. In addition, a portion of the equity amounts shown in the Equity column are expected to become vested in the ordinary course prior to the actual date the merger is completed, and the pro rata target bonuses for 2011 included in the Cash column are expected to be higher based on the actual date that the merger is closed.

Narrative to Golden Parachute Compensation Table

The payment of severance benefits, and the continuation of employee benefits, is made pursuant to the arrangements discussed in the section of this proxy statement titled “The Merger — Interests of Certain Persons in the Merger — Change of Control Severance Arrangements.”

As described in “The Merger — Interests of Certain Persons in the Merger — Treatment of Stock Options” and The Merger — Interests of Certain Persons in the Merger — Treatment of Restricted Shares,” in connection with the merger, the vesting of all outstanding stock options and restricted stock awards will accelerate in full so that such stock options and awards will become fully vested, to the extent not already fully vested, immediately prior to the completion of the merger. Once vested, each outstanding stock option will represent the right to receive a cash payment equal to the product of (i) the number of shares of our common stock subject to such option immediately prior to the effective time of the merger, multiplied by (ii) the excess, if any, of the merger consideration of $51.25 per share of our common stock over the exercise price per share of our common stock subject to such option, without interest and less any applicable withholding taxes; provided that certain Company employees may be given the opportunity, at the discretion of Leonard Green and CVC, to roll over options to purchase shares of Company common stock currently held by such employees into options to purchase shares of Buyer common stock as described in “The Merger — Interests of Certain Persons in the Merger — Discussions with Leonard Green and CVC” beginning on page 65. Once vested, each outstanding share of restricted stock will represent the right to receive the merger consideration of $51.25 with respect to each such share, without interest and less any applicable withholding taxes.

As described in “The Merger — Interests of Certain Persons in the Merger — Executive Retirement Plan,” in connection with the merger and in accordance with the terms of the Company’s executive retirement plan, each participant in the plan will become fully vested in all benefits accrued under the plan and will no longer forfeit such amounts upon a termination of employment. In addition, each participant will receive a contribution under the plan for the current year equal to 5% of the participant’s annualized compensation for the current plan year. Such accelerated benefits and contributions under the plan are subject to a tax gross-up.

 

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Advisory Vote on Golden Parachute Compensation

Section 14A of the Exchange Act and Rule 14a-21(c) under the Exchange Act require that the Company seek a nonbinding advisory vote from its stockholders to approve the “golden parachute” compensation that its named executive officers will receive in connection with the merger. As required by these provisions, the Company is asking its stockholders to vote on the adoption of the following resolution:

“RESOLVED, that the compensation that may be paid or become payable to the Company’s named executive officers in connection with the merger, as disclosed in the table entitled “Golden Parachute Compensation” pursuant to Item 402(t) of Regulation S-K including the associated narrative discussion, and the agreements or understandings pursuant to which such compensation may be paid or become payable, are hereby APPROVED.”

The board of directors recommends that you vote “FOR” approval of this nonbinding advisory proposal. Approval of this proposal requires the approval of a majority of the votes properly cast upon this proposal. Approval of this proposal is not a condition to completion of the merger. The vote with respect to this proposal is an advisory vote and will not be binding on the Company. Therefore, regardless of whether stockholders approve this proposal, if the merger is approved by the stockholders and completed, the “golden parachute” compensation will still be paid to the Company’s named executive officers to the extent payable in accordance with the terms of such compensation contracts and arrangements.

Accounting Treatment

The merger will be accounted for as a “purchase transaction” for financial accounting purposes.

Material U.S. Federal Income Tax Consequences of the Merger

The following discussion summarizes the material U.S. federal income tax consequences of the merger to holders of Company common stock. This discussion is based upon the provisions of the Internal Revenue Code of 1986, as amended, which we refer to as the Code, the U.S. Treasury Regulations promulgated thereunder and judicial and administrative rulings, all as in effect as of the date of this proxy statement and all of which are subject to change or varying interpretation, possibly with retroactive effect. Any such changes could affect the accuracy of the statements and conclusions set forth herein.

This discussion assumes that holders of Company common stock hold their shares as capital assets within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all aspects of U.S. federal income taxation that may be relevant to a holder of Company common stock in light of such holder’s particular circumstances, nor does it discuss the special considerations applicable to holders of our common stock subject to special treatment under the U.S. federal income tax laws, such as, for example, financial institutions or broker-dealers, mutual funds, partnerships or other pass-through entities and their partners or members, tax-exempt organizations, insurance companies, dealers in securities or foreign currencies, traders in securities who elect mark-to-market method of accounting, controlled foreign corporations, passive foreign investment companies, U.S. expatriates, holders who acquired their Company common stock through the exercise of options or otherwise as compensation, holders who hold their Company common stock as part of a hedge, straddle, constructive sale or conversion transaction, holders whose functional currency is not the U.S. dollar and holders who will own, actually or constructively, any stock of Buyer or the surviving corporation at the effective time of the merger. This discussion does not address any aspect of foreign, state, local, alternative minimum, estate, gift or other tax law that may be applicable to a holder.

We intend this discussion to provide only a general summary of the material U.S. federal income tax consequences of the merger to holders of Company common stock. We do not intend it to be a complete analysis or description of all potential U.S. federal income tax consequences of the merger. The U.S. federal income tax laws are complex and subject to varying interpretation. Accordingly, the Internal Revenue Service may not agree with the tax consequences described in this proxy statement.

 

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If an entity or arrangement treated as a partnership for U.S. federal income tax purposes holds Company common stock, the tax treatment of a partner in such partnership generally will depend on the status of the partner and activities of the partnership. If you are a partner of a partnership holding Company common stock, you should consult your own tax advisor regarding the U.S. federal income tax consequences of the merger to you.

All holders should consult their own tax advisors to determine the particular tax consequences to them (including the application and effect of any state, local or foreign income and other tax laws) of the receipt of cash in exchange for shares of Company common stock pursuant to the merger.

For purposes of this discussion, the term “U.S. holder” means a beneficial owner of Company common stock that is, for U.S. federal income tax purposes:

 

   

an individual citizen or resident of the United States;

 

   

a corporation (including any entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia;

 

   

a trust if (1) its administration is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all substantial decisions of the trust or (2) it has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a U.S. person; or

 

   

an estate the income of which is subject to U.S. federal income tax regardless of its source.

A “non-U.S. holder” is a beneficial owner (other than a partnership or any entity or arrangement treated as a partnership for U.S. federal income tax purposes) of Company common stock that is not a U.S. holder.

U.S. Holders

The conversion of shares of Company common stock into cash pursuant to the merger will be a taxable transaction for U.S. federal income tax purposes. A U.S. holder generally will recognize gain or loss for U.S. federal income tax purposes equal to the difference, if any, between the amount of cash received pursuant to the merger (determined before the deduction of any applicable withholding taxes) and such U.S. holder’s adjusted tax basis in the shares converted into cash pursuant to the merger. A U.S. holder’s adjusted tax basis will generally equal the price the U.S. holder paid for such shares. Such gain or loss generally will be capital gain or loss, and will be long-term capital gain or loss if the holder’s holding period for such shares exceeds one year as of the date of the merger. Long-term capital gains for certain non-corporate U.S. holders, including individuals, are generally eligible for a reduced rate of federal income taxation. The deductibility of capital losses is subject to limitations. If a U.S. holder acquired different blocks of Company common stock at different times or different prices, such U.S. holder must determine its tax basis, holding period, and gain or loss separately with respect to each block of Company common stock.

A U.S. holder may, under certain circumstances, be subject to information reporting and backup withholding at the applicable rate (currently, 28%) with respect to the cash received pursuant to the merger, unless such holder properly establishes an exemption or provides its correct tax identification number and otherwise complies with the applicable requirements of the backup withholding rules. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules can be refunded or credited against a payee’s U.S. 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. All U.S. holders surrendering shares of Company common stock pursuant to the merger should complete and sign , under penalty of perjury, the Internal Revenue Service Form W-9 included as part of the Letter of Transmittal and return it to the exchange agent to provide the information, including such holder’s taxpayer identification number, and certifications necessary to avoid backup withholding (unless an applicable exemption exists and is proved in a manner satisfactory to us and the exchange agent). Corporations are not subject to backup withholding.

 

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Non-U.S. Holders

Any gain recognized on the receipt of cash pursuant to the merger by a non-U.S. holder generally will not be subject to U.S. federal income tax unless:

 

   

the gain is effectively connected with a U.S. trade or business of such non-U.S. holder (and, if required by an applicable income tax treaty, is also attributable to a permanent establishment or, in the case of an individual, a fixed base in the United States maintained by such non-U.S. holder), in which case the non-U.S. holder generally will be subject to U.S. federal income tax on such gain in the same manner as a U.S. holder, provided such non-U.S. holder provides an Internal Revenue Service Form W-8ECI and, if the non-U.S. holder is a foreign corporation, such corporation may be subject to branch profits tax at the rate of 30% (or such lower rate as may be specified by an applicable income tax treaty); or

 

   

the non-U.S. holder is a nonresident alien individual who is present in the United States for 183 days or more in the taxable year of the merger and certain other conditions are met, in which case the non-U.S. holder generally will be subject to a 30% tax on the non-U.S. holder’s net gain realized in the merger, which may be offset by U.S. source capital losses of the non-U.S. holder, if any; or

 

   

the non-U.S. holder owned (directly, indirectly or constructively) more than 5% of the Company’s outstanding common stock at any time during the five years preceding the merger, and the Company is or has been a “United States real property holding corporation” for U.S. federal income tax purposes at any time during such non-U.S. holder’s ownership of more than 5% of the Company’s common stock. Although there can be no assurances in this regard, the Company does not believe that it is or was a “United States real property holding corporation” for U.S. federal income tax purposes.

A non-U.S. holder will be subject to information reporting and, in certain circumstances, backup withholding (currently, at a rate of 28%) with respect to the cash received by such holder pursuant to the merger, unless such non-U.S. holder certifies under penalties of perjury that it is not a United States person (and the payor does not have actual knowledge or reason to know that the holder is a United States person as defined under the Code) or such holder otherwise establishes an exemption from backup withholding. 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 U.S. federal income tax liability, if any. In order to avoid backup withholding, a non-U.S. holder should complete and sign an appropriate Form W-8 which may be obtained from the exchange agent or at www.irs.gov.

Appraisal Rights

Under specified circumstances a holder may be entitled to appraisal rights in connection with the merger. If a holder of Company common stock receives cash pursuant to the exercise of appraisal rights, such holder generally will recognize gain or loss, measured by the difference between the cash received and such holder’s tax basis in such stock. Interest, if any, awarded in an appraisal proceeding by a court would be included in such holder’s income as ordinary income for U.S. federal income tax purposes. Holders of Company common stock who exercise appraisal rights are urged to consult their own tax advisors as to the U.S. federal income tax consequences of their exercise of appraisal rights.

THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION PURPOSES ONLY AND IS NOT A COMPLETE ANALYSIS OR DISCUSSION OF ALL POTENTIAL TAX CONSEQUENCES RELEVANT TO COMPANY STOCKHOLDERS. THE TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON THE PARTICULAR CIRCUMSTANCES OF EACH STOCKHOLDER. YOU SHOULD CONSULT YOUR TAX ADVISOR CONCERNING THE FEDERAL, STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES OF THE MERGER TO YOU.

 

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Regulatory Approvals and Notices

Under the terms of the merger agreement, the merger cannot be consummated until the waiting period applicable to the consummation of the merger under the HSR Act has expired or been terminated.

Under the HSR Act and the rules promulgated thereunder by the FTC, the merger cannot be consummated until each of the Company and Buyer files a notification and report form with the FTC and the Antitrust Division of the DOJ under the HSR Act and the applicable waiting period has expired or been terminated. Each of the Company and Buyer filed such a notification and report form on July 15, 2011 and each requested early termination of the waiting period. There can be no assurance as to the outcome of the review.

At any time before or after consummation of the merger, and irrespective of the expiration or termination of the waiting period under the HSR Act, the Antitrust Division of the DOJ, the FTC, or a state attorney general could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the completion of the merger or seeking divestiture of substantial assets of the Company or Buyer. Private parties may also bring legal action under the antitrust laws under certain circumstances.

There can be no assurance that a challenge to the merger on antitrust grounds will not be made and, if such a challenge is made, there can be no assurance as to its result.

Litigation Relating to the Merger

On June 29, 2011, we, our directors, Buyer, Transitory Subsidiary and Leonard Green were named as defendants in a putative class action complaint, captioned Phillips v. BJ’s Wholesale Club, Inc., et al., C.A. No. 6623-VCN, filed in the Court of Chancery of the State of Delaware. That action, purportedly brought on behalf of a class of stockholders, alleges that our directors breached their fiduciary duties in connection with the proposed acquisition by, among other things, failing to maximize stockholder value, obtain the best financial and other terms and act in the best interests of public stockholders, and by seeking to benefit themselves improperly. The complaint further alleges that Leonard Green aided and abetted the directors’ purported breaches. The plaintiff seeks injunctive and other equitable relief, including to enjoin us from consummating the merger, and damages, in addition to fees and costs.

On June 30, 2011, a second putative class action complaint was filed against us, our directors, Buyer, Transitory Subsidiary, CVC and Leonard Green in the Court of Chancery of the State of Delaware in an action captioned Norfolk County Retirement System v. Zarkin, et al., C.A. No. 6631-VCN. That action, purportedly brought on behalf of a class of stockholders, also alleges that our directors breached their fiduciary duties in connection with the proposed merger by, among other things, failing to maximize stockholder value, obtain the best financial and other terms and act in the best interest of public stockholders, and by seeking to benefit themselves improperly. The complaint further alleges that the Company and non-director defendants aided and abetted the directors’ purported breaches. The plaintiff seeks injunctive and other equitable relief, including to enjoin us from consummating the merger, and damages, in addition to fees and costs.

On July 1, 2011, a third putative class action complaint was filed against us, our directors, Buyer, Transitory Subsidiary, CVC and Leonard Green in the Court of Chancery of the State of Delaware in an action captioned Page v. BJ’s Wholesale Club, Inc., et al., C.A. No. 6633-VCN. That action, purportedly brought on behalf of a class of stockholders, also alleges that our directors breached their fiduciary duties in connection with the proposed merger by, among other things, failing to maximize stockholder value, obtain the best financial and other terms and act in the best interest of public stockholders, and by seeking to benefit themselves improperly. The complaint further alleges that the non-Company and the non-director defendants aided and abetted the directors’ purported breaches. The plaintiff seeks injunctive and other equitable relief, including to enjoin us from consummating the merger and to impose a constructive trust, in addition to fees and costs.

 

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On July 6, 2011, a fourth putative class action complaint was filed against us, our directors, Buyer, Transitory Subsidiary, CVC Capital Partners Limited and Leonard Green in the Court of Chancery of the State of Delaware in an action captioned Employees’ Retirement System of the Government of the Virgin Islands v. BJ’s Wholesale Club, Inc., et al., C.A. No. 6638-VCN. That action, purportedly brought on behalf of a class of stockholders, also alleges that our directors breached their fiduciary duties in connection with the proposed merger by, among other things, failing to maximize stockholder value, obtain the best financial and other terms and act in the best interest of public stockholders, and by seeking to benefit themselves improperly. The complaint further alleges that the non-Company and the non-director defendants aided and abetted the directors’ purported breaches. The plaintiff seeks injunctive and other equitable relief, including to enjoin us from consummating the merger, in addition to fees and costs.

On July 7, 2011, a fifth putative class action complaint was filed against us, our directors, Buyer, Transitory Subsidiary, CVC and Leonard Green in the Court of Chancery of the State of Delaware in an action captioned Kramer v. BJ’s Wholesale Club, Inc., et al., C.A. No. 6642-VCN. That action, purportedly brought on behalf of a class of stockholders, also alleges that our directors breached their fiduciary duties in connection with the proposed merger by, among other things, failing to maximize stockholder value, obtain the best financial and other terms and act in the best interest of public stockholders, and by seeking to benefit themselves improperly. The complaint further alleges that the non-Company and the non-director defendants aided and abetted the directors’ purported breaches. The plaintiff seeks injunctive and other equitable relief, including to enjoin us from consummating the merger, and damages, in addition to fees and costs.

Also on July 7, 2011, a sixth putative class action complaint was filed against us, our directors, Buyer, Transitory Subsidiary, CVC Capital Partners Advisory (U.S.), Inc. and Leonard Green in the Court of Chancery of the State of Delaware in an action captioned Malkowski v. BJ’s Wholesale Club, Inc., et al., C.A. No. 6644-VCN. That action, purportedly brought on behalf of a class of stockholders, also alleges that our directors breached their fiduciary duties in connection with the proposed merger by, among other things, failing to maximize stockholder value, obtain the best financial and other terms and act in the best interest of public stockholders, and by seeking to benefit themselves improperly. The complaint further alleges that the non-Company and the non-director defendants aided and abetted the directors’ purported breaches. The plaintiff seeks injunctive and other equitable relief, including to enjoin us from consummating the merger, and damages, in addition to fees and costs.

On July 8, 2011, a seventh putative class action complaint was filed against us, our directors, Buyer and Transitory Subsidiary in the Court of Chancery of the State of Delaware in an action captioned Baumgartner v. BJ’s Wholesale Club, Inc., et al., C.A. No. 6648-VCN. That action, purportedly brought on behalf of a class of stockholders, also alleges that our directors breached their fiduciary duties in connection with the proposed merger by, among other things, failing to maximize stockholder value, obtain the best financial and other terms and act in the best interest of public stockholders, and by seeking to benefit themselves improperly. The complaint further alleges that the non-director defendants aided and abetted the directors’ purported breaches. The plaintiff seeks injunctive and other equitable relief, including to enjoin us from consummating the merger and to impose a constructive trust, in addition to fees and costs.

Also on July 8, 2011, an eighth putative class action complaint was filed against us, our directors, Buyer, Transitory Subsidiary, CVC Capital Partners Limited and Leonard Green in the Court of Chancery of the State of Delaware in an action captioned LBBW Asset Management Investment GMBH v. BJ’s Wholesale Club, Inc., et al., C.A. No. 6649-VCN. That action, purportedly brought on behalf of a class of stockholders, also alleges that our directors breached their fiduciary duties in connection with the proposed merger by, among other things, failing to maximize stockholder value, obtain the best financial and other terms and act in the best interest of public stockholders, and by seeking to benefit themselves improperly. The complaint further alleges that the non-Company and the non-director defendants aided and abetted the directors’ purported breaches. The plaintiff seeks injunctive and other equitable relief, including to enjoin us from consummating the merger, in addition to fees and costs.

 

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Also on July 8, 2011, a ninth putative class action complaint was filed against us, our directors, Buyer, Transitory Subsidiary, CVC Capital Partners Limited and Leonard Green in the Court of Chancery of the State of Delaware in an action captioned NECA-IBEW Welfare Trust Fund v. BJ’s Wholesale Club, Inc., et al., C.A. No. 6651-VCN. That action, purportedly brought on behalf of a class of stockholders, also alleges that our directors breached their fiduciary duties in connection with the proposed merger by, among other things, failing to maximize stockholder value, obtain the best financial and other terms and act in the best interest of public stockholders, and by seeking to benefit themselves improperly. The complaint further alleges that Leonard Green aided and abetted the directors’ purported breaches. The plaintiff seeks injunctive and other equitable relief, including to enjoin us from consummating the merger, in addition to fees and costs.

On July 12, 2011, a tenth putative class action complaint was filed against us, our directors, Buyer, CVC and Leonard Green in the Court of Chancery of the State of Delaware in an action captioned Elsman v. Zarkin, et al., C.A. No. 6658-VCN. That action, purportedly brought on behalf of a class of stockholders, also alleges that our directors breached their fiduciary duties in connection with the proposed merger by, among other things, failing to maximize stockholder value, obtain the best financial and other terms and act in the best interest of public stockholders, and by seeking to benefit themselves improperly. The complaint further alleges that the non-director defendants aided and abetted the directors’ purported breaches. The plaintiff seeks injunctive and other equitable relief, including to enjoin us from consummating the merger, in addition to fees and costs.

Also on July 12, 2011, an eleventh putative class action complaint was filed against us, our directors, Buyer and Transitory Subsidiary in the Court of Chancery of the State of Delaware in an action captioned Sigler v. BJ’s Wholesale Club, Inc., et al., C.A. No. 6659-VCN. That action, purportedly brought on behalf of a class of stockholders, also alleges that our directors breached their fiduciary duties in connection with the proposed merger by, among other things, failing to maximize stockholder value, obtain the best financial and other terms and act in the best interest of public stockholders, and by seeking to benefit themselves improperly. The complaint further alleges that the non-director defendants aided and abetted the directors’ purported breaches. The plaintiff seeks injunctive and other equitable relief, including to enjoin us from consummating the merger and to impose a constructive trust, in addition to fees and costs.

On July 13, 2011, a twelfth putative class action complaint was filed against us, our directors, Buyer, Transitory Subsidiary, CVC Capital Partners, Inc. and Leonard Green in the Court of Chancery of the State of Delaware in an action captioned New Jersey Building Laborers Pension Fund v. BJ’s Wholesale Club, Inc., et al., C.A. No. 6664-VCN. That action, purportedly brought on behalf of a class of stockholders, also alleges that our directors breached their fiduciary duties in connection with the proposed merger by, among other things, failing to maximize stockholder value, obtain the best financial and other terms and act in the best interest of public stockholders, and by seeking to benefit themselves improperly. The complaint further alleges that the non-Company and non-director defendants aided and abetted the directors’ purported breaches. The plaintiff seeks injunctive and other equitable relief, including to enjoin us from consummating the merger, and damages, in addition to fees and costs.

On July 27, 2011, a thirteenth putative class action complaint was filed against us, our directors, Buyer, Transitory Subsidiary, Leonard Green and CVC Capital Partners Advisory (U.S.), Inc. in the United States District Court for the District of Massachusetts in an action captioned Puzey v. BJ’s Wholesale Club, Inc., et al., No. 1:11-cv-11339-MWL. That action, purportedly brought on behalf of a class of stockholders, alleges that the Company, its directors, Leonard Green and CVC Capital Partners Advisory (U.S.), Inc. violated federal securities laws in connection with the filing of the preliminary proxy. It also alleges that our directors breached their fiduciary duties in connection with the proposed merger by, among other things, failing to maximize stockholder value, obtain the best financial and other terms and act in the best interest of public stockholders, and by seeking to benefit themselves improperly. The complaint further alleges that the non-director defendants aided and abetted the directors’ purported breaches. The plaintiff seeks injunctive and other equitable relief, including to enjoin us from consummating the merger and to impose a constructive trust, in addition to fees and costs.

 

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On July 26, 2011, the twelve actions pending in the Court of Chancery of the State of Delaware were consolidated into one action captioned In re BJ’s Wholesale Club, Inc. Shareholder Litigation, Consolidated C.A. No. 6623-VCN. On July 28, 2011, the plaintiffs in that action filed a consolidated amended complaint against us, our directors, Buyer, Transitory Subsidiary, Leonard Green, and CVC. That action, purportedly brought on behalf of a class of stockholders, alleges that our directors breached their fiduciary duties in connection with the proposed merger by, among other things, failing to maximize stockholder value, causing a purportedly deficient proxy statement to be filed, failing to obtain the best financial and other terms and act in the best interest of public stockholders, and by seeking to benefit themselves improperly. The complaint further alleges that the non-Company and non-director defendants aided and abetted the directors’ purported breaches. The plaintiff seeks injunctive and other equitable relief, including to enjoin us from consummating the merger, in addition to fees and costs. Also on July 28, 2011, the plaintiffs in this action filed a motion for a preliminary injunction and a motion for expedited proceedings. A hearing on the motion for a preliminary injunction has been scheduled for September 2, 2011.

We believe that the claims asserted in these suits are without merit.

 

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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 merger agreement, a copy of which is attached as Annex A and is 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 the merger.

Explanatory Note Regarding the Merger Agreement

The merger agreement is included to provide you with information regarding its terms. 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. The representations, warranties and covenants made in the merger agreement by the Company, Buyer and Transitory Subsidiary were qualified and subject to important limitations agreed to by the Company, Buyer and Transitory Subsidiary 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 consummate 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 as facts the matters described therein. 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 the matters contained in a disclosure letter that the Company delivered in connection with the merger agreement, 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.

The Merger

Under the terms of the merger agreement, Transitory Subsidiary, a wholly owned subsidiary of Buyer, will merge with and into the Company, with the Company continuing as the surviving corporation of the merger. As a result of the merger, the separate corporate existence of Transitory Subsidiary will cease, and the Company will become a wholly owned subsidiary of Buyer. We sometimes refer to the Company after the consummation of the merger as the surviving corporation. The certificate of incorporation of the Company will be amended and restated in its entirety, by virtue of the merger, to read as set forth on an exhibit to the merger agreement. The by-laws of the Company will also be amended and restated in their entirety so that, immediately following the effective time of the merger (as explained below) they are identical to the by-laws of Transitory Subsidiary as in effect immediately prior to the effective time of the merger, except that all references to the name of Transitory Subsidiary shall be changed to refer to the Company. The directors of Transitory Subsidiary immediately prior to the effective time of the merger shall be the initial directors of the surviving corporation. The officers of the Company immediately prior to the effective time of the merger shall be the initial officers of the surviving corporation.

Effective Time of the Merger

The closing of the merger will occur no later than the second business day following the satisfaction or waiver of all of the closing conditions set forth in the merger agreement or at such other date as the parties may agree in writing. The merger will become effective upon the filing of a certificate of merger with the Delaware

 

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Secretary of State (or such later time as may be agreed in writing by the Company and Buyer and specified in the certificate of merger). However, if the marketing period (as described below) has not ended at such time, then, subject to the continued satisfaction or waiver of such conditions to closing at such time, the closing will instead take place on the earlier of (1) any business day during the marketing period as may be specified by Buyer on no less than three business days’ notice to the Company and (2) the final day of the marketing period. We intend to complete the merger as promptly as practicable, subject to receipt of stockholder approval and all requisite regulatory approvals. Although we currently expect to complete the merger at the end of September 2011, we cannot specify when, or assure you that, all conditions to the merger will be satisfied or waived.

Marketing Period

The Marketing Period

The marketing period is the first period of 15 consecutive business days (1) after the Company has delivered to Buyer the marketing material (as described below) and the financing information (as described below) and such marketing material and financing information delivered prior to the start of such 15 consecutive business day period is and remains compliant (as described below) throughout such period and (2) throughout which all closing conditions to the obligations of Buyer and Transitory Subsidiary (described under “The Merger Agreement — Conditions to Closing the Merger”) have been satisfied (other than the condition relating to Company stockholder approval, which must be satisfied no later than the final day of the marketing period including by extending the marketing period if required, and those conditions that by their terms are to be satisfied at the closing, which need only be satisfied at the closing, as the case may be), and nothing has occurred and no condition exists that would cause any of such conditions not to be satisfied if the closing were to be scheduled for any time during such 15 consecutive business day period. The marketing period will not include any day from August 20, 2011 through September 6, 2011 or from November 23, 2011 through November 25, 2011 and no days prior to either such period shall be included in computing any marketing period that is not completed prior to either such period. If Buyer’s debt financing is consummated prior to the date on which the marketing period would otherwise end, the marketing period will end on the date such debt financing is consummated and, subject to the satisfaction or waiver of all of the conditions to the merger set forth in the merger agreement, the closing of the merger will occur on the second business day thereafter.

The Marketing Material and the Financing Information

In connection with the marketing period:

 

   

we refer to “public side” and “private side” bank books, information memoranda and other information packages and presentations regarding the business, operations, financial condition, projections and prospects of the Company customarily provided by a borrower in a secured financing transaction which the Company is required to provide to Buyer under the merger agreement as the marketing material; and

 

   

we refer to information with respect to business, operations, financial condition, projections and prospects of the Company as may be reasonably requested by Buyer and customarily provided by a borrower in a secured financing transaction which the Company is required to provide to Buyer under the merger agreement as the financing information.

Whether the Marketing Material and the Financing Information is “Compliant”

In determining whether the marketing material and the financing information is compliant, we use the term “compliant” to mean that the marketing material and the financing information satisfies the following two requirements:

 

   

does not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make such marketing material or financing information not misleading in light of the circumstances in which they were made; and

 

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the Company’s auditors have not withdrawn any audit opinion with respect to any financial statements contained in the marketing material or the financing information.

Commencement of the Marketing Period

If the Company in good faith reasonably believes it has provided the marketing material and the financing information and that such marketing material and financing information is compliant at the time such notice is given, it may deliver to Buyer a written notice to that effect (stating when it believes it completed such delivery), in which case the Company will be deemed to have provided the marketing material and financing information to Buyer and the marketing material and financing information will be deemed compliant unless:

 

   

at any time during such 15 consecutive business day period after the date such notice is given the marketing material and financing information delivered to Buyer prior to the start of such 15 consecutive business day period is not compliant; or

 

   

Buyer in good faith reasonably believes the Company has not completed the delivery of the marketing material and the financing information or that the marketing material and the financing information is not compliant and, within five business days after the giving of such notice by the Company, Buyer gives a written notice to the Company to that effect (stating with specificity which marketing material and financing information the Company has not delivered or is not compliant).

Notwithstanding the defined term “marketing period” in the merger agreement, Buyer may nonetheless seek to market and arrange the debt financing at any time prior to or during the marketing period and if such debt financing is available and the other conditions to the merger have been satisfied, the merger may be consummated prior to the commencement or conclusion of the marketing period.

Merger Consideration

At the effective time of the merger, each issued and outstanding share of Company common stock, other than treasury shares, any shares owned by any of our wholly owned subsidiaries, any shares owned by Buyer, Transitory Subsidiary or any other wholly owned subsidiary of Buyer, and shares owned by stockholders who have demanded and not effectively withdrawn or lost appraisal rights, will be cancelled and automatically converted into the right to receive $51.25 in cash, without interest and less applicable withholding taxes. The per share merger consideration will be equitably adjusted in the event of any reclassification, stock split, reverse split, stock dividend, reorganization, recapitalization or other like change with respect to the Company common stock that occurs (or for which a record date is established) prior to the effective time of the merger. Treasury shares, shares owned by any of our wholly owned subsidiaries, and any shares of our capital stock owned by Buyer, Transitory Subsidiary or any other wholly owned subsidiary of Buyer, will be automatically cancelled and extinguished without any conversion of such shares and no consideration will be paid for such shares. Shares held by our stockholders who perfect their appraisal rights will be converted into the right to receive such consideration as may be determined by the Delaware Court of Chancery under Section 262 of the DGCL.

Payment Procedures

At or immediately prior to the effective time of the merger, Buyer will deposit, or cause to be deposited, cash with an exchange agent in order to permit the payment of the merger consideration. Promptly (and in any event within three business days) after the effective time of the merger, the exchange agent will mail to each holder of record of Company common stock that was issued and outstanding immediately prior to the effective time of the merger a letter of transmittal and instructions for use in effecting the surrender of the certificates that represent shares of the Company common stock in exchange for the merger consideration. If any of your certificates representing Company common stock have been lost, stolen or destroyed, you will be entitled to obtain the merger consideration after you make an affidavit of that fact and, if required by Buyer, post a bond, in such reasonable amount as Buyer may direct, as indemnity against any claim that may be made against Buyer

 

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with respect to such certificates. In the event of a transfer of ownership of the Company common stock which is not registered in the transfer records of the Company, the merger consideration may be paid to a person other than the person in whose name the certificate so surrendered is registered, if such certificate is presented to the exchange agent, accompanied by all documents required to evidence and effect such transfer and by evidence that any applicable stock transfer taxes have been paid. No interest will be paid or will accrue on the cash payable upon the surrender of any certificate.

Buyer is entitled to cause the exchange agent to deliver to it any funds that have not been distributed within one year after the effective time of the merger. After that date, holders of certificates who have not complied with the instructions to exchange their certificates will be entitled to look only to Buyer for payment of the merger consideration.

To the extent permitted by applicable law, none of Buyer, Transitory Subsidiary, the Company, the surviving corporation, or the exchange agent will be liable to any holder of shares of Company common stock for any amount required to be delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. Any merger consideration remaining unclaimed by holders of shares of Company common stock immediately prior to such time as such amounts would otherwise escheat to or become property of any governmental entity will, to the extent permitted by applicable law, become the property of Buyer free and clear of any claims or interest of any person previously entitled thereto.

You should not send your Company stock certificates (if any) to the exchange agent until you have received transmittal materials from the exchange agent. Do not return your Company stock certificates (if any) with the enclosed proxy.

Appraisal Rights

Shares of Company common stock issued and outstanding immediately prior to the effective time of the merger that are held by any holder who has demanded and not lost appraisal rights to such shares will not be converted into the right to receive the merger consideration. Instead such stockholder will only be entitled to payment of the appraised value of such shares in accordance with the DGCL. At the effective time of the merger, all such shares will automatically be cancelled and will cease to exist or be outstanding, and each holder will cease to have any rights with respect to the shares, except for rights granted under Section 262 of the DGCL. In the event a stockholder loses (through failure to perfect or otherwise) the right to appraisal under the DGCL, then the shares of such holder will be deemed to have been converted at the effective time of the merger into the right to receive the merger consideration described above. We are required to give Buyer prompt notice of any demands for appraisal that we receive, and Buyer has the right to control, and make decisions in respect of, all negotiations and proceedings with respect to demands for appraisal under the DGCL. We may not, without Buyer’s prior written consent, make any payment with respect to, or offer to settle, any demands for appraisal.

These rights in general are discussed more fully under the section of this proxy statement entitled “Appraisal Rights” beginning on page 101.

Treatment of Options

In connection with the merger, each option to purchase shares of Company common stock will be fully vested, to the extent not already fully vested, and cancelled at the effective time of the merger and will represent the right to receive from Buyer or the surviving corporation in consideration of each such option, at the effective time of the merger or as soon as practicable thereafter (but in any event not later than three business days following the effective time of the merger), a cash payment equal to the product of (i) the number of shares of Company common stock subject to such option immediately prior to the effective time of the merger, multiplied by (ii) the excess, if any, of the merger consideration of $51.25 per share of the Company common stock over the exercise price per share of the Company common stock subject to such option, without interest and less any applicable withholding taxes. Regardless of the terms of the merger agreement, certain Company employees may, however, be given the opportunity, at the discretion of Leonard Green and CVC, to roll over options to purchase shares of Company common stock currently held by such employees into options to purchase shares of Buyer common stock. See “The Merger — Interests of Certain Persons in the Merger — Discussions with Leonard Green and CVC” beginning on page 65.

 

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Treatment of Restricted Shares

In connection with the merger, each share of Company common stock granted subject to time-based, performance or other vesting or lapse restrictions that is outstanding and subject to such restrictions immediately prior to the effective time of the merger will automatically vest, and the Company’s reacquisition right with respect thereto shall lapse, and the holder thereof will, subject to compliance with the applicable exchange procedures, be entitled to receive the merger consideration of $51.25 with respect to each such share, without interest and less any applicable withholding taxes.

Representations and Warranties

In the merger agreement, we made representations and warranties to Buyer and Transitory Subsidiary, including those relating to the following:

 

   

our corporate organization, standing and power;

 

   

our capitalization;

 

   

our subsidiaries;

 

   

our authorization (including board of directors approval and direction to submit the merger agreement to a stockholder vote and recommendation of stockholder approval), execution, delivery, performance and the enforceability of the merger agreement;

 

   

the absence of conflicts with, or violations of, our organizational documents, applicable laws or other obligations as a result of our execution of the merger agreement or consummation of the merger and the identification of government filings and consents required in connection therewith;

 

   

the vote required by Company stockholders to approve the adoption of the merger agreement;

 

   

documents filed by us with the SEC, the accuracy and completeness of the financial statements and other information contained therein;

 

   

the absence of undisclosed liabilities;

 

   

the absence of certain changes or events involving the Company from January 29, 2011 until the date of the merger agreement;

 

   

our filing of tax returns, payment of taxes and other tax matters;

 

   

our owned real property and our leased real property;

 

   

our intellectual property;

 

   

our material contracts;

 

   

the absence of pending or threatened litigation or investigations involving the Company;

 

   

environmental matters with respect to our operations;

 

   

our employee benefit plans, matters relating to the Employee Retirement Income Security Act of 1974, as amended, and other matters concerning employee benefits and employment agreements;

 

   

our compliance with laws;

 

   

our possession of and compliance with permits, licenses and franchises to conduct our business;

 

   

our employees and other labor matters;

 

   

our insurance policies;

 

   

the receipt by the independent committee of an opinion from Morgan Stanley, its financial advisor;

 

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that we have taken all action to ensure that the anti-takeover provisions of the DGCL do not apply to the execution, delivery or performance of the merger agreement or the consummation of the merger;

 

   

the absence of undisclosed obligations to brokers and investment bankers, and our good faith estimate, as of the date of the merger agreement, of our unpaid out-of-pocket fees and expenses, and the fees and expenses we will incur following the date of the merger agreement, to our advisors and other representatives in connection with the merger; and

 

   

our suppliers.

Definition of Company Material Adverse Effect

Several of the representations and warranties made by us in the merger agreement and certain conditions to performance by Buyer and Transitory Subsidiary of their obligations under the merger agreement are qualified by reference to whether the item in question would have a “Company Material Adverse Effect” on us. The merger agreement provides that a “Company Material Adverse Effect” means any change, event, circumstance or development, in each case that, individually or in the aggregate with all other such changes, events, circumstances or developments is, or would reasonably be expected to be, materially adverse with respect to, or has, or would reasonably be expected to have, a material adverse effect on, the business, financial condition or results of operations of the Company and our subsidiaries, taken as a whole.

However, none of the following, or any change, event, circumstance or development arising or resulting from, or related to, any of the following will constitute, or will be considered in determining whether there has occurred, or may, would or could occur, a “Company Material Adverse Effect”:

 

   

general economic conditions in the United States or any other country or region in the world, or conditions in the global economy generally (except any effect, change, event, circumstance or development arising or resulting from, or related to, such conditions may be considered solely if and to the extent it has a materially disproportionate adverse effect on the Company and our subsidiaries, taken as a whole, as compared to other participants in the industry in which the Company and our subsidiaries operate);

 

   

conditions in the securities markets, credit markets, currency markets or other financial markets in the United States or any other country or region in the world, including (i) changes in interest rates in the United States or any other country or region in the world and changes in exchange rates for the currencies of any countries and (ii) any suspension of trading in securities (whether equity, debt, derivative or hybrid securities) generally on any securities exchange or over-the-counter market operating in the United States or any other country or region in the world (except any effect, change, event, circumstance or development arising or resulting from, or related to, such conditions may be considered solely if and to the extent it has a materially disproportionate adverse effect on the Company and our subsidiaries, taken as a whole, as compared to other participants in the industry in which the Company and our subsidiaries operate);

 

   

conditions in the industries or markets in which the Company and our subsidiaries operate (except any effect, change, event, circumstance or development arising or resulting from, or related to, such conditions may be considered solely if and to the extent it has a materially disproportionate adverse effect on the Company and our subsidiaries, taken as a whole, as compared to other participants in the industry in which the Company and our subsidiaries operate);

 

   

political conditions in the United States or any other country or region in the world or acts of war, sabotage or terrorism (including any escalation or general worsening of any such acts of war, sabotage or terrorism) in the United States or any other country or region in the world (except any change, event, circumstance or development arising or resulting from, or related to, such conditions may be considered solely if and to the extent it has a materially disproportionate adverse effect on the Company and our subsidiaries, taken as a whole, as compared to other participants in the industry in which the Company and our subsidiaries operate);

 

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earthquakes, hurricanes, tsunamis, tornadoes, floods, mudslides, wild fires or other natural disasters, weather conditions and other force majeure events in the United States or any other country or region in the world (except any effect, change, event, circumstance or development arising or resulting from, or related to, such conditions may be considered solely if and to the extent it has a materially disproportionate adverse effect on the Company and our subsidiaries, taken as a whole, as compared to other participants in the industry in which the Company and our subsidiaries operate);

 

   

the public announcement of the merger agreement or the consummation of the merger or the other transactions contemplated by the merger agreement, including the impact thereof on business opportunities, sales, membership, membership fee income, profits, gross margins, profit margins or relationships, contractual or otherwise, with customers, business partners, suppliers, landlords or employees;

 

   

changes in laws or other legal or regulatory conditions (or the interpretation thereof) or changes in GAAP or other accounting standards (or the interpretation thereof), in each case arising after the date of the merger agreement, or that result from any action taken for the purpose of complying with any of the foregoing (except any effect, change, event, circumstance or development arising or resulting from, or related to, such changes may be considered solely if and to the extent it has a materially disproportionate adverse effect on the Company and our subsidiaries, taken as a whole, as compared to other participants in the industry in which the Company and its subsidiaries operate);

 

   

any actions taken or failure to take action, in each case, to which Buyer has approved, consented to or requested in writing, or that is described in and permitted to be taken without consent under certain provisions of the merger agreement, or the failure to take any action that is prohibited by the merger agreement;

 

   

any fees or expenses incurred in connection with the transactions contemplated by the merger agreement;

 

   

any (i) changes in our stock price or the trading volume of our stock, (ii) failure by us to meet any public estimates or expectations of our revenue, earnings or other financial performance or results of operations for any period or (iii) failure by us to meet any internal budgets, plans or forecasts of our revenues, earnings or other financial performance or results of operations (except that the underlying cause of any such change or failure may be considered unless it would otherwise be excluded from such determination); and

 

   

any legal proceedings arising out of in connection with the merger agreement or any of the transactions contemplated by the merger agreement.

Definition of Buyer Material Adverse Effect

Certain of the representations and warranties made by Buyer and Transitory Subsidiary in the merger agreement and certain conditions to our performance of our obligations under the merger agreement are qualified by reference to whether the item in question would have a “Buyer Material Adverse Effect.” The merger agreement provides that a “Buyer Material Adverse Effect” means any change, event, circumstance or development, in each case that, individually or in the aggregate, is materially adverse with respect to, or would reasonably be expected to have, any material adverse effect on, the ability of Buyer or Transitory Subsidiary to timely consummate the transactions contemplated by the merger agreement or timely perform any of their respective obligations under the merger agreement or the ability of any of the funds to timely perform any of its obligations under the guarantee.

 

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Equity Financing Covenant

Buyer and Transitory Subsidiary have acknowledged that they are fully responsible for obtaining the financing contemplated by the equity commitment letters (which we refer to as the equity financing) and have agreed to take (or cause to be taken) all action, and do (or cause to be done) all things, necessary, proper or advisable to obtain the equity financing, including:

 

   

maintaining in effect the equity commitment letters;

 

   

using reasonable best efforts to ensure the accuracy of all representations or warranties made by them in the equity commitment letters;

 

   

complying with all of their covenants in the equity commitment letters;

 

   

timely satisfying all conditions applicable to them set forth in the equity commitment letter that are within their control (other than the consummation of the debt financing);

 

   

subject to the satisfaction of all applicable conditions, consummating the equity financing at or prior to the closing; and

 

   

fully enforcing the obligations of the funds under the equity commitment letters (including, at the Company’s request by filing one or more lawsuits against the funds to fully enforce their obligations and the rights of Buyer and Transitory Subsidiary thereunder).

Buyer and Transitory Subsidiary have also agreed not to amend, alter or waive any term of the equity commitment letters without our written consent and to notify us promptly (and in any event within one business day) if (1) any equity commitment letter expires or is terminated, (2) any fund refuses to provide the equity financing on the terms set forth in the equity commitment letters or (3) Buyer or Transitory Subsidiary no longer believes in good faith that it will be able to obtain the equity financing on the terms set forth in the equity commitment letters.

Debt Financing Covenant; Company Cooperation

Buyer and Transitory Subsidiary have acknowledged that they are fully responsible for obtaining the financing contemplated by the debt commitment letter (which we refer to as the debt financing) and have agreed to use their reasonable best efforts to obtain such financing on the terms set forth therein.

Buyer and Transitory Subsidiary will not permit any amendment or modification to be made to, or any waiver of any material provision under, the debt commitment letter, if such amendment, modification or waiver:

 

   

reduces the aggregate amount of the debt financing unless the equity financing is increased by a corresponding amount; or

 

   

imposes new or additional conditions precedent, or otherwise amends, modifies or expands any conditions precedent, to the receipt of the debt financing in a manner that would reasonably be expected to (1) prevent, delay or impair the closing of the merger, (2) make the funding of the debt financing (or the satisfaction of the conditions to the debt financing) less likely to occur or (3) adversely impact the ability of Buyer or Transitory Subsidiary to enforce its rights against the other parties to the debt commitment letter, the ability of Buyer or Transitory Subsidiary to consummate the transactions contemplated by the merger agreement or the likelihood of consummation of the transactions contemplated by the merger agreement.

Buyer and the Transitory Subsidiary may (1) replace or amend the debt commitment letter or any other document contemplated by the debt financing to add commercial banks, investment banks or other institutional investors as lenders, lead arrangers, bookrunners, syndication agents or similar entities with commitments thereunder that have not executed the debt commitment letter as of the date of the merger agreement, if the addition of such additional parties, individually or in the aggregate, would not prevent, delay or impair the

 

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availability of the debt financing or the consummation of the transactions contemplated by the merger agreement and (2) enter into additional financing commitment letters with respect to the financing of the transactions contemplated by the merger agreement, including commitments to enter into sale-leaseback financings with respect to real property if such commitment letters do not reduce the aggregate amount of the debt financing committed pursuant to the terms of the debt commitment letter, or, if such commitments are reduced, such letters do not contain any new or additional conditions precedent other than those set forth in the debt commitment letter or that would not adversely affect the ability of Buyer or the Transitory Subsidiary to consummate the transactions contemplated by the merger agreement or the likelihood of consummation of the transactions contemplated by the merger agreement.

Buyer and Transitory Subsidiary will use reasonable best efforts to:

 

   

maintain in effect the debt commitment letter and negotiate definitive documents for the debt financing that contain terms and conditions set forth in the debt commitment letter (or terms not materially less favorable, in the aggregate, to Buyer and Transitory Subsidiary, taken as a whole, (including with respect to the conditionality thereof) than the terms and conditions in the debt commitment letter);

 

   

ensure the accuracy of all representations or warranties made by them in the debt commitment letter;

 

   

comply with all of their covenants in the debt commitment letter;

 

   

satisfy on a timely basis all conditions applicable to them in the debt commitment letter (including by consummating the equity financing) that are within their control; and

 

   

consummate the debt financing at or prior to the closing.

If all applicable conditions to the debt financing are satisfied (other than the availability of the equity financing), Buyer and Transitory Subsidiary are obligated to use their reasonable best efforts to cause the commitment parties to fund the debt financing required to consummate the transactions contemplated by the merger agreement and otherwise enforce their rights under the debt commitment letter (including through litigation pursued in good faith).

Buyer will furnish to the Company a copy of any document contemplated by the debt financing promptly upon its execution.

Buyer has agreed to keep us informed upon request with respect to all material activity concerning the debt financing and give us prompt notice if it becomes aware of any material adverse change with respect to the availability of the debt financing, including providing notice within one business day if:

 

   

the debt commitment letter expires or is terminated (or any person attempts or purports to terminate the debt commitment letter, whether or not such attempted or purported termination is valid);

 

   

Buyer or Transitory Subsidiary has actual knowledge of any breach or default by any party to the debt commitment letter;

 

   

Buyer or Transitory Subsidiary receives any written notice or other written communication with respect to any:

 

   

actual or potential breach, default, termination or repudiation by any party to the debt commitment letter, or

 

   

material dispute or disagreement between or among any parties to the debt commitment letter; or

 

   

a lender refuses in writing to provide, express an intent to refuse to provide, or expresses any material concern or reservation regarding its obligation and/or ability to provide, all or any portion of the debt financing on the terms set forth in the debt commitment letter.

 

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Buyer and Transitory Subsidiary have agreed that, without our prior written consent, they will not, and will not permit any of their affiliates to, take any action or enter into any transaction, including any merger, acquisition, joint venture, disposition, lease, contract or debt or equity financing, that could reasonably be expected to impair, delay or prevent consummation of the debt financing.

If all or any portion of the debt financing becomes unavailable on the terms and conditions contemplated by the debt commitment letter, Buyer and Transitory Subsidiary will use their reasonable best efforts to promptly obtain substitute debt financing from alternative sources in an amount sufficient, together with the debt and equity financing that is available and any cash or cash equivalents held by the Company as of the effective time of the merger, to pay all amounts required to be paid by Buyer, Transitory Subsidiary or the surviving corporation in connection with the merger and to obtain a new financing commitment letter with respect thereto that provides for such financing on terms (including structure, covenants and pricing) not materially less favorable in the aggregate to Buyer and Transitory Subsidiary than those set forth in the debt commitment letter.

The Company will use, at Buyer’s sole cost and expense, our reasonable best efforts to provide, and to cause our subsidiaries and our and their respective personnel and advisors to use their reasonable best efforts to provide, Buyer with such cooperation in connection with the financing of the merger (including the financing contemplated by the debt commitment letter and any sale-leaseback transaction) as may be reasonably requested by Buyer and as is customary in connection with the arrangement of financing similar in all material respects to the equity financing and the debt financing (provided that such requested cooperation does not unreasonably interfere with the ongoing operations of the Company and our subsidiaries, none of the Company or our subsidiaries is required to issue any offering or information document, and no such cooperation is required with respect to a sale-leaseback transaction to the extent it would unreasonably interfere with compliance with our obligation to provide such cooperation with respect to the debt financing), including:

 

   

participating in a reasonable and limited number of meetings with third parties in connection with the financing, presentations, road shows, due diligence sessions, drafting sessions and sessions with rating agencies in connection with the debt financing;

 

   

delivering to Buyer, Transitory Subsidiary and the commitment parties, as promptly as reasonably practicable following Buyer’s request, the financing information (as described above under “The Merger Agreement — Marketing Period”) and all information with respect to the business, operations, financial conditions, projections and prospects of the Company as may be reasonably requested by Buyer and customarily provided in a sale-leaseback financing (which we refer to as the sale-leaseback information);

 

   

furnishing Buyer and Transitory Subsidiary and the commitment parties, as promptly as practicable, with such financial and other information regarding the Company and our subsidiaries, the receipt of which is an express condition to the obligations of a lender under the debt commitment letter;

 

   

participation by senior management of the Company in the negotiation of, and the execution and delivery of documents contemplated by the debt financing and documents which Buyer or Transitory Subsidiary reasonably request or are required to consummate a sale-leaseback transaction with respect to the Company’s real property;

 

   

using its reasonable best efforts to take such actions as are reasonably requested by Buyer, Transitory Subsidiary or the commitment parties to facilitate the satisfaction on a timely basis of certain conditions precedent to the debt financing, including by providing Buyer, Transitory Subsidiary or the commitment parties or their respective representatives timely access to any real property owned or leased by the Company or its subsidiaries in order to take all actions necessary for the completion of documents related to a sale-leaseback transaction with respect to the Company’s real property; and

 

   

using reasonable best efforts to arrange for customary payoff letters, lien terminations and instruments of discharge to be delivered at closing providing for the payoff, discharge, and termination on the closing date of all indebtedness contemplated by the debt commitment letter to be paid off, discharged and terminated on the closing date.

 

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No obligation of the Company or any of our subsidiaries under any certificate, document or instrument executed in connection with our obligation to cooperate with Buyer’s financing of the merger will be effective until the effective time of the merger, and none of the Company or any of its subsidiaries will be required to take any actions under any such certificate, documents or instrument that is not contingent on the closing of the merger (including the entry into any agreement that is effective before the effective time of the merger) or that would be effective prior to the effective time of the merger.

The Company has also agreed to provide Buyer, Transitory Subsidiary and the commitment parties such information as may be necessary so that the financing information, the sale-leaseback information and the marketing material are complete and correct in all material respects and do not and will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein not misleading.

Subject to certain exceptions, the Company has consented to the use of our and our subsidiaries’ logos in connection with the debt financing.

The condition to the obligation of Buyer and Transitory Subsidiary to consummate the merger requiring the Company to perform in all material respects all obligations required to be performed by it prior to the closing of the merger, as it applies to the Company’s obligations to cooperate with Buyer’s financing of the merger, will be deemed satisfied unless the Company commits a knowing and willful material breach of its obligations to provide such cooperation.

Buyer has agreed to promptly, upon our request, reimburse us for all reasonable out-of-pocket costs we and our subsidiaries incur in connection with such cooperation. Buyer and Transitory Subsidiary have agreed to indemnify and hold harmless us and our representatives from and against any and all liabilities, losses, damages, claims, costs, expenses, interest, awards, judgments and penalties suffered or incurred in connection with the arrangement of the equity financing or the debt financing and any information used in connection therewith (other than historical information relating to us approved by us for use therein).

Covenants Relating to the Conduct of Our Business

During the period between the date of the merger agreement and the effective time of the merger, we have agreed with Buyer, except as expressly provided in the merger agreement or the disclosure letter attached to the merger agreement or as Buyer may otherwise consent in writing (which will not be unreasonably withheld), that we will, and will cause each of our subsidiaries to, use commercially reasonable efforts to act and carry on our and each of our subsidiaries’ businesses in the ordinary course of business consistent in all material respects with past practice.

In addition, we have agreed with Buyer that, except as expressly provided in the merger agreement or the disclosure letter delivered in connection with the merger agreement, we will not, and will not permit our subsidiaries to, directly or indirectly, do any of the following without the prior written consent of Buyer (which will not be unreasonably withheld, conditioned or delayed):

 

   

(i) declare, set aside or pay any dividends on, or make any other distributions (whether in cash, securities or other property) in respect of, any of the Company’s or our subsidiaries’ capital stock (other than dividends and distributions by our direct or indirect wholly owned subsidiaries to a parent), (ii) split, combine or reclassify any of the Company’s or our subsidiaries’ capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of the Company’s or any of our subsidiaries’ capital stock any other securities of the Company or any of our subsidiaries or (iii) subject to customary exceptions, purchase, redeem or otherwise acquire any shares of the Company’s or our subsidiaries’ capital stock or any other of the Company’s or our subsidiaries’ other securities or any rights, warrants or options to acquire any such shares or other securities;

 

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issue, deliver, sell, grant, pledge or otherwise dispose of or encumber any shares of the Company’s or our subsidiaries’ capital stock, any other voting securities or any securities convertible into or exchangeable for, or any rights, warrants or options to acquire, any such shares, voting securities or convertible or exchangeable securities (other than the issuance of shares of our common stock upon exercise of outstanding stock options);

 

   

amend the Company’s or our subsidiaries’ certificate of incorporation, by-laws or other comparable charter or organizational documents;

 

   

acquire (i) by merging or consolidating with, or by purchasing all or a substantial portion of the assets or any stock of, or by any other manner, any business or any corporation, partnership, joint venture, limited liability company, association or other business organization or division thereof or (ii) any assets that are material, in the aggregate, to us and our subsidiaries, taken as a whole, except purchases of inventory and raw materials in the ordinary course of business consistent in all material respects with past practice;

 

   

sell, lease, license, pledge, or otherwise dispose of or encumber any material properties or material assets of the Company or any of our subsidiaries other than in the ordinary course of business consistent in all material respects with past practice;

 

   

(i) subject to customary exceptions, incur any indebtedness for borrowed money or guarantee any such indebtedness of another person, (ii) issue or sell any debt securities or warrants or other rights to acquire any debt securities of the Company or any of our subsidiaries, guarantee any debt securities of another person, enter into any “keep well” or other agreement to maintain any financial statement condition of another person (other than us or our subsidiaries) or enter into any arrangement having the economic effect of any of the foregoing, (iii) make any loans, advances (other than routine advances to employees of the Company and its subsidiaries in the ordinary course of business consistent in all material respects with past practice), or capital contributions to, or investment in, any other person other than the Company or any of its direct or indirect subsidiaries (except that we can, in the ordinary course of business consistent in all material respects with past practice, invest in debt securities issued by the United States government which mature not later than the second business day prior to the closing date of the merger), or (iv) other than in the ordinary course of business consistent in all material respects with past practice enter into any hedging agreement or other financial agreement or arrangement designed to protect the Company or our subsidiaries against fluctuations in commodities prices or exchange rates;

 

   

make any capital expenditures or other expenditures with respect to property, plant or equipment in excess of $10,000,000 in the aggregate for the Company and our subsidiaries, taken as a whole, other than as set forth in the Company’s budget for capital expenditures for the fiscal year ended January 30, 2012 previously make available to Buyer or the specific capital expenditures disclosed in the disclosure letter delivered in connection with the merger agreement;

 

   

make any material changes in accounting methods, principles or practices, except insofar as may be required by a change in GAAP;

 

   

compromise, settle or agree to settle any action or claim in respect of any threatened action (including any action or claim in respect of any threatened action relating to the merger agreement or the transactions contemplated thereby), other than compromises or settlements that involve the payment of monetary damages not in excess of $2,500,000 individually or $10,000,000 in the aggregate, in any case without the imposition of material equitable relief on, or the admission of wrongdoing by (other than in connection with compromises or settlements in the ordinary course of business consistent in all material respects with past practice or that involve the payment of monetary damages not in excess of $100,000 individually), the Company or any of our subsidiaries;

 

   

(i) enter into any material contracts (other than renewals or replacement of any existing material contract that is expiring by its terms, the terms and conditions of which renewal or replacement

 

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material contract, in the aggregate, are at least as favorable to the Company as the existing material contract) or terminate any material contract, (ii) other than in the ordinary course of business consistent in all material respects with past practice, materially modify, amend or waive any material right under or renew any material contract, (iii) enter into or extend the term or scope of any contract or agreement that purports to materially restrict the Company, or any of our subsidiaries, from engaging or competing in any line of business or in any geographic area or (iv) enter into any material contract or agreement that would be breached by, or require the consent of any other person in order to continue such contract or agreement in full force following, consummation of the transactions contemplated by the merger agreement;

 

   

except as required to comply with applicable law or as required pursuant to a Company employee benefit plan existing on the date of the merger agreement, (i) adopt, enter into, terminate or materially amend any employment, retention, change in control, severance or similar agreement, material benefit plan for the benefit or welfare of any current or former director, officer or employee or any collective bargaining agreement or other labor agreement or arrangement, (ii) increase in any material respect the compensation or fringe benefits of, or pay any bonus to, any director or officer, except for annual increases of salaries in the ordinary course of business consistent in all material respects with past practice, (iii) accelerate the payment, right to payment or vesting of any material compensation or benefits, including any outstanding options or restricted stock awards, other than as contemplated by the merger agreement or (iv) grant any equity compensation except for the grant of awards for up to 15,000 shares of Company common stock to new hires on the Company’s customary terms;

 

   

(i) make, change or revoke any material tax election, (ii) settle or compromise any material tax liability, audit, claim or assessment or (iii) surrender any right to a claim for a material tax refund;

 

   

enter into, amend or cancel any insurance policies other than (i) in the ordinary course of business consistent in all material respects with past practice or (ii) to the extent such policy is replaced with a substantially similar policy;

 

   

adopt a plan or agreement of complete or partial liquidation or dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of the Company or any of our subsidiaries;

 

   

enter into a material joint venture or partnership or similar third party business enterprise; or

 

   

authorize any of, or commit or agree, in writing or otherwise, to take any of, the foregoing actions.

Conditions to Closing the Merger

The obligations of the Company, Buyer and Transitory Subsidiary to consummate the merger are subject to the satisfaction or waiver of each of the following conditions (except that no party may rely on the failure of any of the following conditions to the extent such failure results from its failure to use the standard of efforts to consummate the merger required from it under the terms of the merger agreement):

 

   

the adoption of the merger agreement by the affirmative vote of the holders of a majority of the outstanding shares of Company common stock entitled to vote thereon;

 

   

the expiration or termination of the waiting period applicable to the merger under the HSR Act;

 

   

other than the filing of the certificate of merger, all authorizations, consents, orders or approvals of, or declarations or filings with, or expirations of waiting periods imposed by, any governmental entity in connection with the merger and the consummation of the other transactions contemplated by the merger agreement, the failure of which to file, obtain or occur would have a “Buyer Material Adverse Effect” or a “Company Material Adverse Effect,” shall have been filed, been obtained or occurred on terms and conditions which would not have a “Buyer Material Adverse Effect” or a “Company Material Adverse Effect;”

 

   

no order suspending the use of this proxy statement shall have been issued and no proceeding for that purpose shall have been initiated or threatened in writing by the SEC or its staff; and

 

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no governmental entity of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any order, executive order, stay, decree, judgment or injunction (preliminary or permanent) or statute, rule or regulation which is in effect and which has the effect of making the merger illegal or otherwise prohibiting consummation of the merger or the other transactions contemplated by the merger agreement.

In addition, the obligations of Buyer and Transitory Subsidiary to consummate the merger are subject to the satisfaction of each of the following additional conditions:

 

   

our representation and warranty that there was not a “Company Material Adverse Effect” from January 29, 2011 until the date of the merger agreement must be true and correct in all respects; certain of our representations and warranties relating to capitalization, anti-takeover provisions of the DGCL and brokers must be true and correct except for breaches that, in the aggregate, are not material; and the rest of our representations and warranties must be true and correct, except for breaches that have not had a “Company Material Adverse Effect”;

 

   

we must have performed in all material respects all obligations required to be performed by us on or prior to the closing date;

 

   

we shall have delivered to Buyer a certificate, dated as of the closing date of the merger, signed on our behalf by our chief executive officer or chief financial officer, certifying to the satisfaction of the above described conditions; and

 

   

since the date of the merger agreement, there shall not have occurred any “Company Material Adverse Effect.”

In addition, our obligations to consummate the merger are subject to the satisfaction of each of the following additional conditions:

 

   

Buyer and Transitory Subsidiary’s representations and warranties in the merger agreement must be true and correct except for breaches that have not had a “Buyer Material Adverse Effect;”

 

   

Buyer and Transitory Subsidiary shall have performed in all material respects all obligations required to be performed by them under the merger agreement on or prior to the closing date; and

 

   

Buyer shall have delivered to us a certificate, dated as of the closing date of the merger, signed on behalf of Buyer by its chief executive officer or chief financial officer, certifying to the satisfaction of the above described conditions.

Restrictions on Solicitation of Other Offers

We have agreed that neither we nor any of our subsidiaries will, and we will use our reasonable best efforts to cause our directors, officers, employees, investment bankers, attorneys, accountants and other advisors or representatives not to, directly or indirectly:

 

   

solicit, initiate or knowingly encourage any inquiries or the making of any proposal or offer that constitutes, or could reasonably be expected to lead to, any acquisition proposal;

 

   

amend, or grant a waiver or release under, any standstill or similar agreement; or

 

   

enter into, continue or otherwise participate in any discussions or negotiations regarding, or furnish to any person any non-public information for the purpose of encouraging or facilitating, any acquisition proposal.

However, in response to an acquisition proposal that did not result from a breach of our “no solicitation” obligations under the merger agreement, and subject to compliance with our obligations under the merger agreement to provide notices to Buyer concerning alternative acquisition proposals, we may contact the person making such acquisition proposal to clarify the terms and conditions thereof, and we may furnish information

 

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with respect to the Company to, engage in discussions or negotiations with (including solicitations of revised acquisition proposals), or amend, or grant a waiver or release under any standstill or similar agreement of, the person who has made such acquisition proposal, but only if our board of directors determines in good faith, after consultation with outside counsel and its financial advisors, that such acquisition proposal constitutes or could reasonably be expected to lead to a superior proposal.

We may furnish such information only pursuant to a confidentiality agreement not materially less restrictive of the person making such acquisition proposal with respect to the confidentiality provisions thereof than the confidentiality agreement we previously entered into with Leonard Green, and we are required promptly (and in any event within 24 hours) to provide Buyer any non-public information provided pursuant to any such confidentiality agreement that was not previously made available to Buyer.

Any violation of the above described restrictions by any representative of the Company or any of our subsidiaries will be deemed a breach of such restrictions by the Company.

We are required to promptly (and in any event within 48 hours) advise Buyer orally, with written confirmation to follow, of our receipt of any written acquisition proposal and the material terms and conditions (including any amendments or modifications thereto) of any such acquisition proposal (including financing terms and conditions), including the identity of the person making such acquisition proposal.

An “acquisition proposal” means, in each case other than transactions contemplated by the merger agreement:

 

   

any proposal or offer for a merger, consolidation, dissolution, tender offer, recapitalization, share exchange or other business combination transaction involving the Company (other than any such transaction involving solely the Company and one or more of our subsidiaries or that, if consummated, would not result in any person or group owning 20% or more of the outstanding equity securities of the Company);

 

   

any proposal for the issuance by the Company of our equity securities that, if consummated, would result in any person or group owning 20% or more of the outstanding equity securities of the Company; or

 

   

any proposal or offer to acquire in any manner (including by virtue of the transfer of equity interests in one or more of our subsidiaries), directly or indirectly, 20% or more of the consolidated total assets of the Company and our subsidiaries.

A “superior proposal” means any bona fide written acquisition proposal (except that references in the definition of “acquisition proposal” to “20%” shall be replaced by “50%”) (i) on terms which our board of directors determines in its good faith judgment to be more favorable from a financial point of view to the holders of Company common stock than the merger (after consultation with its financial advisor), taking into account all the terms and conditions of such proposal and the merger agreement (including any written proposal by Buyer to amend the terms of the merger agreement) and (ii) that our board of directors determines in its good faith judgment to be reasonably likely to be consummated on the terms proposed, taking into account all financial, regulatory, legal and other aspects of such proposal.

Restrictions on Change of Recommendation to Stockholders

Our board of directors has agreed not to: (i) fail to recommend the adoption of the merger agreement in the proxy statement or otherwise withhold, withdraw, modify or qualify, its recommendation to our stockholders in favor of the merger, (ii) cause or permit us to enter into any letter of intent, memorandum of understanding, agreement in principle, acquisition agreement, merger agreement or similar agreement providing for the

 

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consummation of a transaction contemplated by another acquisition proposal (other than a confidentiality agreement entered into in compliance with our non-solicitation obligations) or (iii) adopt, approve or recommend another acquisition proposal (we refer to any of the actions described in the foregoing clauses (i), (ii) or (iii) as an adverse recommendation change).

However, prior to the adoption of the merger agreement by our stockholders, our board of directors may terminate the merger agreement and/or effect an adverse recommendation change in response to a bona fide acquisition proposal that did not result from a breach of our “no solicitation” obligations under the merger agreement if it determines in good faith, after consultation with outside counsel, that failure to do so could be inconsistent with its fiduciary obligations under applicable law. Nonetheless, we can terminate the merger agreement and/or effect an adverse recommendation in such circumstances only if:

 

   

our board of directors determines in good faith (after consultation with outside counsel and its financial advisors) that such acquisition proposal constitutes a superior proposal after giving effect to all adjustments to the terms of the merger agreement offered by Buyer following the process described in the next three bullet points;

 

   

we give Buyer at least three calendar days’ prior written notice of the intention of our board of directors to take such action (which notice includes an unredacted copy of the superior proposal that is the basis for such action, an unredacted copy of the relevant proposed transaction agreements and a copy of any financing commitments (including redacted fee letters) relating thereto and a written summary of the material terms of any superior proposal not made in writing, including any financing commitments relating thereto);

 

   

upon Buyer’s request, we discuss with Buyer in good faith and in reasonable detail the terms and conditions of such superior proposal during such notice period and provide all information reasonably requested by Buyer concerning such superior proposal to facilitate Buyer’s evaluation of whether to improve the terms and conditions of the merger agreement and the related transaction agreements in such a manner that would cause such superior proposal to no longer constitute a superior proposal;

 

   

following the end of such notice period (with any material change to the material terms of such superior proposal requiring a new notice to Buyer but only a one calendar day period instead of a three calendar day period), our board of directors has considered in good faith any proposed revisions to the merger agreement and the related transaction documents proposed in writing by Buyer and has determined that the superior proposal would continue to constitute a superior proposal if such revisions were to be given effect; and

 

   

we enter into a definitive agreement with respect to the superior proposal and in connection therewith terminate the merger agreement and pay the $80 million Company termination fee.

Furthermore, prior to the adoption of the merger agreement by our stockholders, our board of directors may effect an adverse recommendation change other than in response to a superior proposal if it determines in good faith, after consultation with outside counsel, that failure to do so could be inconsistent with its fiduciary obligations under applicable law. Nonetheless, we can effect an adverse recommendation in such circumstances only if:

 

   

we give Buyer at least three calendar days’ prior written notice of the intention of our board of directors to take such action and a description of the reasons for taking such action;

 

   

upon Buyer’s request, we discuss with Buyer in good faith and in reasonable detail the facts and circumstances giving rise to such proposed adverse recommendation change and provide all information reasonably requested by Buyer concerning such facts and circumstances to facilitate Buyer’s evaluation of whether to improve the terms and conditions of the merger agreement and the related transaction agreements in such a manner that would obviate the need for the taking of such action; and

 

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following the end of such notice period, our board of directors has considered in good faith any proposed revisions to the merger agreement and the related transaction documents proposed in writing by Buyer and has determined in good faith, after consultation with its financial advisor and outside legal counsel, that failure to effect an adverse recommendation change could be inconsistent with its fiduciary obligations under applicable law.

Termination

The Company and Buyer may agree to terminate the merger agreement at any time prior to the effective time of the merger, even after our stockholders have adopted the merger agreement at the special meeting.

In addition, we and Buyer each have separate rights to terminate the merger agreement without the agreement of the other party if, among other things:

 

   

the merger has not been consummated by December 15, 2011, except that this termination right will not be available to any party whose failure to fulfill any obligation under the merger agreement has been a principal cause of or resulted in the failure of the merger to occur on or before such date;

 

   

a governmental entity of competent jurisdiction has issued a nonappealable final order, decree or ruling or taken any other nonappealable final action, in each case having the effect of permanently restraining, enjoining or otherwise prohibiting the merger, except that this termination right will not be available to any party whose failure to fulfill any obligation under the merger agreement has been a principal cause of or resulted in such order, decree, ruling or other action; or

 

   

our stockholders do not vote to adopt the merger agreement at the special meeting.

Buyer may also terminate the merger agreement if:

 

   

our board of directors effects an adverse recommendation change, except that Buyer can only exercise this termination right if it does so no later than 5:00 pm Eastern time on the fifth business day after such termination right first arises;

 

   

a tender offer or exchange offer for our outstanding common stock is commenced and our board of directors recommends that our stockholders tender their shares in such tender or exchange offer or, within ten business days after the commencement of such tender or exchange offer, our board of directors fails to recommend against acceptance of such offer, except that Buyer can only exercise this termination right if it does so no later than 5:00 pm Eastern time on the fifth business day after such termination right first arises;

 

   

we fail to publicly recommend adoption of the merger agreement by our stockholders within five business days of a written request from Buyer for us to do so if such request follows the making of an alternative acquisition proposal other than a tender or exchange offer by any person, except that Buyer can only exercise this termination right if it does so no later than 5:00 pm Eastern time on the fifth business day after such termination right first arises;

 

   

we fail to hold the special meeting within ten business days prior to December 15, 2011 and Buyer and Transitory Subsidiary have not breached in any material respect their obligations under the merger agreement in any manner that proximately contributes to our failure to hold the special meeting by such date, except that Buyer can only exercise this termination right if it does so no later than 5:00 pm Eastern time on the fifth business day after such termination right first arises;

 

   

we breach our “no solicitation” obligations under the merger agreement in any material respect; or

 

   

we breach or fail to perform any of our representations, warranties, covenants or agreements in the merger agreement and such breach or failure to perform would cause certain conditions to the obligations of Buyer and Transitory Subsidiary to consummate the closing not to be satisfied and such breach or failure to perform is not timely cured or is not capable of being cured.

 

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Additionally, we may terminate the merger agreement if:

 

   

our board of directors pursuant to and in compliance our non-solicitation obligations under the merger agreement enters into an alternative acquisition agreement for a superior proposal and prior to or simultaneously with such termination we pay to Buyer in cash a $80 million termination fee;

 

   

Buyer or Transitory Subsidiary breach or fail to perform any of their representations, warranties, covenants or agreements in the merger agreement and such breach or failure to perform would cause certain conditions to our obligation to consummate the closing not to be satisfied and such breach or failure to perform is not timely cured or is not capable of being cured; or

 

   

the marketing period has ended and all of the conditions to the obligations of Buyer and Transitory Subsidiary to consummate the merger have been satisfied (other than those conditions that by their nature are to be satisfied by actions taken at the closing) and we have notified Buyer in writing after the end of the marketing period that we are ready and willing to consummate the merger (subject to the satisfaction of all of the conditions to our obligation to consummate the merger), and Buyer and Transitory Subsidiary fail to consummate the merger within three business days following delivery of such notice.

Termination does not relieve any party of liability for fraud.

Termination Fees

Except for fees and expenses incurred with respect to the printing, filing and mailing of this proxy statement (which fees and expenses will be shared equally by the Company and Buyer), and as provided below, each of the parties will bear all fees and expenses it incurs in connection with the merger and the merger agreement.

Payable by the Company

We must pay to Buyer a termination fee of $80 million if:

 

   

our board of directors pursuant to and in compliance with our non-solicitation obligations under the merger agreement terminates the merger agreement and enters into an alternative acquisition agreement for a superior proposal;

 

   

our board of directors effects an adverse recommendation change and Buyer terminates the merger agreement pursuant to its terms;

 

   

a tender offer or exchange offer for our outstanding common stock is commenced and our board of directors recommends that our stockholders tender their shares in such tender or exchange offer or, within ten business days after the commencement of such tender or exchange offer, our board of directors fails to recommend against acceptance of such offer and Buyer terminates the merger agreement pursuant to its terms;

 

   

we fail to publicly recommend adoption of the merger agreement by our stockholders within five business days of a written request from Buyer for us to do so if such request follows the making of an alternative acquisition proposal by any person and Buyer terminates the merger agreement pursuant to its terms; or

 

   

we fail to hold the special meeting within 10 business days prior to December 15, 2011 and Buyer and Transitory Subsidiary have not breached in any material respect their obligations under the merger agreement in any manner that proximately contributes to our failure to hold the special meeting by such date and Buyer terminates the merger agreement pursuant to its terms.

We must also pay to Buyer the termination fee of $80 million if:

 

   

the merger agreement is terminated (A) by Buyer or the Company, because the merger is not consummated by December 15, 2011, (B) by Buyer or the Company, if our stockholders’ approval of

 

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the proposal to adopt the merger agreement is not obtained at the special meeting, (C) by Buyer, because we breach our “no solicitation” obligations under the merger agreement in any material respect or (D) by Buyer because we breach or fail to perform any of our representations, warranties, covenants or agreements in the merger agreement and such breach or failure to perform would cause certain conditions to the obligations of Buyer and Transitory Subsidiary to consummate the closing not to be satisfied and such breach or failure to perform is not timely cured or is not capable of being cured;

 

   

an acquisition proposal (provided that references to 20% are deemed to refer to 50% in the definition of such term) is publicly announced or otherwise communicated to holders of our common stock and not withdrawn prior to termination of the merger agreement; and

 

   

within twelve months after termination, we enter into an agreement regarding any acquisition proposal and such acquisition proposal is ultimately consummated.

Payable by Buyer

Buyer must pay to us a reverse termination fee of $175 million if we terminate the merger agreement pursuant to its terms because:

 

   

Buyer or Transitory Subsidiary breach or fail to perform any of their representations, warranties, covenants or agreements in the merger agreement and such breach or failure to perform would cause certain conditions to our obligation to consummate the closing not to be satisfied and such breach or failure to perform is not timely cured or is not capable of being cured; or

 

   

the marketing period has ended and all of the conditions to the obligations of Buyer and Transitory Subsidiary to consummate the merger have been satisfied (other than those conditions that by their nature are to be satisfied by actions taken at the closing) and we have notified Buyer in writing after the end of the marketing period that we are ready and willing to consummate the merger (subject to the satisfaction of all of the conditions to our obligation to consummate the merger), and Buyer and Transitory Subsidiary fail to consummate the merger within three business days following delivery of such notice.

Expense Reimbursement

We must pay to Buyer up to $7.5 million as reimbursement for expenses incurred in relation to the transactions contemplated by the merger agreement, if the merger agreement is terminated:

 

   

by Buyer or us because our stockholders do not vote to adopt the merger agreement at the special meeting;

 

   

by Buyer because we breach our “no solicitation” obligations under the merger agreement in any material respect; or

 

   

by Buyer because we breach or fail to perform any of our representations, warranties, covenants or agreements in the merger agreement and such breach or failure to perform would cause certain conditions to the obligations of Buyer and Transitory Subsidiary to consummate the closing not to be satisfied and such breach or failure to perform is not timely cured or is not capable of being cured.

If we owe the $80 million termination fee to Buyer, we are entitled credit against such termination fee for any expense reimbursement we have paid to Buyer.

Limitation on Remedies and Liability Cap

The parties are entitled to an injunction or injunctions to prevent breaches of the merger agreement and to enforce specifically the terms and provisions thereof, this being in addition to any other remedy to which they are entitled. However, we can enforce specifically the obligations of Buyer and Transitory Subsidiary to cause the

 

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equity financing to be funded and to consummate the closing of the merger only if (1) the marketing period has ended and all conditions to the obligations of Buyer and Transitory Subsidiary to effect the merger have been satisfied (other than those conditions that by their terms are to be satisfied by actions taken at the closing) at the time the merger agreement contemplated the closing to occur, (2) the debt financing has been funded or the commitment parties have confirmed in writing that the debt financing will be funded at the closing if the equity financing is funded at the closing and (3) we have irrevocably confirmed that if specific performance is granted and the equity financing and debt financing are funded, then we would take such actions required of us by the merger agreement to cause the closing of the merger to occur.

Buyer’s liability relating to the merger agreement is limited to the $175 million reverse termination fee, any indemnification or reimbursement owed to us in connection with cooperation we provide for Buyer’s efforts to arrange the financing for the merger, and interest (at the prime rate) and reimbursement of reasonable costs and expenses we may incur in enforcing our right to payment of such reverse termination fee. Our liability relating to the merger agreement is limited to the $80 million termination fee, reimbursement for expenses of up to $7.5 million incurred in relation to the transactions contemplated by the merger agreement (which is offset against the payment of any future termination fee), and interest (at the prime rate) and reimbursement of reasonable costs and expenses Buyer may incur in enforcing its right to payment of such termination fee and expense reimbursement. However, such liability limitation will in no way limit the rights of any party to an injunction to prevent breaches of the merger agreement and to enforce specifically the terms of the merger agreement.

Further Actions and Agreements

Company Stockholders’ Meeting

We have agreed to call and hold a stockholders’ meeting as promptly as practicable after the execution of the merger agreement for the purpose of voting upon the adoption of the merger agreement. Subject to the ability of our board to change its recommendation (as described above), we have agreed to take all reasonable and lawful action to solicit from our stockholders proxies, and to take all other action necessary or advisable to secure the vote of our stockholders, in favor of the adoption of the merger agreement.

Access to Information

We have agreed to afford Buyer and its representatives with reasonable access to our properties, books, personnel, records and other information as Buyer may reasonably request prior to the closing of the merger.

Directors’ and Officers’ Indemnification and Insurance

For a period of six years following the effective time of the merger, the surviving corporation shall indemnify and hold harmless directors and officers of the Company or any of our subsidiaries, against all claims, losses, liabilities, damages, judgments, fines and reasonable fees, costs and expenses, including attorneys’ fees and disbursements, incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to the fact that such officer or director is or was an officer, director, employee or agent of the Company or any of our subsidiaries, or, while a director or officer of the Company or any of our subsidiaries, is or was serving at the request of the Company or any of its subsidiaries as director, officer, employee or agent of another person, whether asserted or claimed prior to, at or after the effective time of the merger agreement, to the fullest extent permitted by law. Each such person will also be entitled to advancement of expenses incurred in defending such claims, subject to such person’s execution of an undertaking to repay any expenses so advanced if a court of competent jurisdiction determines that such person did not act in good faith or in a manner that such person believed to be in the best interest of the surviving corporation. The surviving corporation has an obligation to maintain our directors’ and officers’ liability insurance after the effective time of the merger for a period of six years; provided that Buyer shall not be required to pay annual premiums for such insurance in excess of 300% of the current annual premiums paid by us

 

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for such insurance. We may purchase a six-year prepaid “tail” policy on terms and conditions providing substantially equivalent benefits as the policies of directors’ and officers’ liability insurance we currently maintain with respect to matters arising at or before the effective time of the merger; provided that the annual premium therefor would not be in excess of 300% of the last annual premium paid prior to the merger.

Further Action, Consents and Filings

The merger agreement obligates Buyer and us to use reasonable best efforts to (i) take, or cause to be taken, all action and do, or cause to be done, all things necessary, proper or advisable to consummate and make effective the merger, (ii) obtain from governmental entities any consents, licenses, permits, waivers, approvals, authorizations or orders required to be obtained or made by Buyer or us or any respective subsidiaries in connection with the consummation of the merger, (iii) make all necessary filings, and thereafter make any other submissions, with respect to the merger agreement, the merger and the other transactions contemplated by the merger agreement that are required under securities, antitrust or other applicable laws and (iv) execute and deliver any additional instruments necessary to consummate the merger.

Public Announcements

We and Buyer have agreed to use reasonable best efforts to consult with the other before issuing any press release or otherwise making any public statements with respect to the merger agreement or the merger.

Employee Benefits

Buyer has agreed to use commercially reasonable efforts to continue to provide our employees with full credit for prior service with us for purposes of eligibility, vesting and other determinations under Buyer benefit plans in which our employees may become eligible to participate (but not for purposes of benefit accrual under any defined benefit pension plan), except where such credit would result in a duplication of benefits or was not recognized prior to the merger under comparable benefit plans. In addition, Buyer has generally agreed to use commercially reasonable efforts to waive pre-existing condition limits to the extent such limits are waived under our comparable benefit plans, and to recognize deductible and out-of-pocket expenses paid by our employees during the calendar year in which the merger closes to the same extent such payments were recognized under any comparable plan of the Company or any of our subsidiaries.

Amendment and Waiver

Amendment

The merger agreement may be amended by the parties to the merger agreement by action taken by or on behalf of our or their respective boards of directors at any time prior to the effective time. However, after adoption by our stockholders of the merger agreement, no amendment will be made which under applicable law would require further approval by our stockholders unless so approved by our stockholders.

Waiver

At any time prior to the effective time, any party to the merger agreement may (a) extend the time for the performance of any obligation or other act of any other party to the merger agreement, (b) waive any inaccuracy in the representations and warranties of the other parties contained in the merger agreement or in any document delivered pursuant to the merger agreement and (c) waive compliance by the other parties with any agreement or condition contained in the merger agreement. Any such extension or waiver shall be valid if set forth in an instrument in writing signed by the party or parties to be bound thereby.

 

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COMPANY STOCKHOLDER AGREEMENT

As a condition to the Company entering into the merger agreement, the LGP funds entered into a Company Stockholder Agreement with the Company, dated as of June 28, 2011, which we refer to as the stockholder agreement.

Pursuant to the stockholder agreement, the LGP funds agreed vote all shares of Company common stock held by them in favor of the adoption of the merger agreement and in favor of any actions necessary to consummate the merger and any of the other transactions contemplated by the merger agreement. The LGP funds agreed that if they failed to comply with their obligations to vote in favor of the adoption of the merger agreement, such failure would result, without any further action by the LGP funds and effective as of the date of any such failure, in the appointment of the Company (or any nominee of the Company) as such LGP fund’s proxy to vote in favor of the adoption of the merger agreement. The LGP funds also waived any rights of appraisal in connection with the merger.

The stockholder agreement encompasses all shares of Company common stock held by the LGP funds at the time the stockholder agreement was entered into, as well as any shares of Company common stock subsequently acquired by the LGP funds. As of July 29, 2011, the record date for the special meeting, the LGP funds collectively held approximately 3.8% of the outstanding shares of Company common stock. The LGP funds also held options to acquire 3 million shares of Company common stock, which the LGP funds did not have the right to vote prior to exercise. See “Security Ownership of Certain Beneficial Owners and Management.” In connection with the execution and delivery of the stockholder agreement, the Company did not pay the LGP funds any consideration in addition to the consideration they may receive pursuant to the merger agreement in respect of their shares of Company common stock.

In addition, under the stockholder agreement, the LGP funds agreed not to, directly or indirectly:

 

   

offer for sale, sell (including short sales), transfer, tender, pledge, encumber, assign or otherwise dispose of (including by gift), or enter into any contract, option, derivative, hedging or other arrangement or understanding (including any profit-sharing arrangement) with respect to, or consent to the offer for sale, sale, transfer, tender, pledge, encumbrance, assignment or other disposition of, any of such shares of Company common stock, or options or any interest therein, except to any affiliate who agrees in writing to be bound by the terms of the stockholder agreement, provided, that the LGP funds shall have the right to exercise options they hold for Company common stock;

 

   

grant any proxies or powers of attorney, deposit any such Company common stock into a voting trust or enter into any other voting arrangement with respect to such Company common stock;

 

   

permit to exist any lien of any nature whatsoever with respect to such Company common stock or the options they hold (other than any liens created by or arising under the stockholder agreement or existing by operation of law); or

 

   

commit or agree to take any of the foregoing actions.

Except for certain miscellaneous provisions, the provisions of the stockholder agreement will automatically terminate upon the earlier to occur of:

 

   

the effective time of the merger; or

 

   

the date of termination of the merger agreement in accordance with its terms.

No termination of the stockholder agreement, however, will relieve any party to the stockholder agreement of any liability for damages resulting from any breach of the stockholder agreement.

 

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MARKET PRICE OF COMPANY COMMON STOCK

The Company common stock is listed for trading on the NYSE under the symbol “BJ”. The table below shows, for the periods indicated, the high and low prices for the Company common stock, as reported by Bloomberg L.P.

 

     Fiscal Quarters  
     First      Second      Third      Fourth  

Fiscal Year Ended January 30, 2010

           

High

   $ 34.81       $ 39.59       $ 37.97       $ 37.33   

Low

     27.26         31.06         29.73         31.85   

Fiscal Year Ended January 29, 2011

           

High

     39.85         47.51         46.43         48.88   

Low

     33.59         36.19         40.31         40.75   

Fiscal Year Ending January 28, 2012 (through August 2, 2011)

           

High

     52.38         52.46         

Low

     42.88         44.97         

The closing price of Company common stock on the NYSE on June 28, 2011, the last trading day prior to the public announcement of the merger agreement, was $48.08 per share of Company common stock. On August 2, 2011, the closing price for Company common stock on the NYSE was $50.13 per share of Company common stock. You are encouraged to obtain current market quotations for Company common stock in connection with voting your shares of Company common stock.

The Company has never declared or paid any cash dividends on shares of Company common stock. In accordance with the merger agreement, the Company cannot pay any cash dividends prior to the closing of the merger or termination of the merger agreement without the prior consent of Buyer.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information regarding the beneficial ownership of our common stock as of July 13, 2011 (unless otherwise indicated) by (i) each person known to the Company to beneficially own more than 5% of the outstanding shares of our common stock, (ii) each director of the Company, (iii) each executive officer of the Company named in the Summary Compensation Table set forth in the Definitive Proxy Statement for our 2011 Annual Meeting filed with the SEC on April 6, 2011, and (iv) all of the Company’s current directors and executive officers as a group. The information provided in connection with this table has been obtained from our records and a review of statements filed with the SEC. Unless otherwise indicated, the address of each person listed in the table is c/o BJ’s Wholesale Club, Inc., 25 Research Drive, Westborough, Massachusetts 01581. There were 54,945,969 shares of Company common stock outstanding as of July 13, 2011.

 

Name and Address of Beneficial Owner

   Amount and
Nature of
Beneficial
Ownership(1)
    Percent of Class(1)  

LGP Management, Inc.
11111 Santa Monica Boulevard, Suite 2000
Los Angeles, California 90025

     5,100,000 (2)      9.3   

S.A.C. Capital Advisors, L.P.
72 Cummings Point Road
Stamford, CT 06902

     3,359,974 (3)      6.1   

BlackRock, Inc.
40 East 52nd Street
New York, New York 10022

     3,306,218 (4)      6.0   

Credit Suisse AG
Uetlibergstrasse 231
P.O. Box 900, CH 8070
Zurich, Switzerland

     3,145,148 (5)      5.7   

LSV Asset Management
1 N. Wacker Drive, Suite 4000
Chicago, Illinois 60606

     2,840,030 (6)      5.2   

Citadel Advisors LLC
131 S. Dearborn St., 32nd Floor
Chicago, Illinois 60603

     2,746,408 (7)      5.0   

Christine M. Cournoyer

     17,284        *   

Paul Danos

     34,100        *   

Edmond J. English

     24,100        *   

Helen Frame Peters

     34,100        *   

Leonard A. Schlesinger

     15,634        *   

Michael J. Sheehan

     21,900        *   

Thomas J. Shields

     40,000        *   

Herbert J Zarkin

     22,500        *   

Laura J. Sen

     334,188        *   

Frank D. Forward

     12,570        *   

Thomas F. Gallagher

     —          *   

Christina M. Neppl

     120,063        *   

Lon F. Povich

     108,286        *   

All directors and executive officers as a group (17 persons)

     1,015,706        1.8   

 

* Less than 1%
(1)

Includes, for the persons indicated, the following shares of common stock that may be acquired upon exercise of outstanding stock options which were exercisable on July 13, 2011, or within 60 days

 

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  thereafter: Ms. Cournoyer, 6,667 shares; Dr. Danos, 20,000 shares; Mr. English, 10,000 shares; Dr. Peters, 20,000 shares; Mr. Schlesinger, 6,667 shares; Mr. Sheehan, 10,000 shares; Mr. Shields, 25,000 shares; Ms. Sen, 100,000 shares; Ms. Neppl, 55,500 shares; Mr. Povich, 50,000 shares; all current directors and executive officers as a group, 345,234 shares.
(2) Information is as of June 28, 2011, and is based on a Schedule 13D filed with the SEC on June 30, 2011, by Green Equity Investors V, L.P., Green Equity Investors Side V, L.P., GEI Capital V, LLC, Green V Holdings, LLC, Leonard Green & Partners, L.P., and LGP Management, Inc. (collectively, the “Green Reporting Persons”) pursuant to their joint filing agreement dated June 30, 2010. The Green Reporting Persons have shared voting and shared dispositive power over all of these reported shares. 3,000,000 of these shares are shares underlying call options that expire on June 15, 2012.
(3) Information is as of February 17, 2011, and is based on a Schedule 13G (Amendment No. 1) filed with the SEC on February 28, 2011, by S.A.C. Capital Advisors, L.P., S.A.C. Capital Advisors, Inc., S.A.C Capital Associates, LLC, Sigma Capital Management, LLC and Steven A. Cohen pursuant to their joint filing agreement dated February 28, 2011. S.A.C Capital Advisors LP, S.A.C Capital Advisors Inc. and Mr. Cohen beneficially own 2,784,974 shares subject to shared voting and shared dispositive power. Sigma Capital Management, LLC and Mr. Cohen own 575,000 shares subject to shared voting and shared dispositive power.
(4) Information is as of December 31, 2010, and is based on a Schedule 13G (Amendment No. 1) filed with the SEC on February 2, 2011, by BlackRock, Inc. (“BlackRock”). BlackRock reported that it has sole voting and sole dispositive power over all of these reported shares. These shares are held by various investment advisor subsidiaries of BlackRock.
(5) Information is as of December 31, 2010, and is based on a Schedule 13G filed with the SEC on February 11, 2011, by Credit Suisse AG (“Credit Suisse”). Credit Suisse reported that it owns all shares subject to shared voting and shared dispositive power.
(6) Information is as of February 10, 2010 and is based on a Schedule 13G filed with the SEC on February 11, 2010. LSV Asset Management has reported that it has sole voting and sole dispositive power over all such shares.
(7) Information is as of February 16, 2011, and is based on a Schedule 13G filed with the SEC on February 24, 2011, by Citadel Advisors LLC, Citadel Holdings II LP, Citadel Investment Group II, LLC and Mr. Kenneth Griffin (collectively the “Citadel”) pursuant to their joint filing agreement dated February 24, 2011. Citadel has shared voting and shared dispositive power over all of these reported shares.

 

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APPRAISAL RIGHTS

Holders of shares of Company common stock who do not vote for the adoption of the merger agreement at the special meeting and otherwise comply with the applicable statutory procedures of Section 262 of the DGCL, summarized herein, will be entitled to appraisal rights in connection with the merger under Section 262 of the DGCL. In order to exercise and perfect appraisal rights, a record holder of our common stock must follow the steps prescribed in Section 262 of the DGCL and summarized below properly and in a timely manner.

Section 262 of the DGCL is reprinted in its entirety as Annex C to this proxy statement. Set forth below is a summary description of Section 262 of the DGCL. The following summary describes the material aspects of Section 262 of the DGCL, and the law relating to appraisal rights and is qualified in its entirety by reference to Annex C. All references in Section 262 and this summary to “stockholder” are to the record holder of the shares of our common stock immediately prior to the effective time of the merger as to which appraisal rights are asserted. Failure to comply strictly with the procedures set forth in Section 262 of the DGCL will result in the loss of appraisal rights.

ANY COMPANY STOCKHOLDER WHO WISHES TO EXERCISE APPRAISAL RIGHTS OR WHO WISHES TO PRESERVE HIS, HER OR ITS RIGHT TO DO SO SHOULD REVIEW ANNEX C CAREFULLY AND SHOULD CONSULT HIS, HER OR ITS LEGAL ADVISOR, SINCE FAILURE TO TIMELY COMPLY WITH THE PROCEDURES SET FORTH THEREIN WILL RESULT IN THE LOSS OF SUCH RIGHTS.

Under the DGCL, holders of our common stock who do not vote in favor of the adoption of the merger agreement and otherwise follow the procedures set forth in Section 262 of the DGCL will be entitled to have their shares appraised by the Delaware Court of Chancery and to receive payment in cash of the “fair value” of those shares, exclusive of any element of value arising from the accomplishment or expectation of the merger as determined by the Delaware Court of Chancery, together with interest, if any, to be paid upon the amount determined to be the fair value.

Under Section 262 of the DGCL, where a merger agreement relating to a proposed merger is to be submitted for adoption at a meeting of stockholders, as in the case of the special meeting, the corporation, not less than 20 days prior to such meeting, must notify each of its stockholders who was a stockholder on the record date for notice of such meeting with respect to shares for which appraisal rights are available, that appraisal rights are so available, and must include in each such notice a copy of Section 262 of the DGCL. This proxy statement constitutes such notice to the holders of our common stock and Section 262 of the DGCL is attached to this proxy statement as Annex C. Any stockholder who wishes to exercise such appraisal rights or who wishes to preserve his right to do so should review the following discussion and Annex C carefully and should consult his, her or its legal advisor, because failure to timely and properly comply with the procedures specified will result in the loss of appraisal rights under the DGCL.

If you wish to exercise appraisal rights you must not vote for the adoption of the merger agreement and must deliver to the Company, before the vote on the proposal to adopt the merger agreement, a written demand for appraisal of such stockholder’s shares of our common stock. If you sign and return a proxy card that does not contain voting instructions or submit a proxy by telephone, through the Internet or by fax that does not contain voting instructions, you will effectively waive your appraisal rights because such shares represented by the proxy will, unless the proxy is revoked, be voted for the adoption of the merger agreement. Therefore, a stockholder who submits a proxy and who wishes to exercise appraisal rights must submit a proxy containing instructions to vote against the adoption of the merger agreement or abstain from voting on the adoption of the merger agreement. Neither voting against the adoption of the merger agreement, nor abstaining from voting or failing to vote on the proposal to adopt the merger agreement, will in and of itself constitute a written demand for appraisal satisfying the requirements of Section 262.

 

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A demand for appraisal will be sufficient if it reasonably informs the Company of the identity of the stockholder and that such stockholder intends thereby to demand appraisal of such stockholder’s shares of common stock. This written demand for appraisal must be separate from any proxy or vote abstaining from or voting against the adoption of the merger agreement. If you wish to exercise appraisal rights you must be the record holder of such shares of our common stock on the date the written demand for appraisal is made and you must continue to hold such shares of record through the effective time of the merger. Accordingly, a stockholder who is the record holder of shares of common stock on the date the written demand for appraisal is made, but who thereafter transfers such shares prior to the effective time of the merger, will lose any right to appraisal in respect of such shares.

Only a holder of record of shares of our common stock on July 29, 2011, the record date for the special meeting, is entitled to assert appraisal rights for such shares of our common stock registered in that holder’s name. A demand for appraisal should be executed by or on behalf of the holder of record, fully and correctly, as the holder’s name appears on the holder’s stock certificates, and must state that such person intends thereby to demand appraisal of his, her or its shares in connection with the merger. If the shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, execution of the demand for appraisal should be made in that capacity, and if the shares are owned of record by more than one person, as in a joint tenancy or tenancy in common, the demand should be executed by or on behalf of all joint owners. An authorized agent, including one for two or more joint owners, may execute the demand for appraisal on behalf of a holder of record; however, the agent must identify the record owner or owners and expressly disclose the fact that, in executing the demand, he or she is acting as agent for such owner or owners.

A record holder such as a broker who holds shares as nominee for several beneficial owners may exercise appraisal rights with respect to the shares of our common stock held for one or more beneficial owners while not exercising such rights with respect to the shares held for other beneficial owners; in such case, the written demand should set forth the number of shares as to which appraisal is sought. Where the number of shares of our common stock is not expressly stated, the demand will be presumed to cover all shares held in the name of the record owner. If you hold your shares in brokerage accounts or other nominee forms and wish to exercise your appraisal rights, you are urged to consult with your broker to determine the appropriate procedures for the making of a demand for appraisal by such nominee.

All written demands for appraisal of shares must be mailed or delivered to: BJ’s Wholesale Club, Inc., 25 Research Drive, Westborough, Massachusetts 01581, Attention: Lon F. Povich, Secretary.

Within ten days after the effective time of the merger, we will notify each stockholder who properly asserted appraisal rights under Section 262 and has not voted for the adoption of the merger agreement of the effective time of the merger. Within 120 days after the effective time of the merger, but not thereafter, we or any stockholder who has complied with Section 262 of the DGCL and is entitled to appraisal rights under Section 262 may commence an appraisal proceeding by filing a petition in the Delaware Court of Chancery demanding a determination of the value of the shares held by all such stockholder. If no such petition is filed, appraisal rights will be lost for all stockholders who had previously demanded appraisal of their shares. We are not under any obligation, and we have no present intention, to file a petition with respect to appraisal of the value of the shares. Accordingly, if you wish to exercise your appraisal rights, you should regard it as your obligation to take all steps necessary to perfect your appraisal rights in the manner prescribed in Section 262 of the DGCL.

Within 120 days after the effective time of the merger, any stockholder who has complied with the provisions of Section 262 of the DGCL will be entitled, upon written request, to receive from us a statement setting forth the aggregate number of shares of our common stock not voted in favor of adoption of the merger agreement and with respect to which demands for appraisal were received by us, and the number of holders of such shares. Such statement must be mailed within ten days after the written request therefor has been received by us or within ten days after expiration of the period for delivery of appraisal demands, whichever is later. A person who is the beneficial owner of shares of such stock held either in a voting trust or by a nominee on behalf

 

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of such person may, in such person’s own name, file an appraisal petition or request from us the statement described in this paragraph.

If a petition for an appraisal is timely filed and a copy thereof served upon us, we will then be obligated, within 20 days after such service, to file with the Delaware Register in Chancery a duly verified list containing the names and addresses of the stockholders who have demanded appraisal of their shares and with whom agreements as to the value of their shares have not been reached. After notice to the stockholders as required by the Delaware Court of Chancery, the Delaware Court of Chancery is empowered to conduct a hearing on such petition to determine those stockholders who have complied with Section 262 and who have become entitled to appraisal rights thereunder. The Delaware Court of Chancery may require the stockholders who demanded appraisal of their shares of common stock to submit their stock certificates to the Register in Chancery for notation thereon of the pendency of the appraisal proceeding; and if any stockholder fails to comply with such direction, the Delaware Court may dismiss the proceedings as to such stockholder.

After the Delaware Court of Chancery determines which stockholders are entitled to appraisal, the appraisal proceeding shall be conducted in accordance with the rules of the Court, including any rules specifically governing appraisal proceedings. Through such proceeding the Delaware Court of Chancery shall determine the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger, together with interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Delaware Court of Chancery shall take into account all relevant factors. Unless the Delaware Court of Chancery in its discretion determines otherwise for good cause shown, interest from the effective date of the merger through the date of payment of the judgment shall be compounded quarterly and shall accrue at 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during the period between the effective date of the merger and the date of payment of the judgment.

In determining fair value, the Delaware Court of Chancery will take into account all relevant factors. In Weinberger v. UOP, Inc., the Supreme Court of Delaware discussed the factors that could be considered in determining fair value in an appraisal proceeding, stating that “proof of value by any techniques or methods that are generally considered acceptable in the financial community and otherwise admissible in court” should be considered, and that “fair price obviously requires consideration of all relevant factors involving the value of a company.” The Delaware Supreme Court stated that, in making this determination of fair value, the court must consider market value, asset value, dividends, earnings prospects, the nature of the enterprise and any other facts that could be ascertained as of the date of the merger that throw any light on future prospects of the merger corporation. Section 262 provides that fair value is to be “exclusive of any element of value arising from the accomplishment or expectation of the merger.” In Cede & Co. v. Technicolor, Inc., the Delaware Supreme Court stated that such exclusion is a “narrow exclusion [that] does not encompass known elements of value,” but which rather applies only to the speculative elements of value arising from such accomplishment or expectation. In Weinberger, the Supreme Court of Delaware also stated that “elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered.” If you are considering seeking appraisal, you should be aware that the fair value of your shares as determined under Section 262 of the DGCL could be more than, the same as or less than the consideration you are entitled to receive pursuant to the merger agreement if you did not seek appraisal of your shares and that investment banking opinions as to the fairness from a financial point of view of the consideration payable in a merger are not necessarily opinions as to fair value under Section 262 of the DGCL.

The costs of the action (which do not include attorneys’ or expert fees or expenses) may be determined by the Delaware Court of Chancery and taxed upon the parties as the Court deems equitable. Upon application of a stockholder, the Delaware Court of Chancery may order that all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including without limitation reasonable attorneys’ fees and the fees and expenses of experts utilized in the appraisal proceeding, be charged pro rata against the value of all of the shares entitled to appraisal. In the absence of such determination or assessment, each party bears its own expenses.

 

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