UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

 

 

 

 

CLAIRE’S STORES, INC.

(Name of Registrant as Specified In Its Charter)

N/A

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

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

 

CLAIRE’S STORES, INC.
3 S.W. 129th Avenue
Pembroke Pines, Florida 33027
April 27, 2007

 

Dear Shareholder:

 

The board of directors of Claire’s Stores, Inc. (“Claire’s Stores” or the “Company”) has unanimously adopted a merger agreement providing for the acquisition of the Company by Bauble Holdings Corp., an entity currently owned indirectly by funds affiliated with Apollo Management VI, L.P. If the merger is completed, you will receive $33.00 in cash, without interest, for each share of the Company’s common stock you own.

 

You will be asked, at a special meeting of the Company’s shareholders, to approve the merger agreement. The board of directors has unanimously adopted the merger agreement, determined that the merger is fair to, and in the best interests of, the Company and its shareholders and declared advisable the merger agreement and the transactions contemplated by the merger agreement (including the merger). The board of directors unanimously recommends that the Company’s shareholders vote “FOR” the approval of the merger agreement.

 

The time, date and place of the special meeting to consider and vote upon the approval of the merger agreement are as follows:

 

10:00 a.m. Eastern Time, May 24, 2007

1 New York Plaza, 43rd Floor Auditorium, New York, New York 10004

 

The proxy statement attached to this letter provides you with information about the proposed merger and the special meeting of the Company’s shareholders. We encourage you to read the entire proxy statement carefully. You may also obtain more information about the Company from documents we have filed with the Securities and Exchange Commission.

 

YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES OF THE COMPANY’S COMMON STOCK OR CLASS A COMMON STOCK YOU OWN. BECAUSE THE APPROVAL OF THE MERGER AGREEMENT REQUIRES THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF THE COMBINED VOTING POWER OF THE COMPANY’S ISSUED AND OUTSTANDING SHARES OF COMMON STOCK AND CLASS A COMMON STOCK ENTITLED TO VOTE THEREON, A FAILURE TO VOTE OR AN ABSTENTION WILL HAVE THE SAME EFFECT AS A VOTE “AGAINST” THE MERGER. ACCORDINGLY, YOU ARE REQUESTED TO SUBMIT YOUR PROXY BY PROMPTLY COMPLETING, SIGNING AND DATING THE ENCLOSED PROXY CARD AND RETURNING IT IN THE ENVELOPE PROVIDED OR TO SUBMIT YOUR PROXY BY TELEPHONE OR VIA THE INTERNET IN ACCORDANCE WITH THE INSTRUCTIONS SET FORTH IN THE PROXY CARD PRIOR TO THE SPECIAL MEETING, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING.

 

Submitting your proxy will not prevent you from voting your shares in person if you subsequently choose to attend the special meeting.

 

Thank you for your cooperation and continued support.

 

Very truly yours,

 

 

Marla L. Schaefer
Co-Chief Executive Officer

 

 

E. Bonnie Schaefer
Co-Chief Executive Officer

 

THIS PROXY STATEMENT IS DATED APRIL 27, 2007
AND IS FIRST BEING MAILED TO SHAREHOLDERS ON OR ABOUT APRIL 27, 2007.

CLAIRE’S STORES, INC.
3 S.W. 129th Avenue
Pembroke Pines, Florida 33027

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 24, 2007

 

Dear Shareholder:

 

A special meeting of shareholders of Claire’s Stores, Inc., a Florida corporation (“Claire’s Stores” or the “Company”), will be held on May 24, 2007, at 10:00 a.m., Eastern Time, at 1 New York Plaza, 43rd Floor Auditorium, New York, New York 10004, for the following purposes:

 

1. To consider and vote on the approval of the Agreement and Plan of Merger, dated as of March 20, 2007 (the “merger agreement”), among the Company, Bauble Holdings Corp. (“Parent”) and Bauble Acquisition Sub, Inc., a wholly-owned subsidiary of Parent (“Merger Sub”), pursuant to which, upon the merger becoming effective, each outstanding share of Common Stock, par value $0.05 per share, of the Company (the “common stock”) and Class A Common Stock, par value $0.05 per share, of the Company (the “Class A common stock” and together with the common stock, the “company common stock”) (other than shares held in the treasury of the Company or owned directly or indirectly by Parent, Merger Sub or any wholly-owned subsidiary of the Company and other than shares of Class A common stock held by shareholders who properly demand statutory appraisal rights) will be converted into the right to receive $33.00 in cash, without interest;

 

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

 

3. To transact such other business as may properly come before the special meeting.

 

Only shareholders of record on April  26, 2007, are entitled to notice of and to vote at the special meeting and at any adjournment or postponement of the special meeting. All shareholders of record are cordially invited to attend the special meeting in person.

 

The approval of the merger agreement requires the approval of the holders of a majority of the combined voting power of the outstanding shares of company common stock entitled to be cast thereon. Even if you plan to attend the special meeting in person, we request that you complete, sign, date and return the enclosed proxy in the envelope provided, or submit your proxy by telephone or via the Internet subject to such verification required by applicable law or that the Company or its agents otherwise deem appropriate, in accordance with the instructions set forth in the proxy card prior to the special meeting and thus ensure that your shares will be represented at the special meeting if you are unable to attend. If you sign, date and mail your proxy card without indicating how you wish to vote, your proxy will be voted in favor of the approval of the merger agreement. If you fail to return your proxy card or fail to submit your proxy by telephone or via the Internet and do not attend the special meeting in person, the effect will be that your shares will not be counted for purposes of determining whether a quorum is present at the special meeting and, if a quorum is present, will have the same effect as a vote against the approval of the merger agreement. If you are a shareholder of record and you attend the special meeting and wish to vote in person, you may revoke your proxy at or at any time prior to the special meeting and vote in person.

 

The Company has concluded that shareholders holding common stock are not entitled to assert appraisal rights under the Florida Business Corporation Act (“FBCA”) as set forth in Chapter 607 of the Florida Statutes, and that shareholders holding Class A common stock who do not vote in favor of the approval of the merger agreement are entitled to appraisal rights under the FBCA and to obtain payment of the fair value of their shares of Class A common stock if the merger is completed, but only if they timely submit to the Company a written demand for such payment and they comply with all other requirements of the FBCA, which are summarized in the accompanying proxy statement.

By order of the board of directors,

 

Marla L. Schaefer

Co-Chairman of the Board

 

E. Bonnie Schaefer

Co-Chairman of the Board

 

April 27, 2007

 

TABLE OF CONTENTS

 

 

The following questions and answers address briefly some questions you may have regarding the special meeting and the proposed merger. These questions and answers may not address all questions that may be important to you as a shareholder of Claire’s Stores, Inc. Please refer to the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to or incorporated by reference in this proxy statement. In this proxy statement, the terms “Claire’s,” “Claire’s Stores,” “Company,” “we,” “our,” “ours,” and “us” refer to Claire’s Stores, Inc.

 

Q: What is the proposed transaction?

 

 

Q: What will I receive in the merger?

 

 

Q: Where and when is the special meeting?

 

 

Q: What vote of our shareholders is required to approve the merger agreement?

 

 

Q: How does the Company’s board of directors recommend that I vote?

 

 

Q: What do I need to do now?

 

 

 

Voting by telephone or via the Internet is subject to such verification required by applicable law or that the Company or its agents otherwise deem appropriate.

 

Q: If my shares are held in “street name” by my broker, will my broker vote my shares for me?

 

 

Q: Can I change my vote?

 

 

Please note that if you hold your shares in “street name” and you have instructed a broker to vote your shares, the above-described options for changing your vote do not apply, and instead you must follow the instructions received from your broker to change your vote.

 

Q: What does it mean if I get more than one proxy card or vote instruction card?

 

 

Q: Should I send in my stock certificates now?

 

 

Q: Who can help answer my other questions?

 

 

The following summary highlights selected information from this proxy statement and may not contain all of 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 or incorporated by reference in this proxy statement. Each item in this summary includes a page reference directing you to a more complete description of that item.

 

The Parties to the Merger (Page 15)

 

Claire’s Stores, Inc.  

3 S.W. 129th Avenue

Pembroke Pines, FL 33027

(954) 433-3900

 

Claire’s Stores, Inc. is a leading international specialty retailer offering value-priced costume jewelry and accessories to fashion-aware tweens, teens and young adult females through its two store concepts: Claire’s and Icing by Claire’s. While the latter operates only in North America, Claire’s operates internationally. As of March 3, 2007, Claire’s Stores, Inc. operated approximately 3,000 stores in the United States and several other countries. Claire’s Stores, Inc. operates through its subsidiary, Claire’s Nippon, Co., Ltd., approximately 195 stores in Japan as a joint venture with AEON, Co., Ltd. (fka JUSCO, Co. Ltd.). As of March 3, 2007, the Company also licensed 127 stores in the Middle East, Turkey and Russia under a licensing and merchandising agreement with Al Shaya Co. and eight stores in South Africa under similar agreements with The House of Busby Limited.

 

Bauble Holdings Corp.  

c/o Apollo Management VI, L.P.

9 West 57th Street

New York, NY 10019

(212) 515-3200

 

Parent is a Delaware corporation indirectly owned by funds affiliated with Apollo. Parent was formed solely for the purpose of entering into the merger agreement and consummating the transactions contemplated by the merger agreement. It has not conducted any activities to date other than activities incidental to its formation and in connection with the transactions contemplated by the merger agreement.

 

Bauble Acquisition Sub, Inc.  

c/o Apollo Management VI, L.P.

9 West 57th Street

New York, NY 10019

(212) 515-3200

 

Merger Sub is a Florida corporation and a wholly-owned subsidiary of Parent. Merger Sub was formed solely for the purpose of entering into the merger agreement and consummating the transactions contemplated by the merger agreement. It has not conducted any activities to date other than activities incidental to its formation and in connection with the transactions contemplated by the merger agreement.

 

Parent and Merger Sub are each entities currently indirectly owned by Apollo. Apollo’s affiliate, Apollo Management, L.P., was founded in 1990, and is a recognized leader in private equity, debt and capital markets investing. Since its inception, Apollo Management, L.P. has invested over $16 billion in companies representing a wide variety of industries, both in the U.S. and internationally.

 

The Special Meeting

 

Time, Place and Date (Page 16)

 

The special meeting will be held on May 24, 2007, starting at 10:00 a.m., Eastern Time, at 1 New York Plaza, 43rd Floor Auditorium, New York, New York 10004.

 

Purpose (Page 16)

 

You will be asked to consider and vote upon approval of the merger agreement. The merger agreement provides that Merger Sub will be merged with and into the Company, and each outstanding share of the company common stock (other than shares held in the treasury of the Company or owned directly or indirectly by Parent, Merger Sub or any wholly-owned subsidiary of the Company and other than Class A common stock held by shareholders who properly demand statutory appraisal rights) will be converted into the right to receive $33.00 in cash, without interest.

 

The persons named in the accompanying proxy card will also have discretionary authority to vote upon other business, if any, that properly comes before the special meeting and any adjournments or postponements of the special meeting.

 

Record Date, Quorum and Adjournment (Pages 16, 17)

 

You are entitled to vote at the special meeting if you owned shares of the company common stock at the close of business on April 26, 2007, the record date for the special meeting. You will have one vote for each share of common stock and ten votes for each share of Class A common stock that you owned on the record date. The presence at the meeting, in person or by proxy, of the holders of a majority of the aggregate combined voting power of the shares of common stock and Class A common stock issued and outstanding and entitled to be cast as of the close of business on the record date will constitute a quorum. If, however, such quorum is not present at the special meeting, the holders of a majority of the aggregate combined voting power of the shares of company common stock present in person or represented by proxy at the special meeting and entitled to vote thereat may adjourn the special meeting. As of the record date, there were 93,081,774 shares of company common stock entitled to be voted, consisting of 88,216,591 shares of common stock and 4,865,183 shares of Class A common stock.

 

Required Vote (Page 16)

 

For us to complete the merger, shareholders holding at least a majority of the combined voting power of the company common stock issued and outstanding and entitled to be cast at the close of business on the record date must vote “FOR” the approval of the merger agreement. All of our shareholders holding our common stock are entitled to one vote per share and our shareholders holding our Class A common stock are entitled to 10 votes per share. A failure to vote your shares of the company common stock or an abstention will have the same effect as a vote against the merger agreement.

 

In connection with the execution of the merger agreement, Marla L. Schaefer and E. Bonnie Schaefer, the Co-Chief Executive Officers and Co-Chairmen of our board of directors, and certain shareholder entities affiliated with them (collectively, the “Schaefer Family Holders”), entered into a shareholders agreement pursuant to which they have agreed to vote in favor of the merger and against any competing transaction proposed to the Company’s shareholders, unless the merger agreement is terminated in accordance with its terms. As of the record date, the Schaefer Family Holders beneficially owned an aggregate of 7,254,087 shares of Claire’s Stores company common stock (excluding options) (consisting of 3,028,831 shares of common stock and 4,225,256 shares of Class A common stock), which represented approximately 33.1% of the combined voting power of the company common stock as of the record date subject to the shareholders agreement.

 

Share Ownership of Directors and Executive Officers (Page 71)

 

As of the record date, the directors and current executive officers of Claire’s Stores beneficially owned in the aggregate 7,417,372 shares of Claire’s Stores company common stock (excluding options), consisting of 2,941,522 shares of common stock and 4,475,850 shares of Class A common stock, representing approximately 34.9% of the combined voting power of the company common stock as of the record date entitled to vote at the special meeting. Each of them either agreed to vote, or has advised us that he or she plans to vote, all of his or her shares in favor of the approval of the merger agreement.

 

Voting and Proxies (Page 17)

 

Any Claire’s Stores shareholder of record entitled to vote may submit a proxy by telephone or via the Internet (subject to such verification required by applicable law or that the Company or its agents otherwise deem appropriate) or returning the enclosed proxy card by mail, or may vote in person by appearing at the special meeting. If your shares are held in “street name” by your broker, you should instruct your broker on how to vote your shares using the instructions provided by your broker. If you do not provide your broker with instructions, your shares will not be voted and that will have the same effect as a vote against the merger agreement.

 

Revocability of Proxy (Page 17)

 

Any Claire’s Stores shareholder of record who executes and returns a proxy card (or submits a proxy by telephone or via the Internet) may revoke the proxy at any time before it is voted in any one of the following ways:

 

 

 

Simply attending the special meeting will not constitute revocation of a proxy. If you have instructed your broker to vote your shares, the above-described options for revoking your proxy do not apply and instead you must follow the directions provided by your broker to change these instructions.

 

When the Merger Will be Completed (Page 53)

 

We are working to complete the merger as soon as possible. We anticipate completing the merger prior to the end of our second fiscal quarter, which ends on August 4, 2007, subject to approval of the merger agreement by the Company’s shareholders and the satisfaction of the other closing conditions. In addition, Merger Sub is not obligated to complete the merger until the expiration of a thirty consecutive calendar day “marketing period” throughout which Parent shall have the financial information that the Company is required to provide pursuant to the merger agreement to complete its debt financing of the merger. So long as we have provided all required financial information to Parent for purposes of its completing its offerings of debt securities, the marketing period will begin to run after the approval of the merger agreement by our shareholders.

 

Effects of the Merger (Page 54)

 

If the merger agreement is approved by the Company’s shareholders and the other conditions to closing are satisfied, Merger Sub will be merged with and into the Company, with the Company being the surviving corporation. Upon completion of the merger, the Company’s common stock and Class A common stock will be converted into the right to receive $33 per share, without interest and less any required withholding taxes. Following the completion of the merger, we will no longer be a public company and you will cease to have any ownership interest in the Company and will not participate in any future earnings or growth of the Company.

 

Board Recommendation (Page 27)

 

After careful consideration, our board of directors has unanimously:

 

 

In reaching its decision, our board of directors continuously consulted with our management team and advisors in considering the proposed merger agreement. In considering the recommendation of the Company’s board of directors with respect to the merger, you should be aware that some of the Company’s directors and executive officers who participated in meetings of our board of directors have interests in the merger that are different from, or in addition to, the interests of our shareholders generally. See “Interests of the Company’s Directors and Executive Officers in the Merger” beginning on page 44.

 

For the factors considered by our board of directors in reaching its decision to adopt the merger agreement and recommend that shareholders vote for the approval of the merger agreement, see “The Merger — Reasons for the Merger” beginning on page 25.

 

Shareholders Agreement with the Schaefer Family Holders (Page 68 and Annex B)

 

The Schaefer Family Holders, including, among others, Marla L. Schaefer and E. Bonnie Schaefer, the Co-Chief Executive Officers and Co-Chairmen of our board of directors, have entered into a shareholders agreement, dated as of March 20, 2007, with Parent and Merger Sub with respect to 7,254,087 shares of company common stock (consisting of 3,028,831 shares of common stock and 4,225,256 shares of Class A common stock) beneficially

owned in the aggregate by the Schaefer Family Holders as of the date of the shareholders agreement as well as any shares of company common stock acquired by the Schaefer Family Holders after such date. As of the record date, the Schaefer Family Holders held 7,254,087 shares of the company common stock (consisting of 3,028,831 shares of common stock and 4,225,256 shares of Class A common stock) subject to the shareholders agreement.

 

The Schaefer Family Holders have agreed to vote all of these shares in favor of the approval of the merger agreement and against any competing transaction proposed to the Company’s shareholders, unless the merger agreement is terminated in accordance with its terms, and have delivered an irrevocable proxy to Parent for the purpose of voting such shares. The shareholders agreement will terminate upon the earlier of (i) the termination of the merger agreement and (ii) the effective time of the merger. The full text of the shareholders agreement is attached to this proxy statement as Annex B. We encourage you to read the full text of the shareholders agreement in its entirety.

 

Opinion of Goldman, Sachs & Co. (Page 28 and Annex C)

 

Goldman, Sachs & Co. (“Goldman Sachs”) delivered its opinion to the Company’s board of directors that, as of March 20, 2007 and based upon and subject to the factors and assumptions set forth in its opinion, the $33.00 in cash per share to be received by the holders of the company common stock, in the aggregate, pursuant to the merger agreement was fair, from a financial point of view, to such holders, in the aggregate.

 

The full text of the written opinion of Goldman Sachs, dated March 20, 2007 which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached to this proxy statement as Annex C. Goldman Sachs provided its opinion for the information and assistance of the Company’s board of directors in connection with its consideration of the transaction. The Goldman Sachs opinion is not a recommendation as to how any holders of company common stock should vote with respect to the transaction. Pursuant to an engagement letter between the Company and Goldman Sachs, the Company has agreed to pay Goldman Sachs a transaction fee estimated to be approximately $18,000,000, calculated based on an escalating percentage of the aggregate consideration, all of which is payable upon consummation of the transaction.

 

Opinion of Peter J. Solomon Company, L.P. (Page 35 and Annex D)

 

Peter J. Solomon Company, L.P. (“PJSC”) delivered its opinion to the Company’s board of directors that, as of the date of its opinion and based upon and subject to the factors and assumptions set forth therein, the merger consideration of $33.00 in cash per share to be received by the holders of company common stock pursuant to the merger agreement was fair, from a financial point of view, to such shareholders.

 

The opinion of PJSC is addressed to the Company’s board of directors, is directed only to the consideration to be paid in the merger and does not constitute a recommendation as to how any of our shareholders should vote with respect to the merger agreement or whether such shareholders should exercise any dissenter’s rights or appraisal rights, where available, with respect to the merger or any other matter. The full text of the written opinion of PJSC, dated March 20, 2007, which sets forth the procedures followed, limitations on the review undertaken, matters considered and assumptions made in connection with such opinion, is attached as Annex D to this proxy statement. We recommend that you read the opinion carefully in its entirety. Pursuant to the terms of the engagement letter with PJSC, the Company has agreed to pay to PJSC a fee of $900,000. Payment of the fee to PJSC is not contingent upon consummation of the merger.

 

Financing (Page 42)

 

The Company and Apollo estimate that the total amount of funds necessary to consummate the merger and related transactions (including payment of the aggregate merger consideration, the repayment or refinancing of some of the Company’s currently outstanding debt and all related fees and expenses) will be approximately $3.270 billion. Merger Sub has received commitments from Credit Suisse, Bear Stearns Corporate Lending Inc., Lehman Brothers Commercial Bank and Lehman Commercial Paper Inc. with respect to the financing.

 

In connection with the execution and delivery of the merger agreement, Merger Sub has obtained commitments to provide up to approximately $2.587 billion in debt financing (not all of which is expected to be drawn at closing) consisting of (1) senior secured credit facilities with an aggregate principal amount of up to $1.65 billion, consisting of a $1.45 billion senior term loan facility and a $200 million revolving credit facility and (2) (i) up to $537 million in a senior unsecured bridge loan facility if the Company is unable to issue the equivalent amount of senior unsecured notes by the time the merger is completed in a public offering or in an offering exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), including pursuant to Rule 144A or Regulation S and (ii) up to $400 million in a senior subordinated bridge loan facility if the Company is unable to issue the equivalent amount of senior subordinated notes by the time the merger is completed in a public offering or in an offering exempt from registration under the Securities Act, including pursuant to Rule 144A or Regulation S, to finance, in part, the payment of the merger consideration, the repayment or refinancing of certain debt of the

Company outstanding on the closing date of the merger and the payment of fees and expenses in connection therewith and, in the case of the revolving facility, for general corporate purposes.

 

Parent has agreed to use its reasonable best efforts to arrange and obtain the debt financing on the terms and conditions described in the commitments. In addition, Parent and Merger Sub have obtained a $600 million equity commitment from Apollo Management VI, L.P. (the “Sponsor”) on behalf of certain affiliated co-investment partnerships. The facilities contemplated by the debt financing commitments are conditioned on the merger being consummated prior to the merger agreement termination date, as well as other conditions, as described in further detail under “The Merger — Financing — Debt Financing” beginning on page 42.

 

The closing of the merger is not conditioned on the receipt of the debt financing by Merger Sub. Parent, however, is not required to consummate the merger until after the completion of the marketing period as described above under “When the Merger Will be Completed” and in further detail under “The Merger Agreement — Effective Time; The Marketing Period” beginning on page 53.

 

Treatment of Stock Options (Page 55)

 

The merger agreement generally provides that all outstanding Company stock options issued pursuant to the Company’s stock option and incentive plans, whether or not vested, will be cashed out and cancelled in connection with the completion of the merger. Each option holder will receive an amount in cash, less applicable withholding taxes and without interest, equal to the product of:

 

 

Treatment of Restricted Stock and Stock Units (Page 55)

 

The merger agreement generally provides that:

 

 

Interests of the Company’s Directors and Executive Officers in the Merger (Page 44)

 

Our directors and executive officers may have interests in the merger that are different from, or in addition to, yours, including the following:

 

 

 

Material United States Federal Income Tax Consequences (Page 49)

 

If you are a U.S. holder of our company common stock, the merger will be a taxable transaction to you. For U.S. federal income tax purposes, your receipt of cash in exchange for your shares of the company common stock generally will cause you to recognize a gain or loss measured by the difference, if any, between the cash you receive in the merger and your adjusted tax basis in your shares. If you are a non-U.S. holder of our company common stock, the merger will generally not be a taxable transaction to you under U.S. federal income tax laws unless you have certain connections to the United States. You should consult your own tax advisor for a full understanding of how the merger will affect your taxes.

 

Regulatory Approvals (Page 51)

 

The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “Hart-Scott-Rodino Act”) provides that transactions such as the merger may not be completed until certain information and documents have been submitted to the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice and certain waiting period requirements have been observed. On March 27, 2007, the Company and Apollo Investment Fund, VI, L.P., respectively, each filed a Notification and Report Form with the Antitrust Division and the Federal Trade Commission and requested early termination of the waiting period. The Federal Trade Commission granted early termination of the waiting period initiated by these filings on April 11, 2007.

 

In addition, in connection with the merger, the Sponsor filed the required notification with the antitrust authorities of the European Union on April 17, 2007, and clearance is expected on or before May 29, 2007.

 

Except as noted above with respect to the required filings under the Hart-Scott-Rodino Act, applicable foreign antitrust laws noted above and the filing of articles of merger in Florida at or before the effective date of the merger, we are unaware of any material federal, state or foreign regulatory requirements or approvals required for the execution of the merger agreement or completion of the merger.

 

Procedure for Receiving Merger Consideration (Page 55)

 

Promptly after the effective time of the merger, a paying agent will mail a letter of transmittal and instructions to you and the other Claire’s Stores shareholders. The letter of transmittal and instructions will tell you how to surrender your stock certificates or book-entry shares in exchange for the merger consideration. You should not return your stock certificates with the enclosed proxy card, and you should not forward your stock certificates to the paying agent without a letter of transmittal.

 

No Solicitation of Transactions (Page 60)

 

The merger agreement restricts our ability to solicit or engage in discussions or negotiations with a third party regarding specified transactions involving the Company. Notwithstanding these restrictions, under certain limited circumstances required for our board of directors to comply with its fiduciary duties, our board of directors may respond to an unsolicited written bona fide proposal for an alternative acquisition or terminate the merger agreement and enter into an agreement with respect to a superior proposal after paying the termination fee specified in the merger agreement.

 

Conditions to Closing (Page 64)

 

Before we can complete the merger, a number of conditions must be satisfied. These include:

 

 

Other than the conditions pertaining to the Company shareholder approval, the absence of governmental orders and the expiration or termination of the Hart-Scott-Rodino Act and foreign antitrust waiting periods, either the Company, on the one hand, or Parent and Merger Sub, on the other hand, may elect to waive conditions to their respective performance and complete the merger. None of the Company, Parent or Merger Sub, however, has any intention to waive any condition as of the date of this proxy statement.

 

Termination of the Merger Agreement (Page 65)

 

Claire’s Stores, Parent and Merger Sub may agree in writing to terminate the merger agreement at any time without completing the merger, even after the shareholders of Claire’s Stores have approved the merger agreement. The merger agreement may also be terminated at any time prior to the effective time of the merger in certain other circumstances, including:

 

 

 

 

Termination Fees and Expenses (Page 66)

 

The Company will be required to pay Parent $90 million in termination fees if:

 

 

In the event that we terminate the merger agreement in circumstances that all closing conditions (other than conditions solely for the Company’s benefit and conditions that by their terms are to be satisfied at closing) have been satisfied and on or prior to the last day of the marketing period:

 

 

we are entitled to a termination fee of $90 million from Parent. If we elect to receive this termination fee, subject to certain exceptions it will be our sole and exclusive remedy for any loss or damage suffered in connection with the merger agreement or the transactions contemplated thereby. If we elect not to receive the termination fee, or in case of a breach by Parent or Merger Sub of the merger agreement in circumstances in which we are not entitled to the termination fee, we are entitled to enforce all of our rights under the merger agreement and also enforce our rights against the Sponsor under the equity commitment letter.

 

Market Price of Claire’s Stores Stock (Page 70)

 

Our common stock is listed on the New York Stock Exchange (the “NYSE”) under the trading symbol “CLE”. On March 19, 2007, which was the last trading day before we announced the merger, the Company’s common stock closed at $30.76 per share. On April 26, 2007, which was the last trading day before the date of this proxy statement, the Company’s common stock closed at $32.44 per share.

 

Appraisal Rights of Dissenting Class A Shareholders (page 73 and Annex E)

 

We have concluded that the holders of our Class A common stock are entitled to appraisal rights under the Florida Business Corporation Act (“FBCA”) as set forth in Chapter 607 of the Florida Statutes, in connection with the consummation of the merger. These rights are explained in detail in the section entitled “Appraisal Rights of Dissenting Class A Shareholders” which begins on page 73 of this proxy statement. If a holder of Class A common stock wishes to dissent and exercise its appraisal rights, then such holder must

 

 

If a holder of shares of Class A common stock complies with the procedures for perfecting appraisal rights provided under the FBCA, it may be entitled to receive in cash the fair value of its shares of Class A common stock as determined immediately prior to the merger, excluding any appreciation or depreciation in anticipation of the merger. Perfection of appraisal rights requires strict adherence to the procedures set forth in the FBCA, and failure to do so may result in the complete loss of a dissenter’s appraisal rights. Accordingly, each holder of shares of Class A common stock who desires to dissent and exercise its appraisal rights should carefully consider and comply with the provisions of those sections and, if such shareholder deems appropriate, consult his or her legal advisor. A copy of Sections 607.1301 through 607.1333 of the FBCA is set forth in Annex E of this proxy statement and a summary thereof is included under “Appraisal Rights of Dissenting Class A Shareholders” at page 73 of this proxy statement.

 

This proxy statement, and the documents to which we refer you in this proxy statement, contain forward-looking statements based on estimates and assumptions. Forward-looking statements include information concerning possible or assumed future results of operations of the Company, the expected completion and timing of the merger and other information relating to the merger. There are forward-looking statements throughout this proxy statement, including, among others, under the headings “Summary,” “The Merger,” “The Merger — Opinion of Goldman, Sachs & Co.,” “The Merger — Opinion of Peter J Solomon Company, L.P.” and in statements containing the words “believes,” “plans,” “expects,” “anticipates,” “intends,” “estimates” or other similar expressions. For each of these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should be aware that forward-looking statements involve known and unknown risks and uncertainties. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that the actual results or developments we anticipate will be realized, or even if realized, that they will have the expected effects on the business or operations of the Company. These forward-looking statements speak only as of the date on which the statements were made and we undertake no obligation to update or revise any forward-looking statements made in this proxy statement or elsewhere as a result of new information, future events or otherwise. In addition to other factors and matters contained or incorporated in this document, we believe the following factors could cause actual results to differ materially from those discussed in the forward-looking statements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Claire’s Stores, Inc.

 

Claire’s Stores, Inc. is a Florida corporation with its principal executive offices at 3 S.W. 129th Avenue, Pembroke Pines, FL 33027. The Company’s telephone number is (954) 433-3900. The Company is a leading international specialty retailer offering value-priced costume jewelry and accessories to fashion-aware tweens, teens and young adult females through its two store concepts: Claire’s and Icing by Claire’s. While the latter operates only in North America, Claire’s operates internationally. As of March 3, 2007, the Company operated approximately 3,000 stores in the United States, Canada, Puerto Rico, the Virgin Islands, the United Kingdom, Ireland, France, Switzerland, Austria, Germany, Spain, Portugal, the Netherlands and Belgium. The Company operates through its subsidiary, Claire’s Nippon, Co., Ltd., approximately 195 stores in Japan as a 50:50 joint venture with AEON, Co., Ltd. (fka JUSCO, Co. Ltd.), a $40 billion specialty retailer headquartered in Japan. As of March 3, 2007, the Company also licensed 127 stores in the Middle East, Turkey and Russia under a licensing and merchandising agreement with Al Shaya Co. and eight stores in South Africa under similar agreements with The House of Busby Limited.

 

Bauble Holdings Corp.

 

Parent is a Delaware corporation with its principal executive offices at c/o Apollo Management VI, L.P., 9 West 57th Street, New York, NY 10019. Parent’s telephone number is (212) 513-3200. Parent is indirectly owned by funds affiliated with Apollo. Parent was formed solely for the purpose of entering into the merger agreement and consummating the transactions contemplated by the merger agreement. It has not conducted any activities to date other than activities incidental to its formation and in connection with the transactions contemplated by the merger agreement.

 

Bauble Acquisition Sub, Inc.

 

Merger Sub is a Florida corporation and a wholly-owned subsidiary of Parent. Merger Sub’s principal executive offices are located at c/o Apollo Management VI, L.P., 9 West 57th Street, New York, NY 10019 and its telephone number is (212) 513-3200. Merger Sub was organized solely for the purpose of entering into the merger agreement and consummating the transactions contemplated by the merger agreement. It has not conducted any activities to date other than activities incidental to its formation and in connection with the transactions contemplated by the merger agreement. Under the terms of the merger agreement, at the effective time of the merger, Merger Sub will merge with and into us. The Company will survive the merger and Merger Sub will cease to exist.

 

This proxy statement is being furnished to our shareholders as part of the solicitation of proxies by our board of directors for use at the special meeting to be held on May 24, 2007, starting at 10:00 a.m., Eastern Time, at 1 New York Plaza, 43rd Floor Auditorium, New York, New York 10004 or at any postponement or adjournment thereof. The purpose of the special meeting is for our shareholders to consider and vote upon the approval of the merger agreement. Our shareholders must approve the merger agreement for the merger to occur. If the shareholders fail to approve the merger agreement, the merger will not occur. A copy of the merger agreement is attached to this proxy statement as Annex A. This proxy statement and the enclosed form of proxy are first being mailed to our shareholders on or about April 27, 2007.

 

The holders of record of the company common stock as of the close of business on April 26, 2007, the record date for the special meeting, are entitled to receive notice of, and to vote at, the special meeting. On the record date, there were 93,081,774 shares of the company common stock outstanding (which includes 88,216,591 shares of our common stock and 4,865,183 shares of our Class A common stock).

 

The holders of a majority of the aggregate combined voting power of the shares of common stock and Class A common stock entitled to be cast as of the close of business on the record date represented in person or by proxy will constitute a quorum for purposes of the special meeting. A quorum is necessary to hold the special meeting. Any shares of the company common stock held in treasury by the Company or by any of our subsidiaries are not considered to be outstanding for purposes of determining a quorum. Once a share is represented at the special meeting, it will be counted for the purpose of determining a quorum at the special meeting and any postponement 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.

 

Pursuant to the shareholders agreement with the Schaefer Family Holder, shares beneficially owned by the Schaefer Family Holders are required to be voted in accordance with the terms and conditions of the shareholders agreement so as to ensure that such shares are duly counted for purposes of determining that a quorum is present and for purposes of recording the results of such vote.

 

Completion of the merger requires the approval of the merger agreement by the affirmative vote of the holders of a majority of the combined voting power of the company common stock issued and outstanding and entitled to be cast as of the close of business on the record date. Each outstanding share of common stock on the record date entitles the holder to one vote at the special meeting, whereas each outstanding share of Class A common stock entitles the holder to ten votes at the special meeting. For purposes of voting on approval of the merger agreement, the holders of common stock and Class A common stock vote together as a single class.

 

As of April 26, 2007, the record date, the directors and current executive officers of Claire’s Stores beneficially owned (excluding options and excluding shares beneficially owned by Marla L. Schaefer and E. Bonnie Schaefer, each of whom is party to the shareholders agreement discussed below), in the aggregate, 213,773 shares of the company common stock (consisting of 213,773 shares of common stock and no shares of Class A common stock), which represented less than 1% of the combined voting power of the company common stock as of the record date entitled to vote at the special meeting. The directors and current executive officers have informed Claire’s Stores that they intend to vote all of their shares of the company common stock “FOR” the approval of the merger agreement and “FOR” any postponement or adjournment of the special meeting, if necessary or appropriate to solicit additional proxies.

 

The Schaefer Family Holders, including, among others, Marla L. Schaefer and E. Bonnie Schaefer, our Co-Chief Executive Officers and Co-Chairman of our board of directors, have entered into a shareholders agreement with Parent and Merger Sub with respect to the 7,254,087 shares of company common stock (consisting of 3,028,831 shares of common stock and 4,225,256 shares of Class A common stock) owned or controlled in the aggregate by the Schaefer Family Holders as of the date of the shareholders agreement. As of the record date, the aggregate number of shares of the company common stock owned by the Schaefer Family Holders subject to the shareholders agreement is 7,254,087 shares, which represents approximately 33.1% of the voting power of all outstanding shares of the company common stock. The Schaefer Family Holders have agreed to vote all of these

shares in favor of the approval of the merger agreement and against any competing transaction proposed to the Company’s shareholders, unless the merger agreement is terminated in accordance with its terms.

 

If you are a shareholder of record and submit a proxy by telephone or the Internet or by returning a signed proxy card by mail, your shares will be voted at the special meeting as you indicate on your proxy card or by such other method. If no instructions are indicated on your proxy card, your shares of the company common stock will be voted in accordance with the recommendation of the board of directors to vote “FOR” the approval of the merger agreement and “FOR” any postponement or adjournment of the special meeting, if necessary or appropriate to solicit additional proxies.

 

If your shares are held in “street name” by your broker, you should instruct your broker how to vote your shares using the instructions provided by your broker. If you have not received such voting instructions or require further information regarding such voting instructions, contact your broker and they can give you directions on how to vote your shares. Under the rules of the NYSE, brokers who hold shares in “street name” for customers may not exercise their voting discretion with respect to the approval of non-routine matters such as the merger proposal and thus, absent specific instructions from the beneficial owner of such shares, brokers are not empowered to vote such shares with respect to the approval of the merger agreement (i.e., “broker non-votes”). Shares of company common stock held by persons attending the special meeting but not voting, or shares for which the Company has received proxies with respect to which holders have abstained from voting, will be considered abstentions. Abstentions and properly executed broker non-votes, if any, will be treated as shares that are present and entitled to vote at the special meeting for purposes of determining whether a quorum exists but will have the same effect as a vote “AGAINST” approval of the merger agreement.

 

You may revoke your proxy at any time before the vote is taken at the special meeting. If you hold your shares of record, to revoke your proxy, you must either advise our Corporate Secretary in writing, submit a proxy by telephone or via the Internet (subject to such verification required by applicable law or that the Company or its agents otherwise deem appropriate) or by mail, dated after the date of the proxy you wish to revoke, or attend the special meeting and vote your shares in person. Attendance at the special meeting will not by itself constitute revocation of a proxy.

 

Please note that if you have instructed your broker to vote your shares, the options for revoking your proxy described in the paragraph above do not apply and instead you must follow the directions provided by your broker to change these instructions.

 

The Company does not expect that any matter other than the approval of the merger agreement (and to approve the adjournment of the meeting, if necessary or appropriate to solicit additional proxies) will be brought before the special meeting. If, however, any such other matter is properly presented at the special meeting or any adjournment or postponement of the special meeting, the persons appointed as proxies will have discretionary authority to vote the shares represented by duly executed proxies in accordance with their discretion and judgment.

 

Shareholders of record and many shareholders who hold their shares through a broker or bank will have the option to submit their proxies or voting instructions via the Internet or by telephone. There are separate arrangements for using the Internet and telephone to submit your proxy depending on whether you are a shareholder of record or your shares are held in “street name” by your broker. If your shares are held in “street name,” you should check the voting instruction card provided by your broker to see which options are available and the procedures to be followed.

 

In addition to submitting the enclosed proxy card by mail, the Company’s shareholders of record may submit their proxies via the following means of electronic transmission, subject to such verification required by applicable law or that the Company or its agents otherwise deem appropriate:

 

 

 

Although it is not currently expected, the special meeting may be adjourned or postponed for the purpose of soliciting additional proxies. Any adjournment may be made without notice (if the adjournment is not for more than thirty days), other than by an announcement made at the special meeting of the time, date and place of the adjourned meeting. Whether or not a quorum exists, holders of a majority of the aggregate combined voting power of the shares of company common stock present in person or represented by proxy at the special meeting and entitled to vote thereat may adjourn the special meeting. Any signed proxies received by the Company in which no voting instructions are provided on such matter will be voted in favor of an adjournment in these circumstances. Any adjournment 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 or postponed.

 

The Company will pay the cost of this proxy solicitation. In addition to soliciting proxies by mail, directors, officers and employees of Claire’s Stores may solicit proxies personally and by telephone, facsimile or other electronic means of communication. These persons will not receive additional or special compensation for such solicitation services. Claire’s Stores will, upon request, reimburse brokers, banks and other nominees for their expenses in sending proxy materials to their customers who are beneficial owners and obtaining their voting instructions. The Company has retained D.F. King & Co., Inc. to assist it in the solicitation of proxies for the special meeting and will pay D.F. King & Co., Inc. a fee of approximately $10,000, plus reimbursement of out-of-pocket expenses.

 

As part of its ongoing evaluation of its business, the Company’s board of directors (“board”) and senior management regularly evaluate the Company’s long-term strategic alternatives and prospects for continued operations as an independent company. This evaluation took on renewed focus in late 2005 as senior management of the Company considered the risks regarding the desires of the Co-Chief Executive Officers, Ms. Marla Schaefer and Ms. Bonnie Schaefer, to eventually transition from active management. In addition, while senior management noted that the trading price of the Company’s common stock had almost tripled from the date that Marla and Bonnie Schaefer had become Co-Chief Executive Officers upon the leave of absence of their father who had previously served as Chief Executive Officer of the Company, they also appreciated the likelihood that the Company would face a challenging environment to continue to achieve the earnings growth it had over the past few years. The combination of these factors, together with the Company’s strong cash flow and the strength of the credit and financial markets, suggested to senior management that this might be an opportune time to realize substantial value through a strategic alternative. Senior management of the Company also believed that this was an opportune time to explore strategic alternatives because the Company would be doing so from a position of strength.

 

At the May 16, 2006 regularly scheduled board meeting, senior management of the Company reviewed with the board the Company’s business and prospects and outlined various strategic alternatives available to the Company, including the risks and benefits of remaining an independent public company, pursuing strategic investments and acquisitions, engaging in share repurchases and a potential sale of the Company. Subsequent to this meeting, the Company contacted Goldman, Sachs & Co. to engage Goldman Sachs as its financial advisor in connection with the Company’s review of its strategic alternatives.

 

Following initial contacts, representatives of Goldman Sachs met with various members of the Company’s senior management team to discuss strategic alternatives available to the Company, and on August 15, 2006, a meeting of the Company’s board of directors was convened to thoroughly review and discuss these strategic alternatives.

 

At the August 15, 2006 board of directors meeting, Ms. Marla Schaefer and Ms. Bonnie Schaefer, the Co-Chairmen of the board of directors, opened the meeting by stating that, as a follow-up to the review of strategic alternatives undertaken at prior board meetings, representatives from Simpson Thacher & Bartlett LLP and Goldman, Sachs & Co. would be joining the meeting. Representatives of Simpson Thacher & Bartlett reviewed with the board of directors the fiduciary duties of directors in the context of considering the Company’s strategic alternatives, noted that Florida law applied to the Company and actions taken by the board of directors and responded to various questions posed by the board members. Ms. Marla Schaefer then reviewed with the board members the reasons that the strategic review had been undertaken and the current state of the Company, its growth prospects and the opportunities and the challenges facing the Company. Specifically, she noted the capital expenditures and other steps that would need to be taken to establish a new platform for higher earnings growth and the difficulties associated with that alternative given the focus of the public markets on quarterly earnings. Ms. Bonnie Schaefer offered her perspectives on the strategic choices facing the Company and noted that the Company was not compelled to pursue a sale of itself at this time. Members of the Company’s management then reviewed certain highlights of the financial information presented at the May 16, 2006 board of directors meeting and indicated that there had been no material change to the financial information presented at the May board meeting in connection with this evaluation. Management responded to various questions from the board members and the board discussed, among other matters, the growth opportunities of the Company.

 

Representatives of Goldman Sachs then joined the meeting and reviewed their preliminary analysis regarding financial aspects of various strategic alternatives, including status quo, a leveraged recapitalization and a sale of the Company. In connection with its consideration of potential strategic alternatives, the board of directors assessed, with assistance from Goldman Sachs, those parties that would most likely have an interest in the Company. The board also evaluated the additional information that Goldman Sachs would require to refine its leveraged buyout analysis, particularly as it related to a price that a financial buyer would be able to pay. Representatives of management, Goldman Sachs and Simpson Thacher & Bartlett each responded to questions from board members. The board discussed, and Goldman Sachs responded to questions regarding, the viability and the advantages and disadvantages associated with each of the strategic alternatives that the Company could pursue. The board also discussed the risks of a potential sale process, including information leaks. Following these discussions, the board of directors authorized Goldman Sachs to refine its analysis and continue its analysis regarding the financial aspects of various strategic alternatives of the Company.

 

On October 10, 2006, the board of directors met to receive an update as to the on-going progress of the strategic review and to discuss whether to continue exploring a possible sale of the Company or other alternatives. Representatives of Goldman Sachs and Simpson Thacher & Bartlett were present at this meeting. Representatives of Goldman Sachs reviewed their analysis of the financial aspects of various strategic alternatives available to the Company, including status quo, a leveraged recapitalization and a sale of the Company. Management of the Company informed the board regarding communications received from JANA Partners, a hedge fund and a significant shareholder of the Company, indicating its interest in the Company returning cash to the Company’s shareholders in the form of a significant share repurchase. In lieu of a share repurchase, JANA Partners also suggested the possibility of a sale of the Company. The board of directors discussed the Company’s various alternatives, and Goldman Sachs and management responded to questions from the board. In response to questions from the board, Goldman Sachs discussed the premia obtained in the sale of other relatively comparable retailers in the recent past. Ms. Marla Schaefer discussed the frequent conflict of meeting Wall Street expectations and focusing on the long term needs of the Company. Ms. Marla Schaefer and Ms. Bonnie Schaefer also provided their perspectives on managing a more leveraged company.

 

During the course of the October 10, 2006 meeting, the board of directors discussed with Goldman Sachs possible next steps in the event that the board of directors were to authorize further exploration of a sale transaction. Goldman Sachs noted the absence of any obvious strategic buyers, and the board of directors, discussed the advantages and disadvantages of approaching potential strategic buyers. After discussion, reached the consensus that, if they decided to authorize Goldman Sachs to solicit preliminary indications of interest from potential purchasers, such solicitation would initially be limited to financial buyers and the question of whether to approach potential strategic buyers could be revisited at a later time after receiving initial responses from financial buyers. The board of directors discussed the benefits and risks associated with a potential sale of the Company, a leveraged recapitalization and other strategic alternatives. Representatives of Simpson Thacher & Bartlett noted that a buyer would seek to negotiate various provisions in a definitive agreement that would restrict the Company from pursuing a topping bid. Representatives of Simpson Thacher & Bartlett also informed the board that a buyer would likely require the Schaefer family to enter into a voting agreement to support a transaction approved by the board. Ms. Marla Schaefer and Ms. Bonnie Schaefer then addressed the alignment of their interests with the interests of other shareholders and indicated that their only objective was to choose the alternative that would result in the highest value for shareholders. Ms. Marla Schaefer, Ms. Bonnie Schaefer and representatives of Simpson Thacher & Bartlett responded to questions from the board. After further discussion, the board authorized Goldman Sachs to initiate contact with a select number of potential buyers to seek preliminary indications of interest, and thereafter the representatives of Goldman Sachs left the meeting. Senior management of the Company and representatives of Simpson Thacher & Bartlett then discussed the terms of the proposed engagement letter between the Company and Goldman Sachs, including the proposed fee structure. After discussion, the board of directors authorized management to engage Goldman Sachs as its financial advisor on the terms and conditions described to the board.

 

During October 2006, as directed by the board, Goldman Sachs and members of the Company’s management made initial approaches to twelve potential purchasers (including Apollo) and provided confidentiality agreements to each of these potential purchasers. Following execution of confidentiality agreements in respect of a sale of the Company by eleven of the twelve potential purchasers approached by Goldman Sachs, pursuant to which the potential purchasers were prohibited from discussing, at this stage, the proposed transaction with any co-investor or financing source without the prior consent of the Company, preliminary presentations were made by senior members of the Company’s management, with the assistance of Goldman Sachs, to each potential purchaser (who executed the confidentiality agreement) during the course of November 2006. Presentations were made during this time frame to all of the eleven potential purchasers who had previously entered into confidentiality agreements with the Company, each of whom expressed an interest in pursuing a business combination with the Company and a willingness to begin the due diligence process.

 

Each of the eleven potential purchasers of the Company to whom management presentations were made was invited to submit preliminary indications of interest with respect to a possible acquisition of all of the Company’s outstanding capital stock at the same price per share. On November 22, 2006, the Company received preliminary indications of interest from eight out of the eleven potential purchasers, which in each case provided for an all-cash purchase of all of the Company’s outstanding capital stock.

 

On November 28, 2006, a meeting of the Company’s board of directors was convened. Members of the Company’s management presented a review and update relating to various aspects of the Company’s business. Representatives of Goldman Sachs summarized for the board members the initial indications of interest received from the eight potential purchasers and background information relating to each. Goldman Sachs then provided an analysis of the preliminary indications of interest received on November 22, 2006 and analyses of the financial

aspects of other alternatives available to the Company, including status quo and a leveraged recapitalization. Representatives of Goldman Sachs, in the course of their review, discussed the valuation impact of management’s downward revisions to estimated revenues and EBITDA for fiscal year 2007, including on the leveraged buyout analysis. Management indicated that the Company would be conducting a comprehensive review of its financial projections. During the meeting, management of the Company informed the board that JANA Partners had filed a Schedule 13F on November 14, 2007 reporting its holdings of almost three million shares of the Company’s common stock, noted press coverage of this filing and discussed with the board recent communications with JANA Partners. The Company’s board of directors then discussed, among other matters, the key offer provisions included in the indications of interest, including, among other matters, price and ability of each potential purchaser to finance the proposed transaction. The Company’s board of directors discussed the Company’s various strategic alternatives, and Goldman Sachs and members of the Company’s management responded to questions from the board of directors. The board discussed the risks associated with a leveraged recapitalization transaction in which the Company would remain an independent company and acknowledged the succession risk faced by the Company.

 

Following this discussion, representatives of Simpson Thacher & Bartlett reviewed with the board the process of exploring strategic alternatives initiated in May 2006 in relation to the board’s fiduciary duties and responded to questions from board members. With respect to the possible formation of a special committee, Ms. Marla Schaefer and Ms. Bonnie Schaefer reaffirmed their view that their interests were aligned with the Company’s shareholders and that they had no interest different from the Company’s shareholders generally (other than as disclosed in this proxy statement with respect to their existing employment agreements). In that connection, they confirmed to the board that they did not have any interest in remaining as Co-Chief Executive Officers of the Company or investing as part of an acquisition of the Company (including any rollover of their beneficially-owned equity in a purchase of the Company by a private equity buyer). This discussion confirmed the board’s view that the formation of a special committee was not necessary. Goldman Sachs recommended to the board of directors that, if the board was prepared to continue the process, then the Company should proceed with each of the eight bidders to the next round of the process. Representatives of Goldman Sachs discussed the possibility that certain of the potential purchasers may seek to partner with another potential purchaser and discussed with the board the desire to balance the need for bidders with sufficient financial capability with the objective of maintaining a competitive process. Representatives of Simpson Thacher & Bartlett and Goldman Sachs discussed with the board the likelihood of increased speculation and rumors regarding a potential sale of the Company, as well as a recent article to this effect that appeared in one of the industry newspapers.

 

During the course of the November 28, 2006 meeting, the board of directors also reviewed the prior decision to revisit whether the Company should approach any strategic buyers. Simpson Thacher & Bartlett and Goldman Sachs discussed this issue with the board members and the advantages and disadvantages of approaching potential strategic buyers. In this respect, the board discussed, among other matters, timing issues and the board’s and management’s concerns regarding confidentiality, poaching of employees, protecting the Company’s sourcing capabilities, the proprietary nature of the terms of the Company’s leasing arrangements and the distraction to management that would result from expanding the process to potential strategic buyers, particularly if the potential strategic buyers were merely taking advantage of the process to conduct due diligence. Goldman Sachs and the management confirmed that neither Goldman Sachs nor the Company had received any prior contact from any potential strategic buyer at any time, despite press speculation of a possible sale of the Company. Following this discussion, the board of directors decided that, if the process were to continue and in the absence of any change in circumstances, the Company and Goldman Sachs would not initiate contact with any potential strategic buyers. The board then again discussed the sale process (including the potential need to publicly disclose the sale process), the preliminary indications of interest as well as the leveraged recapitalization analysis presented by Goldman Sachs. After discussion, the board decided to authorize management and Goldman Sachs to move forward with the next steps in the sale process, including compiling materials to be made available to the eight potential purchasers for due diligence purposes and preparing for in-depth management presentations.

 

During November 2006, various news articles indicated that the Company was in the process of potentially considering a business combination transaction. On December 1, 2006, the Company issued a press release announcing that it was exploring strategic alternatives to enhance shareholder value, including a possible sale of the Company, and that it had retained Goldman Sachs as its financial advisor.

 

After the meeting of the board of directors on November 28, 2006, the Company permitted each of the potential purchasers to initiate contact with a single potential co-investor and asked Goldman Sachs to coordinate the potential purchasers’ formation of “teams,” if required. At the request of one of the potential purchasers, the Company subsequently executed a confidentiality agreement with a ninth potential purchaser in January 2007 and permitted this new party to speak with one of the existing eight potential purchasers that were already part of the

process. As a result, three teams of potential purchasers were formed, each consisting of two potential purchasers, while three of the potential purchasers did not choose to form a team, which resulted in a total of six bidding groups. At this time, the Company also authorized each potential purchaser to hold discussions with and engage potential debt financing sources.

 

Beginning with the third week of December 2006, the Company made due diligence materials available to all of the potential purchasers and their advisors and, in the month of January 2007, held in-depth management presentations with each potential purchaser.

 

At a meeting of the board of directors on January 4, 2007, management presented to the board management’s fiscal year 2008 budget for review and approval by the board and management’s financial projections to be provided to potential purchasers by Goldman Sachs, on behalf of the Company. Management responded to questions from the board with respect to their presentation. Representatives of Goldman Sachs reviewed with the board their presentation which included a summary of their analyses regarding the financial impact of the downward revision of the Company’s estimated revenues and EBITDA on strategic alternatives available to the Company, and responded to questions from the board. Representatives of Goldman Sachs and Simpson Thacher & Bartlett provided an update on the sale process and the draft merger agreement, and the board discussed next steps in the process. After the representatives of Goldman Sachs had left the meeting, the board discussed potentially engaging a second financial advisor to render an opinion as to the fairness of a potential transaction. The board discussed the benefits of retaining a second financial advisor and authorized management to contact Peter J. Solomon (“PJSC”) for the purpose of retaining them to evaluate the fairness of any potential transaction.

 

On January 9, 2007, the board met again to review the Company’s fiscal year 2008 budget and financial projections. Management discussed the proposed budget and financial projections and responded to questions from the board. Following discussion, the board approved the fiscal year 2008 budget presented as well as the financial projections to be provided to potential purchasers.

 

After the last in-depth management presentation with the potential purchasers was held on January 18, 2007, senior management of the Company and representatives of Goldman Sachs provided the board of directors with an update on the status of the sale process, including due diligence process and management meetings with each of the bidders.

 

On February 6, 2007, Simpson Thacher & Bartlett circulated to each of the six bidding groups an initial draft of the merger agreement.

 

On February 9, 2007, the board of directors met to discuss the retention of PJSC. Members of the Company’s management and Simpson Thacher & Bartlett described the proposed terms and conditions of PJSC’s engagement, noting that PJSC was expected to evaluate the fairness of any potential transaction that may result from the process currently underway. Following a discussion, the board of directors authorized management of the Company to engage PJSC on the terms and conditions described to the Board, and an engagement letter was executed between the Company and PJSC on February 14, 2007.

 

During the second and third weeks of February, 2007, three of the bidding groups which had received access to confidential information informed Goldman Sachs that they were not interested in proceeding further. On February 15, 2007, on behalf of the Company, Goldman Sachs sent to each of the three remaining bidding groups a letter outlining the procedures for submitting a final bid for the Company by February 28, 2007. Pursuant to the bidding instructions, each bidding group was asked to submit a definitive proposal along with their debt and equity commitment letters by the final bid date of February 28, 2007. On February 22, 2007, one of the bidding groups, who we refer to as Bidder X in this proxy statement, submitted its initial comments on the draft merger agreement circulated previously by Simpson Thacher & Bartlett on February 6, 2007.

 

In light of the Schaefer Family Holders’ significant shareholding in the Company, and based on Bidder X’s request in its initial comments on the draft merger agreement for a voting commitment from the Schaefer Family Holders to support a transaction, Simpson Thacher & Bartlett sent to Bidder X on February 23, 2007, a draft shareholders agreement. In that connection, the Schaefer Family Holders had engaged Holland & Knight LLP as separate legal counsel with respect to the shareholders agreement. Pursuant to the proposed terms of the shareholders agreement, the Schaefer Family Holders would vote their company common stock in favor of approval of the merger agreement and against any competing transaction.

 

During the last week of February, on behalf of the Company, representatives of Goldman Sachs and Simpson Thacher & Bartlett contacted Bidder X and its advisors to clarify the material terms reflected in its proposal and to identify aspects of the comments to the draft merger agreement which raised material issues for the Company. The key terms addressed included provisions relating to termination of the merger agreement and the payment of any

termination fees, employee benefits and the conduct of business by the Company from execution of the agreement until closing. Bidder X was requested to improve the non-financial terms and conditions of its proposal.

 

On February 28, 2007, Goldman Sachs received written bid proposals from Bidder X and Apollo. The other potential bidding group which had remained in the process and been invited to submit a final proposal did not submit a written bid proposal. The bid proposal received from Apollo was for all the outstanding shares of capital stock of the Company for a price of $33.00 per share and was conditioned on the Schaefer Family Holders entering into a shareholders agreement on the terms previously described. This bid was not conditioned upon the ability of Apollo to obtain the proceeds from its proposed debt financing but did indicate that completion of due diligence by Apollo would require a period of two to three additional weeks. The bid proposal from Bidder X was for a price per share of $30.00, with non-financial terms and conditions similar, or slightly more favorable, than those proposed by Apollo.

 

On March 2, 2007, the Company’s board of directors met to review the two bid proposals received by Goldman Sachs. Representatives of Goldman Sachs reviewed the terms of each of the written bid proposals from Bidder X and Apollo, including the proposed debt financing commitments submitted by Bidder X and Apollo, as well as the due diligence process previously conducted by Bidder X and Apollo. Representatives of Goldman Sachs informed the board of the timing for completion of due diligence by Apollo, and responded to questions from the board regarding the two bid proposals. Representatives of Simpson Thacher & Bartlett reviewed certain material terms of the revised merger agreement submitted by Bidder X and the proposed changes indicated in Bidder X’s bid proposal as well as the proposed material terms indicated in Apollo’s bid proposal (which did not include a revised draft of the merger agreement). The board members discussed their views on the values contained in the proposed bid proposals as well as the potential value of other strategic alternatives, including a leveraged recapitalization transaction. Goldman Sachs responded to questions from the board regarding, among other matters, the financial aspects of the bid proposals and the Company’s strategic alternatives and reviewed with the board the history of the sale process, including the downward revisions in the financial projections prepared by the Company’s management. The board discussed, along with representatives of Goldman Sachs, the risks and challenges presented by the Company pursuing other strategic alternatives or continuing as an independent company following any termination of the sale process. After further discussion, the consensus of the board was to continue the sale process and the board directed Goldman Sachs to continue its attempts to obtain higher proposed prices per share from Bidder X and Apollo.

 

On March 5, 2007, the Company’s board of directors convened a meeting for the purpose of reviewing, among other matters, the discussions Goldman Sachs had engaged in with Apollo and Bidder X since the last board meeting. Goldman Sachs informed the board that, although Bidder X had not increased its bid, Bidder X had indicated its continued strong interest in acquiring the Company and continued to engage in discussions with Goldman Sachs about the possibility of increasing its proposed price per share. During the meeting, Goldman Sachs updated the board on Apollo’s indications that it was willing to rapidly proceed to finalize its due diligence if the Company agreed to reimburse the out-of-pocket expenses which it would incur in connection with such review. Goldman Sachs reviewed with the board the terms of an expense reimbursement arrangement whereby the Company would reimburse Apollo’s expenses, up to a maximum aggregate amount of $2,000,000, in the event that the Company entered into or consummated an alternative transaction with a third party at a price per share equal to or higher than the $33.00 per share proposed by Apollo, subject to Apollo continuing to negotiate in good faith with the Company and not withdrawing or reducing its bid proposal. The board discussed the prospect of agreeing to reimburse Apollo’s expenses on the terms and conditions described in light of the sale process, the terms of the only other bid proposal that had been received by the Company and the fact that the Company would be required to reimburse Apollo’s expenses only if it entered into an agreement at a price per share of $33.00 or higher. Representatives of Goldman Sachs provided an update on their analysis of the financial aspects of Apollo’s proposal and a potential leveraged recapitalization transaction and responded to questions from the board. Following further discussion by the board, the consensus of the board was that representatives of Simpson Thacher & Bartlett and Goldman Sachs were directed to negotiate an expense reimbursement letter between the Company and Apollo on the terms and conditions described to the board and the board authorized management of the Company to enter into such an expense reimbursement letter with Apollo. The Company entered into the expense reimbursement letter with Apollo as of March 5, 2007.

 

On March 6, 2007, Apollo sent comments to the draft merger agreement that had been distributed by Simpson Thacher & Bartlett to the potential purchasers on February 6, 2007. The draft merger agreement submitted by Apollo reflected the same basic structure as the draft submitted earlier by Bidder X and provided for the Company to be the surviving company in a merger in which all of the Company’s outstanding shares of capital stock were acquired at the same price per share. Representatives of Simpson Thacher & Bartlett engaged in negotiations with

Morgan, Lewis & Bockius LLP, outside legal counsel to Apollo, to identify aspects of its proposal which raised issues for the Company and to attempt to narrow the legal issues presented in the merger agreement draft submitted by Apollo. During this time, Bidder X and Goldman Sachs engaged in discussions with respect to Bidder X’s desire to acquire the Company and potential willingness to increase its proposed price per share. In addition, during this time, Goldman Sachs pressed both bidders to submit their best and final proposal on March 16, 2007. Following discussions with Morgan, Lewis & Bockius, Simpson Thacher & Bartlett sent the draft shareholders agreement to Apollo on March 6, 2007. On March 8, 2007, Apollo sent its comments to the shareholders agreement draft that had been previously provided by Simpson Thacher & Bartlett.

 

On March 13, 2007, Simpson Thacher & Bartlett distributed revised drafts of the merger agreement to each of Bidder X and Apollo based on the comments received from each of them with respect to the original draft merger agreement distributed on February 6, 2007 and the subsequent discussions held with their respective outside legal counsel. In the meantime, Goldman Sachs continued its efforts to elicit higher bids from each of the two bidders, and impressed upon Apollo the need to expedite the due diligence process. Representatives of Simpson Thacher & Bartlett and Goldman Sachs also informed Apollo of comments from the Schaefer Family Holders, after consulting with their legal advisors at Holland & Knight, on the shareholders agreement draft submitted by Apollo.

 

On the evening of March 16, 2007, Apollo sent a revised draft of the merger agreement in response to the draft sent by Simpson Thacher & Bartlett on March 13, 2007. On the same date, Apollo also sent a revised draft of the shareholders agreement. Following receipt of the draft merger agreement from Apollo on March 16, 2007, representatives of Simpson Thacher & Bartlett and Goldman Sachs updated management of the Company regarding Goldman Sachs’ discussion with representatives of Apollo and the significant outstanding legal issues raised by Apollo’s revised draft of the merger agreement. After discussions with Goldman Sachs and Simpson Thacher & Bartlett, the Company’s management directed Goldman Sachs and Simpson Thacher & Bartlett to seek to reduce the optionality for Apollo associated with Apollo’s proposed merger agreement terms as well as to attempt to reach agreement on the other areas of concern to the Company in Apollo’s revised draft of the merger agreement. Bidder X did not respond to the draft merger agreement sent to it on March 13, 2007, although Goldman Sachs continued to engage in discussions with Bidder X regarding its potential willingness to increase its proposed price per share.

 

On March 17, 2007, representatives of Goldman Sachs and Simpson Thacher & Bartlett contacted representatives of Apollo and Morgan, Lewis & Bockius to communicate, among other matters, the need for Apollo to further reduce the optionality for Apollo inherent in their proposed merger agreement terms, to reduce the restrictions proposed by Apollo on the Company’s operations between signing of the merger agreement and closing of the transaction and to amend certain terms relating to the termination of the agreement and the termination fees that the parties may be obligated to pay. On March 18 and March 19, 2007, these negotiations continued and Apollo proposed, in the aggregate, improved terms with respect to the terms of the merger agreement.

 

On March 19, 2007, a meeting of the Company’s board of directors was convened to discuss the two bid proposals received. At the beginning of the meeting, Goldman Sachs informed the board members that, while Bidder X had verbally shown some inclination to improve meaningfully the price per share contained in its prior bid, Bidder X did not submit a specific revised price per share and the level to which Bidder X indicated a willingness to increase its price was less than the $33.00 price per share offered by Apollo. Simpson Thacher & Bartlett informed the board that the non-financial terms last proposed by Bidder X were, taken as a whole, no more favorable to the Company in any material respect than the improved terms proposed by Apollo. Goldman Sachs also informed the board that it had been recently contacted by one of the bidding groups which had remained in the process in February 2007 and had been invited to submit a final proposal (but did not submit any final proposal) and that, while inquiring about the process, this potential purchaser indicated that it was not willing to participate in the bidding process. Goldman Sachs also confirmed that, throughout the process, no interest had been shown by any strategic buyer despite the Company’s December 1, 2006 press release and the widespread speculation and publicity concerning the proposed transaction. Representatives of Simpson Thacher & Bartlett then reviewed for the Company’s board of directors a detailed summary of the material legal terms and conditions of the merger agreement being negotiated with Apollo (a draft of which had been previously provided to the board), and along with representatives of Goldman Sachs, further discussed the proposals received from Bidder X and Apollo. Simpson Thacher & Bartlett informed the board of directors that the main areas of negotiation on the merger agreement related to conditionality, deal protection, responsibility of Apollo for breaches of the agreement and certain matters related to employee benefits. Representatives of Simpson Thacher & Bartlett and Goldman Sachs responded to various questions from the board regarding Apollo’s proposal and the proposed terms of the merger agreement.

 

Representatives of Simpson Thacher & Bartlett again reviewed with the Company’s board of directors the legal duties of directors in connection with an extraordinary transaction such as the proposed merger and reviewed with the board the terms of the proposed shareholders agreement. Representatives of Goldman Sachs reviewed with the board their presentation which, among other matters, summarized the sale process, the financial aspects of Apollo’s proposal and the strategic alternatives of remaining an independent company or engaging in a leveraged recapitalization. The representatives of Goldman Sachs responded to questions from the board and left the meeting. Representatives of PJSC then joined the meeting and reviewed with the board of directors their presentation which, among other matters, summarized its valuation analyses with respect to the proposed transaction with Apollo. Representatives of PJSC responded to questions from the board. Thereafter, the representatives of Goldman Sachs re-joined the meeting. Following further discussion, the board of directors instructed Simpson Thacher & Bartlett and Goldman Sachs to continue negotiating with Apollo to attempt to further improve the terms of the merger agreement. Following the board meeting, Simpson Thacher & Bartlett continued negotiations with Morgan, Lewis & Bockius on the merger agreement.

 

Late in the evening of March 19, 2007, the Company’s board of directors convened a meeting to consider whether to approve the transaction proposed by Apollo. Representatives of Simpson Thacher & Bartlett and Goldman Sachs updated the board as to the negotiations between the parties since the last time the board met earlier in the day, and representatives of Simpson Thacher & Bartlett detailed for the board the results achieved in its negotiations of the merger agreement. Goldman Sachs also informed the board that Apollo was unwilling to increase the price of $33.00 per share contained in its proposal. Representatives of Goldman Sachs responded to questions from the board. The board of directors discussed the Goldman Sachs and PJSC presentations made at the meeting earlier in the day and asked additional questions.

 

After further discussions, the Company’s board of directors requested that each of Goldman Sachs and PJSC independently render an opinion as to whether the proposed merger with Apollo was fair from a financial point of view to the Company’s common stock and Class A common stock shareholders. Goldman Sachs delivered to the Company’s board of directors its oral opinion, which was subsequently confirmed by delivery of a written opinion dated March 20, 2007, that, as of such date and based upon and subject to the factors and assumptions set forth in such opinion, the $33.00 in cash per share to be received by the holders of company common stock, in the aggregate, pursuant to the merger agreement was fair, from a financial point of view, to such holders, in the aggregate. Immediately thereafter, PJSC delivered to the Company’s board of directors its oral opinion, which was subsequently confirmed by delivery of a written opinion dated March 20, 2007, that, based upon and subject to various assumptions made, matters considered and limitations described, as of such date, the $33.00 in cash per share to be received by the holders of company common stock in connection with the merger was fair, from a financial point of view, to such holders. The full text of the written opinion by each of Goldman Sachs and PJSC, which sets forth the assumptions made, procedures followed, matters considered and limitation on the review undertaken in connection with such opinion, is attached as Annex C and D, respectively, to this proxy statement. Following additional discussion and deliberation, the board of directors unanimously adopted the merger agreement, the shareholders agreement and the transactions contemplated by each agreement and unanimously resolved to recommend that the Company’s shareholders vote to approve the agreement.

 

The merger agreement was executed by the Company, Parent and Merger Sub and the shareholders agreement was executed by Parent, Merger Sub and the Schaefer Family Holders, in each case, as of March 20, 2007. Later in the day on March 20, 2007, the Company and Apollo issued a joint press release announcing the transaction.

 

In reaching its decision to approve the merger agreement, the merger and the other transactions contemplated by the merger agreement, and to recommend that the Company’s shareholders vote to approve the merger agreement, the board of directors of the Company consulted with management and its financial and legal advisors. The board of directors considered a number of factors and potential benefits of the merger including, without limitation, the following:

 

 

 

 

 

 

The board of directors also considered and balanced against the potential benefits of the merger a number of potentially adverse factors concerning the merger including, without limitation, the following:

 

 

After taking into account all of the factors set forth above, as well as others, the board of directors agreed that the benefits of the merger outweigh the risks and that the merger agreement and the merger are advisable and fair and in the best interests of the Company and its shareholders. The board of directors has unanimously adopted the merger agreement and the merger and recommends that the Company’s shareholders vote to approve the merger agreement at the special meeting.

 

The board of directors did not assign relative weights to the above factors or the other factors considered by it. In addition, the board of directors did not reach any specific conclusion on each factor considered, but conducted an overall analysis of these factors. Individual members of the board of directors may have given different weights to different factors.

 

After careful consideration, the Company’s board of directors, by unanimous vote:

 

 

 

Goldman Sachs rendered its oral opinion to the Company’s board of directors, which was subsequently confirmed in writing, that, as of March 20, 2007 and based upon and subject to the factors and assumptions set forth therein, the $33.00 in cash per share to be received by the holders of the outstanding shares of company common stock, in the aggregate, pursuant to the merger agreement was fair, from a financial point of view, to such holders, in the aggregate.

 

The full text of the written opinion of Goldman Sachs, dated March 20, 2007, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex C to this proxy statement. Goldman Sachs provided its opinion for the information and assistance of the Company’s board of directors in connection with its consideration of the transaction. The Goldman Sachs opinion is not a recommendation as to how any holder of company common stock should vote with respect to the transaction.

 

In connection with rendering the opinion described above and performing its related financial analyses, Goldman Sachs reviewed, among other things:

 

 

Goldman Sachs also held discussions with members of the Company’s senior management regarding their assessment of the Company’s past and current business operations, financial condition, and future prospects. In addition, Goldman Sachs reviewed the reported price and trading activity for the Company’s common stock, compared certain financial and stock market information for the Company with similar information for certain other companies the securities of which are publicly traded, and reviewed the financial terms of certain recent business combinations in the retail industry specifically and in other industries generally and performed such other studies and analyses, and considered such other factors, as it considered appropriate.

 

Goldman Sachs relied upon the accuracy and completeness of all of the financial, legal, accounting, tax and other information discussed with or reviewed by it and assumed such accuracy and completeness for purposes of rendering the opinion described above. In addition, Goldman Sachs did not make an independent evaluation or appraisal of the assets and liabilities (including any contingent, derivative or off-balance-sheet assets and liabilities) of the Company or any of its subsidiaries, nor was any evaluation or appraisal of the assets or liabilities of the Company or any of its subsidiaries furnished to Goldman Sachs. Goldman Sachs’ opinion does not address the underlying business decision of the Company to engage in the transaction. In addition, Goldman Sachs does not express any opinion as to the impact of the transaction on the solvency or viability of the Company or the ability of the Company to pay its obligations when they become due.

 

The following is a summary of the material financial analyses delivered by Goldman Sachs to the Company’s board of directors in connection with rendering the opinion described above. The following summary, however, does not purport to be a complete description of the financial analyses performed by Goldman Sachs, nor does the order of analyses described represent relative importance or weight given to those analyses by Goldman Sachs. Some of the summaries of the financial analyses include information presented in tabular format. The tables must be read together with the full text of each summary and are alone not a complete description of Goldman Sachs’ financial analyses. 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 March 16, 2007 and is not necessarily indicative of current market conditions.

 

Historical Premium, Trading Levels and Same Store Sales Analyses.  Goldman Sachs reviewed the historical trading prices for the Company’s common stock for the one-year period and the three-year period ended March 16, 2007. Goldman Sachs also noted that the price of the Company’s common stock dropped after the Company lowered its earnings guidance on May 4, 2006 and the price of the Company’s common stock gained momentum

after November 14, 2006, the day JANA Partners, a hedge fund, publicly disclosed its holding of almost 3 million shares of the Company’s common stock. In addition, Goldman Sachs analyzed the consideration to be received by holders of company common stock pursuant to the merger agreement in relation to the latest twelve months high, low and average market prices of the Company’s common stock, the market price of the Company’s common stock on March 16, 2007, the market price of the Company’s common stock on November 13, 2006 (the last trading day prior to which JANA Partners publicly disclosed its holding of almost 3 million shares of the Company’s common stock), and the latest three year average market price of the Company’s common stock.

 

This analysis indicated that the $33.00 per share to be paid to the Company’s shareholders pursuant to the merger agreement represented:

 

 

Goldman Sachs also reviewed the trading levels of the Company’s common stock and calculated the price to earnings ratio for the Company for fiscal year 2007, the current Company fiscal year, and fiscal year 2008, the next Company fiscal year (1-year forward), based on fiscal year 2007 and fiscal year 2008 IBES median earnings per share, or EPS, estimates and the share price on November 13, 2006, the day prior to the date on which JANA Partners, a hedge fund, announced its holding of almost 3 million shares of the Company’s common stock; the average share price for each of the 30-day, 20-day and 10-day periods preceding November 13, 2006; and the LTM average share price between March 16, 2006 and March 16, 2007. The result of this analysis is summarized as follows:

 

 

Goldman Sachs also considered that the Company’s actual monthly same store sales performance in fiscal year 2007 was lower than First Call same store sales estimates for nine of the 12 months in fiscal year 2007. Goldman Sachs noted that after September 2006, the Company’s stock price increased upon announcements in the months of October 2006, November 2006, and December 2006 that the Company’s actual same store sales performance was lower than First Call same store sales estimates. The result of this analysis is summarized as follows:

 

Implied Transaction Multiples Analysis.  Goldman Sachs calculated and compared various implied transaction multiples based on the fully diluted equity consideration to be received by the holders of the outstanding shares of company common stock pursuant to the merger agreement, based on financial projections prepared by the Company’s management. The following multiples were calculated for the Company:

 

 

Each of the multiples was calculated using financial projections prepared by the Company’s management for each of fiscal years 2007, 2008 and 2009. In calculating the equity value (on a fully-diluted basis) of the Company, Goldman Sachs assumed 93.3 million shares of company common stock outstanding, which includes 0.5 million options with a weighted average exercise price of $16.31 per share and 0.2 million accelerated restricted stock units. The enterprise value of a company is calculated by adding its short and long-term debt to its equity value (on a fully-diluted basis), the value of any preferred stock (at liquidation value) and the book value of any minority interest, and from the resulting sum, subtracting the value of its cash and cash equivalents. The following table sets forth the results of this analysis:

 

 

Present Value of Future Stock Price Analysis.  Goldman Sachs performed an illustrative analysis of the implied present value of the future stock price of the Company, which is designed to provide an indication of the present value of a theoretical future value of a company’s equity as a function of such company’s future earnings and its assumed price to earnings multiple. For this analysis, Goldman Sachs used the financial projections prepared by the Company’s management and IBES median EPS estimates. Goldman Sachs used the price to forward earnings multiples of 13.3x, calculated by dividing the share price of the Company’s common stock on November 13, 2006, the day prior to the filing by JANA Partners, by the IBES median EPS estimate for fiscal year 2008, and 14.4x, calculated by dividing the LTM average share price between March 16, 2006 and March 16, 2007 by the IBES median EPS estimate for fiscal year 2008. Goldman Sachs then calculated implied future per share values for the company common stock for each of the fiscal years 2008 to 2010 by applying the price to a forward price to earnings multiples of 13.3x and 14.4x, respectively, to the Company’s management EPS estimates for fiscal years 2009 to 2011 and IBES median EPS estimates for fiscal years 2009 to 2011. Goldman Sachs assumed the IBES median EPS

estimates for fiscal years 2008 and 2009 and calculated the IBES median EPS estimates for fiscal years 2010 and 2011 by extrapolating using the IBES five-year growth rate of 13%. Goldman Sachs then discounted those values, using a cost of equity discount rate of 10.65%. This analysis resulted in a range of implied present values per share of company common stock of $29.43 to $30.69, using the price to forward earnings multiple of 13.3x, and a range of implied present values per share of company common stock of $32.05 to $33.43, using the price to forward earnings multiple of 14.4x. Goldman Sachs noted that the LTM average forward price to earnings multiple of 14.4x included a period of time after November 14, 2006, the date on which JANA Partners, a hedge fund, announced its holding of almost 3 million share of the Company’s common stock and after December 1, 2006, the date on which the Company announced that it was exploring strategic alternatives to enhance shareholder value, including a possible sale of the Company, and had engaged Goldman Sachs as its financial advisor, and also included a period of time during which there were several press articles speculating about a potential transaction and potential buyers.

 

Selected Companies Analysis.  Goldman Sachs reviewed and compared certain financial information for the Company to corresponding financial information, ratios and public market multiples for the following publicly traded companies in the retail industry:

 

 

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

 

The multiples and ratios for the Company were calculated using the closing price of the Company’s common stock on March 16, 2007 and the multiples and ratios for the selected companies were calculated using the selected companies’ closing prices on March 16, 2007. The multiples and ratios for the Company were based on historical information and projections provided by the Company’s management. The multiples and ratios for each of the selected companies were based on the most recent publicly available information and IBES median estimates. With respect to the Company and the selected companies, Goldman Sachs calculated:

 

 

The results of these analyses are summarized as follows:

 

 

 

 

With respect to Claire’s Stores and the selected companies, Goldman Sachs also calculated the ratio of price to estimated fiscal years 2008 and 2009, respectively, earnings, and considered the estimated compound annual growth rate of EPS for the five fiscal years ending in 2012. The following table presents the results of this analysis:

 

 

 

 

With respect to Claire’s Stores and the selected companies, Goldman Sachs also calculated LTM EBITDA margins and EBIT margins.

 

The following table presents the results of this analysis:

 

 

Goldman Sachs also considered that over the last five years, the average annual forward price to earnings ratio for the Company was 13.7x to 15.7x and that over the last four years, the average annual forward price to earnings ratio for the Company was 13.7x to 14.4x. Goldman Sachs also considered that over the last five years, the average annual LTM EBITDA multiple for the Company was 7.6x to 8.6x and that over the last four years, the average annual LTM EBITDA multiple for the Company was 7.6x to 8.2x.

 

Selected Transactions Analysis.  Goldman Sachs analyzed certain information relating to selected strategic and LBO transactions in the retail industry. For each of the selected transactions, Goldman Sachs calculated and compared the enterprise values as a multiple of the target company’s publicly reported LTM EBITDA prior to announcement of the applicable transaction. The following tables set forth the transactions reviewed (listed by acquirer/target and month and year announced) and the results of the analysis.

 

Strategic Transactions

 

LBO Transactions

 

 

Goldman Sachs multiplied a selected range of transaction multiples of 8.0x to 10.0x by the Company’s EBITDA for the twelve months ended February 2, 2007, then subtracted net debt, and divided that amount by the number of fully diluted shares of the Company to arrive at a range of per share equity values for the company common stock. This selected transaction analysis indicated an estimated range of equity values for the company common stock of between $30.31 and $36.97 per share. Goldman Sachs noted that the $33.00 in cash per share of company common stock to be paid to the holders of company common stock pursuant to the merger agreement implied an enterprise value multiple of LTM EBITDA of 9.5x.

 

Leveraged Buyout Analysis.  Goldman Sachs analyzed the implied equity returns that a financial buyer paying an offer price of $33.00 per share might achieve from the transaction over a period of five years, based upon the financial projections prepared by the Company’s management and assuming no adjustments relating to purchaser’s operation of the business, an assumed capital structure including initial leverage of funded debt to EBITDAR (earnings before interest, taxes, depreciation, amortization and rent expense) of 7.7x and the completion of an exit transaction at the end of five years at selected a range of exit multiples between 7.0x and 9.0x. This analysis implied internal rates of return between 17.1% and 29%. Goldman Sachs also performed an illustrative analysis of the range of the prices per share of company common stock that an acquirer would theoretically pay if the Company were acquired in a leveraged buyout transaction that closed as of February 3, 2007 assuming, among other things, (i) a minimum sponsor equity range of 20%, (ii) initial leverage of funded debt to EBITDAR of 7.7x, (iii) the Company would be valued at the end of fiscal year 2012 at 8.0x 2012E EBITDA (the “Exit EBITDA multiple”), (iv) a range of fiscal year 2012 EBITDA margins of 22.3% to 23.3%, (v) a range of sales compounded annual growth rates of 6.0% to 7.0% from fiscal years 2008 to 2012, (vi) an internal rate of return of 23.6% and (vii) projections provided by the Company’s management. The analysis resulted in a range of implied values of $32.23 to $33.80 per share of company common stock.

 

Recapitalization Analysis.  Goldman Sachs analyzed an illustrative recapitalization transaction involving the Company and the theoretical value the Company’s shareholders would receive in such a transaction. In the theoretical recapitalization transaction, Goldman Sachs assumed that the Company used excess cash and the proceeds of new debt financings to finance a cash tender offer in the range of $30.64 to $32.78 (0% to 7% repurchase premium over current share price depending on the size of the share repurchase) per share of company common stock for $200 million to $600 million of the Company’s outstanding shares. The theoretical post-recapitalization trading value of the shares not purchased in the tender offer was based upon estimated current price to earnings multiples of 14.6x and 15.9x and forward price to earnings multiples of 13.3x and 14.4x, respectively, and projections for the Company provided by the Company’s management after giving effect to the use of excess cash and the interest costs of additional leverage. Goldman Sachs calculated the current and forward price to earnings ratios by dividing the share price of the Company’s common stock on November 13, 2006, the day prior to the filing by JANA Partners, by the respective IBES current and forward median EPS estimates for fiscal years 2008 and 2009 and also calculated the price to current and forward earnings multiples by dividing the LTM average share price between March 16, 2006 and March 16, 2007 by the respective IBES current and forward median EPS estimates for fiscal years 2008 and 2009. Goldman Sachs noted that the LTM average forward price to earnings multiples of 14.4x and 15.9x each included a period of time after November 14, 2006, the date on which JANA Partners, a hedge fund, announced its holding of almost 3 million shares of the Company’s common stock and after December 1, 2006, the

date on which the Company announced that it was exploring strategic alternatives to enhance shareholder value, including a possible sale of the Company, and had engaged Goldman Sachs as its financial advisor, and also included a period of time during which there were several press articles speculating about a potential transaction and potential buyers. Goldman Sachs then calculated the implied share prices in FY2008 and FY2009. The following table presents the results of Goldman Sachs’ analysis:

 

 

Discounted Cash Flow Analysis.  Goldman Sachs performed an illustrative discounted cash flow analysis to determine a range of implied present values per share of company common stock. A discounted cash flow analysis is used to derive a valuation of an asset by calculating the “net present value” of estimated future cash flows of the asset. “Net present value” refers to the current value of future cash flows or amounts and is obtained by discounting such future cash flows or amounts by a discount rate that takes into account risk, the opportunity cost of capital, expected returns and other appropriate factors. Goldman Sachs calculated implied indications of net present value of free cash flows for the Company through 2012 using discount rates ranging from 9.0% to 11.0%. Goldman Sachs then calculated implied illustrative “terminal values” for the Company in the year 2012 based on multiples ranging from 6.5x to 8.0x 2012E EBITDA. “Terminal value” refers to the present value of future cash flows of an asset from a particular point in time. These illustrative terminal values were then discounted to calculate implied indications of present values using discount rates ranging from 9.0% to 11.0%. The ranges for the discount rates used by Goldman Sachs were based on a weighted average cost of capital analysis of the Company. This analysis resulted in a range of implied present values of $31.78 to $38.85 per share of company common stock. Goldman Sachs noted the $33.00 in cash per share of company common stock to be paid to the holders of company common stock pursuant to the merger agreement.

 

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

 

Goldman Sachs prepared these analyses for purposes of Goldman Sachs’ providing its opinion to the Company’s board of directors as to the fairness from a financial point of view to the holders of the outstanding shares of company common stock, in the aggregate, of the $33.00 in cash per share to be received by such holders. These analyses do not purport to be appraisals nor do they necessarily reflect the prices at which businesses or securities actually may be sold. Analyses based upon forecasts of future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by these analyses. 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, Goldman Sachs or any other person assumes responsibility if future results are materially different from those forecast.

 

The merger consideration was determined through arms’-length negotiations between the Company and Apollo and was approved by the Company’s board of directors. Goldman Sachs provided advice to the Company during these negotiations. Goldman Sachs did not, however, recommend any specific amount of consideration to the Company or its board of directors or that any specific amount of consideration constituted the only appropriate consideration for the transaction.

 

As described above, Goldman Sachs’ opinion to the Company’s board of directors was one of many factors taken into consideration by the Company’s board of directors in making its determination to approve the merger agreement. The foregoing summary does not purport to be a complete description of the analyses performed by Goldman Sachs in connection with the fairness opinion and is qualified in its entirety by reference to the written opinion of Goldman Sachs attached as Annex C.

 

Goldman Sachs and its affiliates, as part of their investment banking business, are continually engaged in performing financial analyses with respect to businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and other transactions as well as for estate, corporate and other purposes. Goldman Sachs has acted as financial advisor to the Company in connection with, and has participated in certain of the negotiations leading to, the transaction contemplated by the merger agreement. Goldman Sachs has provided and is currently providing certain investment banking services to Apollo and its affiliates and portfolio companies from time to time, including having acted as a co-manager with respect to the issuance of preferred shares of Hexion Specialty Chemicals, Inc., a portfolio company of Apollo, in May 2005; as joint book runner with respect to the public offering of 23,529,411 shares of common stock of Goodman Global, Inc., a portfolio company of Apollo (aggregate principal amount of $346,500,000) in February 2006; as joint global coordinator and joint book runner for the initial public offering of AP Alternative Assets L.P., an affiliate of Apollo (aggregate principal amount of $1,500,000) in June 2006; as lead arranger on a senior and senior subordinated notes offering (aggregate principal amount €530,000,000) of Luis No. 1 PLC, in connection with Apollo’s acquisition of the logistics division of TNT NV, an Amsterdam-based provider of postal and logistics services in August 2006; as joint book runner with respect to the holding company senior unsecured note offering by General Nutrition Centers, Inc. or GNC, a portfolio company of Apollo (aggregate principal amount $425,000,000) in November 2006; and as financial advisor to GNC in connection with its sale in February 2007. Goldman Sachs also may provide investment banking services to the Company, Apollo and their respective affiliates in the future. In connection with the above-described investment banking services, Goldman Sachs has received, and may receive in the future, compensation.

 

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

 

The board of directors of the Company selected Goldman Sachs as its financial advisor because it is an internationally recognized investment banking firm that has substantial experience in transactions similar to the transaction. Pursuant to a letter agreement dated October 16, 2006, the Company engaged Goldman Sachs to act as its financial advisor in connection with the contemplated transaction. Pursuant to the terms of this engagement letter, the Company has agreed to pay Goldman Sachs a transaction fee estimated to be approximately $18,000,000, calculated based on an escalating percentage of the aggregate consideration, all of which is payable upon consummation of the transaction. In addition, the Company has agreed to reimburse Goldman Sachs for its expenses, including attorneys’ fees and disbursements, and to indemnify Goldman Sachs and related persons against various liabilities, including certain liabilities under the federal securities laws.

 

Pursuant to an engagement letter dated February 14, 2007, the Company engaged PJSC to act as its financial advisor with respect to the merger and, if requested, to render to the Company’s board of directors an opinion as to the fairness, from a financial point of view, to the holders of common stock and Class A common stock, of the merger consideration proposed to be received by such holders in connection with the merger. On March 19, 2007, PJSC rendered its oral opinion to the Company’s board of directors, which opinion was subsequently confirmed by delivery of a written opinion dated March 20, 2007, to the effect that, based upon and subject to various assumptions made, matters considered and limitations set forth in such opinion, as of the date of such opinion, the merger consideration proposed to be received by the holders of our common stock and Class A common stock in connection with the merger was fair, from a financial point of view, to such holders.

 

The full text of PJSC’s opinion, which sets forth assumptions made, procedures followed, matters considered, and limitations on and scope of the review by PJSC in rendering PJSC’s opinion, is attached as Annex D to this proxy statement. PJSC’s opinion was directed only to the fairness, from a financial point of view, to the holders of company common stock of the merger consideration proposed to be received by such holders in connection with the merger, was provided to the Company’s board of directors in connection with their evaluation of the merger, did not address any other aspect of the merger and did not, and does not, constitute a recommendation to any holder of our company common stock or any other person as to how such holder or person should vote or act on any matter relating to any part of the merger. The summary of PJSC’s

opinion set forth in this proxy statement is qualified in its entirety by reference to the full text of such opinion. Holders of company common stock are encouraged to read PJSC’s opinion carefully and in its entirety.

 

In connection with PJSC’s opinion, PJSC:

 

 

PJSC assumed and relied upon the accuracy and completeness of the information provided to PJSC for the purposes of PJSC’s opinion and PJSC did not assume any responsibility for independent verification of such information. With respect to the financial projections, PJSC assumed that the financial projections were reasonably prepared on bases reflecting the best currently available estimates and judgments of the future financial performance of the Company. PJSC did not conduct a physical inspection of the facilities or property of the Company. PJSC did not assume any responsibility for any independent valuation or appraisal of the assets or liabilities of the Company, nor was PJSC furnished with any such valuation or appraisal. Furthermore, PJSC did not consider any tax, accounting or legal effects of the merger or the transaction structure on any person or entity. PJSC evaluated the merger consideration without giving effect to any premium or discount that may be attributable to any class of common stock or Class A common stock by reason of any control, liquidity, dividend or voting, or other rights or aspects relating thereto.

 

PJSC assumed that the merger will be consummated in accordance with the terms of the merger agreement, without waiver, modification or amendment of any material term, condition or agreement, that, in the course of obtaining the necessary regulatory or third party approvals, consents and releases for the merger, no delay, limitation, restriction or condition will be imposed that would have an adverse effect on the Company, in any respect meaningful to PJSC’s analysis, and that Parent will obtain the necessary financing to effect the merger substantially in accordance with the terms of financing commitments in the forms provided by Parent. PJSC further assumed that all representations and warranties set forth in the merger agreement and all related agreements were and will be true and correct in all material respects as of all of the dates made or deemed made and that all parties to the merger agreement and all agreements related thereto will comply with all covenants of such party thereunder.

 

PJSC’s opinion was necessarily based on economic, market and other conditions as in effect on, and the information made available to PJSC as of, March 16, 2007. In particular, PJSC did not express any opinion as to the prices at which shares of our common stock or Class A common stock may trade at any future time. Furthermore, PJSC’s opinion did not address the Company’s underlying business decision to undertake any part of the merger. PJSC’s opinion did not address any other aspect or implication of the merger or any other agreement, arrangement or understanding entered into in connection with the merger or otherwise except as expressly identified in PJSC’s opinion.

 

In arriving at its opinion, PJSC was not authorized to solicit, and PJSC did not solicit, interest from any party with respect to a merger or other business combination transaction involving the Company or any of its assets and PJSC was not authorized to evaluate and did not evaluate any other merger or other business combination transaction involving the Company or any other strategic or financial transaction.

 

The following summarizes the significant financial analyses performed by PJSC and reviewed with the Company’s board of directors on March 19, 2007 in connection with the delivery of PJSC’s opinion. The financial analyses summarized below include information presented in tabular format. In order to fully understand PJSC’s financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data 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 PJSC’s financial analyses.

 

Analysis of Selected Publicly Traded Comparable Companies

 

PJSC performed a comparable companies analysis to determine (1) what the Company’s valuation would be if our common stock traded in the valuation range of certain comparable retail companies and (2) what the Company’s valuation would be if our common stock traded in such range and was to receive a premium to this valuation consistent with premiums received by other publicly traded companies in cash acquisitions valued between $2.0 billion and $5.0 billion since January 1, 2004 (excluding financial services and real estate companies). PJSC reviewed and compared selected financial data of the Company with similar data using publicly available information for the following publicly traded companies in the retail industry, which have operations that, for purposes of PJSC’s analysis, PJSC deemed similar to certain operations of the Company’s based on PJSC’s experience:

 

 

For each of these companies, PJSC calculated and compared various financial multiples and ratios, including, among others:

 

 

 

for the selected companies, for the twelve month period ended February 3, 2007 (other than for Charlotte Russe, whose net sales, EBIT and EBITDA figures were for the twelve month period ended December 30, 2006); and

 

 

 

The enterprise value of a company is calculated by adding its short and long-term debt to its equity value (on a fully-diluted basis), the value of any preferred stock (at liquidation value) and the book value of any minority interest, and from the resulting sum, subtracting the value of its cash and cash equivalents.

 

For purposes of this analysis, PJSC obtained the projected EPS estimates for the public comparable companies by using the mean of Wall Street analysts’ estimates as reported by First Call Investment Research on March 16, 2007.

 

Based on this data, as of March 16, 2007, PJSC developed a summary valuation analysis based on a range of trading valuation multiples and ratios for the selected comparable companies. This analysis resulted in the following ranges of implied multiples and ratios:

 

 

 

PJSC calculated ranges of implied equity values per share of company common stock using multiples and ratios from the selected companies set forth above and applying them to the Company’s financial statistics (both excluding and including a “control premium” described below). For this calculation, the Company’s historical financial statistics were obtained from the Company’s historical financial statements, and the Company’s projected financial statistics were provided by the Company’s management. The per share values were based on the number of shares of company common stock outstanding as of February 3, 2007, plus dilutive shares accounted for by the treasury stock method, due to stock options and restricted stock. PJSC used a “control premium” of 18.7%, which was the median premium paid (based on the target’s stock price five days prior to closing) in cash acquisition transactions valued between $2.0 billion and $5.0 billion since January 1, 2004, excluding financial services and real estate companies, as reported by Securities Data Corporation.

 

PJSC derived from the ranges of implied equity values per share calculated in the analysis described above (i) a reference range of implied equity values per share of company common stock of $27.00 to $35.50, excluding a control premium of 18.7%, and (ii) a reference range of implied equity values per share of company common stock of $32.00 to $42.00, including a control premium of 18.7%.

 

PJSC noted that the merger consideration was $33.00 per share.

 

Analysis of Selected Precedent Transactions

 

To analyze the merger consideration relative to the consideration received by shareholders in selected other similar precedent transactions, PJSC prepared an analysis of selected precedent transactions in the retail industry that, for purposes of PJSC’s analysis, PJSC deemed similar to the merger based on PJSC’s experience.

 

The list of transactions reviewed was (referred to below by the acquiror and target in the transaction and date of announcement, respectively):

 

 

 

PJSC calculated the enterprise value in each of these transactions as a multiple of last twelve months (“LTM”) sales, EBITDA and EBIT, and the implied equity value in each of these transactions as a multiple of LTM net income. PJSC used publicly available data for the precedent transactions collected from public filings. This analysis resulted in the following ranges of multiples and ratios:

 

 

 

PJSC then calculated ranges of implied equity values per share of company common stock using multiples and ratios from the precedent transactions set forth above and applied them to the Company’s financial statistics. For this calculation, the Company’s historical financial statistics were obtained from the Company’s historical financial statements, and the Company’s projected financial statistics were provided by the Company’s management. The per share values were based on the number of shares of company common stock outstanding as of February 3, 2007, plus dilutive shares accounted for by the treasury stock method, due to stock options and restricted stock.

 

PJSC derived from the ranges of implied equity values per share calculated in the analysis described above a reference range of implied equity values per share of company common stock of $30.50 to $41.50, as compared to the merger consideration of $33.00 per share.

 

Discounted Cash Flow Analysis

 

PJSC performed a discounted cash flow analysis to calculate theoretical per share value of company common stock based on the value of the forecasted future free cash flows of the Company provided by its management for fiscal years 2008 to 2012.

 

In performing its discounted cash flow analysis, PJSC considered various assumptions that it deemed appropriate based on a review with management of the Company’s prospects and risks. PJSC believed it appropriate to utilize various discount rates ranging from 10.5% to 12.5%, and EBITDA terminal value multiples ranging from 8.0 times to 10.0 times EBITDA. PJSC determined to use these discount rates based on the range of weighted average cost of capital of the Company and other companies deemed comparable to the Company by PJSC in its professional judgment.

 

Based on this analysis, PJSC derived a reference range of implied equity values per share of company common stock of $32.75 to $41.25. PJSC noted that the merger consideration was $33.00 per share.

 

Miscellaneous

 

In arriving at its opinion, PJSC performed a variety of financial analyses, the material portions of which are summarized above. The preparation of a fairness opinion is a complex process involving various determinations as to the most appropriate and relevant methods of financial analyses and the application of those methods to the particular circumstances and, therefore, such an opinion is not necessarily susceptible to a partial analysis or summary description. In arriving at its opinion, PJSC did not attribute any particular weight to any analysis or factor considered by it, but rather made qualitative judgments as to significance and relevance of each analysis and factor.

Accordingly, PJSC believes that its analyses must be considered as a whole and that selecting portions of its analyses, without considering all such analyses, could create an incomplete view of the process underlying PJSC’s opinion.

 

In performing its analyses, PJSC relied on numerous assumptions made by the management of the Company and made numerous judgments of its own with regard to current and future industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of the Company. Actual values will depend upon several factors, including changes in interest rates, dividend rates, market conditions, general economic conditions and other factors that generally influence the price of securities. The analyses performed by PJSC are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by such analyses. Such analyses were prepared solely as a part of PJSC’s analysis of the fairness, from a financial point of view, to the holders of our common stock and Class A common stock of the merger consideration proposed to be received by such holders in connection with the merger and were provided to the Company’s board of directors in connection with the delivery of PJSC’s opinion. The analyses do not purport to be appraisals or necessarily reflect the prices at which businesses or securities might actually be sold, which may be higher or lower than the merger consideration and which are inherently subject to uncertainty. Because such analyses are inherently subject to uncertainty, neither the Company nor PJSC nor any other person assumes responsibility for their accuracy.

 

With regard to the comparable public company analysis and the precedent transactions analysis summarized above, PJSC selected such public companies and transactions on the basis of various factors for reference purposes only; however, no public company or transaction utilized as a comparison is identical to the Company or the merger. Accordingly, an analysis of the foregoing was not mathematical; rather, it involved complex considerations and judgments concerning differences in financial and operating characteristics of the selected companies and other factors that could affect the acquisition or public trading value of the selected companies and transactions to which the Company and the merger were being compared. The consideration in the merger was determined through arm’s length negotiations between Parent and the Company and was approved by the Company’s board of directors. PJSC did not recommend any specific consideration to the Company’s board of directors or that any given consideration constituted the only appropriate consideration for the merger. In addition, as described elsewhere in this proxy statement, PJSC’s opinion was one of many factors taken into consideration by the Company’s board of directors in evaluating the merger. Consequently, the PJSC analyses described above should not be viewed as determinative of the opinion of the Company’s board of directors with respect to the merger.

 

As part of its investment banking activities, PJSC is regularly engaged in the evaluation of businesses and their securities in connection with mergers and acquisitions, restructurings and valuations for corporate or other purposes. The Company’s board of directors selected PJSC to deliver an opinion with respect to the fairness, from a financial point of view, to the holders of our common stock and Class A common stock of the merger consideration proposed to be received by such holders in connection with the merger on the basis of such experience.

 

The financial advisory services PJSC provided to the Company’s board of directors in connection with the merger were limited to the delivery of its opinion. PJSC received a fee of $900,000 for its services, which was payable upon the delivery of PJSC’s opinion. In addition, the Company has also agreed to reimburse PJSC for its out-of-pocket expenses, including fees and disbursements of its counsel, incurred in connection with its engagement and to indemnify PJSC and certain related persons against liabilities and expenses, including liabilities under the federal securities laws, relating to or arising out of its engagement.

 

PJSC has not received compensation during the last two years for providing investment banking services to the Company or Apollo.

 

The Company does not as a matter of course publicly disclose detailed forecasts or internal projections as to future revenues, earnings or financial condition (see the discussion regarding forward-looking statements based on estimates and assumptions under the heading “Cautionary Statement Concerning Forward-Looking Information”). However, we have set forth below a summary of the financial projections as of February 23, 2007 prepared by senior management of the Company referenced in this proxy statement as this information was made available to the board of directors, Goldman Sachs, PJSC and potential purchasers, including Apollo, and their respective financing sources prior to execution and delivery of the merger agreement. This information was not prepared with a view towards public disclosure, but rather for purposes of the board’s consideration of the transaction and as a means of facilitating Goldman Sachs’ and PJSC’s analyses and potential purchasers’ due diligence investigations. This

information was also not prepared with a view to complying with the published guidelines of the SEC regarding forecasts, and the Company’s management did not prepare the information in accordance with the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of financial forecasts. Neither our independent auditors nor any other independent accountants have compiled, examined or performed any procedures with respect to the prospective financial information contained in the projections, nor have they expressed any opinion or given any form of assurance on the financial projections or their achievability. The financial projections as of February 23, 2007, which were provided to Goldman Sachs, PJSC and potential purchasers prior to their submission of final bid proposals, included the following estimates of the Company’s future financial performance:

 

Claire’s Stores, Inc.
Projected Consolidated Statement of Operations Data
($ in millions, except per share data) (1)
(February 23, 2007)

 

 

 

 

In addition to providing the projected financial information described above, management of the Company indicated an estimated range of net annual sales growth rates between 6.0% and 7.0% for fiscal years 2008 through 2012.

 

The principal assumptions of the Company’s management in preparing the projected financial information described above included:

 

 

Although the above-described projected financial information was prepared in good faith by the Company’s management, no assurance can be made regarding future events and, accordingly, such information cannot be considered a reliable predictor of future operating results and should not be relied on as such. In the view of the Company’s management, the information in this table was prepared on a reasonable basis, reflecting the best currently available estimates and judgments, and presented, to the best knowledge and belief of the Company’s management, the expected course of action and the expected future financial performance of the Company. However, this information is neither fact nor any guarantee of future performance and should not be relied upon as being necessarily indicative of future results, and you are cautioned not to place undue reliance on this information.

 

The Company has not updated or otherwise revised, and does not intend to update or otherwise revise, the projected financial information described above to reflect circumstances existing since its preparation or to reflect the occurrence of unanticipated events, even in the event that any or all of the underlying assumptions are shown to be in error. Furthermore, the Company has not updated or otherwise revised, and does not intend to update or otherwise revise, the projected financial information to reflect changes in general economic or industry conditions or the existence or occurrence of any circumstances of events subsequent to the preparation of such projected financial information.

 

The Company and the Sponsor estimate that the total amount of funds necessary to complete the merger and the related transactions is anticipated to be approximately $3.270 billion, which includes approximately $3.079 billion to be paid out to the Company’s shareholders and holders of other equity-based interests in the Company, with the remainder to be applied to pay change of control and other employee payments and fees and expenses in connection with the merger, the financing arrangements and the related transactions. These payments are expected to be funded by a combination of equity contributions by affiliates of Apollo and debt financing.

 

Parent has obtained equity and debt financing commitments for the transactions contemplated by the merger agreement, which are generally subject to customary conditions. After giving effect to contemplated draws by the Company under the new debt commitments, Parent currently expects total new debt outstanding at closing of the merger transaction will be approximately $2.387 billion.

 

Equity Financing

 

The Sponsor, on behalf of certain affiliated co-investment partnerships, has agreed to cause $600 million of cash to be contributed to Parent, which would constitute the equity portion of the merger financing. The Sponsor may assign its obligations under the equity commitment to one or more of its affiliates who agree to assume the obligations, provided that the Sponsor shall remain obligated to perform its obligations under the equity commitment to the extent not performed by such affiliate(s).

 

The equity commitment letter provides that the equity funds will be contributed at the closing of the merger to fund a portion of the total merger consideration pursuant to and in accordance with the merger agreement, to pay related expenses and to satisfy any liabilities or obligations of Parent or Merger Sub arising out of or in connection with any breach by Parent or Merger Sub of their respective obligations under the merger agreement. The obligation of the Sponsor to fund the equity commitment is subject to the prior or simultaneous closing of the merger in accordance with the terms of the merger agreement without waiver, modification or amendment of any provision thereof (except those consented to by the Sponsor), except that, if the transaction does not close, the Sponsor may be liable to the Company for breaches of the merger agreement by Parent or Merger Sub, subject to the cap and other conditions described below.

 

The Company has third-party beneficiary rights under the equity commitment letter and the Sponsor will be liable to us for any loss incurred by us as a result of breach by Parent or Merger Sub of their representations, warranties and covenants under the merger agreement, provided that, if the closing does not occur, the Sponsor’s liability under the equity commitment is capped at $150 million, provided, further, that if the closing does not occur, any obligation of the Sponsor under the equity commitment letter shall be conditioned upon the entry of a final and non-appealable judgment awarding the Company damages as a result of Parent or Merger Sub’s breach of any representation, warranty, covenant or obligation in the merger agreement. This liability constitutes our sole and exclusive remedy against the Sponsor for any matter in any way relating to or arising in connection with the merger or the merger agreement.

 

The equity commitment letter will terminate upon the earlier of the effective time or the termination of the merger agreement. However, if at the time of such termination, we are not in material breach of our warranties, representations or covenants under the agreement such that the relevant conditions to closing would not be satisfied, and have fulfilled our obligation to file our Annual Report on Form 10-K for the fiscal year ended February 3, 2007, the equity commitment will terminate 90 days after such termination of the merger agreement. With respect to any claim arising from any lawsuit filed by us against Parent, Merger Sub or the Sponsor within the aforementioned 90-day period, the commitment under the equity commitment letter will terminate 60 days after final adjudication of such lawsuit, provided that any outstanding obligations or liabilities of the Sponsor in respect of such adjudication have been satisfied or discharged in full at such time. The equity commitment letter will not be terminated until such satisfaction or discharge.

 

Debt Financing

 

In connection with the execution and delivery of the merger agreement, Merger Sub has obtained commitments to provide up to $2.587 billion in debt financing (not all of which is expected to be drawn at closing) consisting of (1) senior secured credit facilities with a maximum availability of $1.65 billion, out of which $1.45 billion consists of a senior term loan and $200 million consists of a revolving credit facility (the “Senior Facilities”), (2) up to $537 million in a senior unsecured bridge loan facility if Merger Sub is unable to issue the equivalent amount of senior unsecured notes by the time the merger is completed in a public offering or in an offering exempt from registration under the Securities Act, including pursuant to Rule 144A or Regulation S and

(3) up to $400 million in a senior subordinated bridge loan facility if Merger Sub is unable to issue the equivalent amount of senior subordinated notes by the time the merger is completed in a public offering or in an offering exempt from registration under the Securities Act, including pursuant to Rule 144A or Regulation S, to finance, in part, the payment of the merger consideration, the repayment of certain debt of the Company outstanding on the closing date of the merger and to pay fees and expenses in connection with the merger.

 

The facilities contemplated by the debt financing are conditioned on the merger being consummated prior to the merger agreement termination date, as well as other customary conditions including:

 

 

Parent has agreed to use its reasonable best efforts to arrange and obtain the debt financing on the terms and conditions described in the commitments and the merger agreement. In the event that any portion of the debt financing becomes unavailable on the terms and conditions contemplated in the commitment papers, Parent must use its reasonable best efforts to arrange to obtain alternative financing from alternative sources in an amount sufficient to consummate the merger and other transactions contemplated by the merger agreement on terms which are not materially less beneficial to Parent or Merger Sub and would not reasonably be expected to prevent, materially impede or materially delay the consummation of the merger and related transactions, as promptly as practicable following the occurrence of such event, but no later than the last day of the marketing period.

 

Although the debt financing described in this proxy statement is not subject to due diligence or “market out,” such financing may not be considered assured. 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 herein is not available as anticipated.

 

Senior Secured Credit Facilities, Senior Unsecured Notes and Senior Subordinated Notes

 

The commitment to provide the Senior Facilities and to purchase senior unsecured notes and senior subordinated notes was issued by Credit Suisse (“Credit Suisse”), Bear Stearns Corporate Lending Inc. (“BSCL”), Lehman Brothers Commercial Bank (“LBCB”) and Lehman Commercial Paper Inc. (“LCP” together with Credit Suisse, BSCL and LBCB, the “Initial Lenders”). Borrowings under the senior term loan facility will be made on the closing date, and the senior unsecured notes and senior subordinated notes will be issued on the closing date. Up to a certain amount to be agreed of the revolving facility may be borrowed on the closing date, and thereafter the full amount of the revolving facility shall be available during the availability period thereof. The Senior Facilities will be guaranteed by Parent and the U.S. subsidiaries (subject to certain exceptions) of the Company and will be secured by a first priority lien on capital stock and substantially all owned personal and real property of the Company and the subsidiary guarantors. The senior unsecured notes will be guaranteed on a senior unsecured basis by the subsidiaries that are guarantors under the Senior Facilities. The senior subordinated notes will be guaranteed on a senior subordinated basis by the subsidiaries that are guarantors under the Senior Facilities.

 

Bridge Facilities

 

If the full amounts of the senior unsecured notes and the senior subordinated notes are not issued in the proposed offerings on or prior to the closing date, the Initial Lenders have committed to provide up to $537 million in loans under the unsecured bridge facility and up to $400 million in loans under the senior subordinated bridge facility. Borrowings under the bridge facilities will be used by Merger Sub in a single draw on the closing date to pay the merger consideration, to repay or refinance certain debt of the Company outstanding on the closing date of the merger and to pay fees and expenses in connection with the merger. The senior unsecured bridge facility will be

guaranteed on a senior unsecured basis by the subsidiaries that are guarantors under the Senior Facilities. The senior subordinated bridge facility will be guaranteed on a senior subordinated basis by the subsidiaries that are guarantors under the Senior Facilities.

 

In considering the recommendation of the Company’s board of directors with respect to the merger, you should be aware that some of the Company’s directors and executive officers have interests in the merger that are different from, or in addition to, the interests of our shareholders generally.

 

These interests may present them with actual or potential conflicts of interest, and these interests, to the extent material, are described below. The Company’s board of directors was aware of these interests and considered them, among other matters, in approving the merger agreement and the merger.

 

Treatment of Stock Options, Restricted Stock and Stock Units

 

As of the record date, there were approximately 340,000 shares of our common stock subject to stock options granted under our equity incentive plans to our current executive officers and directors. Each outstanding stock option that remains unexercised as of the completion of the merger, whether or not the option is vested, will be canceled, and the holder of such stock option that has an exercise price of less than $33.00 will be entitled to receive a cash payment, without interest and less applicable withholding taxes, equal to the product of:

 

 

provided, however, to the extent agreed by Parent and the holder of an option between the date of the merger agreement and the effective time of the merger, options to acquire common stock may be converted into options to purchase shares of common stock (or other equity interests) of Parent or the surviving corporation and/or other consideration in a manner that does not exceed the intrinsic value of the converted option.

 

As of the record date, there were approximately 142,500 shares of our common stock to be issued pursuant to our outstanding stock unit awards held by our current executive officers and directors under our equity incentive plans. Under the terms of the merger agreement, all such equity awards shall become immediately vested and free of restrictions at the effective time of the merger. At the effective time of the merger, any such equity award that is then outstanding will be canceled, and the holder of each such award will receive a cash payment of $33.00 per share of restricted stock or $33.00 per share of common stock subject to a stock unit, without interest and less any applicable withholding taxes (or, if such award provides for payments to the extent the value of shares of the Company exceeds a specified reference price, the amount, if any, by which $33.00 exceeds such reference price). To the extent agreed by Parent and the holder of a stock unit between the date of the merger agreement and the effective time, stock units may be converted into equity-based awards of Parent or the surviving corporation and/or other consideration with an equal fair market value.

 

The table below sets forth, as of April 26, 2007, the record date, for each of our directors and executive officers:

 

 

 

 

 

Employment Agreement with Ira Kaplan, Company’s Chief Financial Officer

 

In 2005, the Company began discussions with Ira Kaplan, the Company’s Chief Financial Officer, regarding the terms of an employment agreement to be entered into between Mr. Kaplan and the Company. The Company finalized its discussions with Mr. Kaplan, and, on January 18, 2007, the Company entered into an employment agreement (the “Kaplan Employment Agreement”) with Mr. Kaplan, which had been previously approved by the Compensation Committee of our board of directors. The Kaplan Employment Agreement provides for an initial term commencing on the date of the agreement and terminating on January 31, 2008, with automatic one year renewal periods (with a three-year renewal period in the event of a change in control), unless the Company or Mr. Kaplan provide notice of non-renewal.

 

If Mr. Kaplan’s employment is terminated by the Company without cause (as defined in the Kaplan Employment Agreement) or Mr. Kaplan terminates his employment for good reason (as defined in the Kaplan Employment Agreement), Mr. Kaplan shall receive: (i) payment of an amount equal to his annual base salary; (ii) payment of an amount equal to his average annual incentive compensation in respect of the prior three fiscal years (the “Kaplan Bonus Amount”); (iii) payment for unused vacation days; (iv) all accrued base salary through the termination date and incentive compensation earned but unpaid for any previous completed fiscal year; and (v) an amount equal to the Kaplan Bonus Amount pro rated for the time for which he was employed in the fiscal year in which the termination occurs. The Company will continue to provide Mr. Kaplan with certain benefits for a period of twelve months following the termination date. Also, the restricted stock and performance shares (or any other

similar long term incentive grant) held by Mr. Kaplan shall immediately vest, any restrictions thereupon shall lapse and any performance criteria applicable thereto shall be deemed to have been satisfied. Mr. Kaplan shall have ninety days following termination to exercise any previously granted stock options.

 

If, within twenty four months of a change in control, (a) the Company involuntarily terminates Mr. Kaplan’s employment without cause or (b) Mr. Kaplan terminates for good reason, Mr. Kaplan will receive: (i) an amount equal to two-and-one-half (2.5) times his annual base salary; (ii) an amount equal to two-and-one-half (2.5) times the Kaplan Bonus Amount; (iii) payment for unused vacation days; (iv) all accrued base salary through the termination date and incentive compensation earned but unpaid for any previous completed fiscal years; and (v) an amount equal to the Kaplan Bonus Amount pro rated for the time for which he was employed in the fiscal year in which the termination occurs. The Company will continue to provide Mr. Kaplan with certain benefits for a period of thirty months following the termination date. The closing of the merger will constitute a change of control under Mr. Kaplan’s employment agreement. If Mr. Kaplan’s employment were involuntarily terminated without cause or voluntarily terminated for good reason immediately following the closing of the merger, the aggregate amount payable to Mr. Kaplan pursuant to clauses (i) and (ii) above would equal approximately $2,476,000 (not including potential excise tax gross-up payments).

 

If, after a change in control, the Company serves a non-renewal notice that has the effect of terminating Mr. Kaplan’s employment on the third anniversary of the date of change in control, the Company will be required to pay to Mr. Kaplan the enhanced termination payments described above. However, if Mr. Kaplan’s employment is renewed for at least one additional year following the third anniversary of the date of change in control, a termination of Mr. Kaplan’s employment thereafter will not require the Company to make the enhanced payments described above. If payment that Mr. Kaplan is entitled to receive from the Company gives rise to an excise tax liability, Mr. Kaplan is entitled to a gross-up payment in an amount that would place him in the same after-tax position that he would have been in if no excise tax had applied on the amounts payable to Mr. Kaplan by the Company under this paragraph.

 

If Mr. Kaplan continues to be employed by the Company through the date of a change in control, Mr. Kaplan will receive: (i) an amount equal to six months base salary plus 50% of incentive compensation he would be entitled to receive for “plan” level performance with respect to the fiscal year ending January 31, 2007, (ii) all amounts accrued under the Company’s deferred compensation plans, and (iii) all previously deferred bonus payments. Also, the restricted stock and performance shares (or any other similar long term incentive grant) held by Mr. Kaplan will immediately vest, any restrictions thereupon will lapse and any performance criteria applicable thereto shall deem to have been satisfied on the basis of “plan” level performance achievement with respect to performance periods continuing after the effective time of the change in control. The aggregate amount payable to Mr. Kaplan pursuant to clauses (i) through (iii) above, assuming Mr. Kaplan remains employed through the date of the change of control, equals approximately $2,927,000 (not including potential excise tax gross-up payments).

 

The Kaplan Employment Agreement provides for customary protections of the Company’s confidential information and intellectual property and provides that Mr. Kaplan shall not, during his employment term and for a period of two (2) years following his period of employment, compete with the Company, employ or attempt to employ employees of the Company, or call on or solicit any of the actual or targeted prospective customers or clients of the Company. However, if the termination of employment is in circumstances other than those in which enhanced termination payments would be payable by the Company following termination upon change in control, the non-compete provision will be effective for a period of only one year following termination.

 

Amended and Restated Employment Agreements with Marla L. Schaefer and E. Bonnie Schaefer

 

The Company had entered into employment agreements with E. Bonnie Schaefer, the Company’s Co-Chief Executive Officer and Co-Chairman of the board of directors, and Marla L. Schaefer, the Company’s Co-Chief Executive Officer and Co-Chairman of the board of directors, on February 11, 2005. On January 18, 2007, we entered into amended and restated employment agreements with Ms. Bonnie Schaefer and Ms. Marla Schaefer (collectively, the “Schaefer Employment Agreements”), which had been previously approved by the Compensation Committee. The amendments reflected in the Schaefer Employment Agreements were intended to address technical issues in the existing agreements and to better conform the existing agreements to prevailing practice and address recent changes in law. The amendments also reflected changes intended to provide benefits corresponding to those provided to Mr. Kaplan under the Kaplan Employment Agreement and to other key employees pursuant to the Change in Control Termination Protection Agreements described below in the event that the executive remained employed through the closing of the merger. The Schaefer Employment Agreements provide for an initial term through January 31, 2008, with automatic one year renewal periods (with a three-year renewal period in the event of a change in control), unless the Company or the executive provides notice of non-renewal.

If the executive is terminated by the Company without cause (as defined in the Schaefer Employment Agreements) or the executive terminates her employment for good reason (as defined in the Schaefer Employment Agreements) the executive will receive payment of: (i) two (2) times the amount of her annual base salary; (ii) two (2) times the highest annual incentive compensation earned by the executive in respect of any of the three prior fiscal years (such highest amount, the “Schaefer Bonus Amount”); (iii) all accrued base salary and any incentive compensation unpaid for any previously completed fiscal year, and (iv) the Schaefer Bonus Amount pro rated for the time for which the executive was employed in the fiscal year in which the termination occurs. The Company will continue to provide the executive with certain benefits until the executive’s full retirement date for Social Security purposes or until the age of seventy (70). Also, the restricted stock and performance shares held by the executive will immediately vest.

 

If, following a change in control, (a) the Company terminates the executive’s employment involuntarily and without cause, (b) the executive terminates for good reason (which includes termination for any reason by the executive upon a change in control following which the Company ceases to be publicly traded), or (c) the employment period expires following the Company’s notice of non-renewal, the executive will receive: (i) an amount equal to three (3) times her annual base salary; (ii) an amount equal to three times (3) the Schaefer Bonus Amount; (iii) all accrued base salary through the termination date and incentive compensation earned but unpaid for any previous completed fiscal years; and (iv) an amount equal to the Schaefer Bonus Amount pro rated for the time for which the executive was employed in the fiscal year in which the termination occurs. The Company will continue to provide the executive with her benefits under the employment agreement until full retirement date for Social Security purposes or until the age of seventy (70). In addition, if the executive’s employment is terminated, without cause, within six months prior to a change in control, the executive will be entitled to the enhanced change in control payments described above to the extent they exceed the regular severance payments that the executive would otherwise be entitled to receive under the agreement. If payment that an executive is entitled to receive from the Company gives rise to an excise tax liability, the executive is entitled to a gross-up payment in an amount that would place her in the same after-tax position that she would have been in if no excise tax had applied on the amounts payable to the executive by the Company. The closing of the merger will constitute a change of control under the Schaefer Employment Agreements. If Ms. Bonnie Schaefer’s employment were involuntarily terminated without cause or voluntarily terminated for good reason immediately following the closing of the merger, the aggregate cash severance amount payable to Ms. Bonnie Schaefer pursuant to clauses (i) and (ii) above would equal approximately $6,400,000 (not including potential excise tax gross-up payments). If Ms. Marla Schaefer’s employment were involuntarily terminated without cause or voluntarily terminated for good reason immediately following the closing of the merger, the aggregate cash severance amount payable to Ms. Marla Schaefer pursuant to clauses (i) and (ii) above would equal approximately $6,400,000 (not including potential excise tax gross-up payments).

 

Pursuant to the employment agreements in effect prior to the amendments reflected in the Schaefer Employment Agreements, Ms. Bonnie Schaefer and Ms. Marla Schaefer would have received the same payments described above (other than in immaterial respects) in connection with a qualifying termination of employment following the merger.

 

If the executive continues to be employed by the Company through the date of a change in control, the executive shall receive: (i) an amount equal to six months’ base salary plus 50% of incentive compensation she would be entitled to receive for “plan” level performance with respect to the fiscal year ending January 31, 2007, (ii) all amounts accrued under the Company’s deferred compensation plans, and (iii) all previously deferred bonus payments. Also, all restricted stock and performance shares held by the executive will immediately vest, any performance criteria to earn performance shares shall deem to have been satisfied in full, and all performance shares that would otherwise be phased in over annual increments for periods continuing after the date of the change in control shall instead be completely phased in on the basis of deemed “plan” level performance achievement with respect to performance periods continuing after the effective time of the change in control. The aggregate amount payable to Ms. Bonnie Schaefer pursuant to clauses (i) through (iii) above, assuming Ms. Bonnie Schaefer remains employed through the date of the change of control, equals approximately $2,429,000 (not including potential excise tax gross-up payments). The aggregate amount payable to Ms. Marla Schaefer pursuant to clauses (i) through (iii) above, assuming Ms. Marla Schaefer remains employed through the date of the change of control, equals approximately $3,515,000 (not including potential excise tax gross-up payments).

 

The Schaefer Employment Agreements provide for customary protections of the Company’s confidential information and intellectual property and provides that the executive shall not, during her employment term and for a period of two (2) years following her period of employment, compete with the Company, employ or attempt to

employ employees of the Company, or call on or solicit any of the actual or targeted prospective customers or clients of the Company.

 

Change in Control Termination Protection Agreements

 

Effective as of December 15, 2006, the Company entered into Change in Control Termination Protection Agreements (“TPAs”) with a number of its key employees. The TPAs provide for certain payments and benefits upon the occurrence of a change of control and provide for additional payments and benefits in the event that a covered employee is terminated without “cause” or terminates employment for “good reason” within two years following a change in control (or in the event that the employee is terminated prior to a change in control in anticipation of the change in control). None of the Company’s executive officers is party to a TPA.

 

The TPAs provide that, upon a change in control, a covered employee will receive a cash payment equal to the sum of: (i) an amount equal to six months base salary plus 50% of the annual bonus amount that the employee would be entitled to receive for “plan” level performance with respect to the fiscal year ending February 3, 2007 (subject to the employee’s continued employment through the date of the change in control), (ii) all amounts accrued under the Company’s deferred compensation plans, and (iii) all previously deferred bonus payments. Also, the equity incentive awards held by the covered employee will immediately vest, any restrictions thereupon will lapse and any performance criteria applicable thereto shall deem to have been satisfied on the basis of “plan” level performance achievement with respect to performance periods continuing after the effective time of the change in control. The aggregate amount of cash payments payable under the TPAs to all covered employees upon the closing of the merger (assuming all covered employees remain employed through the closing of the merger and based on deferred compensation amounts as of December 29, 2006) pursuant to clauses (i) through (iii) above is approximately $10,862,966.

 

In the event of a termination without “cause” or a termination for “good reason” within two years following a change in control (or in anticipation of a change in control), the TPAs provide for the employee to receive (i) a lump sum cash payment equal to a stated “severance multiple” of either 1, 1.5 or 2 (depending on the employee’s designated classification level) times the sum of the employee’s base salary and target bonus, (ii) a pro-rata bonus for the year of termination based on the portion of the fiscal year for which the employee was employed with the Company, (iii) continued health benefits for a period of years equal to the employee’s designated severance multiple and (iv) certain other previously earned but unpaid amounts. Additionally, if any payments that a TPA covered employee is entitled to receive from the Company give rise to a “golden parachute” excise tax liability, the employee is entitled to a gross-up payment in an amount that would place the employee in the same after-tax position that he or she would have been in if no excise tax had applied on the amounts payable to the employee (unless such parachute payments do not exceed 105% of the greatest amount that could be paid to the employee without giving rise to any excise tax, in which case the payments will be reduced to avoid the imposition of any such excise tax). The aggregate amount of cash severance payments payable under the TPAs to all covered employees pursuant to clause (i) above (assuming all covered employees terminate their employment within two years of, or in anticipation of, the closing of the merger) is approximately $18,761,000 (not including potential excise tax gross-up payments).

 

Employee Change in Control Severance Plan

 

On December 15, 2007, the Company’s board of directors, pursuant to the recommendation of the Compensation Committee, adopted an Employee Change in Control Severance Plan, which became effective in February 2007, to provide severance protection benefits to U.S. employees (other than store employees, district managers, temporary employees and employees who are entitled to severance benefits under a different plan or agreement) in the event that a covered employee is terminated without “cause” or due to the employee’s refusal to relocate as a condition to continued employment, in each case, within two years following a change in control. Covered employees are generally entitled to receive three weeks’ base salary per year of service with the Company in the event of a qualifying termination, subject to a minimum severance amount ranging from three weeks base salary to nine months base salary (depending on the employee’s position classification) and subject to a maximum severance benefit of one year’s base salary. None of the Company’s executive officers are covered by, or entitled to any benefits under, the Employee Change in Control Severance Plan.

 

Deferred Compensation Plans

 

Following the closing of the merger, all account balances under the Company’s management deferred compensation plans and all previously deferred annual bonus payments will be paid out in cash to participants

therein, which include our executive officers, by the Company or the surviving corporation, less any required withholding taxes.

 

Indemnification and Insurance

 

The merger agreement provides that, without limiting any additional rights that any employee may have under any employment agreement or benefit plan, for a period of six years after the effective time of the merger, Parent will, or will cause the surviving corporation to, indemnify and hold harmless each present (as of the effective time of the merger) and former officer, director or employee of the Company or any of our subsidiaries against all claims, losses, liabilities, damages, judgments, inquiries, fines and reasonable fees, costs and expenses, including attorney’s fees and disbursements, incurred in connection with any claim arising out of actions taken by them in their capacity as officers, directors, employees, fiduciaries or agents of the Company or any of our subsidiaries to the fullest extent permitted under applicable law. In this regard, the surviving corporation will also be required to advance expenses to an indemnified officer, director or employee, provided that the person to whom expenses are advanced provides an undertaking to repay such advances if it is ultimately determined that this person is not entitled to indemnification.

 

Neither Parent nor the surviving corporation will settle, compromise or consent to the entry of any judgment in any action, suit, proceeding, investigation or claim under which indemnification could be sought unless such settlement, compromise or consent includes an unconditional release of the indemnified person or the indemnified person otherwise consents. The surviving corporation will cooperate in the defense of any of the matters described above.

 

The merger agreement provides that for a period of six years after the effective time of the merger, the articles of incorporation and bylaws of the surviving corporation will continue to contain provisions with respect to indemnification, advancement of expenses and exculpation of former or present directors and officers that are no less favorable than presently set forth in our current articles of incorporation and bylaws as of the date of the merger agreement.

 

The merger agreement provides that Parent will maintain, or will cause the surviving corporation to maintain, for a period of not less than six years after the effective time for the persons who, as of the date of the merger agreement, are covered by the Company’s directors’ and officers’ liability insurance policies, insurance policies that are no less favorable than the existing policies of the Company from insurance carriers with financial strength ratings equal to or greater than the financial strength ratings of the Company’s existing directors’ and officers’ liability insurance carriers. In lieu of the foregoing, the surviving corporation may purchase a six-year “tail” coverage that is no less favorable than the existing policies of the Company from insurance carriers with financial strength ratings equal to or greater than the financial strength ratings of the Company’s existing directors’ and officers’ liability insurance carriers. However, in no event will Parent or the surviving corporation be required to pay aggregate premiums for insurance in excess of 300% of the amount of the aggregate premiums paid by the Company in respect of such coverage for its most recently completed fiscal year. In addition, Parent will honor, and will cause the surviving corporation to honor, all indemnification agreements entered into by the Company or any of its subsidiaries.

 

New Management Arrangements

 

As of the date of this proxy statement, no member of our management has entered into any amendments or modifications to existing employment agreements with us or our subsidiaries in connection with the merger. In addition, as of the date of this proxy statement, no member of our management has entered into any agreement, arrangement or understanding with Parent, Merger Sub or their affiliates regarding employment with, or the right to purchase or participate in the equity of, the surviving corporation.

 

Although we believe members of our management team (other than Ms. Marla Schaefer and Ms. Bonnie Schaefer, the Company’s Co-Chief Executive Officers) may enter into new arrangements with Parent, Merger Sub or their affiliates regarding employment with, and the right to purchase or participate in the equity of, the surviving corporation, such matters are subject to further negotiations and discussion and no terms or conditions have been proposed.

 

The following is a general discussion of certain material U.S. federal income tax consequences of the merger to holders of our company common stock. We base this summary on the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), applicable current and proposed U.S. Treasury Regulations, judicial authority, and administrative rulings and practice, all of which are subject to change, possibly on a retroactive basis.

 

For purposes of this discussion, we use the term “U.S. holder” to mean:

 

 

A “non-U.S. holder” is a person (other than a partnership) that is not a U.S. holder.

 

This discussion assumes that a holder holds the shares of our company common stock as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all aspects of U.S. federal income tax that may be relevant to a holder in light of the particular circumstances, or that may apply to a holder that is subject to special treatment under the U.S. federal income tax laws (including, for example, insurance companies, dealers in securities or foreign currencies, traders in securities who elect the mark-to-market method of accounting for their securities, shareholders subject to the alternative minimum tax, persons that have a functional currency other than the U.S. dollar, tax-exempt organizations, financial institutions, mutual funds, partnerships or other pass through entities for U.S. federal income tax purposes, controlled foreign corporations, passive foreign investment companies, certain expatriates, corporations that accumulate earnings to avoid U.S. federal income tax, shareholders who hold shares of our company common stock as part of a hedge, straddle, constructive sale or conversion transaction, or shareholders who acquired their shares of our common stock through the exercise of employee stock options or other compensation arrangements). In addition, this discussion does not address any tax considerations under state, local or foreign laws or U.S. federal laws other than those pertaining to the U.S. federal income tax that may apply to holders. Holders are urged to consult their own tax advisors to determine the particular tax consequences, including the application and effect of any state, local or foreign income and other tax laws, of the receipt of cash in exchange for our company common stock pursuant to the merger.

 

If a partnership holds our company common stock, the tax treatment of a partner will generally depend on the status of the partners and the activities of the partnership. If you are a partner of a partnership holding our common stock, you should consult your tax advisors.

 

U.S. Holders

 

The receipt of cash in the merger (or pursuant to the exercise of dissenters’ rights) by U.S. holders of our company common stock will be a taxable transaction for U.S. federal income tax purposes. In general, for U.S. federal income tax purposes, a U.S. holder of our company common stock will recognize gain or loss in an amount equal to the difference between:

 

 

If the holding period in our company common stock surrendered in the merger (or pursuant to the exercise of dissenters’ rights) is greater than one year as of the date of the merger, the gain or loss will be long-term capital gain or loss. The deductibility of a capital loss recognized on the exchange is subject to limitations under the Code. If a U.S. holder acquired different blocks of our company common stock at different times and different prices, such holder must determine its adjusted tax basis and holding period separately with respect to each block of our company common stock.

 

Under the Code, a U.S. holder of our company common stock may be subject, under certain circumstances, to information reporting on the cash received in the merger (or pursuant to the exercise of dissenters’ rights) unless such U.S. holder is a corporation or other exempt recipient. Backup withholding will also apply (currently at a rate of 28%) with respect to the amount of cash received, unless a U.S. holder provides proof of an applicable exemption or a correct taxpayer identification number, and otherwise complies with the applicable requirements of the backup withholding rules. Backup withholding is not an additional tax and any amounts withheld under the backup withholding rules may be refunded or credited against a U.S. holder’s U.S. federal income tax liability, if any, provided that such U.S. holder furnishes the required information to the Internal Revenue Service in a timely manner.

 

Non-U.S. Holders

 

Any gain realized on the receipt of cash in the merger (or pursuant to the exercise of dissenters’ rights) by a non-U.S. holder generally will not be subject to United States federal income tax unless:

 

 

An individual non-U.S. holder described in the first bullet point immediately above will be subject to tax on the net gain derived from the merger under regular graduated U.S. federal income tax rates. An individual non-U.S. holder described in the second bullet point immediately above will be subject to a flat 30% tax on the gain derived from the merger, which may be offset by U.S. source capital losses, even though the individual is not considered a resident of the United States. If a non-U.S. holder that is a foreign corporation falls under the first bullet point immediately above, it will be subject to tax on its net gain in the same manner as if it were a United States person as defined under the Code and, in addition, may be subject to the branch profits tax equal to 30% of its effectively connected earnings and profits or at such lower rate as may be specified by an applicable income tax treaty.

 

We have not determined whether we are a “United States real property holding corporation” for U.S. federal income tax purposes. Non-U.S. holders who have owned more than 5% of the company common stock at any time during the five years preceding the merger should consult their own tax advisors regarding the U.S. federal income tax consequences of the merger.

 

Information reporting and, depending on the circumstances, backup withholding (currently at a rate of 28%) will apply to the cash received in the merger (or pursuant to the exercise of dissenters’ rights), unless the beneficial owner certifies under penalty of perjury that it is a non-U.S. holder (and the payor does not have actual knowledge or reason to know that the beneficial owner is a United States person as defined under the Code) or such owner otherwise establishes an exemption. Backup withholding is not an additional tax and any amounts withheld under the backup withholding rules may be refunded or credited against a non-U.S. holder’s U.S. federal income tax liability, if any, provided that such non-U.S. holder furnishes the required information to the Internal Revenue Service in a timely manner.

 

The summary set forth above is for general information only and is not intended to constitute a complete description of all tax consequences relating to the merger. Because individual circumstances may differ, each holder should consult its own tax advisor regarding the applicability of the rules discussed above to the holder and the particular tax effects to the holder of the merger, including the application of state, local and foreign tax laws.

 

The Hart-Scott-Rodino Act and related rules provide that transactions such as the merger may not be completed until certain information and documents have been submitted to the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice and specified waiting period requirements have been observed. On March 27, 2007, the Company and Apollo Investment Fund VI, L.P. each filed a Notification and Report Form with the Antitrust Division and the Federal Trade Commission and requested early termination of the waiting period. The Federal Trade Commission granted early termination of the waiting period initiated by these filings on April 11, 2007.

 

On account of our business operations in various other countries, we may be subject to the antitrust and other laws of each of the jurisdictions in which we operate. European Union Council Regulation (EC) 139/2004, or the Merger Control Regulation, requires notification to and approval by the European Commission of mergers or acquisitions involving parties with aggregate worldwide sales and individual European Union sales exceeding specified thresholds. The Sponsor filed a merger notification with the European Commission on April 17, 2007, and clearance is expected on or before May 29, 2007.

 

Under the merger agreement, the Company, Parent and Merger Sub have agreed to use their reasonable best efforts to obtain all required governmental approvals in connection with the execution of the merger agreement and completion of the merger. In addition, the Company, Parent and Merger Sub have agreed to use their best efforts to take those actions as may be necessary to resolve any objections asserted on antitrust grounds with respect to the merger, including agreeing to hold separate or to divest any of the businesses or assets of Parent, Merger Sub or the Company.

 

Except as noted above with respect to the required filings under the Hart-Scott-Rodino Act, applicable foreign antitrust laws and the filing of articles of merger in Florida at or before the effective date of the merger, we are unaware of any material federal, state or foreign regulatory requirements or approvals required for the execution of the merger agreement or completion of the merger.

 

On December 20, 2006, a purported class action complaint was filed in the Circuit Court of the Seventeenth Judicial Circuit in Broward County, Florida by a plaintiff who is an alleged shareholder of the Company. The complaint, which is styled as Lustig v. Claire’s Stores, Inc., et al. (Case No. 06-020798), was amended by the plaintiff on March 21, 2007. The amended complaint names as defendants the Company, its directors, and Apollo Management, L.P. and alleges, among other things, that the directors breached their fiduciary duties to the shareholders of the Company in connection with the transaction and that the Company and Apollo Management, L.P. aided and abetted the directors’ alleged breaches of their fiduciary duties. Among other relief, the amended complaint seeks class action status, injunctive relief from completing the merger, and payment of attorneys’ fees.

 

The following putative class action complaints were subsequently filed in Broward County: Henzel v. Claire’s Stores, Inc., et al. (Case No. 07-006325) (March 21, 2007); McCormack v. Schaeffer, et al. (Case No. 07-006327) (March 21, 2007); Minissa v. Schaefer, et al. (Case No. 07-06630) (March 26, 2007); Benoit v. Schaefer, et al. (Case No. 07-006907) (March 28, 2007); Call4U v. Claire’s Stores, Inc., et al. (Case No. 07-07178) (April 2, 2007); and International Union of Operating Engineers Pension Fund of Eastern Pennsylvania and Delaware v. Claire’s Stores, Inc., et al., (Case No. 07-007913) (April 11, 2007). These complaints allege similar claims and seek similar relief as the Lustig action, with the McCormack action also seeking unspecified money damages. With the exception of the Call4U complaint, these complaints also name as defendants the Company, its directors, and Apollo Management, L.P.. The Call4U action names as defendants the Company, its directors and its chairman emeritus. On April 16, 2007, the Court consolidated for all pre-trial purposes all complaints filed to date and on April 20, 2007, plaintiffs served a second amended and consolidated complaint alleging similar claims and seeking similar relief as the Lustig amended complaint. Plaintiffs also served on April 20, 2007 a motion for expedited discovery, a motion for a preliminary injunction enjoining a shareholder vote of the merger, and a motion to set a hearing and briefing schedule on plaintiffs’ motion for a preliminary injunction.

 

We believe the lawsuits are without merit and intend to vigorously defend against them.

 

The following summarizes material provisions of the merger agreement, a copy of which is attached to this proxy statement as Annex A and which we incorporate by reference into this document. 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 carefully the merger agreement in its entirety, as the rights and obligations of the parties are governed by the express terms of the merger agreement and not by this summary or any other information contained in this proxy statement.

 

The description of the merger agreement in this proxy statement has been included to provide you with information regarding its terms. The merger agreement contains representations and warranties made by and to the Company, Parent and Merger Sub as of specific dates. The statements embodied in those representations and warranties were made for purposes of that contract between the parties and are subject to qualifications and limitations agreed by the parties in connection with negotiating the terms of that contract. In addition, certain representations and warranties were made as of a specified date, may be subject to contractual standards of materiality different from those generally applicable to shareholders, or may have been used for the purpose of allocating risk between the parties rather than establishing matters as facts.

 

The effective time of the merger will occur at the time that we file articles of merger with the Secretary of State of the State of Florida on the closing date of the merger (or such later time as provided in the articles of merger). So long as the marketing period has expired, the closing date will occur as soon as practicable, but in no event later than the third business day after all of the conditions to the merger set forth in the merger agreement have been satisfied or waived (or such other date as Parent and the Company may agree). In the event that all conditions have been satisfied but the marketing period has not expired, then Parent and Merger Sub are not required to effect the closing until the earlier of:

 

 

The marketing period is defined in the merger agreement as the first period of 30 consecutive days after the “Initiation Date” (defined below) throughout and at the end of which:

 

 

at the end of which no law or order by any U.S. or foreign governmental entity is in effect which prohibits, restrains or enjoins consummation of the merger, the waiting period under the Hart-Scott-Rodino Act and any applicable foreign antitrust laws has terminated or has expired and all other authorizations and orders of and filings with any governmental entity required to permit the consummation of the merger have been obtained and are in effect.

 

Pursuant to the merger agreement, the Initiation Date means the date on which the merger agreement is approved by the shareholders of the Company by the requisite vote.

 

The purpose of the marketing period is to provide Apollo a reasonable and appropriate period of time during which it can market and place the permanent debt financing contemplated by the debt financing commitments for the purposes of financing the merger. Throughout this period Parent has agreed:

 

 

 

In addition, in the event that any portion of the debt financing structured as high yield financing has not been consummated, Parent must use the proceeds of the bridge financing or, at Parent’s election, the proceeds of any alternative financing such as an additional tranche of senior loans, to replace the high yield financing no later than the last day of the marketing period. See “— Parent Financing Commitments; Company Cooperation” below for a further discussion of Parent’s and Merger Sub’s covenants relating to the financing commitments.

 

At the effective time of the merger, Merger Sub will merge with and into us. Claire’s Stores will survive the merger and continue to exist after the merger as a wholly-owned subsidiary of Parent. All of the Company’s and Merger Sub’s property, rights, privileges, immunities, powers and franchises will vest in the surviving corporation, and all of their debts, liabilities, obligations and duties will become those of the surviving corporation. Following completion of the merger, the Company’s common stock will be delisted from the NYSE, deregistered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and no longer publicly traded. The Company will be a privately held corporation and the Company’s current shareholders, other than any employees of the Company who may be permitted to invest in the surviving corporation (or its parent) and who choose to so invest, will cease to have any ownership interest in the Company or rights as Company shareholders. Therefore, such current shareholders of the Company will not participate in any future earnings or growth of the Company and will not benefit from any appreciation in value of the Company.

 

Company Common Stock

 

At the effective time of the merger, each share of company common stock issued and outstanding immediately prior to the effective time of the merger will automatically be canceled and will cease to exist and will be converted into the right to receive $33.00 in cash, without interest and less any required withholding taxes, other than shares of company common stock:

 

 

After the effective time of the merger, each of our outstanding stock certificates or book-entry shares representing shares of common stock converted in the merger will cease to have any rights with respect thereto except the right to receive the merger consideration, without any interest and less any required withholding taxes.

 

Company Stock Options

 

At the effective time of the merger, each outstanding option, whether or not vested, to acquire our common stock will be canceled, and the holder of each stock option that has an exercise price of less than $33.00 will be

entitled to receive from the surviving corporation on the 15th business day following the effective time of the merger an amount in cash, without interest and less applicable withholding taxes, equal to the product of:

 

 

provided, however, to the extent agreed by Parent and the holder of an option between the date of the merger agreement and the effective time, options to acquire common stock may be converted into options to purchase shares of common stock (or other equity interests) of Parent or the surviving corporation and/or other consideration in a manner that does not exceed the intrinsic value of the converted option.

 

Restricted Shares and Stock Unit Awards

 

At the effective time of the merger, each outstanding share of our restricted stock, the restrictions of which have not lapsed immediately prior to the effective time of the merger, will become fully vested, free of such restrictions and will be converted into the right to receive $33.00 in cash, without interest and less any applicable withholding taxes. As of the effective time of the merger, all restricted shares will automatically cease to exist, and each holder of a restricted share will cease to have any rights, except the right to receive such payment.

 

Also, at the effective time of the merger, each outstanding right to receive shares of our common stock or cash equal to or based on the value of shares of our common stock pursuant to a stock unit award under any of our stock or other incentive plans, whether or not vested, will be canceled, and the holder of the stock unit will be entitled to receive from the surviving corporation on the 15th business day following the effective time an amount in cash equal to the product of the number of shares previously subject to the stock unit and $33.00 in cash (or, if such award provides for payments to the extent the value of shares of the Company exceeds a specified reference price, the amount, if any, by which $33.00 exceeds such reference price), without interest and less applicable withholding taxes; provided, however, to the extent agreed by Parent and the holder of a stock unit between the date of the merger agreement and the effective time, stock units may be converted into equity-based awards of Parent or the surviving corporation and/or other consideration with an equal fair market value. In the case of a stock unit award with respect to which the amount of the award is contingent upon the performance level achievement for periods continuing after the effective time of the merger, the number of shares subject to such stock unit awards shall be determined on the basis of deemed “plan” level performance achievement (as defined in the relevant Company stock plan or award agreement) for such periods. As of the effective time of the merger, all stock units will automatically cease to exist, and each holder of a stock unit will cease to have any rights, except the right to receive the payment described above.

 

Deferred Compensation Plans

 

On the 15th business day following the effective time, all account balances under the Company’s 1999 Management Deferred Compensation Plan and 2005 Management Deferred Compensation Plan and all previously deferred annual bonus payments (including both the employee “holdback” portions and the Company matching contributions thereon) will be paid out in cash to participants, less any required withholding taxes.

 

At the effective time of the merger, Parent or the surviving corporation will deposit, or will cause to be deposited, an amount of cash sufficient to pay the merger consideration to each holder of shares of our company common stock with American Stock Transfer & Trust Company (the “paying agent”), which paying agent shall be reasonably acceptable to us. Promptly after the effective time of the merger, the paying agent will mail a letter of transmittal and instructions to you and the other shareholders. The letter of transmittal and instructions will tell you how to surrender your company common stock certificates or shares you may hold represented by book entry in exchange for the merger consideration.

 

You should not return your stock certificates with the enclosed proxy card, and you should not forward your stock certificates to the paying agent without a letter of transmittal.

 

You will not be entitled to receive the merger consideration until you surrender your stock certificate or certificates (or book-entry shares) to the paying agent, together with a duly completed and executed letter of transmittal and any other documents as may be required by the letter of transmittal. The merger consideration may be paid to a person other than the person in whose name the corresponding certificate is registered if the certificate is properly endorsed or is otherwise in the proper form for transfer. In addition, the person who surrenders such

certificate must either have paid any transfer or other applicable taxes or establish to the satisfaction of the surviving corporation that such taxes have been paid or are not applicable.

 

No interest will be paid or will accrue on the cash payable upon surrender of the certificates (or book-entry shares). The paying agent will be entitled to deduct and withhold, and pay to the appropriate taxing authorities, any applicable taxes from the merger consideration. Any sum which is withheld and paid to a taxing authority by the paying agent will be deemed to have been paid to the person with regard to whom it is withheld.

 

At the effective time of the merger, our stock transfer books will be closed, and there will be no further registration of transfers of outstanding shares of company common stock. If, after the effective time of the merger, certificates are presented to the surviving corporation for transfer, they will be canceled and exchanged for the merger consideration.

 

None of the paying agent, Parent or the surviving corporation will be liable to any person for any cash delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. Any portion of the merger consideration deposited with the paying agent that remains undistributed to the holders of certificates evidencing shares of our company common stock for twelve months after the effective time of the merger, will be delivered, upon demand, to the surviving corporation. Holders of certificates who have not surrendered their certificates prior to the delivery of such funds to Parent may only look to the surviving corporation for the payment of the merger consideration as general creditors. The surviving corporation shall pay all charges and expenses, including those of the paying agent, in connection with the exchange of shares for the merger consideration.

 

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 comply with the replacement requirements established by the paying agent, including, if necessary, the posting of a bond in a customary amount sufficient to protect the surviving corporation against any claim that may be made against it with respect to that certificate.

 

We make various representations and warranties in the merger agreement that are subject, in some cases, to specified exceptions and qualifications. Our representations and warranties relate to, among other things:

 

 

 

For the purposes of the merger agreement, “material adverse effect” means any change, effect or circumstance that is, or would reasonably be expected to be, individually or in the aggregate, materially adverse to the business, condition (financial or otherwise) or results of operations of the Company and its subsidiaries, taken as a whole. A “material adverse effect” will not have occurred, however, as a result of any change, effect or circumstance resulting from:

 

 

You should be aware that these representations and warranties are made by the Company to Parent and Merger Sub, may be subject to important limitations and qualifications agreed to by Parent and Merger Sub, may or may not be accurate as of the date they were made and do not purport to be accurate as of the date of this proxy statement. See “Where You Can Find Additional Information.”

 

The merger agreement also contains various representations and warranties made by Parent and Merger Sub that are subject, in some cases, to specified exceptions and qualifications. The representations and warranties relate to, among other things:

 

 

The representations and warranties of each of the parties to the merger agreement will expire upon the effective time of the merger.

 

Under the merger agreement, we have agreed that, subject to certain exceptions and unless Parent gives its prior written consent, between March 20, 2007 and the completion of the merger:

 

 

We have also agreed that during the same time period, and again subject to certain exceptions or unless Parent gives its prior written consent (which consent, in most cases, will be in the sole discretion of Parent), we and our subsidiaries will not:

 

 

 

 

 

 

 

 

The merger agreement requires us, as soon as reasonably practicable, to call, give notice of and hold a meeting of our shareholders to approve the merger agreement. Except to the extent necessary in order to comply with its fiduciary duties under applicable law, our board of directors is required to recommend that our shareholders vote in favor of approval of the merger agreement and to use its reasonable best efforts to have the merger agreement approved by our shareholders. In the event that our board of directors, in order to act in a manner consistent with its fiduciary duties under applicable law, decides to withdraw or modify its recommendation in a manner adverse to Parent or Merger Sub, we are required to give Parent at least three business days’ notice prior to such change of recommendation.

 

We have agreed that we, our subsidiaries and our respective directors, officers and employees will not, and we are required to use our reasonable best efforts to cause our and our subsidiaries’ representatives not to, directly or indirectly:

 

 

 

An “acquisition proposal” is any proposal or offer with respect to a tender offer or exchange offer, proposal for a merger, consolidation, or other business combination involving us and/or any of our subsidiaries or any proposal or offer to acquire in any manner a substantial equity interest in us or any of our subsidiaries or 20% or more of our assets or the assets of any of our subsidiaries. We are required to promptly (and in no event later than two business days after receipt) notify Parent in writing of the receipt of any acquisition proposal (or any request for information that we reasonably believe could lead to an acquisition proposal), and keep Parent reasonably informed of the status of any such acquisition proposal.

 

Except as described below, neither we nor our board of directors may recommend any acquisition proposal to our shareholders or approve any agreement with respect to an acquisition proposal. Prior to approval of the merger agreement by our shareholders, however, we or our board of directors are permitted to provide access to our properties, books and records and provide other information and data in response to a request for such information or data or to engage in discussions or negotiations with, or provide any information to, a third party in connection with an unsolicited bona fide written acquisition proposal, if and only to the extent that before taking any of these actions our board of directors determines in its good faith judgment, after consultation with its outside legal counsel and financial advisors, that:

 

 

For purposes of the merger agreement, “superior proposal” means any acquisition proposal:

 

 

In addition to the above, we can also contact and engage in discussions with any person who has made an unsolicited acquisition proposal solely for the purpose of clarifying such acquisition proposal so as to determine whether there is a reasonable possibility that such acquisition proposal could lead to a superior proposal.

 

Furthermore, if, at any time prior to the approval of the merger agreement by our shareholders, our board of directors determines in its good faith judgment, after consultation with its outside legal counsel and financial advisors, that an unsolicited bona fide written acquisition proposal that did not result from a material breach of the provisions described in the previous paragraphs is a superior proposal, we may terminate the merger agreement, our board of directors may approve or recommend the superior proposal to our shareholders, and/or immediately prior to or concurrently with the termination of the merger agreement we may enter into any agreement, understanding, letter of intent or arrangement with respect to such superior proposal, as applicable, but only if:

 

 

We have also agreed:

 

 

For a period of two years after the effective time of the merger, Parent will cause the surviving corporation and its subsidiaries to maintain the severance-related provisions of specified existing Company plans and to provide severance related payments and benefits required thereunder to any Company employee terminated during that twenty-four month period.

 

For a period of eighteen months after the effective time of the merger, Parent will cause the surviving corporation and its subsidiaries to maintain for any Company employee:

 

 

Parent will also recognize and give effect to:

 

 

Subject to Parent’s general right to modify or terminate a benefit plan, where permitted by the terms of such plan, after completion of the merger, Parent will honor, and will cause its subsidiaries to honor, in accordance with their terms all existing employment, change in control, severance and termination, equity-based and bonus arrangements, and all obligations under outstanding restoration plans, equity-based plans, programs or agreements, bonus plans or programs, bonus deferral plans, vested and accrued benefits under any employee benefit plan, program or arrangement of the Company or its subsidiaries in effect as of the effective time of the merger.

 

Subject to the terms and conditions of the merger agreement, each party has agreed to use its reasonable best efforts to take all actions and to do all things necessary, proper or advisable under applicable law to consummate the transactions contemplated by the merger agreement, including making filings under the Hart-Scott-Rodino Act and under the antitrust laws of foreign jurisdictions for which similar filings are required. In addition, each party has agreed to cooperate and use best efforts to resolve any objections or suits brought by any governmental entity or private third party challenging any of the transactions contemplated by the merger agreement as being in violation of any antitrust law. Such efforts include agreeing to sell, hold separate or otherwise dispose of or conduct such party’s business in a manner which would resolve such objections or suits.

 

Parent has agreed to use 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:

 

 

In the event any portion of the debt financing becomes unavailable on the terms and conditions contemplated in the debt financing commitments, Parent shall use its reasonable best efforts to arrange alternative financing in an amount sufficient to consummate the merger and related transactions on terms not materially less beneficial to Parent or Merger Sub (including with respect to conditionality) and would not reasonably be expected to prevent, materially impede or materially delay the consummation of the debt financing or the merger, as promptly as practicable but in no event later than the last day of the marketing period. In addition, Parent and Merger Sub have agreed that:

 

 

 

then Parent will use the proceeds of the bridge financing, or at Parent’s election, the proceeds of any alternative financing, such as an additional tranche of senior loans, to replace the high yield financing no later than the last day of the marketing period (see “— Effective Time; The Marketing Period” above for a discussion of the marketing period).

 

Parent is required to give us prompt notice of any material breach by any party of the debt financing commitments or any termination of the debt financing commitments. Parent is also required to keep us informed on a reasonably current basis in reasonable detail of the status of its efforts to arrange the debt financing and to provide us with copies of all documents related to the debt financing (other than ancillary documents subject to confidentiality agreements).

 

We have agreed to, and have agreed to cause our subsidiaries (and our and their respective officers, employees, representatives and advisors) to, provide such cooperation as may be requested by Parent that is necessary, proper or advisable in connection with the debt financing, including:

 

 

 

The obligations of the parties to complete the merger are subject to the satisfaction or waiver of the following mutual conditions:

 

 

The obligations of Parent and Merger Sub to complete the merger are subject to the satisfaction or waiver of the following additional conditions:

 

 

 

 

 

Our obligation to complete the merger is subject to the following additional conditions:

 

 

Other than the conditions pertaining to the Company shareholder approval, the absence of governmental orders and the expiration or termination of the Hart-Scott-Rodino Act or foreign antitrust law waiting periods, either the Company, on the one hand, or Parent and Merger Sub, on the other hand, may elect to waive conditions to their respective performance and complete the merger. We do not anticipate re-soliciting our shareholders for approval of any such waiver unless we propose to waive a condition and such waiver would be material to our shareholders, in which case we would re-solicit the vote of our shareholders. None of the Company, Parent or Merger Sub, however, has any intention to waive any condition as of the date of this proxy statement.

 

The merger agreement may be terminated and the merger may be abandoned at any time prior to the effective time of the merger, whether before or after shareholder approval has been obtained, as follows:

 

 

 

 

Payable by the Company

 

We have agreed to pay to Parent a termination fee of $90.0 million if:

 

 

 

 

 

 

 

For purposes of determining whether a termination fee is payable by us, an “acquisition proposal” is any proposal or offer with respect to a tender offer or exchange offer, proposal for a merger, consolidation, or other business combination involving us and/or any of our subsidiaries or any proposal or offer to acquire in any manner a substantial equity interest in us or any of our subsidiaries, or 50% or more of our assets or the assets of any of our subsidiaries.

 

Payable by Parent or Merger Sub

 

 

This termination fee is our sole and exclusive remedy against Parent, Merger Sub and their affiliates in the event that we terminate the agreement in circumstances in which we are entitled to the termination fee and elect to

receive such termination fee, except that Parent and Merger Sub shall also be obligated under the provisions of the merger agreement relating to confidentiality, public announcements, expenses and Parent’s obligation to reimburse the Company’s expenses and indemnify the Company against liabilities and losses in connection with the debt financing except in certain specified circumstances. If we elect not to receive the termination fee, or in case of a breach by Parent or Merger Sub of the merger agreement in circumstances in which we are not entitled to the termination fee, we are entitled to enforce all of our rights under the merger agreement and the equity financing commitment.

 

Subject to applicable law, the merger agreement may be amended by the written agreement of the parties at any time prior to the closing date of the merger, whether before or after the approval of the merger agreement by our shareholders, unless the merger agreement has already been approved by our shareholders and under applicable law such amendment would require the further approval of the Company’s shareholders.

 

The merger agreement also provides that, at any time prior to the effective time of the merger, any party may, by written agreement:

 

 

The following is a summary of the material terms of the shareholders agreement among Parent, Merger Sub and the Schaefer Family Holders. This summary is qualified in its entirety by reference to the complete text of the shareholders agreement, a copy of which is attached to this proxy statement as Annex B and is incorporated by reference into this document. Claire’s Stores shareholders are urged to read the shareholders agreement in its entirety.

 

Concurrently with the execution and delivery of the merger agreement, Parent and Merger Sub entered into a shareholders agreement with Marla L. Schaefer and E. Bonnie Schaefer, the Co-Chairmen of our board of directors, and certain other shareholder entities controlled by them. As of the date of the shareholders agreement, the Schaefer Family Holders were the beneficial owners of 7,254,087 shares of company common stock (consisting of 3,028,831 shares of common stock and 4,225,256 shares of Class A common stock) subject to the shareholders agreement. As of the date of the shareholders agreement, the aggregate number of shares of company common stock beneficially owned by the Schaefer Family Holders which are subject to the shareholders agreement represented approximately 33.1% of the combined voting power of the outstanding shares of company common stock. We refer to the Claire’s Stores shares beneficially owned by the Schaefer Family Holders, together with any shares of company common stock issued upon exercise of any of their options and any other Claire’s Stores shares over which the Schaefer Family Holders acquire beneficial ownership after the date of the shareholders agreement, as the “Subject Shares.”

 

Pursuant to the shareholders agreement, the Schaefer Family Holders have agreed that, during the period from and including March 20, 2007 through and including the earliest to occur of (a) the closing of the merger and (b) the termination of the merger agreement in accordance with its terms (the “voting period”), they will vote or execute consents with respect to the Subject Shares beneficially owned by them on the applicable record date, at any meeting or in connection with any proposed action by written consent of the Company’s shareholders, with respect to any of the following matters:

 

 

 

 

 

In connection with the performance of the obligations of the Schaefer Family Holders under the shareholders agreement, each Schaefer Family Holder irrevocably appointed Parent as his, her or its proxy and attorney-in-fact to vote or execute consents with respect to his, her or its Subject Shares in the manner described above and agreed not to grant any other proxy or take any actions that are inconsistent with or that would impede such holder’s performance of the shareholders agreement. The proxy and power of attorney granted by the Schaefer Family Holders pursuant to the shareholders agreement will terminate only upon the expiration of the voting period.

 

Under the shareholders agreement, each Schaefer Family Holder has agreed not to take the following actions with respect to his, her or its Subject Shares, without the prior written consent of Parent or Merger Sub, including by:

 

 

 

 

In addition, the Schaefer Family Holders have agreed that, except to the extent that the Company or our board of directors is permitted under the merger agreement, during the voting period, they will not solicit or initiate any alternative acquisition proposal or engage in any negotiations with or furnish access to properties, books or records or any confidential information or data relating to the Company or any of its subsidiaries to any person relating to an alternate acquisition proposal, or execute any letter of intent or similar document or agreement or commitment with respect to any alternate acquisition proposal.

 

Each Schaefer Family holder has waived his, her or its appraisal rights under Section 607.1302 of the FBCA or other applicable law in connection with the merger.

 

The shareholders agreement will terminate on the earlier to occur of (i) the effective time of the merger and (ii) the termination of the merger agreement in accordance with its terms.

 

Our common stock is traded on the NYSE under the symbol “CLE”. The following table sets forth the high and low sales price per share of our common stock on the NYSE for the periods indicated.

 

Market Information

 

 

The closing sale price of our common stock on the NYSE on March 19, 2007, which was the last trading day before we announced the merger, was $30.76. On April 26, 2007, the last trading day before the date of this proxy statement, the closing price for the Company’s common stock on the NYSE was $32.44. You are encouraged to obtain current market quotations for the Company’s common stock in connection with voting your shares.

 

As of April 26, 2007, the last trading day before the date of this proxy statement, there were 1,156 registered holders of the Company’s common stock and 333 registered holders of the Company’s Class A common stock.

 

If the merger is consummated, the Company’s common stock will be delisted from the NYSE and will be deregistered under the Exchange Act.

 

The following table sets forth dividends announced and paid in respect of company common stock, on a per share basis for the periods indicated.