JAS Jo-Ann Stores, Inc.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

 

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE

SECURITIES EXCHANGE ACT OF 1934

(Rule 14a-101)

 

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Filed by a Party other than the Registrant  o

 

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o   Preliminary Proxy Statement

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

þ   Definitive Proxy Statement

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o   Soliciting Material Pursuant to §240.14a-12

JO-ANN STORES, INC.

(Name of Registrant as Specified In Its Charter)

 

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

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February 17, 2011

 

Dear Shareholder:

 

We cordially invite you to attend a special meeting of the shareholders of Jo-Ann Stores, Inc., an Ohio corporation, which we refer to as the Company, to be held on March 18, 2011 at 9:00 a.m. Eastern time, at the Conference Center at our corporate offices located at 5373 Darrow Rd., Hudson, Ohio 44236.

 

On December 23, 2010, the Company entered into an agreement and plan of merger, which we refer to as the merger agreement, with Needle Holdings Inc., a Delaware corporation, which we refer to as Parent, and Needle Merger Sub Corp., an Ohio corporation and a wholly-owned subsidiary of Parent, which we refer to as Merger Sub, providing for the merger of Merger Sub with and into the Company, with the Company surviving the merger as a wholly-owned subsidiary of Parent. Parent and Merger Sub are beneficially owned by affiliates of Leonard Green & Partners, L.P. At the special meeting, you will be asked to consider and vote upon a proposal to adopt the merger agreement.

 

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 automatically cancelled and converted into and will thereafter represent solely the right to receive $61.00 in cash, without interest, which we refer to as the per share merger consideration, less any applicable withholding taxes. The following shares of Company common stock will not be converted into the right to receive the per share merger consideration: (i) shares owned by Parent, Merger Sub or any other direct or indirect wholly-owned subsidiary of Parent (including, if any, shares contributed to Parent by the rollover investors as described below under “ The Merger —  Interests of Certain Persons in the Merger —  Arrangements with Rollover Investors ”), (ii) shares owned by the Company as treasury stock or by any direct or indirect wholly-owned subsidiary of the Company and (iii) shares owned by shareholders who have perfected and not otherwise waived, withdrawn or lost their rights as dissenting shareholders, if any, to demand to be paid the “fair cash value” of their shares of Company common stock under Ohio law. The merger consideration of $61.00 per share of Company common stock represents a premium of approximately 32% to the average closing price of Company common stock during the 30-day period ended on December 22, 2010 (the last trading day prior to the public announcement of the execution of the merger agreement) and a premium of approximately 34% to the closing price of Company common stock on December 22, 2010.

 

The board of directors of the Company, which we refer to as the board of directors, acting on the unanimous recommendation of a strategic transactions committee composed of independent directors, by a unanimous vote of the non-employee directors, (i) determined that the merger is in the best interests of the Company and our shareholders, (ii) approved, including for purposes of the Ohio Revised Code, the execution, delivery and performance by the Company of the merger agreement and the consummation of the transactions contemplated by the merger agreement, including the merger and (iii) resolved that the merger agreement be submitted for consideration by the shareholders of the Company at a special meeting of shareholders and recommended that our shareholders vote 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. Mr. Darrell Webb, the Company’s Chairman and Chief Executive Officer, abstained from the vote on the merger. The board of directors recommends that you vote “FOR” approval of the proposal to adopt the merger agreement 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.

 

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” the proposal to adopt the merger agreement and “FOR” 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 at our corporate offices before the start of the special meeting, submitting a later-dated vote 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.

 

If you do not vote to adopt the merger agreement, you will be entitled to seek relief as a dissenting shareholder and to seek a determination of the “fair cash value” of your dissenting shares of Company common stock and receive that “fair cash value” in lieu of the merger consideration if the merger is consummated. To do so, however, you must properly comply with certain requirements under Ohio law described in the section of the accompanying proxy statement entitled “RIGHTS OF DISSENTING SHAREHOLDERS,” which summarizes the provisions of Section 1701.85 of the Ohio Revised Code, a copy of which is attached as Annex C thereto.

 

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 Alliance Advisors, the Company’s proxy solicitor, toll-free at (866) 329-8440.

 

Thank you in advance for your cooperation and continued support.

 

Sincerely,

 

Darrell Webb
Chairman and Chief Executive Officer

 

This proxy statement is dated February 17, 2011, and is first being mailed to our shareholders on February 17, 2011.

 

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.

 

 

 

JO-ANN STORES, INC.

5555 Darrow Road

Hudson, Ohio 44236

 

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

TO BE HELD ON MARCH 18, 2011

 

 

 

 

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,

David B. Goldston
Senior Vice President
General Counsel and Secretary

 

Dated: February 17, 2011

Hudson, OH

 

TABLE OF CONTENTS

 

We are furnishing this proxy statement to our shareholders 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 February 17, 2011 to our shareholders who owned shares of Company common stock as of the close of business on February 16, 2011.

 

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 101.

 

Parties to the Merger (Page 27)

 

In this proxy statement, we refer to the agreement and plan of merger, dated December 23, 2010, as it may be amended from time to time, among Parent, Merger Sub and the Company, as the merger agreement, and the merger of Merger Sub with and into the Company, as the merger. The parties to the merger agreement and the merger are:

 

Jo-Ann Stores, Inc., which we refer to as the Company, we or us, is an Ohio corporation headquartered in Hudson, Ohio which is the nation’s largest specialty retailer of fabrics and one of the largest specialty retailers of crafts.

 

Needle Holdings Inc., which we refer to as Parent, is a Delaware corporation that was formed by affiliates of Leonard Green & Partners, L.P., which we refer to as Leonard Green, 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 with approximately $9 billion in equity commitments under management. Upon completion of the merger, the Company will be a direct wholly-owned subsidiary of Parent.

 

Needle Merger Sub Corp., which we refer to as Merger Sub, is an Ohio corporation that was formed by Parent 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, Merger Sub 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 22)

 

Time, Place and Purpose of the Special Meeting (Page 22)

 

The special meeting of the shareholders of the Company, which we refer to as the special meeting, will be held on March 18, 2011, starting at 9:00 a.m. Eastern time, at the Conference Center at our corporate offices located at 5373 Darrow Rd., Hudson, Ohio 44236.

 

At the special meeting, holders, which we refer to as shareholders, of common stock of the Company, without par value per share, which we refer to as Company common stock, will be asked to approve the proposal to adopt the merger agreement 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.

 

Record Date and Quorum (Page 22)

 

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 February 16, 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 26,339,999 shares of Company common stock outstanding and entitled to vote at the special meeting. A quorum is necessary to transact business 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.

 

Vote Required (Page 22)

 

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.

 

Approval of the proposal to adjourn the special meeting, if necessary or appropriate, for the purpose of soliciting additional proxies requires the affirmative vote of holders of a majority of the shares of Company common stock present in person or represented by proxy and entitled to vote on the merger at the special meeting.

 

As of the record date, the directors and executive officers of the Company beneficially owned and were entitled to vote, in the aggregate, 1,233,099 shares of Company common stock (including restricted shares of Company common stock and shares of Company common stock acquired under our Jo-Ann Stores, Inc. Associate Stock Ownership Plan or held in our 401(k) plan, but not including any shares of Company common stock deliverable upon exercise or conversion of any options to purchase shares of Company common stock or that may be earned as performance shares, restricted stock units, stock equivalent units or deferred stock units), representing 4.68% 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 and “FOR” the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

Proxies and Revocation (Page 25)

 

Any shareholder 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, 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 an effect on approval of the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

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 or the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies, which will have the same effect as a vote “AGAINST” the proposal to adopt the merger agreement and “AGAINST” the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

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 voting again at a later date 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 Merger Sub 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 outstanding share of Company common stock (other than treasury shares owned by the Company, shares owned by Parent, Merger Sub or any other direct or indirect wholly-owned subsidiary of Parent (including, if any, shares contributed to Parent by the rollover investors as described below under “The Merger — Interests of Certain Persons in the Merger — Arrangements with Rollover Investors” ), shares owned by any of the Company’s direct or indirect wholly-owned subsidiaries and shares owned by shareholders who have perfected and not otherwise waived, withdrawn or lost their rights as dissenting shareholders, if any, to demand to be paid the “fair cash value” of their shares of Company common stock under Section 1701.85 of the Ohio Revised Code, which we refer to as the dissenting shares) (we sometimes refer to the shares described in the parentheses in the foregoing sentence, collectively, as the excluded shares) will be automatically cancelled and converted into and will thereafter represent solely the right to receive $61.00 in cash, without interest, which amount we refer to as the per share merger consideration or, in the aggregate, the merger consideration, less any applicable withholding taxes.

 

Reasons for the Merger; Recommendation of the Board of Directors (Page 38)

 

After careful consideration of various factors described in the section entitled “The Merger — Reasons for the Merger; Recommendation of the Board of Directors,” the board of directors of the Company, which we refer to as the board of directors, acting on the unanimous recommendation of a strategic transactions committee of the board of directors composed entirely of independent directors, which we refer to as the special committee, by a unanimous vote of the non-employee directors, with Darrell Webb, the Company’s Chairman and Chief Executive Officer, having abstained from the vote on the merger, (i) determined that the merger is in the best interests of the Company and our shareholders, (ii) approved, including for purposes of the Ohio Revised Code, the execution, delivery and performance by the Company of the merger agreement and the consummation of the transactions contemplated by the merger agreement, including the merger, and (iii) resolved that the merger agreement be submitted for consideration by the shareholders of the Company at a special meeting of shareholders and recommended that our shareholders 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 have interests in the merger that may be different from, or in addition to, yours. The special 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 shareholders of the Company. See the section entitled “The Merger — Interests of Certain Persons in the Merger” beginning on page 58.

 

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

 

Opinion of Centerview Partners LLC (Page 43)

 

In connection with the merger, Centerview Partners LLC, which we refer to as Centerview, financial advisor to the special committee and the board of directors, delivered to the board of directors an oral opinion, which was confirmed by delivery of a written opinion dated as of December 22, 2010, that, as of the date of the opinion, and based upon and subject to the various assumptions and limitations set forth in the written opinion, the $61.00 per share merger consideration to be paid in cash to the holders of shares of Company common stock (other than Parent, Merger Sub and their respective affiliates and any holder of shares of

Company common stock who is entitled to demand and properly demands appraisal of such shares) pursuant to the merger agreement was fair, from a financial point of view, to such holders. The full text of the written opinion of Centerview, dated as of December 22, 2010, which describes, among other things, the assumptions made, procedures followed, matters considered and limitations on the review undertaken by Centerview in connection with its opinion is attached as Annex B to this proxy statement and is incorporated by reference herein in its entirety. Centerview provided its opinion for the information and assistance of the special committee and the board of directors in connection with its consideration of the merger and only addresses the fairness of the per share merger consideration from a financial point of view. Centerview’s opinion does not address any other aspect of the merger and does not constitute a recommendation as to how any shareholder of the Company should vote with respect to the merger or any other matter. Centerview was not asked to, and did not, recommend the specific consideration provided for in the merger agreement, which consideration was determined through negotiations between the special committee and Parent. The summary of the written opinion of Centerview set forth below under “ The Merger — Opinion of Centerview Partners LLC” is qualified in its entirety by reference to the full text of such opinion.

 

We encourage you to read the opinion of Centerview described above carefully in its entirety for a description of the assumptions made, procedures followed, matters considered and limitations on the review undertaken by Centerview in connection with such opinion.

 

Financing of the Merger (Page 50)

 

Parent has obtained the equity commitment letter and the debt commitment letters 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. Although obtaining the proceeds of any financing, including any financing under the financing letters, is not a condition to the completion of the merger, the failure of Parent and Merger Sub to obtain any portion of the committed financing (or any alternative financing) is likely to result in the failure of the merger to be consummated. In that case, Parent may be obligated to pay a termination fee to the Company, which we refer to as the Parent termination fee, as described under “The Merger Agreement — Termination Fees and Reimbursement of Expenses” beginning on page 90. Parent’s obligation to pay the Parent termination fee under certain circumstances is guaranteed pursuant to the limited guaranty (as described further below).

 

Equity Financing (Page 50)

 

Parent has entered into a letter agreement, dated December 23, 2010, which we refer to as the equity commitment letter, with Green Equity Investors V, L.P. and Green Equity Investors Side V, L.P., which we refer to as the funds, 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 Parent, at or prior to the closing of the merger (which we sometimes refer to as the closing), for an amount equal to $449.3 million in the aggregate, which we refer to collectively as the equity financing. Each fund may assign a portion of its equity commitment to other investors with the consent of the Company. 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 letter only by the amount actually contributed to Parent by such other investors at or prior to the closing of the merger.

 

The funds’ obligations to fund the equity financing contemplated by the equity commitments are generally subject to (i) the execution and delivery of the merger agreement (which took place on December 23, 2010), (ii) the satisfaction or waiver of each of the conditions to Parent’s and Merger Sub’s obligations to

consummate the transactions contemplated by the merger agreement, (iii) the substantially contemporaneous funding of the debt financing pursuant to the terms and conditions of the debt commitment letters described below or any alternative financing that Parent and Merger Sub accept from alternative sources pursuant to and in accordance with the merger agreement and (iv) the substantially simultaneous consummation of the merger in accordance with the terms and conditions of the merger agreement.

 

Debt Financing (Page 51)

 

In connection with the entry into the merger agreement, Parent received a commitment letter, dated December 23, 2010 and amended and restated on January 10, 2011, which, along with the related fee letter, we refer to as the JPM/BofA/Barclays commitment letter, from JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC, Bank of America, N.A., Merrill Lynch Pierce, Fenner & Smith Incorporated and Barclays Capital, the investment banking division of Barclays Bank PLC, which we refer to as the commitment parties. Pursuant to the JPM/BofA/Barclays commitment letter, JPMorgan Chase Bank, N.A., Bank of America, N.A. and Barclays Bank PLC, which we refer to as the lenders, have committed to provide an aggregate of $1.025 billion in debt financing to Parent and Merger Sub, consisting of (i) a senior secured term loan facility in an aggregate principal amount of $650 million and (ii) a senior secured asset-based revolving facility with a maximum availability of $375 million (provided that only a specified amount may be drawn at the closing of the merger), which we refer to collectively as the debt facilities, on the terms and subject to the conditions of the JPM/BofA/Barclays commitment letter (including certain “market flex” provisions).

 

Additionally, in connection with the entry into the merger agreement, Parent received a commitment letter, dated December 23, 2010, which we refer to as the Crescent commitment letter and, together with the JPM/BofA/Barclays commitment letter, as the debt commitment letters, from TCW/Crescent Mezzanine Management V, LLC, which we refer to as Crescent, to purchase (i) at par, $400 million of senior unsecured mezzanine notes, which we refer to as the mezzanine notes, and (ii) $20 million (and, at Crescent’s option, an additional $20 million) of equity securities, at the closing of the merger, on the terms and subject to conditions set forth in the Crescent commitment letter. (We refer to the debt financing in the amounts set forth in the debt commitment letters collectively as the debt financing.) It is expected that at the closing of the merger, either (i) up to $400 million of the mezzanine notes will be purchased by Crescent on the terms and subject to the conditions set forth in the Crescent commitment letter or (ii) in lieu of mezzanine notes, senior unsecured notes will be issued for an issue price of not less than 96% of the principal amount and a yield not to exceed 11.5% pursuant to a Rule 144A transaction (or other private placement), the aggregate principal amount of which may equal or exceed the principal amount of such mezzanine notes. The senior unsecured notes, if issued, will not be registered under the Securities Act of 1933, as amended, which we refer to as the Securities Act, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

 

None of the debt commitment letters is subject to due diligence or a “market out” condition, which would allow the lenders or Crescent 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.

 

Limited Guaranty (Page 54)

 

Pursuant to a limited guaranty, dated December 23, 2010, which we refer to as the limited guaranty, 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 (a) the payment obligations of Parent under the merger agreement to pay the Parent termination fee to the Company as and when due and (b) certain expense reimbursement and indemnification obligations of Parent to the Company as and when due. See “The Merger Agreement — Termination Fees and Reimbursement of Expenses” beginning on page 90.

Interests of Certain Persons in the Merger (Page 56)

 

When considering the recommendation of the board of directors that you vote to approve 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, your interests as a shareholder. The special 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 shareholders of the Company. These interests include the following:

 

 

See “The Merger — Interests of Certain Persons in the Merger” beginning on page 56 for additional information.

 

In addition, Leonard Green requested the ability to enter into employment and equity participation agreements with members of our senior management team following the conclusion of the go-shop period (which concluded at 11:59 p.m. (New York City time) on February 14, 2011), as discussed under “The Merger — Background of the Merger” beginning on page 29, and is permitted under the merger agreement to do so (subject to certain conditions). After the conclusion of the go-shop period, Leonard Green and members of the senior management team of the Company began negotiating definitive agreements with respect to senior management’s employment and equity participation for the period following the closing of the merger as described below under “The Merger — Interests of Certain Persons in the Merger — Arrangements with Rollover Investors ” and “The Merger — Interests of Certain Persons in the Merger — New Stock Option Plan .” No definitive agreements have been entered into between Leonard Green or its affiliates and any members of senior management regarding these matters as of the date of this proxy statement.

 

Material U.S. Federal Income Tax Consequences of the Merger (Page 63)

 

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. Backup withholding may also apply to the cash payments made pursuant to the merger unless the U.S. holder or other payee provides a taxpayer identification number, certifies that such number is correct and otherwise complies with the backup withholding rules. You should read “The Merger — Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 63 for a definition of “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 65)

 

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, or 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 Parent 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 Parent filed such a notification and report form on January 12, 2011 and requested early termination of the waiting period, which was granted on January 24, 2011.

 

Litigation Relating to the Merger (Page 65)

 

In connection with the merger, on December 30, 2010 and January 14, 2011, respectively, purported shareholder derivative and class action complaints were filed in the Court of Common Pleas, Summit County, the State of Ohio against the Company, members of its board of directors, Parent, Merger Sub and Leonard Green. The complaints allege, among other things, that (1) the members of our board of directors breached their fiduciary duties of loyalty, good faith, candor and independence owed to the Company and the Company’s public shareholders and have acted to put their personal interests ahead of the interests of the Company and (2) Leonard Green aided and abetted such members’ alleged breaches of their fiduciary duties. The complaints seek, among other things, injunctive relief, rescission of the merger agreement and awarding the plaintiffs the costs and disbursements of the actions including reasonable attorneys’ and experts’ fees. The Company, the members of its board of directors and each of the other named defendants believe that the lawsuits are without merit and intend to defend each of them vigorously.

 

The Merger Agreement (Page 66)

 

Treatment of Common Stock, Options, Restricted Shares and Other Equity Awards (Page 69)

 

 

 

Solicitation of Takeover Proposals (Page 81)

 

The merger agreement provides that until 11:59 p.m., New York City time, on February 14, 2011, we were permitted to initiate, solicit and encourage, whether publicly or otherwise, any inquiries, proposals or offers that could constitute takeover proposals (as described in “The Merger Agreement — Solicitation of Takeover Proposals — No Change in Recommendation or Company Acquisition Agreement” ) from third parties (or engage in other efforts or attempts that may reasonably be expected to lead to a takeover proposal) and to enter into, engage in, and maintain discussions or negotiations with third parties with respect to any inquiries, proposals or offers that could constitute takeover proposals. No proposals or offers that could constitute takeover proposals were made to the Company prior to this deadline. From and after 12:00 a.m., New York City time, on February 15, 2011, which we refer to as the no-shop period start date, and until the effective time of the merger or, if earlier, the termination of the merger agreement, we are not permitted to solicit, initiate or knowingly facilitate or encourage any inquiry or the making of any takeover proposals, engage in, continue or otherwise participate in any negotiations or discussions with any person relating to a takeover proposal, provide any information to any person in connection with or to encourage or facilitate a takeover proposal or enter into any agreement with respect to any takeover proposal. Notwithstanding these restrictions, under certain circumstances, we may, from and after the no-shop period start date, and prior to the time our shareholders adopt the merger agreement, contact the person making a takeover proposal to clarify the terms and conditions of such takeover proposal and engage in discussions or negotiations with such person, and furnish to such third party information (including non-public information) pursuant to an acceptable confidentiality agreement (as described in “The Merger Agreement — Solicitation of Takeover Proposals — Go-Shop Period” ) (provided that the Company promptly makes such information available to Parent and Merger Sub if not previously made available to Parent or Merger Sub), if the Company’s board of directors (or any duly

constituted and authorized committees of the Company’s board of directors) determines in good faith, after consultation with its financial advisor and outside legal counsel, that such takeover proposal either constitutes a superior proposal (as described in “The Merger Agreement — Solicitation of Takeover Proposals — No Change in Recommendation or Company Acquisition Agreement” ) or could reasonably be expected to lead to a superior proposal. At any time before the merger agreement is adopted by our shareholders, if our board of directors determines that a takeover proposal is a superior proposal, we may terminate the merger agreement and enter into an agreement with respect to such superior proposal, so long as we comply with certain terms of the merger agreement, including paying a termination fee to Parent and reimbursing Parent for certain of its expenses. See “The Merger Agreement — Termination Fees and Reimbursement of Expenses” beginning on page 90.

 

Conditions to the Merger (Page 87)

 

The respective obligations of the Company, Parent and Merger Sub to consummate the merger are subject to the satisfaction or waiver of certain customary conditions, including the adoption of the merger agreement by our shareholders, the expiration or termination of the waiting period applicable to the consummation of the merger under the HSR Act (which condition has been satisfied), the accuracy of the representations and warranties of the parties and compliance by the parties with their respective obligations under the merger agreement. The obligation of Parent and Merger Sub to consummate the merger is also subject to the absence of a material adverse effect, as described under “The Merger Agreement — Representations and Warranties” beginning on page 75, or any event, change or occurrence that, individually or in the aggregate, would reasonably be expected to have a material adverse effect or prevent or materially impair or delay the consummation of the merger, since January 31, 2010 (excluding matters disclosed in any reports (other than disclosures contained in the “Risk Factors” and “Forward Looking Statements” sections of those reports or any other disclosures which are forward-looking in nature) we have filed with the Securities and Exchange Commission, which we refer to as the SEC, after April 17, 2008 and prior to the date of the merger agreement or the matters contained in the confidential disclosure schedule that the Company delivered in connection with the merger agreement).

 

Termination (Page 88)

 

The merger agreement may be terminated and the transactions contemplated by the merger agreement abandoned at any time prior to the effective time, whether before or after receipt of the affirmative vote (in person or by proxy) of the holders of a majority of the outstanding shares of Company common stock at our shareholders meeting, or any adjournment or postponement thereof, in favor of the adoption of the merger agreement, which we sometimes refer to as the Company shareholder approval (except as otherwise expressly noted):

 

 

 

however, the right to terminate the merger agreement under the three sub-bullets above will not be available to any party that has breached in any material respect its obligations under the merger

agreement in any manner that has proximately contributed to the occurrence of the failure of the applicable condition to the consummation of the merger;

 

 

 

 

 

 

 

 

 

 

Termination Fees (Page 90)

 

If the merger agreement is terminated in certain circumstances described under “The Merger Agreement — Termination Fees and Reimbursement of Expenses” beginning on page 90:

 

 

Remedies (Page 93)

 

Except in the case of fraud, our right to receive the termination fee from Parent described below under “The Merger Agreement — Termination Fees and Reimbursement of Expenses” beginning on page 90, or the funds pursuant to the limited guaranty, and certain reimbursement and indemnification payments from Parent will be, subject to certain rights to equitable relief, including specific performance, described below under “The Merger Agreement — Remedies” beginning on page 93, the sole and exclusive remedy of the Company and our subsidiaries and shareholders against Parent, Merger Sub and the funds for, and none of any of their respective former, current or future general or limited partners, shareholders, financing sources, managers, members, directors, officers or affiliates (other than Parent, Merger Sub and the funds) will have any liability or obligation for, any loss suffered as a result of the failure of the merger to be consummated or for a breach or failure to perform under the merger agreement or otherwise relating to or arising out of the merger agreement or the transactions contemplated by the merger agreement, and upon payment of such amount, none of Parent, Merger Sub or the funds will have any further liability or obligation for any loss suffered as a result of the failure of the merger to be consummated or for a breach or failure to perform under the merger agreement or otherwise relating to or arising out of the merger agreement or the transactions contemplated by the merger agreement.

 

Except in the case of fraud and subject to Parent’s limited right to seek monetary damages, solely to the extent described below under “The Merger Agreement — Remedies” beginning on page 93, Parent’s right to

receive payment from us of the Parent expenses or the applicable termination fee described below under “The Merger Agreement — Termination Fees and Reimbursement of Expenses” will be, subject to certain rights to equitable relief, including specific performance, and certain reimbursement payments of their enforcement costs from us, described below under “The Merger Agreement — Expenses” beginning on page 92, the sole and exclusive remedy of Parent and Merger Sub and their affiliates against the Company and its subsidiaries and any of their respective former, current or future officers, directors, partners, shareholders, managers, members or affiliates for any loss suffered as a result of the failure of the merger to be consummated or for a breach or failure to perform hereunder or otherwise, and upon payment of such amount(s), neither the Company nor any of its subsidiaries nor any of their respective former, current or future officers, directors, partners, shareholders, managers, members or affiliates will have any further liability or obligation relating to or arising out of the merger agreement or the transactions contemplated by the merger agreement (excluding the financing) (subject to certain exceptions).

 

Subject to certain exceptions described in “The Merger Agreement — Remedies” beginning on page 93, under no circumstances will (i) the Company be entitled to monetary damages in excess of the amount of the Parent termination fee payable by Parent, or (ii) Parent, Merger Sub or any of their affiliates, be entitled to monetary damages in excess of the amount of the termination fee plus the Parent expenses, in each case, other than costs and expenses incurred in connection with any action to enforce the payment of any such fee. In addition, neither the Company nor Parent will be permitted or entitled to receive both a grant of specific performance that results in a closing and any money damages, including all or any portion of the fee and/or expenses payable by the other party. The parties are entitled to equitable relief to prevent breaches of the merger agreement and to enforce specifically the terms of the merger agreement in addition to any other remedy to which they are entitled under the merger agreement, subject to certain requirements to the Company’s ability to seek an injunction, specific performance or other equitable remedies in connection with enforcing Parent’s obligation to cause the equity financing for the merger to be funded as described below under “The Merger Agreement — Remedies — Specific Performance” .

 

Market Price of Company Common Stock (Page 96)

 

The closing price of Company common stock on the New York Stock Exchange, or NYSE, on December 22, 2010, the last trading day prior to the public announcement of the merger agreement, was $45.63 per share of Company common stock. On February 16, 2011, the most recent practicable date before this proxy statement was mailed to our shareholders, the closing price for Company common stock on the NYSE was $60.58 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.

 

Rights of Dissenting Shareholders (Page 99)

 

Under Section 1701.85 of the Ohio Revised Code, you are entitled to seek relief as a dissenting shareholder and to have the “fair cash value” of your shares of Company common stock determined by a court and paid in cash. The “fair cash value” of a share of Company common stock is the amount that a willing seller who is under no compulsion to sell would be willing to accept and that a willing buyer who is under no compulsion to purchase would be willing to pay. The “fair cash value” is determined as of the day prior to the day on which the vote of the shareholders to adopt the merger agreement is taken. When determining the “fair cash value,” any appreciation or depreciation in market value resulting from the proposed merger is excluded. In no event can the “fair cash value” of your shares of Company common stock exceed the amount specified in your demand as discussed below.

 

To seek relief as a dissenting shareholder, you must not have voted in favor of adoption of the merger agreement and must satisfy certain other conditions and comply with certain procedures pursuant to Section 1701.85 of the Ohio Revised Code, including delivering a written demand to the Company for the “fair cash value” of the dissenting shares on or before the tenth day following the shareholders’ vote adopting the merger agreement. Your failure to comply with the requirements of Section 1701.85 of the Ohio Revised Code will result in the loss of your right to seek relief as a dissenting shareholder. See “Rights of Dissenting Shareholders” beginning on page 99 and the text of Section 1701.85 of the Ohio Revised Code reproduced

in its entirety as Annex C to this proxy statement. If you hold your shares of Company common stock through a bank, brokerage firm or other nominee and you wish to seek relief as a dissenting shareholder, you should consult with your bank, brokerage firm or other nominee to determine the appropriate procedures for the delivery of a written demand by such bank, brokerage firm or nominee. In view of the complexity of the provisions of the Ohio Revised Code, shareholders who may wish to seek relief as dissenting shareholders should consult their legal and financial advisors promptly.

 

Delisting and Deregistration of Company Common Stock (Page 101)

 

If the merger is consummated, the Company common stock will be delisted from the NYSE and deregistered under the Securities Exchange Act of 1934, as amended, which we refer to as 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.

 

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 shareholder. 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 101.

 

 

 

 

 

 

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 statements that, in our opinion, may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee,” “likely,” “project,” “estimate,” “will,” “may,” “should,” “future,” “predicts,” “potential,” “continue” and similar expressions identify these forward-looking statements, which appear in a number of places in this proxy statement (and the documents to which we refer you in this proxy statement) and include, but are not limited to, all statements relating directly or indirectly to the timing or likelihood of completing the merger to which this proxy statement relates, plans for future growth and other business development activities as well as capital expenditures, financing sources and the effects of regulation and competition and all other statements regarding our intent, plans, beliefs or expectations or those of our directors or officers. Investors are cautioned that such forward-looking statements are not assurances for future performance or events and involve risks and uncertainties that could cause actual results and developments to differ materially from those covered in such forward-looking statements. These risks and uncertainties include, but are not limited to, the risks detailed in our filings with the SEC, including our most recent filings on Forms 10-Q and 10-K, factors and matters contained or incorporated by reference in this document, and the following factors:

 

 

Consequently, all of the forward-looking statements we make in this document are qualified by the information contained or incorporated by reference herein, including, but not limited to (a) the information contained under this heading and (b) the information contained under the headings “Risk Factors” and “Business” and information in our consolidated financial statements and notes thereto included in our most recent filings on Forms 10-Q and 10-K (see “Where You Can Find More Information” beginning on page 101). We are under no obligation to publicly release any revision to any forward-looking statement contained or incorporated herein to reflect any future events or occurrences.

 

You should carefully consider the cautionary statements contained or referred to in this section in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf.

 

This proxy statement is being furnished to our shareholders as part of the solicitation of proxies by the board of directors for use at the special meeting to be held on March 18, 2011, starting at 9:00 a.m., Eastern time, at the Conference Center at our corporate offices located at 5373 Darrow Rd., Hudson, Ohio 44236, or at any postponement or adjournment thereof. At the special meeting, holders of Company common stock will be asked to approve the proposal to adopt the merger agreement 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 shareholders must approve the proposal to adopt the merger agreement in order for the merger to be consummated. If our shareholders 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.

 

We have fixed the close of business on February 16, 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 26,339,999 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 shareholder 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 transact business 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, recessed or postponed.

 

Only shareholders 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 shareholder, you must present proof that you are the representative of such shareholder. Please note that cameras, recording devices and other electronic devices will not be permitted at the special meeting.

 

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 counted as votes 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 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, Computershare, you are considered, with respect to those shares of Company common stock, the “shareholder 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 shareholder 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 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.

 

The proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies requires the affirmative vote of the holders of a majority of the shares of Company common stock present in person or represented by proxy and entitled to vote on the matter at the special meeting. For the proposal to adjourn the special meeting, if necessary or appropriate, you may vote “FOR” , “AGAINST” or “ABSTAIN” . For purposes of this proposal, if your shares of Company common stock are present at the special meeting but are not voted on this proposal, if you have given a proxy and vote “ABSTAIN” on this proposal, or if there are broker non-votes, this will have the same effect as if you voted “AGAINST” the proposal. If you fail to submit a proxy or to vote in person at the special meeting, the shares of Company common stock not voted will not be counted in respect of, and will not have an effect on, the proposal to adjourn the special meeting.

 

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

 

 

 

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 vote your shares of Company common stock, and to confirm that your voting instructions have been properly recorded when voting over the internet or by telephone. Please be aware that, though there is no charge for voting your shares, if you vote 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 voting over the internet or by telephone. If you choose to vote 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 vote, 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 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 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 Alliance Advisors, our proxy solicitor, toll-free at (866) 329-8440.

 

IT IS IMPORTANT THAT YOU VOTE 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. SHAREHOLDERS WHO ATTEND THE SPECIAL MEETING MAY REVOKE THEIR PROXIES BY VOTING IN PERSON.

 

If you participate in our 401(k) plan, the number of shares of Company common stock that you may vote is equivalent to the interest in shares of 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 11:59 p.m. Eastern time, on March 15, 2011.

 

As of the record date, the directors and executive officers of the Company beneficially owned and were entitled to vote, in the aggregate, 1,233,099 shares of Company common stock (including restricted shares and shares of Company common stock acquired under our ASOP or held in our 401(k) plan, but not including any shares of Company common stock deliverable upon exercise or conversion of any options or that may be earned as performance shares, RSUs, SEUs or deferred stock units), representing 4.68% 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 and “FOR” the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

Any shareholder 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 vote “ABSTAIN” , or 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 voting at a later date 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 5555 Darrow Road, Hudson, Ohio 44236 by the time the special meeting begins, or by attending the special meeting and voting in person.

 

Although it is not currently expected, the special meeting may be adjourned, recessed or postponed, 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, recess or postponement of the special meeting for the purpose of soliciting additional proxies will allow the Company’s shareholders who have already sent in their proxies to revoke them at any time prior to their use at the special meeting as adjourned, recessed or postponed.

 

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

 

Shareholders of record as of the record date for the special meeting are entitled to seek relief as dissenting shareholders under Section 1701.85 of the Ohio Revised Code in connection with the merger. This means that you are entitled to seek relief as a dissenting shareholder and have the “fair cash value” of your shares of Company common stock determined by a court and paid in cash. The “fair cash value” of a share of Company common stock is the amount that a willing seller who is under no compulsion to sell would be willing to accept and that a willing buyer who is under no compulsion to purchase would be willing to pay. The “fair cash value” is determined as of the day prior to the day on which the vote of the shareholders to adopt the merger agreement is taken. When determining the “fair cash value,” any appreciation or depreciation in market value resulting from the proposed merger is excluded. In no event can the “fair cash value” of your shares of Company common stock exceed the amount specified in your demand as discussed below.

 

To seek relief as a dissenting shareholder, you must not have voted in favor of adoption of the merger agreement and must satisfy certain other conditions and comply with certain procedures pursuant to Section 1701.85 of the Ohio Revised Code including delivering a written demand to the Company for the “fair cash value” of the dissenting shares on or before the tenth day following the shareholders’ vote adopting the merger agreement. Your failure to comply with the requirements of Section 1701.85 of the Ohio Revised Code will result in the loss of your right to seek relief as a dissenting shareholder. See “Rights of Dissenting Shareholders” beginning on page 99 and the text of Section 1701.85 of the Ohio Revised Code reproduced in its entirety as Annex C to this proxy statement. If you hold your shares of Company common stock through a bank, brokerage firm or other nominee and you wish to seek relief as a dissenting shareholder, you should

consult with your bank, brokerage firm or other nominee to determine the appropriate procedures for the delivery of a written demand by such bank, brokerage firm or nominee. In view of the complexity of these provisions of the Ohio Revised Code, shareholders who may wish to seek relief as dissenting shareholders should consult their legal and financial advisors promptly.

 

The Company has engaged Alliance Advisors to assist in the solicitation of proxies for the special meeting. The Company estimates that it will pay Alliance Advisors a fee of approximately $10,500, plus $5 per each call made to or received from shareholders of the Company. The Company will reimburse Alliance Advisors for reasonable out-of-pocket expenses and will indemnify Alliance Advisors 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.

 

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 Alliance Advisors, our proxy solicitor, toll-free at (866) 329-8440.

 

Jo-Ann Stores, Inc.

5555 Darrow Road

Hudson, Ohio 44236

(330) 656-2600

 

The Company is an Ohio corporation with its headquarters in Hudson, Ohio. The Company is the nation’s largest specialty retailer of fabrics and one of the largest specialty retailers of crafts. The Company operates retail stores under the names of Jo-Ann Fabrics and Crafts, and Jo-Ann, which offer a range of merchandise used in sewing, crafting, and home decorating projects, including fabrics, notions, crafts, frames, paper crafting material, artificial floral, home accents, finished seasonal, and home decor merchandise. As of January 29, 2011, the Company operates 751 stores in 48 states. We also sell our products through our website. For more information about the Company, please visit our website at http://www.joann.com. Our website address is provided as an inactive textual reference only. The information contained on our website is not incorporated into, and does not form a part of, this proxy statement or any other report or document on file with or furnished to the SEC. See also “Where You Can Find More Information” beginning on page 101. The Company common stock is publicly traded on the NYSE under the symbol “JAS.”

 

Needle Holdings Inc.

c/o Leonard Green & Partners, L.P.

11111 Santa Monica Blvd., #2000

Los Angeles, California 90025

(310) 954-0444

 

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

 

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 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.

 

Needle Merger Sub Corp.

c/o Leonard Green & Partners, L.P.

11111 Santa Monica Blvd., #2000

Los Angeles, California 90025

(310) 954-0444

 

Needle Merger Sub Corp., or Merger Sub, is an Ohio 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. Merger Sub is a wholly-owned subsidiary of Parent 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, Merger Sub will cease to exist and the Company will continue as the surviving corporation.

 

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 Merger Sub 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.

 

The Company, Parent and Merger Sub entered into the merger agreement on December 23, 2010. Under the terms of the merger agreement, Merger Sub will be merged with and into the Company, with the Company surviving the merger as a wholly-owned subsidiary of Parent. Parent and Merger Sub are beneficially owned by investment funds affiliated with Leonard Green. The following will occur in connection with the merger:

 

 

Following and as a result of the merger:

 

 

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

 

As part of their ongoing oversight and management of the Company’s business, the board of directors and senior management of the Company regularly review and assess strategic alternatives available to the Company, in light of the Company’s performance, risks, opportunities and overall strategic direction. In connection with this ongoing process, the board of directors has also sometimes considered potential business combination transactions.

 

In particular, in 2007, the Company sought and received proposals with regard to a potential sale of the Company from a number of private equity firms, including Leonard Green. At that time, Centerview and another investment banking firm advised the Company with respect to a potential sale process, as did Thompson Hine LLP, which we refer to as Thompson Hine, and Sullivan & Cromwell LLP, which we refer to as Sullivan & Cromwell. The board of directors ultimately decided not to pursue a transaction at that time.

 

From time to time since 2007, a number of parties approached Darrell Webb, the Chairman and Chief Executive Officer of the Company, regarding possible business combination transactions involving the Company. These discussions did not proceed past a preliminary stage until the discussions described below.

 

On August 30, 2010, Mr. Jonathan Sokoloff of Leonard Green, who had contacted Mr. Webb from time to time after the conclusion of the 2007 sale process, contacted Mr. Webb and suggested that it might be an appropriate time to discuss a leveraged buyout transaction with respect to the Company. Mr. Sokoloff suggested an initial meeting between representatives of Leonard Green and members of management of the Company that would involve only public information. Mr. Webb informed and obtained approval from Dr. Scott Cowen, the Company’s lead independent director, to proceed with this first meeting, which was subsequently scheduled for September 20, 2010.

 

On September 20, Mr. Webb and several other members of the Company’s senior management met with Mr. Sokoloff and two other representatives of Leonard Green. Senior management gave a presentation to the representatives of Leonard Green regarding the business and financial position of the Company and the participants had follow-up discussions. 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 September 29, Mr. Sokoloff telephoned Mr. Webb and informed him that Leonard Green would be interested in proceeding with a process that could lead to a sale of the Company to Leonard Green. Mr. Webb

indicated that he would consult with Dr. Cowen and the board of directors regarding Leonard Green’s interest in the Company.

 

On September 30, Mr. Webb briefed Dr. Cowen about the prior day’s phone conversation with Mr. Sokoloff. Dr. Cowen and Mr. Webb determined that Leonard Green’s proposal was a matter that should be discussed by the full board of directors of the Company and agreed that the matter would be raised at a special meeting of the board of directors.

 

On October 7, the board of directors held a telephonic meeting during which Mr. Webb reported to the board that Leonard Green had approached him with an interest in exploring a transaction involving the Company and reviewed the Company’s prior contacts with Leonard Green. Mr. Webb informed the board that Leonard Green wished to enter into a confidentiality agreement with the Company and receive certain non-public information so that it could develop a proposal for a transaction. The board determined that it would obtain independent legal advice before deciding how to respond to Leonard Green and instructed Mr. Webb to retain Sullivan & Cromwell to serve as outside counsel to the board of directors.

 

On October 8, the board of directors retained Sullivan & Cromwell to advise it in connection with the potential transaction.

 

On October 22, the board of directors held a telephonic meeting. Representatives of Sullivan & Cromwell were in attendance. Contingent on Leonard Green providing an acceptable indicative price range based on publicly available information, the board of directors authorized the Company to enter into a confidentiality agreement with Leonard Green pursuant to which limited non-public information would be provided to Leonard Green to allow Leonard Green to refine its indicative offer for a transaction. The board of directors also discussed the retention of financial advisors and authorized the Company’s management to retain a specific financial advisor on behalf of the Company and the board of directors to assist in evaluating and, if appropriate, negotiating any proposal from Leonard Green. In addition, the board of directors discussed whether it wished to establish a special committee and determined to continue to act as a full board, with the issue to be revisited as the directors felt appropriate.

 

On October 23, J.P. Morgan Securities LLC, which we refer to as J.P. Morgan, agreed to assist the Company in the early stages of its interactions with Leonard Green, with the understanding that a formal retention of J.P. Morgan would follow if the board of directors authorized progressing the discussions with Leonard Green and allowed Leonard Green and its representatives to have access to detailed due diligence information about the Company. Additionally, J.P. Morgan was already advising the Company on capital structure and uses of excess balance sheet cash at that time.

 

On October 24, Mr. Webb and Mr. Sokoloff had a discussion by telephone, during which Mr. Webb requested that Leonard Green provide a preliminary indication of the range of prices for the Company common stock that Leonard Green would be willing to offer, based solely on publicly available information about the Company, by October 29. Mr. Sokoloff agreed that Leonard Green would provide a preliminary indication by that date.

 

On October 25, representatives of J.P. Morgan contacted Mr. Sokoloff and further discussed Leonard Green’s preparation of its preliminary indication of price range. Mr. Sokoloff informed the representatives of J.P. Morgan that Leonard Green would be able to provide a more refined indicative price range if it were given access to a limited amount of confidential information about the Company.

 

On October 27, Leonard Green entered into a confidentiality agreement with the Company, and was thereafter provided with limited confidential information about the Company, concerning the number of shares of Company common stock (including restricted stock) and options outstanding, preliminary third-quarter EBITDA results and year-end cash projections, to enable it to provide the requested preliminary indication of price range.

 

On October 28, Leonard Green and the financing team of J.P. Morgan had a conversation regarding the size, pricing and marketing conditions of the financing in connection with a potential transaction with the Company.

On October 29, Leonard Green delivered a letter to J.P. Morgan describing its preliminary indication of interest in pursuing an all cash acquisition of the Company. The letter indicated a price range of $54.00 to $56.00 in cash per share of Company common stock, with such range having been determined based on Leonard Green’s review of all available public information about the Company and the limited non-public information that had been provided by the Company. The letter stated that Leonard Green’s proposal was subject to completion of due diligence, including meetings with management, receipt of financing necessary to complete the transaction, negotiation of satisfactory definitive documentation, HSR clearance and reaching an agreement with the management of the Company with respect to their equity participation arrangements in, and ongoing roles as managers of, the Company.

 

On November 2, the board of directors held a meeting at the offices of Thompson Hine in Cleveland, Ohio. A representative of Sullivan & Cromwell gave a presentation to the board of directors regarding the nature of leveraged buyout transactions and the fiduciary duties of directors in, and potential conflicts of interest associated with, such transactions. The board of directors discussed with the representative of Sullivan & Cromwell the retention of financial advisors and the structuring of a transaction process that could maximize the chance of maintaining confidentiality and that could include the use of a special committee, a “go-shop” period during which the Company and its representatives could solicit potential transactions from other parties following its entering into definitive agreements with Leonard Green, if the discussions with Leonard Green were to reach that stage, and other provisions that would be meant to ensure that any sale of the Company would be on terms most beneficial to the Company’s shareholders. Following the meeting of the board of directors, Mr. Webb and other members of the Company’s senior management left the meeting and the Company’s non-employee directors met in executive session with the representative of Sullivan & Cromwell to discuss in further detail ways in which a transaction process could be developed to optimize price and certainty of closing while being mindful of any potential conflicting interests of management or the Company’s financial advisors that could develop in connection with a leveraged buyout transaction.

 

On November 3, the board of directors held a regularly scheduled meeting at the offices of Thompson Hine in Cleveland, Ohio. Representatives of J.P. Morgan, who had been scheduled to attend to provide a presentation on capitalization alternatives for the Company, and representatives of Sullivan & Cromwell were in attendance. Representatives of J.P. Morgan presented analyses of capital structure alternatives and potential uses of excess balance sheet cash as well as the Company’s current valuation and projected valuations under various capital structure scenarios. The board of directors and the representatives of J.P. Morgan discussed general economic trends; the Company’s historic and projected stock performance vs. peers and the overall market; why investors invest in the Company common stock; historical, current and projected share price multiples for the Company in comparison to peer companies and the overall market; the Company’s projected cash generation; and the Company’s projected growth rate and the impact this might have on share price. The board of directors also discussed various legal and transaction structuring issues with representatives of Sullivan & Cromwell. The board of directors then reviewed strategic alternatives for the Company. At Dr. Cowen’s request, Mr. Webb presented the directors with copies of the October 29, 2010 letter from Leonard Green, indicating that Leonard Green was interested in exploring a purchase of the Company within a range of $54.00 to $56.00 in cash per share of Company common stock. Representatives of J.P. Morgan then gave a presentation addressing the Company’s current valuation and analyzing a variety of strategic alternatives (as opposed to financial alternatives) that the Company could consider pursuing, along with J.P. Morgan’s view of the pros and cons of each alternative, the likelihood that each alternative could be successfully implemented and other considerations. J.P. Morgan expressed its view that it was quite unlikely that any strategic buyer (including one owned by private equity firms) would be interested in acquiring the Company, and that the lack of strategic buyer interest was likely to continue indefinitely. J.P. Morgan also disclosed potential conflicts of interest that it could have arising from prior relationships with Leonard Green, which did not appear material to the board of directors for an institution of J.P. Morgan’s size, or from discussions it could have with Leonard Green regarding financing of a transaction involving the Company. Members of the board of directors asked numerous detailed questions of J.P. Morgan and Sullivan & Cromwell throughout the meeting.

 

The board of directors then continued its strategic transaction discussion in executive session with only the non-employee directors and representatives of Sullivan & Cromwell present. The board of directors

discussed next steps and determined to engage both J.P. Morgan and Centerview as financial advisors in connection with a potential transaction. The board of directors determined that it was important to retain a second financial advisor, in addition to J.P. Morgan, because given J.P. Morgan’s position as a potential source of leveraged acquisition financing in transactions such as the potential transaction with Leonard Green, there was a possibility that J.P. Morgan would be asked to participate in the financing for the transaction. The board of directors also established a special committee, consisting of Dr. Cowen, Frank Newman, David Perdue and Tracey Travis (each an independent director), that was empowered to, among other things: explore available potential transactions, initiate and participate in discussions with potential parties to a potential transaction, establish and revise procedures for proposals from parties to any potential transaction, review, evaluate, reject and/or negotiate the terms of definitive agreements for any potential transaction, determine whether any potential transaction is advisable, fair to and in the best interests of the holders of Company common stock and to report to the board of directors its recommendation with respect thereto and to take all such actions as it may deem necessary or appropriate in connection with effecting a potential transaction.

 

The board of directors determined that all members of the board would generally be invited to attend and participate in meetings of the special committee, and to give comments directly to, and discuss any concerns with, Dr. Cowen. As the lead independent director, Dr. Cowen presided over the meeting of the board of directors held on November 2 and all subsequent full board of directors and special committee meetings described in this “The Merger — Background of the Merger” section.

 

Following the November 3 board of directors meeting, at the board of directors’ direction, representatives of J.P. Morgan informed representatives of Leonard Green that the board of directors needed additional time to consider whether it wished to proceed further with discussions regarding a possible transaction with Leonard Green, and that all future communications regarding the matter should be directed to J.P. Morgan and not to the Company’s management.

 

On November 14, the special committee held a telephonic meeting. A representative of Sullivan & Cromwell and senior management of the Company joined the meeting, with management reviewing and discussing with the special committee its updated strategic plan for the Company.

 

On November 17, the special committee held a telephonic meeting. Representatives of Sullivan & Cromwell joined the meeting, representatives of J.P. Morgan joined the beginning of the meeting and representatives of Centerview joined the second half of the meeting. Senior management of the Company discussed its updated strategic plan for the Company. J.P. Morgan then reviewed an updated analysis of its valuation of the Company and Centerview discussed its view of the Company’s business plan, strategic position and valuation. Following discussion with the outside financial and legal advisors, the special committee determined that the indicative price range of $54.00 to $56.00 per share of Company common stock that had been provided by Leonard Green in its October 29, 2010 letter was lower than the special committee was willing to recommend to the board of directors. The special committee determined to adjourn until the following day when it would give additional consideration to possible actions to take with respect to Leonard Green’s proposal.

 

On November 18, the special committee held a telephonic meeting. Representatives of Sullivan & Cromwell and senior management of the Company joined the meeting. After discussion and consideration, the special committee determined that, based on the preliminary analyses provided by J.P. Morgan and Centerview at its November 17 meeting, it would recommend to the board of directors that the Company seek a higher indicative price range from Leonard Green before it would determine whether to continue with discussions regarding a potential transaction with Leonard Green. The special committee also determined that it would recommend that the board of directors engage J.P. Morgan and Centerview to serve as financial advisors, with J.P. Morgan to have the direct contacts with Leonard Green, and Centerview to be involved actively in special committee and board meetings and to provide a second point of view on valuation and other matters.

 

On November 21, the board of directors held a telephonic meeting to discuss the recent activities of the special committee. The special committee reported its views on the financial analyses to date prepared by each of J.P. Morgan and Centerview, and recommended to the board of directors that J.P. Morgan and Centerview serve as financial advisors with complementary roles. The special committee also recommended to the board

of directors that it direct J.P. Morgan to inform Leonard Green that its indicative price range as expressed in the October 29, 2010 letter was not adequate, but that if Leonard Green entered into a more comprehensive confidentiality agreement, the Company would be willing to continue discussions with Leonard Green on a non-exclusive basis, and provide Leonard Green further due diligence materials, with a view to giving Leonard Green an opportunity to raise its proposed purchase price to greater than $56.00 per share of Company common stock. The board of directors resolved to act in accordance with each of the special committee’s recommendations.

 

On November 22, J.P. Morgan contacted representatives of Leonard Green as directed by the board of directors and the special committee, and informed them that, although the price proposed by Leonard Green was not acceptable, the special committee was willing to engage with Leonard Green on a non-exclusive basis and allow Leonard Green access to further due diligence materials on the Company, contingent on execution of a more comprehensive confidentiality agreement, with a view to giving Leonard Green an opportunity to raise its proposed purchase price to greater than $56.00 per share of Company common stock. J.P. Morgan also informed the representatives of Leonard Green that the special committee would periodically consider reaching out to other potential bidders for the Company. On November 23, a more comprehensive confidentiality agreement was executed and thereafter Leonard Green was provided access to additional due diligence materials, including via an online virtual data room. Leonard Green continued to conduct due diligence and participate in due diligence calls with representatives of the Company following the execution of the confidentiality agreement.

 

On December 2, at the request of representatives of Leonard Green, members of senior management of the Company, representatives of J.P. Morgan and representatives of Leonard Green met in person in Hudson, Ohio. The participants held a due diligence meeting concerning the Company.

 

On December 3, representatives of J.P. Morgan requested that Leonard Green provide an upwardly revised purchase price proposal by December 8 based on the due diligence conducted by Leonard Green by that time.

 

On December 8, a representative of Leonard Green telephoned a representative of J.P. Morgan and conveyed a revised offer of $59.00 in cash per share of Company common stock.

 

Later on December 8, the special committee held a telephonic meeting. Representatives of J.P. Morgan, Centerview and Sullivan & Cromwell and members of senior management of the Company also joined the meeting. A representative of J.P. Morgan updated the special committee on developments since the board of directors’ last meeting on November 21 and on the status of discussions with Leonard Green, including the revised offer of $59.00 in cash per share of Company common stock that was received that day. Representatives of each of J.P. Morgan and Centerview addressed the special committee in turn and each discussed its view of Leonard Green’s offer of $59.00 in cash per share of Company common stock, analyzing the revised offer in the context of their respective preliminary valuation analyses previously discussed with the special committee. It was noted that representatives of Leonard Green had indicated to J.P. Morgan that they were satisfied with the due diligence information that had been provided to date and that Leonard Green’s remaining due diligence would be confirmatory in nature.

 

The special committee also discussed with the outside advisors the goals for non-price contractual terms in the event that a transaction would be entered into, including use of a “go-shop” provision together with other “fiduciary out” provisions, a meaningful reverse termination fee coupled with no financing condition and limited conditionality. Representatives of J.P. Morgan and Centerview discussed strategies for obtaining a higher offer from Leonard Green, including potential responses to offers that Leonard Green could be anticipated to make, as well as next steps.

 

The special committee also discussed at the December 8 meeting Leonard Green’s request to hold discussions with senior management of the Company concerning ongoing employment and equity ownership arrangements that Leonard Green sought to finalize and have executed and delivered prior to the announcement of any transaction, as indicated in Leonard Green’s October 29, 2010 proposal letter. After discussing this issue in depth with the Company’s outside legal and financial advisors, the special committee concluded that it would be premature to permit discussions between senior management and Leonard Green during the

current stage of broader discussions with Leonard Green, but that the special committee would consider allowing such conversations prior to signing definitive documentation for any transaction, to the extent necessary to induce Leonard Green to commit to a transaction at an acceptable price for the Company’s shareholders. It was noted that the senior management team had been strictly following its instructions not to engage with Leonard Green on employment and compensation and equity participation matters. The representatives of senior management of the Company who were present at the meeting were then excused from the meeting.

 

The special committee next discussed the status of Leonard Green’s discussions with financing sources and Leonard Green’s request to contact additional financing sources. It was noted that a financing team from J.P. Morgan had been involved in due diligence of the Company in order to prepare to be a financing source and provide Leonard Green with indicative financing terms but that the Company’s consent would be required for any participation by J.P. Morgan in the financing. Representatives from J.P. Morgan, Centerview and the members of the special committee discussed the banks, other than J.P. Morgan, that were most likely to be able to provide acquisition financing. Following further discussion, the special committee decided on the next steps to be taken to try to obtain a higher price from Leonard Green and keep the transaction moving forward, contingent upon Leonard Green increasing its offer to above $59.00 per share of Company common stock. The special committee also discussed the advantages and disadvantages of permitting J.P. Morgan to provide financing and requested that Sullivan & Cromwell clarify with J.P. Morgan whether J.P. Morgan wished to be a financing source for any potential transaction. The special committee also resolved to delegate to Dr. Cowen the power to direct the negotiation of the terms of the merger and the merger agreement and related documentation and the efforts of the financial and legal advisors in connection therewith, subject to reporting back to the committee, to the extent that a quorum could not be convened quickly at any time.

 

Following the December 8 special committee meeting, at the direction of the board of directors of the Company, representatives of Centerview and J.P. Morgan informed representatives of Leonard Green that the offer of $59.00 per share of Company common stock was insufficient and that a higher per share purchase price would be required in order to proceed with a transaction, but that Leonard Green would be allowed to continue confirmatory due diligence on a non-exclusive basis if it wished to consider engaging in a transaction at a higher price. Additionally, representatives of J.P. Morgan informed representatives of Leonard Green that, while the special committee was continuing to prohibit discussions regarding acquisition financing with financing sources other than J.P. Morgan, Leonard Green would be permitted to discuss potential terms for acquisition financing with a limited number of additional potential lenders if Leonard Green wished to consider engaging in a transaction at a higher price.

 

On December 9, a representative of Leonard Green telephoned a representative of J.P. Morgan and raised Leonard Green’s offer to $60.00 in cash per share of Company common stock. The Leonard Green representative was told by the representative of J.P. Morgan that the revised offer price was not sufficient and that Leonard Green should put forward its best and final offer. Additionally, the law firm of Thompson Hine was added to the Company’s legal team to provide advice with respect to Ohio law and to otherwise assist in the transaction process.

 

 

On December 10, a representative of Leonard Green provided an offer of $60.50 in cash per share of Company common stock, which he indicated was Leonard Greens’s “best and final offer”. A representative of J.P. Morgan confirmed, at the direction of the special committee, that the Company was prepared to continue discussions and that Leonard Green would be permitted to engage in discussions with additional potential financing sources.

 

On December 11, Latham & Watkins LLP, which we refer to as Latham & Watkins, counsel to Leonard Green, provided a draft merger agreement, as well as drafts of the related equity commitment letter and limited guaranty from Leonard Green’s affiliated funds, to the Company and its advisors.

 

During the weekend of December 11-12, representatives of Leonard Green informed the Company’s outside financial and legal advisors that Leonard Green expected to negotiate and execute management employment contracts (which would become effective only if the transaction was consummated) and related equity participation and transaction support agreements with key senior managers of the Company

simultaneously with the execution of the merger agreement, and that the effectiveness of these agreements would need to be a closing condition to a transaction with Leonard Green.

 

On December 13, Dr. Cowen, acting on behalf of the special committee and based on previous discussion at committee meetings, authorized Mr. Webb and the other members of the senior management team to retain separate counsel for use in any discussions with representatives of Leonard Green about employment and related arrangements in connection with a transaction with Leonard Green, should such discussions be authorized, but instructed the senior management team not to discuss employment or equity participation terms with Leonard Green unless it was specifically requested to do so by the special committee. Such separate counsel was retained on December 15.

 

On December 13, members of senior management of the Company conducted a legal due diligence teleconference with representatives of Latham & Watkins. Representatives of Sullivan & Cromwell and Thompson Hine also participated by teleconference.

 

On December 14, the Company held a due diligence meeting at the Company’s headquarters in Hudson, Ohio with representatives of Leonard Green. Members of the Company’s senior management team represented the Company at these meetings and representatives of J.P. Morgan and Centerview were also in attendance.

 

On December 14, Sullivan & Cromwell provided a revised draft of the merger agreement to Leonard Green and Latham & Watkins. Sullivan & Cromwell and Latham & Watkins held several discussions on December 15 and 16 and Latham & Watkins provided a revised draft of the merger agreement on December 16.

 

On December 15, the Company conducted a due diligence meeting and teleconference with representatives of Leonard Green’s debt financing sources. Representatives of J.P. Morgan and Centerview were also in attendance. The Company also conducted a due diligence meeting and teleconference with representatives of Leonard Green on that date, and there were a number of follow-up discussions about due diligence issues over the following days.

 

On December 16, the special committee met telephonically. At the beginning of the meeting, Sullivan & Cromwell and Thompson Hine reviewed the fiduciary duties of directors in connection with a potential sale transaction. The special committee then reviewed the chronology of events since the last special committee meeting on December 8 and received an update on the status of the discussions with Leonard Green from Centerview and J.P. Morgan. The members of the special committee discussed with the Company’s outside financial and legal advisors Leonard Green’s current proposed offer price of $60.50 in cash per share of Company common stock, the go-shop process that would follow if a transaction were to be agreed with Leonard Green, and the advantages and disadvantages of soliciting indications of interest from a limited group of other potential buyers prior to entering into any transaction with Leonard Green. The members of the special committee also discussed Leonard Green’s condition that Parent enter into employment and related agreements with members of the senior management team concurrently with the execution of other definitive agreements for the transaction. The special committee determined that, while it would not authorize the management team to enter into formal employment or other related agreements with Parent, it would permit the Company’s four executive officers (Messrs. Webb, Travis Smith (President and Chief Operating Officer), James Kerr (Executive Vice President, Chief Financial Officer) and Kenneth Haverkost (Executive Vice President, Store Operations) to discuss employment arrangements and the possibility of an equity investment in the merger with representatives of Leonard Green.

 

On December 17, representatives of J.P. Morgan and Centerview informed representatives of Leonard Green that they could begin discussions with senior management within the parameters approved by the special committee at the December 16 meeting. Members of the senior management team and their outside counsel had discussions in respect of employment and equity participation arrangements with representatives of Leonard Green during the period of December 17 to 21.

 

On December 17, representatives of Latham & Watkins and Sullivan & Cromwell had further discussions regarding the merger agreement, specifically regarding the parties’ termination rights (including for certain

material breaches of the merger agreement), remedies and the terms of the go-shop process. Latham & Watkins and Sullivan & Cromwell exchanged drafts of the merger agreement on December 18 and 19.

 

By December 17, the members of the special committee had concluded that it would be beneficial for J.P. Morgan to serve as one of the debt financing sources for Leonard Green (but not the exclusive source of debt financing) if a transaction between Leonard Green and the Company were to proceed. Accordingly, on December 17, Dr. Cowen, acting on behalf of the special committee, authorized J.P. Morgan to finalize commitment papers with Leonard Green for the provision of debt financing for the transaction. Dr. Cowen also determined, acting on behalf of the special committee, that, in light of J.P. Morgan’s anticipated role in connection with the provision of debt financing in the transaction, Centerview should be designated the financial advisor in future negotiations with Leonard Green regarding the proposed transaction and that J.P. Morgan should remain an active financial advisor to the Company.

 

On December 18, the board of directors of the Company met in person at the offices of Sullivan & Cromwell in New York. Representatives of J.P. Morgan, Centerview and Sullivan & Cromwell were in attendance, as were Mr. Webb and David B. Goldston, the Company’s Senior Vice President, General Counsel and Secretary, for the beginning of the meeting. The meeting began with a presentation by representatives of Sullivan & Cromwell and Thompson Hine (who were present telephonically) regarding the fiduciary duties of directors in connection with a potential sale transaction. Representatives of Centerview and J.P. Morgan then reviewed the chronology and progress to date of the discussions with Leonard Green. Centerview discussed how a post-signing market check, or “go-shop” process would work and which parties Centerview would want to approach in a go-shop process. Mr. Webb then informed the other members of the board of directors that senior management had limited discussions with Leonard Green regarding management compensation and that senior management was comfortable from its perspective with the general outline of Leonard Green’s proposal and did not see any need to continue discussions with Leonard Green at that time unless instructed to do so by the board of directors or the special committee. The board of directors requested that the senior management team continue to engage in discussions with representatives of Leonard Green to the extent necessary to get Leonard Green comfortable in proceeding with a transaction with the Company, provided that no definitive agreements in respect of any such arrangements could be executed. Representatives of Centerview and J.P. Morgan then provided an update on Leonard Green’s proposed financing package. Representatives of each of J.P. Morgan and Centerview also reviewed updated financial analyses based on Leonard Green’s proposed offer price of $60.50 in cash per share of Company common stock. Next, representatives of Sullivan & Cromwell reviewed in detail the terms of the draft merger agreement (which had been through several rounds of negotiations with Latham & Watkins by December 18), equity commitment letter and limited guaranty, and the key points that remained open. The board of directors also determined to ratify Dr. Cowen’s determination that, in light of J.P. Morgan’s anticipated role in connection with the provision of debt financing in the transaction, Centerview should be designated the financial advisor in future negotiations with Leonard Green regarding the proposed transaction, and J.P. Morgan would remain an active financial advisor to the Company. Following the meeting of the board of directors, the special committee met in executive session with representatives of Centerview and Sullivan & Cromwell and further discussed the strategy for negotiating the best attainable price and contractual terms for a transaction with Leonard Green.

 

From December 16 through December 23, representatives of Leonard Green and Latham & Watkins negotiated the terms of the debt commitment papers for the transaction with representatives of the lenders.

 

Numerous discussions about the price for the proposed transaction between representatives of Centerview and Leonard Green, and about the contractual terms of the transaction between representatives of Sullivan & Cromwell and Latham & Watkins, took place following the meeting of the board of directors from December 18 through December 21 (in the case of the price discussions) and through the morning of December 23 (in the case of the contractual terms).

 

On December 21, at the direction of the board of directors of the Company, Centerview and Sullivan & Cromwell informed representatives of Leonard Green and Latham & Watkins, respectively, that the special committee was not willing to recommend to the board of directors that it approve a transaction at Leonard Green’s proposed price of $60.50 per share of Company common stock, that certain of Leonard Green’s

proposed contractual terms for a transaction were not acceptable to the special committee, and that the senior management team of the Company was not going to be permitted to engage in further discussions with representatives of Leonard Green about employment and equity participation arrangements unless Leonard Green offered to pay a higher price per share and agreed to terms in the proposed merger agreement that would provide greater certainty of closing and allow a more robust go-shop process.

 

Later on December 21, representatives of Leonard Green telephoned representatives of Centerview to deliver an increased offer of $61.00 in cash per share of Company common stock, which was described as the highest price per share that Leonard Green would be willing to pay for an acquisition of the Company. The representatives of Leonard Green also indicated that Leonard Green would continue to negotiate the merger agreement to reach mutually acceptable terms with the Company and that, in order to get a deal agreed with the Company, it would be willing to proceed with a transaction without having members of senior management execute definitive employment and related equity participation agreements, but that it needed to have further discussions with senior management before a transaction could be entered into to ensure that senior management would be willing to continue working for the Company following the closing of its acquisition by Parent and to make an investment in Parent. Leonard Green also requested that members of the senior management team be allowed to negotiate and enter into definitive agreements with Parent concerning post-closing employment and equity participation following the expiration of the go-shop period provided in the merger agreement. Following receipt of this revised offer, Dr. Cowen requested that senior management and its outside counsel have further discussions with representatives of Leonard Green about employment and equity participation arrangements, and such discussions continued on December 22.

 

On the evening of December 22, the special committee and the board of directors of the Company held a joint telephonic meeting. Representatives of Sullivan & Cromwell, Thompson Hine and Centerview joined the meeting. Mr. Webb was not present for the first part of the meeting. The meeting began with a review of the directors’ fiduciary duties presented by Sullivan & Cromwell and Thompson Hine. The directors and the outside advisors next discussed the developments that had taken place since the meeting on December 18, focusing on: updates on senior management’s discussions with Leonard Green regarding potential employment and equity participation arrangements; developments in Leonard Green’s financing arrangements; developments in negotiating the merger agreement, equity commitment letter and limited guaranty; and pricing. The directors discussed their understanding, earlier communicated by Mr. Webb, that senior management was satisfied with the progress of the discussions with Leonard Green concerning post-closing employment and equity participation and did not feel a need to negotiate definitive documentation in respect of their employment and equity participation.

 

The directors then reviewed Leonard Green’s response to the special committee’s most recent communication through its advisors of its required terms and noted that Leonard Green had raised its price to $61.00 in cash per share of Company common stock and had agreed to not require definitive agreements with management at the time of execution of the merger agreement. Following these discussions, Messrs. Webb and Goldston joined the meeting.

 

Sullivan & Cromwell then reviewed in detail the changes to the draft merger agreement that had been negotiated since the board of directors meeting on December 18, particularly the gains that had been made to provide greater certainty of closing and to allow a more robust go-shop process, and described and received guidance from the directors on the remaining outstanding issues that were being negotiated. The directors discussed with the outside advisors how the marketing of the Company would be conducted under the go-shop process if the merger agreement were to be authorized and entered into.

 

The directors then discussed with the outside advisors the debt commitments that Leonard Green was securing, and received the advice of the advisors that the debt commitment papers were consistent with current market practices. It also was noted that the availability of a mezzanine commitment in lieu of bridge financing was a positive factor that reinforced Leonard Green’s ability to fund the purchase price at the closing. The directors and the outside advisors also discussed a number of other matters related to the signing and announcement of the proposed transaction.

The representatives of Centerview reviewed Centerview’s financial analyses of the proposed transaction, which are described under “— Opinion of Centerview Partners LLC” below, with the directors and delivered Centerview’s oral opinion that, as of the date of the opinion, and based upon and subject to the various assumptions and limitations set forth in the written opinion, the $61.00 per share merger consideration to be paid in cash to the holders of shares of Company common stock (other than Parent, Merger Sub and their respective affiliates and any holder of shares of Company common stock who is entitled to demand and properly demands appraisal of such shares) pursuant to the merger agreement was fair, from a financial point of view, to such holders. Centerview subsequently delivered its written opinion, dated December 22, 2010, confirming its oral opinion. The full text of the written opinion of Centerview, 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 special committee then moved to a vote on the proposed merger. The special committee resolved, by a unanimous vote, to recommend to the board of directors of the Company that the board of directors determine that the merger is in the best interests of the Company and the shareholders, approve the merger agreement and the merger, recommend that the shareholders 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 shareholders for their adoption at a shareholders’ meeting in accordance with applicable law or regulation.

 

The board of directors then moved to a vote on the special committee’s recommendation. Mr. Webb abstained from voting. The board of directors resolved, by a unanimous vote of the non-employee directors, on the recommendation of the special committee, that the merger is in the best interests of the Company and its shareholders and the board of directors approved the merger agreement and the merger and the other transactions contemplated thereby. The board of directors also recommended that the shareholders adopt the merger agreement, resolved that the merger agreement be submitted for consideration by the shareholders at the special meeting of shareholders in accordance with all applicable laws and regulations and authorized the special committee to set the record date for the special meeting to consider and vote on the adoption of the merger agreement.

 

During the evening of December 22 and through the morning on December 23, Sullivan & Cromwell, acting pursuant to the instructions of the special committee and the board of directors, finalized the merger agreement with Latham & Watkins. In addition, Latham & Watkins and counsel for senior management finalized non-binding term sheets for senior management to serve as the basis for definitive agreements regarding employment and equity participation (each of which would be subject to management’s ongoing responsibility to engage in discussions with any other bidder for the Company concerning terms of employment in the event another bidder emerged).

 

Prior to the market open on December 23, the Company, Parent and Merger Sub executed and delivered the merger agreement, the funds executed and delivered the equity commitment letter and limited guaranty, and the financing sources executed and delivered the debt commitment letters. The parties issued a joint press release announcing the merger at approximately 8:00 a.m. (Eastern time).

 

The merger agreement provides that, until 11:59 p.m. (New York City time) on February 14, 2011, the Company was permitted to initiate, solicit and encourage alternative takeover proposals from third parties and provide non-public information to and participate in discussions and negotiate with third parties with respect to alternative takeover proposals. At the direction of the special committee and the board of directors, Centerview conducted this “go-shop” process on behalf of the Company. The “go-shop” process ended at 11:59 p.m. (New York City time) on February 14, 2011 and no proposals or offers that could constitute takeover proposals were made to the Company prior to this deadline.

 

At a meeting held on December 22, 2010, the board of directors, acting upon the unanimous recommendation of the special committee, by a unanimous vote of the non-employee directors, determined that the merger is in the best interests of the Company and our shareholders, approved the execution, delivery and

performance by the Company of the merger agreement and the consummation of the transactions contemplated by the merger agreement (excluding the financing), which we sometimes refer to as the merger transactions, and resolved that the merger agreement be submitted for consideration by the shareholders at the special meeting and recommended that our shareholders vote to adopt the merger agreement. Mr. Darrell Webb, the Company’s Chairman and Chief Executive Officer, abstained from the vote on the merger. In making its recommendation, the board of directors considered the recommendation of the special committee and the special committee and the board of directors consulted with our outside legal and financial advisors and our senior management team at various times, and considered a number of factors, including the following principal factors that the board of directors and the special committee believe support such determinations, approvals, resolutions and recommendations:

 

 

 

 

 

 

 

 

 

 

 

 

 

The special 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:

 

 

 

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 special 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 shareholders of the Company. See the section entitled “The Merger — Interests of Certain Persons in the Merger” beginning on page 56.

 

The foregoing discussion of the information and factors considered by the special 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 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” the proposal to adopt the merger agreement and “FOR” the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

In connection with the merger, Centerview, financial advisor to the special committee and the board of directors, delivered to the board of directors an oral opinion, which was confirmed by delivery of a written opinion dated as of December 22, 2010, that, as of the date of the opinion, and based upon and subject to the various assumptions and limitations set forth in the written opinion, the $61.00 per share merger consideration to be paid in cash to the holders of shares of Company common stock (other than Parent, Merger Sub and their respective affiliates and any holder of shares of Company common stock who is entitled to demand and properly demands appraisal of such shares) pursuant to the merger agreement was fair, from a financial point of view, to such holders.

 

The full text of the written opinion of Centerview, dated as of December 22, 2010, which describes, among other things, the assumptions made, procedures followed, matters considered and limitations on the review undertaken by Centerview in connection with its opinion is attached as Annex B to this proxy statement and is incorporated by reference herein in its entirety. Centerview provided its opinion for the information and assistance of the special committee and the board of directors in connection with its consideration of the merger and only addresses the fairness of the per share merger consideration from a financial point of view. Centerview’s opinion does not address any other aspect of the merger and does not constitute a recommendation as to how any shareholder of the Company should vote with respect to the merger or any other matter. Centerview was not asked to, and did not, recommend the specific consideration provided for in the merger agreement, which consideration was determined through negotiations between the special committee and Parent. The summary of the written opinion of Centerview set forth below is qualified in its entirety by reference to the full text of such opinion.

 

We encourage you to read the opinion of Centerview described above carefully in its entirety for a description of the assumptions made, procedures followed, matters considered and limitations on the review undertaken by Centerview in connection with such opinion.

Summary of Centerview’s Opinion

 

In connection with rendering its opinion and performing its related financial analyses, Centerview reviewed, among other things:

 

 

Centerview also conducted discussions with members of the senior management and representatives of the Company regarding their assessment of the internal data and the strategic rationale for the merger. In addition, Centerview reviewed publicly available financial and stock market data, including valuation multiples, for the Company and compared them with those of certain other companies in lines of business that it deemed relevant. Centerview compared the proposed financial terms of the merger with the financial terms of certain other transactions that Centerview deemed relevant and conducted such other financial studies and analyses and took into account such other information as it deemed appropriate.

 

Centerview did not assume any responsibility for independent verification of any of the financial, legal, regulatory, tax, accounting and other information supplied to, discussed with or reviewed by it for purposes of its opinion and, with the Company’s consent, relied upon such information as being complete and accurate. In that regard, Centerview assumed, with the Company’s consent, that the internal data had been reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of the Company. In addition, at the Company’s direction, Centerview did not make an independent evaluation or appraisal of any of the assets or liabilities (contingent, derivative, off-balance-sheet or otherwise) of the Company, nor was Centerview furnished with any such evaluation or appraisal. Centerview assumed that the merger would be consummated on the terms set forth in the merger agreement, without the waiver or modification of any term or condition the effect of which would be in any way meaningful to Centerview’s analysis. Representatives of the Company advised Centerview, and Centerview assumed, that the merger agreement, when executed, would conform to the draft reviewed by Centerview in all material respects. Centerview did not express any opinion as to the impact of the merger on the solvency or viability of the Company or the ability of the Company to pay its obligations when they come due, and Centerview’s opinion does not address any legal, regulatory, tax or accounting matters.

 

Centerview’s opinion does not address the underlying business decision of the Company to effect the merger or the relative merits of the merger as compared to any alternative business strategies or transactions that might be available to the Company. Centerview’s opinion addresses only the fairness from a financial point of view, as of the date of the opinion, of the $61.00 per share merger consideration to be paid in cash to the holders of shares of Company common stock (other than Parent, Merger Sub and their respective affiliates and any holder of shares of Company common stock who is entitled to demand and properly demands appraisal of such shares) pursuant to the merger agreement. At the Company’s direction, Centerview was not asked to, nor did it, express any view on, and the opinion does not address, any other term or aspect of the merger agreement or the merger, including, without limitation, the fairness of the merger to, or any consideration received in connection therewith by, the holders of any other class of securities, creditors, or other constituencies of the Company; nor as to the fairness of the amount or nature of any compensation to be paid or payable to any of the officers, directors or employees of the Company, or class of such persons in connection with the merger, whether relative to the $61.00 per share merger consideration to be paid in cash to the holders of shares of Company common stock (other than Parent, Merger Sub and their respective affiliates and any holder of shares of Company common stock who is entitled to demand and properly

demands appraisal of such shares) pursuant to the merger agreement or otherwise. Centerview’s opinion was necessarily based on economic, monetary, market and other conditions as in effect on, and the information made available to it as of, the date of its opinion, and Centerview did not have any obligation to update, revise or reaffirm its opinion based on circumstances, developments or events occurring after the date of its opinion. Centerview’s opinion does not constitute a recommendation to any shareholder of the Company as to how such shareholder should vote with respect to the merger or any other matter.

 

Centerview’s financial advisory services and written opinion were provided for the information and assistance of the board of directors of the Company in connection with its consideration of the merger. Centerview’s opinion was approved by the Centerview Partners LLC Fairness Opinion Committee.

 

Summary of Financial Analyses

 

The following is a brief summary of the material financial and comparative analyses that Centerview deemed to be appropriate for this type of merger and that were reviewed with the board of directors in connection with rendering Centerview’s opinion. The following summary, however, does not purport to be a complete description of all the financial analyses performed by Centerview in connection with rendering its opinion, nor does the order of analyses described represent relative importance or weight given to those analyses by Centerview.

 

Some of the summaries of the financial analyses include information presented in tabular format. In order to fully understand the financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the financial analyses of Centerview. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before December 22, 2010 (the last trading day prior to the announcement of the merger agreement) and is not necessarily indicative of current market conditions. In Centerview’s analyses set forth below, each implied price per share range was rounded to the nearest dollar.

 

Historical Stock Trading Analysis

 

Centerview reviewed the historical trading prices and volumes for the Company common stock for the period from July 5, 2006 (the date upon which Darrell Webb was appointed as Chief Executive Officer of the Company) through December 22, 2010 (the last trading day prior to the announcement of the merger agreement). This analysis indicated that the $61.00 per share of Company common stock to be paid in cash pursuant to the merger agreement represented a 33.7% premium to the closing price of the Company common stock on December 22, 2010 of $45.63. Centerview noted that the low, high and average closing prices for the Company common stock during this time period were $9.15, $48.44 and $25.35 per share of Company common stock, respectively.

 

Analyst Price Targets

 

Centerview also reviewed, for reference and informational purposes, stock price targets for the Company’s common stock reflected in publicly available Wall Street research analyst reports. Centerview noted that the low and high analyst stock price targets in such research analyst reports ranged from approximately $47.00 to $60.00 per share of Company common stock, compared to the $61.00 per share merger consideration to be paid in cash pursuant to the merger agreement.

 

Historical Trading Multiples and Selected Comparable Company Analysis

 

Centerview reviewed and compared certain financial information for the Company to corresponding financial information, ratios and public market multiples for the following publicly traded companies in the

specialty retail industry that Centerview, based on its experience in the industry, deemed comparable to the Company:

 

 

Although none of the selected companies is directly comparable to the Company, the companies included were chosen because they are publicly traded companies with certain operations that for purposes of analysis may be considered similar to certain operations of the Company. However, because of the inherent differences between the business, operations and prospects of the Company and those of the selected comparable companies, Centerview did not rely solely on the quantitative results of the selected comparable company analysis. Centerview also made qualitative judgments concerning differences between the business, financial and operating characteristics and prospects of the Company and the selected comparable companies that could affect the public trading values of each in order to provide a context in which to consider the results of the quantitative analysis. These qualitative judgments related primarily to the differing scale, market sizes, underlying market growth rates, store expansion potential, same store sales growth, financial growth prospects, profitability levels and degree of operational risk between the Company and the companies included in the selected company analysis.

 

Centerview calculated and compared the financial multiples and ratios for the selected companies based on information it obtained from SEC filings, Institutional Brokers’ Estimate System estimates, which we refer to as IBES estimates, estimates published by other financial information providers, and closing stock prices on December 22, 2010 (the last trading day prior to the announcement of the merger agreement). The multiples and ratios of the Company were calculated using the closing price of Company common stock on December 22, 2010 and FactSet estimates based on analysts’ research reports. With respect to each of the selected companies, Centerview calculated enterprise value, which is the market value of common equity plus the book value of debt less cash, as a multiple of estimated calendar year 2011 earnings before interest, taxes and depreciation and amortization, or EBITDA.

 

Based on the foregoing, Centerview applied an illustrative range of multiples of 5.5x to 7.0x estimated calendar year 2011 EBITDA, derived from the selected companies analysis, to the internal data provided by the Company to Centerview to calculate an illustrative range of implied values per share of Company common stock, as compared with the value of the per share merger consideration, resulting in an illustrative range of implied values per share of Company common stock of approximately $54.00 to $66.00, compared to the $61.00 per share merger consideration to be paid in cash pursuant to the merger agreement.

Premiums Paid Analysis

 

Centerview also reviewed premiums paid for U.S. publicly traded companies in 62 transactions with values ranging between $1.25 billion and $2.00 billion (the implied enterprise value range for the target company based on the consideration payable in the selected transaction), announced since 2005. Centerview analyzed premiums to the one-day prior share prices, or the unaffected share price if there was evidence of a leak or an announced auction process.

 

The following table presents the results of this analysis with respect to the selected transactions:

 

 

Based on the foregoing, Centerview calculated and applied an illustrative range of premiums of 20% to 45%, derived from the premiums paid analysis, to the $45.63 closing price per share of Company common stock as of December 22, 2010 (the last trading day prior to the announcement of the merger agreement), resulting in an illustrative range of implied values per share of Company common stock of approximately $55.00 to $66.00, compared to the $61.00 per share merger consideration to be paid in cash pursuant to the merger agreement.

 

Selected Precedent Transactions Analysis

 

Centerview analyzed certain information relating to selected transactions preceding December 22, 2010 (the last trading day prior to the announcement of the merger agreement). Centerview segregated its analysis according to transactions occurring prior to the 2008 — 2009 economic downturn and transactions occurring after the 2008 — 2009 economic downturn. For the time period before the economic downturn, Centerview selected transactions in the specialty retail industry that were over $1.0 billion in value (being the enterprise value implied for the target company based on the consideration payable in the selected transaction) and included private-equity acquirors. Due to the limited number of transactions occurring after the economic downturn, for that time period Centerview selected transactions in specialty and other retail industries which included private-equity acquirors, without regard to transaction value.

 

 

For each of the selected transactions, based on filings and press releases made by the companies involved, Centerview calculated and compared implied enterprise value as a multiple of last-twelve-months, or LTM, EBITDA. While none of the companies that participated in the selected transactions are directly comparable to the Company, the companies that participated in the selected transactions are companies with operations that, for the purposes of analysis, may be considered similar to certain of the Company’s results, business mix and product profile.

 

Based on the foregoing, Centerview applied an illustrative range of multiples of 6.5x to 7.5x LTM EBITDA, derived from the selected transactions analysis, to comparable financial data for the Company to calculate an illustrative range of implied values per share of Company common stock, as compared with the value of the per share merger consideration, resulting in an illustrative range of implied values per share of Company common stock of approximately $58.00 to $66.00, compared to the $61.00 per share merger consideration to be paid in cash pursuant to the merger agreement.

 

Discounted Cash Flow Analysis

 

Centerview performed a discounted cash flow analysis to calculate the estimated present value of the standalone unleveraged, after-tax free cash flow that the Company could generate from February 1, 2011 through January 31, 2016. This analysis was based on internal data provided by the Company to Centerview. Stock based compensation expense was treated as a cash expense for purposes of determining unleveraged free cash flow. Estimated terminal values for the Company were calculated by applying an assumed perpetuity growth rate of 2.0% to the Company’s estimated unleveraged free cash flow. The cash flows and terminal values were then discounted to present value using discount rates ranging from 10.0% to 12.0%, which range was based on a weighted average cost of capital calculation. This analysis resulted in an illustrative range of implied values of approximately $53.00 to $66.00 per share of Company common stock, compared to the $61.00 per share merger consideration to be paid in cash pursuant to the merger agreement.

Other Considerations

 

The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Centerview believes that selecting portions of the analyses or of the summary set forth above, without considering the analyses as a whole, could create an incomplete view of the processes underlying Centerview’s opinion. In arriving at its fairness determination, Centerview considered the results of all of its analyses and did not attribute any particular weight to any factor or analysis considered by it. Rather, Centerview made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of its analyses.

 

In its analyses, Centerview considered industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of the Company. No company or transaction used in the analyses is identical to the Company or the merger, and an evaluation of the results of the analyses is not entirely mathematical. Rather, the analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the public trading, acquisition or other values of the companies analyzed. The estimates contained in the analyses and the ranges of valuations resulting from any particular analysis are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. In addition, analyses relating to the value of businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold. Accordingly, the estimates used in, and the results derived from, the analyses are inherently subject to substantial uncertainty.

 

Centerview prepared the above analyses for the purpose of providing its opinion to the board of directors regarding whether, as of the date of the opinion, the $61.00 per share merger consideration to be paid in cash to the holders of shares of Company common stock (other than Parent and Merger Sub and their respective affiliates and any holder of shares of Company common stock who is entitled to demand and properly demands appraisal of such shares) pursuant to the merger agreement was fair, from a financial point of view, to such holders. Because these analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of the parties or their respective advisors, none of the Company, Centerview or any other person assumes responsibility if future results are materially different from those forecasted.

 

The opinion and analyses of Centerview were only one of many factors taken into consideration by the Company’s board of directors in its evaluation of the merger. Consequently, the analyses described above should not be viewed as determinative of the views of the Company’s board of directors or the Company’s management with respect to the per share merger consideration or as to whether the Company’s board of directors would have been willing to determine that a different consideration was fair.

 

Centerview is a securities firm engaged in a number of merchant banking and investment banking activities. In the past, Centerview has provided investment banking services to the Company and received compensation for the rendering of such services. Centerview has not in the past provided investment banking services to Parent, Leonard Green or their respective affiliates. Centerview may provide investment banking and other financial services to the Company, Parent, Leonard Green or their respective affiliates in the future, for which it may receive compensation. Furthermore, in the ordinary course of business, Centerview and its successors and affiliates may trade securities of the Company and its affiliates in the future for its own account and the accounts of its customers and, accordingly, may at any time hold a long or short position in such securities.

 

The board of directors selected Centerview as its financial advisor because it is a nationally recognized investment banking firm that has substantial experience in transactions similar to the merger. Centerview has acted as financial advisor to the Company’s board of directors in connection with, and participated in certain of the negotiations leading to, the transactions contemplated by the merger agreement. The Company has agreed to pay Centerview a fee for its services of $8.0 million, $1.0 million of which became payable upon delivery of Centerview’s fairness opinion described above and attached as Annex B and the remainder of which will become payable upon the closing of the merger. In addition, the Company has agreed to reimburse

Centerview for certain expenses, including attorneys’ fees, and to indemnify Centerview and related persons against various liabilities, including certain liabilities under the federal securities laws.

 

Leonard Green anticipates that the total funds needed to complete the merger, including the funds needed to:

 

 

will be funded through a combination of:

 

 

Parent has obtained the equity commitment letter and the debt commitment letters 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. Although obtaining the proceeds of any financing, including any financing under the financing letters, is not a condition to the completion of the merger, the failure of Parent and Merger Sub to obtain any portion of the committed financing (or alternative financing) is likely to result in the failure of the merger to be consummated. In that case, Parent may be obligated to pay the Parent termination fee to the Company, as described under “The Merger Agreement — Termination Fees and Reimbursement of Expenses” beginning on page 90. Parent’s obligation to pay the Parent termination fee is guaranteed by the funds pursuant to the limited guaranty referred to below.

 

Equity Financing

 

Parent has entered into the equity commitment letter with the funds, dated December 23, 2010, 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 Parent, at or prior to the closing of the merger, for an amount equal to $449.3 million in the aggregate to fund (i) the merger consideration and any other amounts required to be paid by Parent, Merger Sub and the surviving corporation pursuant to the merger agreement that is not funded by the debt financing or the Company’s cash on hand and (ii) all related fees and expenses required to be paid by Parent, Merger Sub and the surviving corporation pursuant to the merger agreement and the financing letters.

Each fund may assign a portion of its equity commitment to other investors with the consent of the Company. 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 letter only by the amount actually contributed to Parent by such other investors at or prior to the closing of the merger.

 

The funds’ obligations to fund the equity financing contemplated by the equity commitments are generally subject to (i) the execution and delivery of the merger agreement (which took place on December 23, 2010), (ii) the satisfaction or waiver of each of the conditions to Parent’s and Merger Sub’s obligations to consummate the transactions contemplated by the merger agreement, (iii) the substantially contemporaneous funding of the debt financing pursuant to the terms and conditions of the debt commitment letters or any alternative financing that Parent and Merger Sub accept from alternative sources pursuant to and in accordance with the merger agreement and (iv) 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 letter to the extent that (a) the Company directly seeks specific performance of each fund’s obligation to fund its equity commitment (assuming all the representations and warranties of the funds in the equity commitment letter are true and correct) in certain circumstances in accordance with the terms of the merger agreement or (b) the Company seeks specific performance of Parent’s obligation to cause the funds to fund their respective equity commitments in certain circumstances in accordance with the terms of the merger agreement.

 

The obligation of the funds to fund their respective equity commitments will terminate upon the earlier to occur of (i) the closing of the merger, (ii) the termination of the merger agreement pursuant to its terms, (iii) the Company, or any person claiming by, through or for the benefit of the Company, accepting all or any portion of the Parent termination fee pursuant to the merger agreement or under the limited guaranty and (iv) 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 limited guaranty or asserting a claim against any of the funds or certain of their affiliates other than claims expressly permitted by the limited guaranty; except, in the case of the foregoing clause (iii), if the Company has made a claim under the equity commitment letter prior to such date or has notified the funds of its intention to make a claim prior to such date (in which case the Company will have to make such claim as promptly as reasonably practicable after giving such notice but in any event within 15 days thereafter), the equity commitment letter 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

 

JPM/BofA/Barclays Commitment Letter.   In connection with the entry into the merger agreement, Parent received the JPM/BofA/Barclays commitment letter, dated December 23, 2010 and amended and restated on January 10, 2011, from the commitment parties. Pursuant to the JPM/BofA/Barclays commitment letter, the lenders have committed to provide an aggregate of $1.025 billion in debt financing to Parent and Merger Sub, consisting of (i) a senior secured term loan facility in an aggregate principal amount of $650 million and (ii) a senior secured asset-based revolving facility with a maximum availability of $375 million (provided that only a specified amount may be drawn at the closing of the merger) on the terms and subject to the conditions of the JPM/BofA/Barclays commitment letter (including certain “market flex” provisions). Unless otherwise agreed by the parties, the JPM/BofA/Barclays commitment letter will terminate at 11:59 p.m., New York City time, on June 23, 2011 or such earlier date which is the earlier of (i) the date on which the merger agreement is validly terminated in accordance with its terms and (ii) the date of the consummation of the merger.

 

The debt facilities contemplated by the JPM/BofA/Barclays commitment letter are subject to the following closing conditions:

 

(i) that, except as set forth in the Company’s SEC filings since April 17, 2008 (other than disclosures contained in the “Risk Factors” and “Forward Looking Statements” sections or any other disclosures which are forward-looking in nature) or the matters contained in the disclosure schedule that the Company delivered in connection with the merger agreement, since January 31, 2010, there will not

have been any “material adverse effect” (as defined in the merger agreement) or any event, change or occurrence that, individually or in the aggregate, would reasonably be expected to have a “material adverse effect”;

 

(ii) the negotiation, execution and delivery of definitive loan documents consistent with the terms set forth in the JPM/BofA/Barclays commitment letter and fee letter entered into between the parties, and consistent with certain specified documentation principles;

 

(iii) consummation of the merger in accordance with the merger agreement (without giving effect to any amendments to the merger agreement or any waivers or consents thereof that are materially adverse to the lenders or the arrangers of the debt facilities without the consent of the arrangers of the debt facilities) concurrently, or substantially concurrently, with the initial funding of the debt facilities contemplated by the JPM/BofA/Barclays commitment letter;

 

(iv) consummation of the equity contribution by Leonard Green and/or its affiliates pursuant to the equity commitment letter and by other investors acceptable to the lenders and the refinancing of all indebtedness under the Company’s existing credit agreement concurrently, or substantially concurrently, with the initial funding of the debt facilities contemplated by the JPM/BofA/Barclays commitment letter on the terms set forth in the JPM/BofA/Barclays commitment letter (provided that, on the closing date, Parent or Merger Sub will not have any material indebtedness for borrowed money other than (a) the debt facilities, the mezzanine notes, the senior unsecured notes, any debt securities issued in lieu of the mezzanine notes or senior unsecured notes on terms not materially less favorable to the lenders than the senior unsecured notes and any debt securities issued as contemplated by the “market flex” provisions in the JPM/BofA/Barclays commitment letter, (b) any indebtedness permitted to be outstanding without any consent from Parent or its affiliates under the merger agreement and (c) other limited indebtedness to be agreed upon);

 

(v) receipt of (a) audited consolidated balance sheets and related statements of income, stockholders’ equity and cash flows of the Company for the three most recently completed fiscal years ended at least 90 days prior to the closing date and (b) unaudited consolidated balance sheets and related statements of income and cash flows of the Company for each fiscal quarter subsequent to the most recently ended fiscal year for which financial statements have been delivered pursuant to clause (a) above (other than the fourth fiscal quarter of the Company’s fiscal year) ended at least 45 days prior to the closing date (and the corresponding period of the prior fiscal year) provided that filing of the required financial statements on Form 10-K and Form 10-Q by the Company will satisfy the foregoing requirements with respect to the Company;

 

(vi) receipt of (a) a customary 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 (or 90 days in case such four-fiscal quarter period is the end of the Company’s fiscal year) prior to the closing date, prepared after giving effect to the merger and other transactions contemplated by the merger agreement and 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) and (b) in the case of the senior secured asset-based revolving facility, forecasts in form reasonably satisfactory to the arrangers of the debt facilities of balance sheets, income statements and cash flow statements for each month for the first twelve months following the closing date and on an annual basis for the term of the senior secured asset-based revolving facility (it being understood that the arrangers of the debt facilities will not be required to be satisfied with the projected performance or financial results contained in such projections);

 

(vii) receipt of the following closing documents: a solvency certificate, customary legal opinions, customary evidence of authority, customary officer’s certificates, good standing certificates (to the extent applicable), evidence of insurance and customary lien searches;

(viii) receipt of, at least five days prior to the closing date, all documentation and other information about Parent, the surviving corporation and its subsidiary guarantors required under applicable “know your customer” and anti-money laundering rules and regulations, including the PATRIOT Act, that has been requested in writing at least ten days prior to the closing date;

 

(ix) the taking of certain actions necessary to establish and perfect a security interest in certain items of collateral;

 

(x) payment of applicable fees and expenses, as contemplated by the JPM/BofA/Barclays commitment letter and fee arrangements;

 

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

 

(xii) with respect to the senior secured asset-based revolving facility, commercially reasonable efforts to deliver a field exam and inventory appraisals (and if not delivered, for purposes of calculating the borrowing base for the senior secured asset-based revolving facility, the most recent borrowing base under the Company existing credit agreement (determined as in effect on January 10, 2011) will initially apply).

 

Crescent Commitment Letter.   In connection with the entry into the merger agreement, Parent received the Crescent commitment letter, dated December 23, 2010, from Crescent to purchase (i) at par, $400 million of senior unsecured mezzanine notes and (ii) $20 million (and, at Crescent’s option, an additional $20 million) of equity securities, at the closing of the merger, on the terms and subject to conditions set forth in the Crescent commitment letter. It is expected that at the closing of the merger, either (i) up to $400 million of senior unsecured mezzanine notes will be purchased by Crescent on the terms and subject to conditions set forth in the Crescent commitment letter or (ii) in lieu of mezzanine notes, senior unsecured notes will be issued for an issue price of not less than 96% of the principal amount and a yield not to exceed 11.5% pursuant to a Rule 144A transaction (or other private placement), the aggregate principal amount of which may equal or exceed the principal amount of such mezzanine notes. The senior unsecured notes, if issued, will not be registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The commitments contemplated by the Crescent commitment letter are subject to the following closing conditions:

 

(i) the execution and delivery of definitive transaction documents relating to the mezzanine notes and the equity securities of the Company consistent with the terms set forth in the Crescent commitment letter and fee letter entered into between the parties, and consistent with certain specified documentation principles;

 

(ii) concurrent, or substantially concurrent, consummation of the merger in accordance with the merger agreement before June 23, 2011 (without giving effect to any amendments to the merger agreement or any waivers or consents thereof that are materially adverse to the purchasers of the mezzanine notes and equity securities pursuant to the Crescent commitment letter without the consent of Crescent and the purchasers holding greater than 50% of the commitments with respect to the mezzanine notes);

 

(iii) the absence of a “material adverse effect” (as defined in the merger agreement) since January 31, 2010, except as set forth in the Company’s SEC filings since April 17, 2008 (other than disclosures contained in the “Risk Factors” and “Forward Looking Statements” sections or any other disclosures which are forward-looking in nature) or the matters contained in the disclosure schedule that the Company delivered in connection with the merger agreement;

 

(iv) payment of applicable fees and expenses, as contemplated by the Crescent commitment letter and fee arrangements;

 

(v) receipt of a solvency certificate, evidence of insurance and customary lien searches provided that the purchasers of the mezzanine notes and equity securities are not required to be satisfied with the amount of or extent of coverage provided by such insurance and the content of such searches;

(vi) effectiveness of the debt facilities in accordance with their terms which will be consistent in all material respects with the JPM/BofA/Barclays commitment letter;

 

(vii) the accuracy in all material respects or in all respects, as applicable, of certain representations and warranties in the merger agreement and specified representations and warranties in the definitive documents with respect to the transactions contemplated by the Crescent commitment letter;

 

(viii) termination of the Company’s existing credit agreement and release of all liens granted under the existing credit agreement;

 

(ix) right to purchase $40 million of equity securities of the Company by Crescent on the terms and conditions set forth in the Crescent commitment letter concurrently with the consummation of the merger and the issuance of the mezzanine notes;

 

(x) consummation of the equity contribution by Leonard Green and/or its affiliates pursuant to the equity commitment letter and by other investors on the terms set forth in the Crescent commitment letter;

 

(xi) that the aggregate principal amount of debt for borrowed money of Parent and its subsidiaries, after giving effect to the draws on the debt facilities, the issuance of the mezzanine notes and the merger, does not exceed $1.180 billion and the amount of each debt funding source does not exceed the amount of such debt funding source permitted to be drawn as set forth in the Crescent commitment letter;

 

(xii) that, upon consummation of the merger, the portion of the outstanding equity securities of Parent owned and controlled by Leonard Green and its affiliates (together with the portion owned and controlled by Crescent and other purchasers under the Crescent commitment letter) will be a majority of all outstanding equity securities of Parent and Parent will own and control directly all of the equity securities of the Company; and

 

(xiii) receipt of, at least five days prior to the closing date, all documentation and other information about Parent, Merger Sub, the Company and the other funds (as defined in the Crescent commitment letter) required under applicable “know your customer” and anti-money laundering rules and regulations including the PATRIOT Act that has been requested in writing at least ten days prior to the closing date.

 

None of the debt commitment letters is subject to due diligence or a “market out” condition, which would allow the lenders or Crescent 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, Parent and Merger Sub will use their reasonable best efforts to obtain the equity and debt financing for the merger on the terms and conditions described in the 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 equity and debt financing unless the amount of the debt financing or the equity financing is increased by a corresponding amount no later than the date of such amendment, modification or waiver or (b) imposes additional conditions precedent to the initial availability of the debt financing or amends or modifies any of the existing conditions to the initial funding of the financing, in a manner that would reasonably be expected to delay, prevent or render materially less likely to occur the funding of the financing (or the satisfaction of the conditions thereto) on the date of the closing of the merger or adversely impact the ability of Parent, Merger Sub or the Company, as applicable, to enforce its rights against other parties to the financing letters or the definitive agreements with respect thereto, in each of clauses (a) and (b) in any material respect.

 

Pursuant to the limited guaranty delivered by the funds in favor of the Company, dated December 23, 2010, each fund has agreed to, severally but not jointly, guarantee the due and punctual performance and discharge of such fund’s respective percentage of (a) the payment obligations of Parent under the merger

agreement to pay the Parent termination fee of $90 million to the Company as and when due and (b) the expense reimbursement and indemnification obligations of Parent in connection with the costs and expenses incurred (x) in connection with any suit to enforce the payment of the Parent termination fee and (y) the arrangement of the financing of the merger (we refer to such expense reimbursement and indemnification obligations as the expense obligations) as and when due. See “The Merger Agreement — Termination Fees and Reimbursement of Expenses” beginning on page 90. However, each fund’s obligations under the limited guaranty are subject to a cap equal to such fund’s applicable portion of (x) $90 million plus (y) any expense obligations of Parent minus (z) any amount actually paid by Parent or Merger Sub to the Company in respect of the expense obligations.

 

Subject to certain exceptions, the limited guaranty will terminate upon the earlier of (a) the effective time of the merger, (b) the termination of the merger agreement in accordance with its terms in circumstances where the Parent termination fee does not become payable and there are no expense obligations of Parent remaining unpaid and (c) the seven month anniversary of the date of the merger agreement, except, in the case of the foregoing clause (c), if the Company has made a claim under the limited guaranty prior to such date or has notified the funds of its intention to make a claim prior to such date (in which case the Company will have to make such claim as promptly as reasonably practicable after giving such notice but in any event within 15 days thereafter), the relevant date will be the date that such claim is finally satisfied or otherwise resolved by agreement of the parties to the limited guaranty or a final, non-appealable judgment of a governmental entity of competent jurisdiction.

 

The closing of the merger will take place no later than the third business day following the date on which the last of the conditions to closing of the merger (described under “The Merger Agreement — Conditions to the Merger” beginning on page 87) have been satisfied or waived (to the extent permitted by applicable law) (other than the conditions that by their nature are to be satisfied at the closing of the merger, but subject to the satisfaction or waiver of those conditions). However, the merger agreement provides that if the marketing period (as summarized under “The Merger Agreement — Closing and Effective Time of the Merger; Marketing Period” beginning on page 67) 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 (a) any business day during the marketing period specified by Parent on no less than three business days’ prior written notice to the Company and (b) the next business day after the final day of the marketing period. Notwithstanding the defined term “marketing period” in the merger agreement, Parent 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 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 anticipate that the merger will be consummated by the end of March 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 or other appropriate document with the Secretary of State of the State of Ohio (or at such later date as the Company, Parent and Merger Sub may agree and specify in the certificate of merger).

 

 

Promptly, and in any event within three business days, after the effective time of the merger, each record holder of shares of Company common stock (other than the excluded shares) will be sent a letter of transmittal 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 paying agent (described in “The Merger Agreement — Exchange and Payment Procedures” beginning on page 70) 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 paying agent. If your shares are certificated, you must also surrender

your stock certificate or certificates to the paying agent. If ownership of your shares is not registered in the transfer records of the Company, a check for any cash to be delivered will only be issued if the 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.

 

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 the surviving corporation, post a bond in a customary amount as indemnity against any claim that may be made against it with respect to such certificate. These procedures will be described in the letter of transmittal that you will receive, which you should read carefully in its entirety.

 

 

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 shareholders generally, as more fully described below. Our board of directors and the special committee were aware of these interests and considered them, among other matters, in reaching the decision to approve the merger agreement and recommend that our shareholders vote in favor of adopting the merger agreement. For the purposes of all the agreements and plans to which the Company is a party described below that contain a change in control provision, the completion of the transactions contemplated by the merger agreement will constitute a change in control.

 

Strategic Transactions Committee Compensation

 

Members of the special committee did not receive from the Company any compensation for attending committee meetings or board meetings other than certain quarterly cash retainers and RSUs granted to such members under the Company stock plans as described in “— Treatment of Restricted Shares, Performance Shares, Restricted Stock Units and Stock Equivalent Units” below. As of the date of this proxy statement, the board of directors has not approved any additional compensation to be paid to the members of the special committee. The board of directors may, prior to the effective time, approve additional compensation for the members of the special committee to compensate them for their time and efforts in serving on the committee, subject to the merger agreement’s contractual restrictions on the conduct of our business prior to the completion of the merger.

 

Treatment of Stock Options

 

The merger agreement provides that, as of the effective time of the merger, each of the outstanding options, whether vested or unvested, will be cancelled and will entitle the holder thereof to receive, as soon as reasonably practicable after the effective time (but in any event no later than the first payroll date after the effective time), an amount in cash equal to the product of (i) the total number of shares subject to the option immediately prior to the effective time times (ii) the excess, if any, of the per share merger consideration over the exercise price per share under such option, less any required withholding taxes.

 

The following table sets forth, as of the record date, for each of our directors and executive officers holding stock options (without giving effect to any roll-over of stock options by executive officers of the Company as described below under “ — Arrangements with Rollover Investors ”): (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 the Company at 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; (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 the Company at the effective time of the merger; and (d) the aggregate amount of

consideration that we expect to pay to all such individuals with respect to their stock options in connection with the merger.

 

 

 

 

Treatment of Restricted Shares, Performance Shares, Restricted Stock Units and Stock Equivalent Units

 

The merger agreement provides that, as of the effective time of the merger, any vesting conditions or restrictions applicable to any restricted shares granted pursuant to the Company stock plans will lapse, and such restricted shares will be treated the same as all other shares of Company common stock (other than the dissenting shares) and as such will be entitled to receive the per share merger consideration, less applicable withholding taxes. The restricted shares cancelled and converted into cash in connection with the merger will include the Company’s outstanding performance shares, which were granted by the Company on March 23, 2010 and will be earned, as of the end of our 2011 fiscal year, based on our financial performance during such

fiscal year. Payment for restricted shares will be made at the same time that the merger consideration is paid to our shareholders.

 

The merger agreement also provides that, as of the effective time of the merger, each outstanding RSU and SEU under the Company stock plans will be cancelled and will entitle the holder thereof to receive, as soon as reasonably practicable after the effective time (but in any event no later than the first payroll date after the effective time), the per share merger consideration, less any required withholding taxes.

 

The following table sets forth, as of the record date, for each of our directors and executive officers holding restricted shares, performance shares, RSUs and/or SEUs: (a) the aggregate number of restricted shares that will vest in connection with the merger; (b) the aggregate number of performance shares that will vest in connection with the merger (assuming that such performance shares are earned at maximum payout prior to the merger); (c) the aggregate number of RSUs and SEUs that will vest in connection with the merger; and (d) the pre-tax value of such restricted shares, performance shares, RSUs and SEUs at the $61.00 per share merger consideration.

 

 

 

 

 

Treatment of Director Deferred Stock Units

 

Under our Director Deferred Stock Plan, our non-employee directors may elect each year to convert some or all of their cash compensation into deferred stock units. The conversion of cash compensation into deferred stock units is based on the closing market price of the shares of Company common stock on the date the cash compensation would have been payable if it were paid in cash. The deferred stock units are credited to an account for the non-employee director, and no stock is to be issued to the director until the earlier of a distribution date selected by the non-employee director or his or her retirement. In connection with the merger, we currently expect that our Director Deferred Stock Plan will be terminated and all of the deferred stock units held by our directors will be cancelled and paid in cash in the amount of $61.00 per unit. In connection with the termination of this plan, the following payments will be made to our non-employee directors: Scott Cowen, $216,611; Ira Gumberg, $416,508; Frank Newman, $520,025; David Perdue, $19,032; and Tracey Travis, $283,284.

 

Discussions with Leonard Green

 

As described under “The Merger — Background of the Merger” above, members of the senior management team of the Company held discussions with representatives of Leonard Green prior to the execution of the merger agreement regarding employment and equity participation agreements for the period following the closing of the merger. No definitive agreements have been entered into regarding such matters as of the date of this proxy statement, however. Leonard Green requested the ability to enter into employment and equity participation agreements with members of our senior management team following the conclusion of the go-shop period (which concluded at 11:59 p.m. (New York City time) on February 14, 2011), and is permitted under the merger agreement to do so (subject to certain conditions). After the conclusion of the go-shop period, Leonard Green and members of the senior management team of the Company began negotiating definitive agreements with respect to employment and equity participation for the period following the closing of the merger as described below under “ The Merger — Arrangements with Rollover Investors ” and “ The Merger — New Stock Option Plan .”

 

In addition, under the merger agreement, the Company will be permitted, prior to the effective time, (a) to pay annual bonuses for fiscal 2011 in an amount equal to the annual bonus earned by participants for the 2011 fiscal year and (b) to establish bonus targets, maximums and performance goals for fiscal 2012 in the ordinary course of business consistent with past practice.

 

Employee Benefits

 

The merger agreement provides that, after the merger, the Company must continue to provide for a period of one year certain levels of base salary, bonus and incentive opportunities, welfare benefits and severance benefits to the Company’s employees, including our executive officers, as well as take certain actions in respect of vesting, credit and eligibility under the employee benefits provided to the Company’s employees, including our executive officers. For a more detailed description of these provisions of the merger agreement, please see the section of this proxy statement titled “The Merger Agreement — Employee Matters” on page 85.

Termination of Clawback Agreements

 

As following the closing of the merger the Company will no longer be public, the merger agreement provides that, as of the effective time of the merger, our clawback policy and all of the clawback agreements entered into with our executive officers will terminate.

 

Deferred Compensation Plan

 

The Company offers a Deferred Compensation Plan to its upper level management, to which the executives and the Company may contribute. Both Messrs. Haverkost and Kerr participate in the plan. In connection with the closing of the merger, the Company may elect to terminate the Deferred Compensation Plan and distribute previously deferred amounts to participants. If the Company elects to terminate the Deferred Compensation Plan in connection with the closing of the merger, Messrs. Haverkost and Kerr would receive $203,319 and $66,504, respectively (as of January 31, 2011).

 

Severance Arrangements

 

We have entered into agreements with each of our executive officers that provide for severance payments and other benefits upon a termination of employment after a change of control of the Company. Each of these agreements was originally entered into at the time the applicable executive officer first assumed his position as an executive officer of the Company.

 

The consummation of the merger will constitute a change of control of the Company under these agreements, and the agreements will therefore become operative in the event that any of our executive officers is terminated by the Company without “Cause” or terminates his employment with the Company for “Good Reason” within 24 months after the effective time of the merger.

 

Under the agreements, “Cause” is defined as the executive officer’s willful failure to substantially perform his normal duties, his conviction of fraud, embezzlement, theft or other criminal act constituting a felony, or his willful gross negligence materially and demonstrably injurious to the Company. “Good Reason” is defined as a material reduction in the executive officer’s base salary, a material reduction in his short and long-term incentive compensation opportunities, a material reduction in his duties, responsibilities or position, or his place of employment being moved by more than 50 miles. To receive benefits under the agreement for a “Good Reason” termination, an executive officer must give the Company notice within 90 days of the occurrence of the “Good Reason” and specify a termination date that is between 30 and 90 days after such notice. The Company then has the opportunity to remedy the event giving rise to the “Good Reason” prior to the termination date specified by the executive officer.

 

If an executive officer becomes entitled to benefits under his agreement, he will be entitled to payment of (a) a lump sum equal to three times the sum of his base salary plus bonus in the case of Messrs. Webb and Smith and two times the sum of his base salary plus bonus in the case of Messrs. Kerr and Haverkost, (b) any unpaid bonus for any prior year, and (c) a pro rata bonus for that part of the current year that ends on the date of termination of employment. The executive officer also will be entitled to receive continued group term life insurance coverage for three years in the case of Messrs. Webb and Smith and two years in the case of Messrs. Kerr and Haverkost, and will be eligible for up to 18 months of COBRA medical and dental insurance coverage. The group term life insurance coverage will terminate if the executive officer becomes eligible for similar benefits with another employer.

 

The agreements also provide that, in the event of a qualifying termination within 24 months of a change of control, Messrs. Webb, Smith and Kerr will be provided with additional cash payments in the amount of $64,799, $92,735 and $61,823, respectively. These payments are intended to replace the continued Company-subsidized group medical and dental insurance coverage that was provided for under prior agreements with Messrs. Webb, Smith and Kerr.

 

These agreements also provide that if any payments to an executive officer in connection with a change of control would be subject to the excise tax under Sections 280G or 4999 of the Internal Revenue Code on excess parachute payments, we will, in general, “gross-up” the executive officer’s compensation to offset the

excise tax, except that (a) if the aggregate parachute payments that would otherwise be made to the executive officer do not exceed 110% of the maximum amount of parachute payments that can be made without triggering the excise tax, the parachute payments to the executive officer will be reduced to the extent necessary to avoid the imposition of the excise tax and no “gross-up” will be paid, and (b) if the aggregate parachute payments that would otherwise be made to the executive officer exceed 110% of the maximum amount of parachute payments that can be made without triggering the excise tax, the full amount of those parachute payments will be made, the executive officer will have to individually bear the excise tax allocable to 10% of the aggregate total of parachute payments, and we will “gross-up” the executive officer’s compensation to offset the remaining excise taxes.

 

Arrangements with Rollover Investors

 

Each of Messrs. Webb, Smith, Haverkost and Kerr, who we refer to collectively as the rollover investors, has indicated their intent to enter into a contribution and subscription agreement with Parent. Pursuant to the contribution and subscription agreement, it is contemplated that the rollover investors will collectively commit to make the equivalent of an $8.5 million investment (based upon the per share merger consideration of $61.00) in Parent, by one or more of the following: (i) contributing, immediately prior to the effective time of the merger, shares of Company common stock to Parent, (ii) exchanging, immediately prior to the effective time of the merger, outstanding options to purchase shares of Company common stock under the Company stock plans for options to purchase Parent common stock (“Rollover Options”) granted pursuant to the stock option plan described below under “—  New Stock Option Plan ” or (iii) subscribing for shares of Parent common stock for cash. Additionally, Parent has informed the Company that other employees of the Company may be offered the ability to purchase shares of Parent common stock or exchange options to purchase shares of Company common stock for options to purchase Parent common stock, in each case on the same terms and conditions as the rollover investors.

 

Parent has informed the Company that the rollover investors’ commitments pursuant to the contribution and subscription agreement are contemplated to be conditioned upon the contemporaneous equity contribution of cash by the funds in accordance with the equity commitment letter, to Parent in exchange for shares of Parent common stock. Parent currently expects that Messrs. Webb, Smith, Haverkost and Kerr will collectively beneficially own less than 10% of the outstanding common stock of Parent immediately after the merger (including shares subject to any Rollover Options granted to the rollover investors and any options to purchase Parent common stock granted pursuant to the stock option plan described below under “—  New Stock Option Plan ,” but not including any shares beneficially owned by additional employees of the Company who may have the opportunity to invest in Parent and who choose to make such investment prior to the closing).

 

Parent has informed the Company that the commitments of the rollover investors under the contribution and subscription agreement are contemplated to be further conditioned upon (i) the prior adoption by Parent of a stock option plan as described below under “—  New Stock Option Plan ,” including the grant by Parent to each rollover investor of an option to purchase a specified number of shares of Parent common stock and (ii) the execution of the stockholders agreement described below.

 

Parent has informed the Company that each of the rollover investors intends to enter into a management stockholders agreement with Parent and the funds which will govern the parties’ rights and obligations with respect to the capital stock of Parent following completion of the merger. Among other rights and obligations, Parent contemplates that the management stockholders agreement will provide the rollover investors with rights, under certain circumstances, to participate in sales, purchases and registrations of Parent common stock. In addition, Parent contemplates that the management stockholders agreement will provide that, as of the effective time of the merger, the board of directors of Parent will consist of no more than a specified number of directors, with Mr. Webb and Mr. Smith serving as directors and Mr. Webb serving as chairman of the board of directors.

New Stock Option Plan

 

In connection with the closing of the merger, Parent has informed the Company that it expects to adopt a new stock option plan covering Rollover Options and providing for additional grants to Parent’s employees, consultants or directors of stock options to purchase up to approximately 7.5% of the fully-diluted shares of common stock of Parent, subject to partial reduction to reflect increased dilution in connection with the issuance of Rollover Options. Parent does not contemplate granting an option to any individual member of management in excess of approximately 2% of the fully-diluted common stock of Parent, subject to partial reduction to reflect increased dilution in connection with the issuance of Rollover Options to the applicable executive. It is contemplated that the remaining shares available for issuance under the stock option plan following the closing date will be available for post-closing grants as determined by the board of directors of Parent in consultation with Messrs. Webb and Smith.

 

Employment-Related Arrangements Following the Merger

 

Parent has informed the Company that it is contemplated that Mr. Webb will enter into an employment letter agreement, pursuant to which he will agree to continue to serve as the Chief Executive Officer of the Company for a period following the merger in accordance with Mr. Webb’s existing employment agreement and severance agreement. Thereafter, Parent expects that, upon the Company’s request, Mr. Webb will agree to serve as the non-executive chairman of the Company’s board of directors and will be entitled to receive an annual salary of $250,000.

 

Parent has informed the Company that it is contemplated that Mr. Smith will enter into an employment agreement to provide for his continued employment following the merger for a term of five years as president and chief operating officer of the Company. Parent contemplates that Mr. Smith will be entitled to receive salary and benefits consistent with his existing employment agreement.

 

Indemnification of Directors and Officers

 

The Company is incorporated under the laws of the State of Ohio. Consistent with Ohio law, our Amended and Restated Code of Regulations provides that we will indemnify our directors and officers from liability relating to their service to the Company if the director or officer acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. With respect to actions brought by or in the right of the Company, our Amended and Restated Code of Regulations provides that the Company will indemnify our directors and officers from liability relating to their service to the Company if the director or officer acted in good faith and in a manner he or she reasonably believed to be in or not opposed to be the best interests of the Company, except that no indemnification may be made if the director or officer is finally adjudged to be liable for negligence or misconduct in the performance of his or her duties to the Company unless and only to the extent that a court determines that, despite the adjudication of liability but in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity. If a director or officer is successful on the merits in defending any action or suit, our Amended and Restated Code of Regulations mandates that he or she be indemnified by us.

 

Our Amended and Restated Code of Regulations also permits the Company to purchase and maintain insurance on behalf of our directors and officers insuring them against any liability asserted against them in their capacities as directors and officers of the Company, whether or not the Company would have the authority to indemnify them under our Amended and Restated Code of Regulations or Ohio law. Consistent with these provisions, we maintain liability insurance that covers claims against our directors and officers and also insures us against amounts that we are required to pay to indemnify our directors and officers, in each case subject to customary policy limits and retention amounts.

 

We have entered into indemnification agreements with each of our non-employee directors. These agreements were intended to provide each of our non-employee directors with the maximum indemnification protection permitted under Ohio law. The agreements clarify the procedures that are to be followed if a non-employee director is entitled to indemnification, provide for the advancement of legal defense costs, allow the

non-employee director to recover enforcement costs if he or she is required to take action to enforce his or her indemnification rights, and obligate the Company to use commercially reasonable efforts to maintain directors and officers insurance coverage at a customary level. We are required to maintain this insurance coverage for the duration of each non-employee director’s service on our board of directors and for at least six years thereafter.

 

In the merger agreement, Parent agrees that it and the surviving corporation will, for a period of six years after the merger, provide indemnification to our directors and officers to the fullest extent permitted by law, assume the indemnity obligations under our Amended and Restated Code of Regulations and director indemnity agreements, and maintain in effect the Company’s current directors and officers liability insurance coverage. For a more detailed description of these provisions of the merger agreement, please see the section of this proxy statement titled “The Merger Agreement — Indemnification; Directors’ and Officers’ Insurance” on page 94.

 

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, 1,233,099 shares of Company common stock (including restricted shares and shares of Company common stock acquired under our ASOP or held in our 401(k) plan, but not including any shares of Company common stock deliverable upon exercise or conversion of any options or that may be earned as performance shares, RSUs, SEUs or deferred stock units), representing 4.68% 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 and “FOR” the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

 

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

 

The following is a summary of the material U.S. federal income tax consequences of the merger to U.S. holders (as defined below) whose shares of Company common stock are converted into the right to receive cash in the merger. This summary does not purport to consider all aspects of U.S. federal income taxation that might be relevant to our shareholders. For purposes of this discussion, we use the term “U.S. holder” to mean a beneficial owner of shares of Company common stock that is, for U.S. federal income tax purposes:

 

 

If a partnership (including an entity treated as a partnership for U.S. federal income tax purposes) holds Company common stock, the tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. A partner of a partnership holding Company common stock should consult the partner’s tax advisor regarding the U.S. federal income tax consequences of the merger to such partner.

 

This discussion is based on current law, which is subject to change, possibly with retroactive effect. The discussion applies only to beneficial owners who hold shares of Company common stock as capital assets, and does not apply to shares of Company common stock received in connection with the exercise of employee

stock options, stock acquired under the ASOP, or stock otherwise received as compensation, shareholders who hold an equity interest, actually or constructively, in Parent or the surviving corporation after the merger, shareholders who validly exercise their rights under the Ohio Revised Code to object to the merger or to certain types of beneficial owners who may be subject to special rules (such as insurance companies, banks, tax-exempt organizations, financial institutions, broker-dealers, partnerships, S corporations or other pass-through entities, mutual funds, traders in securities who elect the mark-to-market method of accounting, shareholders subject to the alternative minimum tax, shareholders that have a functional currency other than the U.S. dollar or shareholders who hold Company common stock as part of a hedge, straddle, constructive sale or conversion transaction). This discussion also does not address the U.S. tax consequences to any shareholder who, for U.S. federal income tax purposes, is a non-resident alien individual, foreign corporation, foreign partnership or foreign estate or trust, and does not address the receipt of cash in connection with the cancellation of the RSUs and SEUs or options to purchase shares of Company common stock, or any other matters relating to equity compensation or benefit plans (including the 401(k) plan). This discussion does not address any aspect of state, local or foreign tax laws.

 

Exchange of Shares of Common Stock for Cash Pursuant to the Merger Agreement

 

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 capital 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 the U.S. holder’s adjusted tax basis in such shares. A U.S. holder’s adjusted tax basis will generally equal the price the U.S. holder paid for such shares. Gain or loss will be determined separately for each block of shares of Company common stock ( i . e ., shares of Company common stock acquired at the same cost in a single transaction). Such gain or loss will be long-term capital gain or loss provided that the U.S. holder’s holding period for such shares of Company common stock is more than 12 months at the time of the completion of the merger. Long-term capital gains of non-corporate U.S. holders are generally eligible for reduced rates of taxation. There are limitations on the deductibility of capital losses. The gain or loss will generally be income or loss from sources within the U.S. for foreign tax credit limitation purposes.

 

Backup Withholding and Information Reporting

 

Backup withholding of tax may apply to cash payments to which a U.S. holder is entitled under the merger agreement, unless the U.S. holder or other payee provides a taxpayer identification number, certifies that such number is correct and otherwise complies with the backup withholding rules. Each of our U.S. holders should complete and sign, under penalty of perjury, an Internal Revenue Service Form W-9 included as part of the letter of transmittal and return it to the paying agent, in order to provide the information and certification necessary to avoid backup withholding, unless an exemption applies and is established in a manner satisfactory to the paying agent.

 

Backup withholding is not an additional tax. Any amounts withheld from cash payments to a U.S. holder pursuant to the merger under the backup withholding rules will be allowable as a refund or a credit against such U.S. holder’s U.S. federal income tax liability, provided that the required information is timely furnished to the Internal Revenue Service.

 

Cash payments made pursuant to the merger will also be subject to information reporting unless an exemption applies.

 

The U.S. federal income tax consequences described above are not intended to constitute a complete description of all tax consequences relating to the merger. Because individual circumstances may differ, each shareholder should consult the shareholder’s tax advisor regarding the applicability of the rules discussed above to the shareholder and the particular tax effects to the shareholder of the merger in light of such shareholder’s particular circumstances and the application of state, local and foreign tax laws.

 

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 Parent 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 Parent filed such a notification and report form on January 12, 2011 and each requested early termination of the waiting period, which was granted on January 24, 2011.

 

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

 

There can be no assurance that all of the regulatory approvals described above will be sought or obtained and, if obtained, there can be no assurance as to the timing of any approvals, the ability of Parent or the Company to obtain the approvals on satisfactory terms or the absence of any litigation challenging such approvals. There can also be no assurance that the DOJ, the FTC or any other governmental entity or any private party will not attempt to challenge the merger on antitrust grounds and, if such a challenge is made, there can be no assurance as to its result.

 

In connection with the merger, on December 30, 2010 and January 14, 2011, respectively, purported shareholder derivative and class action complaints were filed in the Court of Common Pleas, Summit County, the State of Ohio captioned Dalesandro, Marika v. Cowen, Scott, et al., CV-2010-12-8510, and Locey, Lea v. Cowen, Scott, et al., CV-2011-01-0282, respectively, against the Company, members of its board of directors, Parent, Merger Sub and Leonard Green. The complaints allege, among other things, that (1) the members of our board of directors breached their fiduciary duties of loyalty, good faith, candor and independence owed to the Company and the Company’s public shareholders and have acted to put their personal interests ahead of the interests of the Company and (2) Leonard Green aided and abetted such members’ alleged breaches of their fiduciary duties. The complaints seek among other things, injunctive relief, rescission of the merger agreement and awarding the plaintiffs the costs and disbursements of the actions including reasonable attorneys’ and experts’ fees. The Company, the members of its board of directors and each of the other named defendants believe that the lawsuits are without merit and intend to defend each of them vigorously.

 

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 this merger.

 

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, Parent and Merger Sub were qualified and subject to important limitations agreed to by the Company, Parent and Merger Sub in connection with negotiating the terms of the merger agreement. In particular, in your review of the representations and warranties contained in the merger agreement and described in this summary, it is important to bear in mind that the representations and warranties were negotiated with the principal purposes of establishing the circumstances in which a party to the merger agreement may have the right not to 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 shareholders and reports and documents filed with the SEC and in some cases were qualified by the matters contained in the disclosure schedule 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 agreement provides for the merger of Merger Sub with and into the Company with the Company surviving the merger on the terms and subject to the conditions set forth in the merger agreement and becoming a wholly-owned subsidiary of Parent as a result of the merger. At the effective time, all the properties, rights, privileges, powers, immunities and franchises of the Company and Merger Sub will vest in the Company, which will continue as the surviving corporation, and all debts, liabilities and duties of the Company and Merger Sub will become the debts, liabilities and duties of the surviving corporation as provided in the Ohio Revised Code.

 

At the effective time, the articles of incorporation and code of regulations of the surviving corporation will be amended and restated to be in the form of the articles of incorporation and code of regulations of Merger Sub (except with respect to the name of the Company) until thereafter amended in accordance with their terms or by applicable law.

 

The board of directors of the surviving corporation will, from and after the effective time, consist of the directors of Merger Sub until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal. The officers of the surviving corporation will, from and after the effective time, be the officers of the Company until their successors have been duly appointed and qualified or until their earlier death, resignation or removal.

 

The closing of the merger will take place at 10:00 a.m. (New York City time) on a date to be specified by Parent and the Company, which we refer to as the closing date, no later than the third business day following the date on which the last of the conditions to closing (described under “The Merger Agreement —

Conditions to the Merger” ) has been satisfied or waived (to the extent permitted by applicable law) (other than those conditions that by their nature are to be satisfied at the closing, but subject to the satisfaction or waiver of those conditions), unless another date, time, or place is agreed to in writing by Parent and the Company. 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 Parent on no less than three business days’ prior written notice to the Company and (2) the next business day after the final day of the marketing period.

 

As soon as practicable on the closing date, the parties will file with the Secretary of State of the State of Ohio a certificate of merger in accordance with the relevant provisions of the Ohio Revised Code. The merger will become effective upon the filing of the certificate of merger, or at such later time as is agreed to by the parties prior to the closing date and specified in the certificate of merger.

 

The Marketing Period

 

The marketing period is the first period of 15 consecutive business days after the date of the merger agreement throughout which (1) Parent has the required information (as described below), (2) the required information is compliant (as described below) and (3) all closing conditions to the obligations of Parent and Merger Sub (described under “The Merger Agreement — Conditions to the Merger” ) have been satisfied (other than the condition relating to Company shareholder approval, which must be satisfied no later than five business days prior to the end of the marketing period, 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 Required Information

 

In connection with the marketing period, we refer to the following information, which the Company is required to provide to Parent under the merger agreement, as the required information:

 

 

Whether the Required Information is “Compliant”

 

In determining whether the required information is compliant, we use the term “compliant” to mean that the required information satisfies the following five requirements:

 

 

Commencement of the Marketing Period

 

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

 

 

The marketing period will not commence and will not be deemed to have commenced prior to (1) the no-shop period start date (which was 12:00 a.m. Eastern time on February 15, 2011), (2) the mailing of this proxy statement to shareholders or (3) the date on which the Company files its annual report on Form 10-K for the fiscal year ended January 29, 2011.

 

In addition, the marketing period will not commence and will be deemed not to have commenced if on or prior to the completion of the 15 consecutive business day period comprising the marketing period, either:

 

 

 

Notwithstanding the defined term “marketing period” in the merger agreement, Parent 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.

 

 

Common Stock

 

At the effective time, each share of Company common stock issued and outstanding immediately prior thereto (other than the excluded shares described in this subsection) will be automatically cancelled and converted into and will thereafter represent solely the right to receive the per share merger consideration (less any applicable withholding taxes). All Company common stock owned by the Company as treasury stock and any shares of Company common stock owned by Parent, Merger Sub or any other direct or indirect wholly-owned subsidiary of Parent will be cancelled and cease to exist immediately prior to the effective time without payment of consideration (including, if any, shares contributed to Parent by the rollover investors as described above under “The Merger — Interests of Certain Persons in the Merger — Arrangements with Rollover Investors”). Common stock owned by any of the Company’s direct or indirect wholly-owned subsidiaries will not represent the right to receive the merger consideration and will, at the election of Parent, either convert into shares of a class of stock of the surviving corporation designated by Parent or be canceled. Company common stock owned by shareholders who have perfected and not otherwise waived, withdrawn or lost such shareholders’ rights as dissenting shareholders, including the right to demand to be paid the fair cash value for their shares (under the Ohio Revised Code) will not be converted into the right to receive the merger consideration. Such shareholders will instead be entitled to the right to demand fair cash value for their shares as provided under the Ohio Revised Code and as described under “— Dissenting Shareholders” below. If any such shareholder fails to perfect or otherwise waives, withdraws or loses any such rights as a dissenting shareholder, that shareholder’s Company common stock will be deemed to have been converted, as of the effective time, into only the right to receive the merger consideration at the effective time.

 

Options

 

At the effective time, each of the outstanding options to purchase shares of Company common stock under the 1998 Incentive Compensation Plan or the 2008 Incentive Compensation Plan, which we refer to as the Company stock plans, whether vested or unvested, will be cancelled and (other than, if any, options exchanged by the rollover investors for options to purchase Parent common stock as described above under “The Merger — Interests of Certain Persons in the Merger — Arrangements with Rollover Investors”) will entitle the holder thereof to receive, as soon as reasonably practicable after the effective time (but in any event no later than the first payroll date after the effective time), an amount in cash equal to the product of (1) the total number of shares subject to the option immediately prior to the effective time times (2) the excess, if any, of the per share merger consideration over the exercise price per share under such option, less any required withholding taxes.

Restricted Shares

 

At the effective time any vesting conditions or restrictions applicable to any restricted shares (including performance shares) of Company common stock granted pursuant to the Company stock plans will lapse, and such restricted shares will be treated the same as all other shares of Company common stock (other than the dissenting shares) and as such will be entitled to receive the per share merger consideration, less applicable withholding taxes.

 

Restricted Stock Units

 

At the effective time, each outstanding restricted stock unit and stock equivalent unit under the Company stock plans will be cancelled and will entitle the holder thereof to receive, as soon as reasonably practicable after the effective time (but in any event no later than the first payroll date after the effective time) the per share merger consideration, less any required withholding taxes.

 

Company Awards

 

At the effective time, each Company award will be cancelled and will entitle the holder thereof to receive, as soon as reasonably practicable after the effective time (but in any event no later than the first payroll date after the effective time), an amount in cash equal to the product of (x) the total number of shares subject to such Company award immediately prior to the effective time times (y) the per share merger consideration of $61.00 (or, if the Company award provides for payments to the extent the value of the shares exceeds a specified reference price, the amount, if any, by which $61.00 exceeds such reference price and in all cases subject to any existing plan limits), less any required withholding taxes.

 

Associate Stock Ownership Plan

 

The Company will take all actions necessary to terminate the ASOP, in its entirety as of immediately prior to the closing date and to ensure that no offering period with respect to the ASOP is commenced on or after the date of the merger agreement. In addition, if the closing occurs prior to the end of the offering period in existence under the ASOP on the date of the merger agreement, the Company will take all actions necessary to cause a new exercise date to be set under the ASOP, which date will be immediately prior to the anticipated closing date upon which each participant’s accumulated payroll deductions will be used to purchase shares of Company common stock immediately prior to the effective time in accordance with the terms of the ASOP. Shares of Company common stock acquired under the ASOP prior to the closing of the merger will be treated in a manner consistent with other outstanding shares of Company common stock upon the closing of the merger.

 

 

Prior to the effective time, Parent will designate a bank or trust company reasonably acceptable to the Company to act as agent for payment of the merger consideration, which we refer to as the paying agent, and prior to the closing date, enter into an agreement with the paying agent in a form reasonably acceptable to the Company. At or prior to the effective time, Parent will deposit or cause to be deposited with the paying agent an amount in cash sufficient to pay the aggregate merger consideration to the shareholders, which we refer to as the exchange fund.

 

The paying agent will not disburse any part of the exchange fund until 10 days after approval of the merger at the shareholders meeting, which we refer to as the dissenters determination date. Upon the date that is one business day after the dissenters determination date, the paying agent will disburse to Parent that portion of the exchange fund (if any) attributable to dissenting shares of Company common stock. If such shares cease to be dissenting shares, Parent will make available or cause to be made available to the paying agent, additional funds adequate to pay the merger consideration in respect of such shares. Parent will or will cause the surviving corporation to, promptly replace or restore the cash in the exchange fund so as to ensure that the exchange fund is at all times maintained at a level sufficient for the paying agent to make such payments as are required under the merger agreement in respect of the merger consideration.

Promptly (but in any event within three business days) after the effective time, the surviving corporation will cause the paying agent to mail to each shareholder of record of Company common stock a letter of transmittal (which will specify that delivery will be effected, and risk of loss and title to the stock certificates will pass, only upon delivery of the certificates to the paying agent, and which will have such other customary provisions as Parent and the Company may reasonably agree) and instructions for the surrendering of stock certificates representing Company common stock in exchange for payment of the merger consideration.

 

Holders of certificates representing Company common stock will be entitled to receive the per share merger consideration in exchange therefor no earlier than the dissenters determination date, upon surrender of a stock certificate for cancellation to the paying agent along with a duly completed and validly executed letter of transmittal (and such other customary documents as may reasonably be required by the paying agent). If payment of the merger consideration is to be made to a person other than the person in whose name the surrendered certificate is registered, it will be a condition of payment that (1) the certificate surrendered be properly endorsed or otherwise be in proper form for transfer and (2) the person requesting such payment will have paid any transfer or other taxes required and will have established to the reasonable satisfaction of the surviving corporation that such tax has either been paid or is not applicable. No interest will be paid or accrued on the cash payable as the merger consideration. Parent, the surviving corporation and the paying agent will be entitled to deduct and withhold any applicable taxes from the merger consideration. Any sum that is withheld will be treated as having been paid to the person in respect of whom such deduction and withholding was made.

 

At the effective time, the stock transfer books of the Company will be closed and thereafter there will be no further registration of transfers on the stock transfer books of the surviving corporation of shares of Company common stock that were outstanding immediately prior to the effective time. If, after the effective time, certificates are presented to the surviving corporation for any reason, they will be canceled and exchanged as described herein.

 

Any portion of the merger consideration deposited with the paying agent that remains unclaimed by former record holders of common stock for one year after the closing date (and any interest paid thereon) will be delivered to the surviving corporation at its request. Record holders of Company common stock who have not complied with the above-described exchange and payment procedures will thereafter be entitled to look only to Parent and the surviving corporation (subject to abandoned property, escheat, or other similar laws) for payment of the merger consideration. Any amounts remaining unclaimed by record holders at such time at which such amounts would otherwise escheat to or become property of any governmental authority shall become, to the extent permitted by law, the property of Parent or its designees, free and clear of all claims or interest of any person previously entitled thereto. None of the parties to the merger agreement, the surviving corporation or the paying agent will be liable to any person for merger consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar law.

 

If any certificate representing Company common stock has been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such certificate representing Company common stock to be lost, stolen or destroyed and, if required by the surviving corporation, the posting by such person of a bond, in such reasonable amount as Parent may direct, as indemnity against any claim that may be made against it with respect to such certificate, the paying agent will pay, in exchange for such lost, stolen or destroyed certificate, the applicable merger consideration to be paid in respect of the shares of Company common stock formerly represented by such certificate.

 

 

To the extent required by the Ohio Revised Code, shares of Company common stock issued and outstanding immediately prior to the effective time and held by any shareholder who, as of the record date for the Company shareholders meeting, was a record holder of Company common stock as to which such shareholder seeks relief, and who delivers to the Company within 10 days after such vote at the Company shareholders meeting a written demand to be paid the fair cash value for such shares that have not been voted in favor of the proposal to adopt the merger agreement at the Company shareholders meeting in accordance with the Ohio Revised Code, will not be converted into the right to receive the merger consideration, unless

and until such shareholder fails to perfect or otherwise waives, withdraws or loses such shareholder’s rights as a dissenting shareholder, if any, under the Ohio Revised Code.

 

If any such shareholder fails to perfect or otherwise waives, withdraws or loses any such rights as a dissenting shareholder, that shareholder’s Company common stock will be deemed to have been converted as of the effective time into only the right to receive the merger consideration. From and after the effective time, each shareholder who has properly asserted rights as a dissenting shareholder will be entitled only to such rights as are granted under the Ohio Revised Code. The Company will promptly notify Parent of each shareholder who asserts rights as a dissenting shareholder and will not, without the prior written consent of Parent, voluntarily make any payment in respect of or settle any rights of a dissenting shareholder prior to the effective time.

 

Each of Parent and Merger Sub will use its reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to obtain the equity financing and the debt financing for the merger, which we refer to collectively as the financing, on the terms and conditions described in the financing letters (including any applicable “market flex” provisions).

 

Each of Parent and Merger Sub will not permit any amendment or modification to be made, or any waiver of any material provision under the financing letters, if such amendment, modification or waiver:

 

 

Parent will promptly deliver to the Company copies of any such amendment, modification or replacement.

 

A portion of the financing may consist of an issuance of secured or unsecured non-convertible debt securities distributed pursuant to Rule 144A and/or Regulation S promulgated under the Securities Act, which we refer to as a high yield note transaction, in addition to or in lieu of a portion of other financing contemplated by the debt commitment letters, and the Company’s obligations in connection with the financing as described below apply to both a high yield note transaction and such other financing contemplated by the debt commitment letters.

 

Each of Parent and Merger Sub will use its reasonable best efforts to:

 

 

 

Parent will keep the Company reasonably informed of the status of its efforts to arrange the financing, and provide to the Company copies of the material definitive documents for the financing and will give the Company prompt notice of:

 

 

 

 

Subject to limited exceptions, Parent and Merger Sub will, as soon as reasonably practicable, provide any information reasonably requested by the Company relating to the notice matters described immediately above.

 

Prior to the closing date, if any portion of the debt financing becomes unavailable on the terms and conditions (including any applicable “market flex” provisions) contemplated by the debt commitment letters, Parent and Merger Sub will promptly notify the Company and use their reasonable best efforts to arrange and obtain alternative financing from alternative sources in an amount sufficient to consummate the merger transactions with terms and conditions not materially less favorable in the aggregate (including the “market flex” provisions) to Parent and Merger Sub (or their affiliates) than the terms and conditions set forth in the debt commitment letters as promptly as practicable following such occurrence of such event but no later than the final day of the marketing period.

 

The parties have expressly agreed that the obtaining of the financing or any alternative financing is not a condition to the closing.

 

The Company will use reasonable best efforts to provide to and to cause its subsidiaries and representatives to provide to Parent and Merger Sub, at Parent’s sole expense, all reasonable cooperation reasonably requested by Parent that is customary in connection with the arrangement of the financing or any permitted replacement, amended, modified or alternative financing, including a high yield note transaction ( provided that

such requested cooperation does not unreasonably interfere with the ongoing operations of the Company and its subsidiaries), including:

 

 

No obligation of the Company or any of its subsidiaries under any agreement, certificate, document or instrument will be effective until the effective time, and none of the Company or any of its subsidiaries will be required to pay any commitment or other similar fee or incur any other liability in connection with the available financing prior to the effective time. Subject to certain exceptions, the Company has consented to the use of its and its subsidiaries’ logos in connection with the available financing.

Parent will promptly, upon request by the Company, reimburse the Company for all reasonable out-of-pocket costs and expenses (including reasonable attorneys’ fees) incurred by the Company or any of its subsidiaries in connection with such cooperation and will indemnify and hold harmless the Company, its subsidiaries and their respective representatives from and against any and all liabilities, losses, damages, claims, costs, expenses, interest, awards, judgments and penalties suffered or incurred by any of them in connection with the arrangement of the financing and any information used in connection therewith (other than historical information relating to the Company or its subsidiaries).

 

The merger agreement contains representations and warranties made by the Company, Parent and Merger Sub to each other as of specific dates. The statements embodied in those representations and warranties were made for purposes of the merger agreement and are subject to qualifications and limitations agreed to by the parties in connection with negotiating the terms of the merger agreement (including the disclosure schedules delivered by the Company and Parent in connection therewith). In addition, some of those representations and warranties were made as of a specific date, may be subject to a contractual standard of materiality different from that generally applicable to shareholders or may have been used for the purpose of allocating risk between the parties to the merger agreement rather than establishing matters as facts.

 

The representations and warranties made by the Company to Parent and Merger Sub include representations and warranties relating to, among other things:

 

 

 

Many of the Company’s representations and warranties are qualified as to, among other things, “materiality” or “material adverse effect.” For purposes of the merger agreement, “material adverse effect” means any effect, change, event or occurrence (whether or not constituting any breach of a representation, warranty, covenant or agreement under the merger agreement) that, individually or in the aggregate with all other effects, changes, events or occurrences, has a material adverse effect on the business, results of operations, assets, liabilities or financial condition of the Company and its subsidiaries taken as a whole; provided , however , that none of the following, and no effects, changes, events or occurrences, individually or in the aggregate, arising out of, resulting from or attributable to any of the following will constitute or be taken into account in determining whether a material adverse effect has occurred or would reasonably be expected to occur:

 

 

 

 

The exceptions in the seventh, eighth and ninth sub-bullets above do not prevent or otherwise affect a determination that the underlying cause of any such decline or failure (if not falling within another exception) is a material adverse effect.

 

The representations and warranties made by Parent and Merger Sub to the Company include representations and warranties relating to, among other things:

 

 

 

Many of Parent’s and Merger Sub’s representations and warranties are qualified as to, among other things “materiality” or “Parent material adverse effect.” For purposes of the merger agreement, “Parent material adverse effect” means any effect, change, event or occurrence that would individually or in the aggregate, prevent, materially delay or materially impair the ability of Parent or Merger Sub to consummate the transactions. The representations and warranties in the merger agreement of each of the Company, Parent and Merger Sub will terminate upon the consummation of the merger or the termination of the merger agreement pursuant to its terms.

 

Under the merger agreement, the Company has agreed that, subject to certain exceptions in the merger agreement and disclosure schedules delivered by the Company in connection with the merger agreement,

during the period from the date of the merger agreement until the effective time or the earlier termination of the merger agreement, unless Parent gives its prior written consent (which cannot be unreasonably withheld, delayed or conditioned), the Company will, and will cause each of its subsidiaries to, carry on its business in all material respects in the ordinary course consistent with past practice. To the extent consistent therewith, the Company will, and will cause each of its subsidiaries to, use its and their reasonable efforts to preserve its and each of its subsidiaries’ assets, rights, properties and business organizations intact and maintain existing relations with key customers, suppliers, distributors, employees and other entities with whom the Company or its subsidiaries have business relationships.

 

Subject to certain exceptions set forth in the merger agreement and disclosure schedules delivered by the Company in connection with the merger agreement, unless Parent consents in writing (which consent cannot be unreasonably withheld, delayed or conditioned), during such period the Company and its subsidiaries are restricted from, among other things:

 

 

 

If the Company identifies any activities of the Company or any of its subsidiaries or any affiliate thereof that the Company reasonably believes to be in violation of the FCPA, the Company will use reasonable best efforts to cause each of its subsidiaries and affiliates to cease such activities and take any additional remedial action reasonably requested by Parent or that the Company reasonably deems appropriate under the circumstances.

 

Go-Shop Period

 

Beginning on the date of the merger agreement and continuing until 11:59 p.m. (New York City time) on February 14, 2011 the Company and its subsidiaries and their respective representatives had the right to:

 

 

No proposals or offers that could constitute takeover proposals were made to the Company prior to this deadline.

 

No Solicitation or Negotiation

 

Subject to certain exceptions, from and after the no-shop period start date (which was 12:00 a.m. (New York City time) on February 15, 2011), the Company will and will cause each of its subsidiaries and representatives to immediately cease any solicitation, encouragement, discussions or negotiations (or other efforts) with any persons that may be ongoing with respect to any takeover proposals and request the return or destruction of all confidential information concerning the Company and its subsidiaries. At any time from and after the no-shop period start date and until the effective time or, if earlier, the termination of the merger agreement, the Company will not, and will cause each of its subsidiaries and representatives not to:

 

 

Conduct Following No-Shop Period Start Date

 

At any time from and after the no-shop period start date and prior to the time the Company’s shareholders adopt the merger agreement, if the Company or any of its representatives receives a written takeover proposal from any person or group of persons, which takeover proposal was made or renewed on or after the no-shop

period start date and did not result from a breach by the Company of its obligations relating to the solicitation of takeover proposals, the Company and its representatives may:

 

 

The Company will promptly (and in any event within 48 hours) provide to Parent an unredacted (except, prior to the no-shop period start date, for the identity of the person or group of persons making such takeover proposal, which may be redacted during such period) copy of such takeover proposal made in writing (including any financing commitments (including any redacted fee letters) relating thereto) and a written summary of the material terms of any such takeover proposal not made in writing (including any financing commitments and redacted fee letters relating thereto).

 

The Company will keep Parent reasonably informed of any material developments, discussions or negotiations regarding any takeover proposal (whether made before or after the no-shop period start date) on a prompt basis (and in any event within 48 hours) and, upon the request of Parent, must apprise Parent of the status of such takeover proposal. The Company has agreed that it will not enter into any confidentiality agreement with any Person subsequent to the date of the merger agreement which prohibits the Company from providing any such information to Parent required to be provided to Parent in connection with the Company’s obligations relating to solicitation and takeover proposals.

 

No Change in Recommendation or Company Acquisition Agreement

 

Except as expressly permitted by the terms of the merger agreement described below, the Company has agreed that the board of directors will not (1) fail to recommend the merger to the Company’s shareholders or fail to include such recommendation in the proxy statement, (2) change, qualify, withhold, withdraw or modify (or publicly propose to do so), in a manner adverse to Parent, the Company board recommendation, (3) take or fail to take any formal action or make or fail to make any recommendation or public statement in connection with a tender offer or exchange offer other than a recommendation against such offer or a customary “stop, look and listen” communication, (4) adopt, approve or recommend to shareholders (or publicly propose to do so) a takeover proposal (we refer to the actions listed in (1) through (4) as a Company adverse recommendation change), (5) authorize, cause or permit the Company or any of its subsidiaries to enter into any letter of intent, agreement or agreement in principle with respect to any takeover proposal other than an acceptable confidentiality agreement, or (6) take any action to terminate the merger agreement in light of a superior proposal.

 

Prior to the time the Company’s shareholders adopt the merger agreement, the board of directors may take any of the actions described in the preceding paragraph with respect to any takeover proposal if the board of directors has determined in good faith, after consultation with its financial advisors and outside legal counsel, that there is a reasonable probability that the failure to do so would cause the board of directors to violate its fiduciary duties to the Company’s shareholders under applicable law, and that such takeover proposal constitutes a superior proposal. However, prior to taking such action, the Company must comply with the following procedures:

 

 

 

In addition, prior to the time the Company’s shareholders adopt the merger agreement, the board of directors may change, qualify, withhold, withdraw or modify (or publicly propose to do so) in a manner adverse to Parent, the Company board recommendation (other than with respect to any takeover proposal or a superior proposal) if the board of directors or any duly constituted and authorized committee thereof has determined in good faith, after consultation with its financial advisors and outside legal counsel, that there is a reasonable probability that the failure to take such action would cause the board of directors to violate its fiduciary duties to the Company’s shareholders. (We refer to such action as a change of recommendation.) However, prior to taking such action, the Company and its board of directors is required to comply with the following procedures:

 

 

Nothing in the provisions of the merger agreement prohibits the Company or the board of directors or any committee thereof from (1) taking and disclosing to its shareholders a position contemplated by Rule 14d-9, Rule 14e-2(a) or Item 1012(a) of Regulation M-A under the Exchange Act ( provided that, subject to certain exceptions relating to “stop look and listen” communications and the Company’s ability to take the full period under Rule 14d-9 to respond to a tender offer, any disclosure so permitted that does not contain an express rejection of any applicable takeover proposal or an express reaffirmation of the Company board recommendation shall be deemed a Company adverse recommendation change) or (2) complying with its disclosure obligations under applicable law, provided that the Company’s right to comply with such disclosure

does not in any way limit or modify the effect, if any, that any such disclosure would have under the provisions of the merger agreement relating to solicitation and takeover proposals).

 

In this proxy statement, we use the term “takeover proposal” to mean: any inquiry, proposal or offer from any person (other than Parent and its subsidiaries) or “group” within the meaning of Section 13(d) of the Exchange Act, relating to, in a single transaction or series of related transactions, any (1) acquisition of assets of the Company and its subsidiaries equal to 20% or more of the Company’s consolidated assets or to which 20% or more of the Company’s revenues or earnings on a consolidated basis are attributable, (2) acquisition of 20% or more of the outstanding Company common stock, (3) tender offer or exchange offer that if consummated would result in any person beneficially owning 20% or more of the outstanding Company common stock, (4) merger, consolidation, share exchange, business combination, liquidation, dissolution or similar transaction involving the Company or (5) any combination of the foregoing types of transactions if the sum of the percentage of consolidated assets, consolidated revenues or earnings and Company common stock involved is 20% or more (in each case, other than the merger).

 

In this proxy statement, we use the term “superior proposal” to mean: any bona fide written takeover proposal that the board of directors or any duly constituted and authorized committee thereof has determined, after consultation with its outside legal counsel and financial advisors, in its good faith judgment is reasonably likely to be consummated in accordance with its terms, taking into account all legal, regulatory and financial aspects (including certainty of closing) of the proposal and the person making the proposal, and if consummated, would result in a transaction more favorable to the Company’s shareholders (solely in their capacity as such) from a financial point of view than the merger transactions (including any revisions to the terms of the merger agreement proposed by Parent in response to such proposal or otherwise), provided that all references to 20% in the definition of takeover proposal shall be deemed to be references to 50%.

 

Unless the merger agreement is terminated, the Company is required to take all actions in accordance with applicable law, the Company’s organizational documents and the rules of the NYSE to duly call, give notice of, convene and hold a meeting of its shareholders to obtain shareholder approval of the merger as soon as reasonably practicable after the SEC confirms that it has no further comments on this proxy statement. The Company may adjourn, recess or postpone the Company shareholders meeting (1) after consultation with Parent, and with Parent’s consent, to the extent necessary to ensure that any required supplement or amendment to this proxy statement is provided to the shareholders of the Company within a reasonable amount of time in advance of the Company shareholders meeting or (2) if as of the time for which the Company shareholders meeting is originally scheduled there are insufficient shares of Company common stock represented (either in person or by proxy) to constitute a quorum necessary to conduct the business of the Company shareholders meeting. Subject to the provisions of the merger agreement discussed above under “The Merger Agreement — Solicitation of Takeover Proposals” , the Company will use its reasonable best efforts to obtain the shareholder approval of the merger required by the merger agreement.

 

The parties to the merger agreement will cooperate with each other and use (and will cause their respective subsidiaries to use) their respective reasonable best efforts to promptly (1) take, or cause to be taken, all actions and do, and cause to be done, and assist and cooperate with the other parties in doing, all things necessary, proper or advisable to cause the conditions to closing to be satisfied as promptly as reasonably practicable and to consummate and make effective, in the most expeditious manner reasonably practicable, the transactions, including preparing and filing promptly and fully all documentation to effect all necessary filings, notices and other documents, (2) obtain all approvals, consents, registrations, waivers, permits, authorizations, orders and other confirmations necessary, proper or advisable to consummate the transactions, (3) execute and deliver any additional instruments necessary in order to consummate the transactions and (4) defend or contest any claim, suit, action or other proceeding brought by a third party that would otherwise prevent or materially impede, interfere with, hinder or delay the consummation of the transactions (in each case, except with respect to antitrust laws, which are discussed in the following

paragraph). In furtherance thereof, the Company and Parent will each use its reasonable best efforts to take all reasonable actions to ensure that no state takeover statute or similar law is or becomes applicable to the transactions and refrain from taking any actions that would cause the applicability of such laws and, if the restrictions of any state takeover statute or similar law become applicable to any of the transactions, take all action necessary to ensure that the transactions may be consummated as promptly as practicable on the terms contemplated by the merger agreement and otherwise lawfully minimize the effect of such law on the transactions.

 

In addition to the foregoing, the parties to the merger agreement have agreed, subject to certain exceptions that:

 

 

Parent has agreed that it will, and will cause the surviving corporation after the completion of the merger to:

 

 

 

 

 

The Company shall be permitted, prior to the effective time, to

 

 

Parent has acknowledged that a “change of control” or “change in control” within the meaning of each plan of the Company or its subsidiaries will occur upon the effective time.

 

The merger agreement permits Parent, Merger Sub and their affiliates to enter into agreements with members of management for post-closing employment with the Company and/or the acquisition of securities of Parent, including in exchange for securities of the Company, as of immediately prior to the effective time; provided that no such management agreement may be entered into on or prior to the no-shop period start date

and each such management agreement shall provide for termination upon any termination of the merger agreement in accordance with its terms.

 

The respective obligations of the Company, Parent and Merger Sub to effect the merger are subject to the satisfaction (or waiver, if permissible under applicable law) on or prior to the closing date of the following conditions:

 

 

The obligations of Parent and Merger Sub to effect the merger are further subject to the satisfaction (or waiver, if permissible under applicable law) on or prior to the closing date of the following additional conditions:

 

 

 

The obligation of the Company to effect the merger is further subject to the satisfaction (or waiver, if permissible under applicable law) on or prior to the closing date of the following additional conditions:

 

 

None of Company, Parent or Merger Sub may rely on the failure of any condition to their respective obligations to effect the closing to be satisfied to excuse such party’s obligation to effect the merger if such failure was caused by such party’s failure to use the standard of efforts required from such party to consummate the merger and the other transactions contemplated by the merger agreement.

 

The merger agreement may be terminated and the transactions contemplated by the merger agreement abandoned at any time prior to the effective time, whether before or after receipt of the Company shareholder approval (except as otherwise expressly noted):

 

 

 

however, the right to terminate the merger agreement under the three sub-bullets above will not be available to any party that has breached in any material respect its obligations under the merger agreement in any manner that has proximately contributed to the occurrence of the failure of the applicable condition to the consummation of the merger;

 

 

 

 

 

 

 

 

 

 

The Company is required to pay Parent or its designee the applicable termination fee in the event that: