As filed with the Securities and Exchange Commission on
August 17, 2007
Registration
No. 333-144405
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
AMENDMENT NO. 1
TO
Form S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
ULTA SALON,
COSMETICS & FRAGRANCE, INC.
(Exact name of Registrant as
specified in its charter)
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Delaware
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5999f
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36-3685240
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification No.)
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1135 Arbor Drive
Romeoville, Illinois 60446
(630) 226-0020
(Address, including
zip code, and telephone number, including area code, of
Registrants principal executive offices)
Lynelle P. Kirby
President, Chief Executive Officer and Director
Ulta Salon, Cosmetics & Fragrance, Inc.
1135 Arbor Drive
Romeoville, Illinois 60446
(630) 226-0020
(Name, address,
including zip code, and telephone number, including area code,
of agent for service)
Copies to:
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Christopher D.
Lueking, Esq.
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Leland Hutchinson, Esq.
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Latham & Watkins LLP
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Winston & Strawn LLP
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233 S. Wacker Drive,
Suite 5800
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35 W. Wacker Drive
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Chicago, Illinois 60606
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Chicago, Illinois 60601
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(312)
876-7700
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(312) 558-5600
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after this
Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, as amended (the
Securities Act), check the following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
CALCULATION OF
REGISTRATION FEE
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Proposed
Maximum
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Amount of
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Title of Each
Class of Securities
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Aggregate
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Registration
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to be
Registered
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Offering
Price(1)
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Fee(2)
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Common Stock, par value $.01 per
share
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$115,000,000
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$3,531
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Preferred stock purchase rights(3)
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(1)
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Estimated solely for the purpose of
computing the amount of the registration fee pursuant to
Rule 457(o) under the Securities Act of 1933. Includes
shares of common stock subject to the underwriters option.
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(3)
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The preferred stock purchase rights
initially will trade together with the common stock. The value
attributable to the preferred stock purchase rights, if any, is
reflected in the offering price of the common stock.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act or until the Registration Statement shall
become effective on such date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this preliminary prospectus is not complete and
may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission is effective. This prospectus is not an offer to sell
these securities and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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Subject to
completion,
dated ,
2007
Prospectus
shares
Common stock
This is an initial public offering of shares of common stock of
Ulta Salon, Cosmetics & Fragrance, Inc. We are
selling shares
of common stock. The selling stockholders identified in this
prospectus are offering an
additional shares.
We will not receive any proceeds from the sale of shares by the
selling stockholders. Prior to this offering, there has been no
public market for our common stock. The estimated initial public
offering price is between $ and
$ per share.
We are applying to have our common stock listed on The NASDAQ
Global Select Market under the symbol ULTA.
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Per
share
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Total
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Public offering price
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$
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$
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Underwriting discounts and
commissions
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$
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$
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Proceeds to ULTA, before expenses
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$
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$
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Proceeds to the selling
stockholders, before expenses
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$
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$
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The selling stockholders have granted the underwriters an option
for a period of 30 days to purchase up
to
additional shares of common stock to cover over-allotments, if
any.
Investing in our common stock involves a high degree of risk.
See Risk factors beginning on page 9.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed on the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
The underwriters expect to deliver the shares of common stock to
purchasers
on ,
2007.
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JPMorgan |
Wachovia
Securities |
Thomas
Weisel Partners LLC
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, 2007
Table of
contents
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Page
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1
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5
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7
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9
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23
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24
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24
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25
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27
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29
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32
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52
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68
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73
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90
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92
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96
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98
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103
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105
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109
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113
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113
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113
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F-1
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You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
information that is different. We are offering to sell and
seeking offers to buy shares of our common stock only in
jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery
of this prospectus or of any sale of our common stock.
Unless the context requires otherwise, the words
ULTA, we, company,
us and our refer to Ulta Salon,
Cosmetics & Fragrance, Inc. For purposes of this
prospectus, the term stockholder shall refer to the
holders of our common stock.
i
Prospectus
summary
This summary highlights information contained elsewhere in
this prospectus. You should read the entire prospectus
carefully, including the Risk factors section and
our consolidated financial statements and the related notes
included in this prospectus before making an investment in our
common stock. In this prospectus, our fiscal years ended
January 29, 2000, February 3, 2001, February 2,
2002, February 1, 2003, January 31, 2004,
January 29, 2005, January 28, 2006, February 3,
2007 and February 2, 2008 are referred to as fiscal 1999,
2000, 2001, 2002, 2003, 2004, 2005, 2006 and 2007,
respectively.
Our
company
We are the largest beauty retailer that provides one-stop
shopping for prestige, mass and salon products and salon
services in the United States. We provide affordable indulgence
to our customers by combining the product breadth, value and
convenience of a beauty superstore with the distinctive
environment and experience of a specialty retailer. Key aspects
of our business include:
One-Stop Shopping. We offer a unique
combination of over 21,000 prestige and mass beauty products
across the categories of cosmetics, fragrance, haircare,
skincare, bath and body products and salon styling tools, as
well as salon haircare products. We also offer a full-service
salon in all of our stores.
Our Value Proposition. We focus on
delivering a compelling value proposition to our customers. For
example, we run frequent promotions and gift certificates for
our mass brands, gift-with-purchase offers and multi-product
gift sets for our prestige brands, and a comprehensive customer
loyalty program.
An Off-Mall Location. We are
conveniently located in high-traffic, off-mall locations, and
our typical store is approximately 10,000 square feet,
including a salon of approximately 950 square feet. As of
May 31, 2007, we operated 207 stores across 26 states.
In addition to these fundamental elements of a beauty
superstore, we strive to offer an uplifting shopping experience
through what we refer to as The Four Es:
Escape, Education, Entertainment and
Esthetics.
Escape. We offer our customer a timely
escape without the intimidating, commission-oriented and
brand-dedicated sales approach found in most department stores
and with a level of service typically unavailable in drug stores
and mass merchandisers.
Education. We staff our stores with a
team of well-trained beauty consultants and professionally
licensed estheticians and stylists whose mission is to educate,
inform and advise our customers regarding their beauty needs.
Entertainment. Our catalogs are
invitations for our customers to come to ULTA to play, touch,
test, learn and explore. We further enhance the shopping
experience through live demonstrations, customer makeovers and
in-store videos.
Esthetics. Our store design features
sleek, modern lines, wide aisles that make the store easy to
navigate and pleasant lighting to create a luxurious and
welcoming environment.
1
We were founded in 1990 as a discount beauty retailer at a time
when prestige, mass and salon products were sold through
distinct channelsdepartment stores for prestige products,
drug stores and mass merchandisers for mass products, and salons
and authorized retail outlets for professional hair care
products. When Lyn Kirby, our current President and Chief
Executive Officer, joined us in December 1999, we pioneered our
unique combination of beauty superstore and specialty store
attributes. In October 2005, Ms. Kirby was recognized by
Cosmetics Executive Women (CEW) with a 2005 Achiever Award
for achievement in the beauty industry. In May 2007, we
received a 2007 Hot Retailer Award from the International
Council of Shopping Centers (ICSC) for being an innovative
retail concept.
We believe our strategy provides us with competitive advantages
that have contributed to our strong financial performance. Our
net sales have increased from $206.5 million in fiscal 1999
to $755.1 million in fiscal 2006, representing a 20.3%
compounded annual growth rate. In that same period, we grew our
store base from 75 to 196 stores while growing our net income
from $1.2 million in fiscal 1999 to $22.5 million in
fiscal 2006, representing a 51.6% compounded annual growth rate.
In addition, we have achieved 29 consecutive quarters of
positive comparable store sales growth since fiscal 2000.
Our competitive
strengths
We believe the following competitive strengths differentiate us
from our competitors and are critical to our continuing success:
Differentiated merchandising strategy with broad
appeal. We believe our broad selection of
merchandise across categories, price points and brands offers a
unique shopping experience for our customers. While the products
we sell can be found in department stores, specialty stores,
salons, drug stores and mass merchandisers, we offer all of
these products in one retail format. We offer over 500 brands,
such as Bare Escentuals cosmetics, Chanel and
Estée Lauder fragrances, LOréal
haircare and cosmetics and Paul Mitchell haircare.
Our unique customer experience. We
combine the value and convenience of a beauty superstore with
the distinctive environment and experience of a specialty
retailer. We cater to the woman who loves to indulge in shopping
for beauty products as well as the woman who is time
constrained. We believe our unique shopping experience increases
both the frequency and length of our customers visits.
Retail format poised to benefit from shifting channel
dynamics. Over the past several years, the
approximately $75 billion beauty products and salon
services industry has experienced significant changes, including
a shift in how manufacturers distribute and customers purchase
beauty products. We are capitalizing on these trends by offering
an off-mall, service-oriented specialty retail concept with a
comprehensive product mix across categories and price points.
Loyal and active customer base. We have
approximately six million customer loyalty program members. We
utilize this valuable proprietary database to drive traffic,
better understand our customers purchasing patterns and
support new store site selection.
Strong vendor relationships across product
categories. We have strong, active
relationships with over 300 vendors. We believe these
relationships, which span the three distinct beauty categories
of prestige, mass and salon, and have taken years to develop,
create a significant impediment for other retailers to replicate
our model.
2
Experienced management team. Our senior
management team averages over 25 years of combined beauty
and retail experience and brings a creative merchandising
approach and a disciplined operating philosophy to our business.
Growth
strategy
We intend to expand our presence as a leading retailer of beauty
products and salon services by:
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Growing our store base to our long-term potential of over 1,000
stores.
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Increasing our sales and profitability by expanding our prestige
brand offerings.
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Improving our profitability by leveraging our fixed costs.
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Continuing to enhance our brand awareness to generate sales
growth.
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Driving increased customer traffic to our salons.
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Expanding our online business.
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Risks relating to
our company
Investing in our common stock involves a high degree of risk. In
particular, we may not be able to successfully implement our
growth strategy or capitalize on our competitive strengths.
Additionally:
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We may be unable to compete effectively in our highly
competitive markets.
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If we are unable to gauge beauty trends and react to changing
consumer preferences in a timely manner, our sales will decrease.
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Our failure to retain our existing senior management team and to
continue to attract qualified new personnel could adversely
affect our business.
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We intend to continue to open new stores, which could strain our
resources and have a material adverse effect on our business and
financial performance.
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The capacity of our distribution and order fulfillment
infrastructure may not be adequate to support our recent growth
and expected future growth plans, which could prevent the
successful implementation of these plans or cause us to incur
costs to expand this infrastructure.
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Any material disruption of our information systems could
negatively impact financial results and materially adversely
affect our business operations.
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If any of the foregoing events or circumstances occur, an
investment in our common stock may be impaired. You should read
Risk factors beginning on page 8 for a more
complete discussion of certain factors you should consider
together with all other information included in this prospectus
before making an investment decision.
3
Company
information
We were incorporated in Delaware on January 9, 1990 under
the name R.G. Trends Corporation. On June 7,
1990, we changed our name to Ulta3, Inc., on
February 7, 1992, we changed our name to
Ulta3
The Cosmetic Savings Store, Inc., on July 12, 1995,
we changed our name to
Ulta3
Cosmetics & Salon, Inc., and on July 29,
1999, we changed our name to Ulta Salon,
Cosmetics & Fragrance, Inc. Our principal
executive offices are located at 1135 Arbor Drive, Romeoville,
Illinois 60446 and our telephone number is
(630) 226-0020.
Our primary website is www.ulta.com. The information contained
in, or that can be accessed through, our website is not
incorporated by reference into this prospectus, and you should
not consider information contained on our website as part of
this prospectus.
ULTAtm,
our logo, Basically
Utm,
Formativtm,
Ulta
3tm,
Ulta 3 and
designtm,
Ulta 3 Beauty
Clubtm,
Ulta 3 Cosmetics Savings
Storetm,
Ulta 3 Salon Cosmetics Fragrance
designtm,
Ulta 3 The Ultimate Beauty
Storetm,
Ulta
Beautytm,
Ulta
Salon-Cosmetics-Fragrancetm,
Ulta Salon-Cosmetics-Fragrance and
designtm,
Ulta.comtm
and What a Woman
Wantstm
are our trademarks. All service marks, trademarks and trade
names referred to in this prospectus are the property of their
respective owners. We do not intend our use or display of other
parties service marks, trademarks or trade names or to
imply, and such use or display should not be construed to imply,
a relationship with, or endorsement or sponsorship of us by
these other parties.
4
The
offering
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Common stock offered by us |
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shares |
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Common stock offered by the selling stockholders |
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shares |
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Common stock to be outstanding after the offering |
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shares |
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Use of proceeds |
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We intend to use the net proceeds of
approximately million
from this offering to pay in full the approximately
$91.9 million of accumulated dividends in arrears on our
preferred stock and the approximately $4.8 million
redemption price of the Series III preferred stock, and to
use any remaining proceeds to reduce our borrowings under our
third amended and restated loan and security agreement. We will
not receive any proceeds from the sale of common stock by the
selling stockholders. |
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Dividends |
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We have never paid any dividends on our common stock and do not
anticipate paying any dividends on our common stock in the
foreseeable future. See Dividend policy. |
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Preferred stock purchase rights |
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Each share of common stock offered hereby will have associated
with it one preferred stock purchase right under the stockholder
rights agreement which we intend to adopt in connection with
this offering. Each of these rights will entitle its holder to
purchase one one-thousandth of a share of Series A junior
participating preferred stock at a purchase price specified in
the stockholder rights agreement under the circumstances
provided therein. See Description of capital
stockStockholder rights agreement. |
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Proposed NASDAQ Global Select Market symbol |
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ULTA |
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Risk factors |
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See Risk factors and other information included in
this prospectus for a discussion of some of the factors you
should consider before deciding to purchase our common stock. |
The number of shares of common stock to be outstanding after
this offering is based on 77,411,747 shares outstanding as
of May 5, 2007 and excludes:
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861,011 shares of common stock issuable upon exercise of
outstanding options under our Second Amended and Restated
Restricted Stock Option Plan, as amended, or the Old Plan, at a
weighted average exercise price of $0.48 per share. No further
awards will be made under the Old Plan; and
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5,189,390 shares of common stock issuable upon exercise of
outstanding options under our 2002 Equity Incentive Plan, or the
2002 Plan, at a weighted average exercise price of $2.65.
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5
Except as otherwise indicated, information in this prospectus
reflects or assumes the following:
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the conversion on a one-for-one basis of all outstanding shares
of our Series I, Series II, Series IV, Series V
and
Series V-1
preferred stock into an aggregate of 65,702,530 shares of
common stock effective upon the consummation of this offering
pursuant to the terms of our restated certificate of
incorporation;
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the redemption of all outstanding shares of our Series III
preferred stock effective upon the consummation of this offering
for an aggregate of approximately $4.8 million pursuant to
the terms of our restated certificate of incorporation; and
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no exercise by the underwriters of their option to
purchase additional
shares of common stock to cover over-allotments.
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6
Summary
consolidated financial information
The following table sets forth our summary consolidated
financial data for the periods indicated. You should read this
information in conjunction with our consolidated financial
statements, including the related notes, and
Managements discussion and analysis of financial
condition and results of operations included elsewhere in
this prospectus. The following summary consolidated balance
sheet data as of January 28, 2006 and February 3, 2007
and the summary consolidated income statement data for each of
the three fiscal years ended January 29, 2005,
January 28, 2006 and February 3, 2007 have been
derived from our audited consolidated financial statements
included elsewhere in this prospectus. The summary consolidated
balance sheet data as of May 5, 2007 and the summary
consolidated statement of operations data for the three months
ended April 29, 2006 and May 5, 2007 have been derived
from our unaudited consolidated financial statements included
elsewhere in this prospectus. The summary consolidated balance
sheet data as of January 29, 2005 has been derived from our
audited consolidated financial statements not included in this
prospectus. The selected balance sheet data as of April 29,
2006 has been derived from our unaudited consolidated financial
statements that are not included in this prospectus. Our
unaudited summary consolidated financial data as of
April 29, 2006 and May 5, 2007 and for the three
months then ended, has been prepared on the same basis as the
annual audited consolidated financial statements and includes
all adjustments, consisting of only normal recurring adjustments
necessary for the fair presentation of this data in all material
respects. The results for any interim period are not necessarily
indicative of the results of operations to be expected for a
full fiscal year.
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Fiscal year
ended(1)
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Three months
ended
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January 29,
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January 28,
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February 3,
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April 29,
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May 5,
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(Dollars in
thousands, except per share and per square foot data)
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2005
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2006
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2007
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2006
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2007
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Consolidated income statement
data:
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Net sales(2)
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$
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491,152
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$
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579,075
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$
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755,113
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$
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159,468
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$
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194,113
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Cost of sales
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346,585
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404,794
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519,929
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108,813
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134,600
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Gross profit
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144,567
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174,281
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235,184
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50,655
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59,513
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Selling, general, and
administrative expenses
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121,999
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140,145
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188,000
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41,316
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47,982
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Pre-opening expenses
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4,072
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4,712
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7,096
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826
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1,656
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Operating income
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18,496
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29,424
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40,088
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8,513
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9,875
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Interest expense
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2,835
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2,951
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3,314
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742
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996
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Income before income taxes
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15,661
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26,473
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36,774
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7,771
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8,879
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Income tax expense
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6,201
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10,504
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14,231
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3,071
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3,560
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Net income
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$
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9,460
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$
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15,969
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$
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22,543
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$
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4,700
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$
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5,319
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Net income (loss) per share:
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Basic
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$
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(0.44
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$
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0.47
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$
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0.87
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$
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0.18
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$
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0.14
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Diluted
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$
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(0.44
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$
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0.21
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$
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0.29
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$
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0.06
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$
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0.07
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Weighted average number of shares:
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Basic
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5,032,612
|
|
|
|
6,478,217
|
|
|
9,130,697
|
|
|
6,960,640
|
|
|
11,368,805
|
Diluted
|
|
|
5,032,612
|
|
|
|
76,297,969
|
|
|
79,026,350
|
|
|
76,617,578
|
|
|
80,652,941
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
ended(1)
|
|
Three months
ended
|
|
|
January 29,
|
|
January 28,
|
|
February 3,
|
|
April 29,
|
|
May 5,
|
(Dollars in
thousands, except per share and per square foot data)
|
|
2005
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
|
|
Other operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable store sales increase(3)
|
|
|
8.0%
|
|
|
8.3%
|
|
|
14.5%
|
|
|
12.8%
|
|
|
9.2%
|
Number of stores end of period
|
|
|
142
|
|
|
167
|
|
|
196
|
|
|
170
|
|
|
203
|
Total square footage end of period
|
|
|
1,464,330
|
|
|
1,726,563
|
|
|
2,023,305
|
|
|
1,755,280
|
|
|
2,096,275
|
Total square footage per store(4)
|
|
|
10,312
|
|
|
10,339
|
|
|
10,323
|
|
|
10,325
|
|
|
10,326
|
Average total square footage(5)
|
|
|
1,374,005
|
|
|
1,582,935
|
|
|
1,857,885
|
|
|
1,650,697
|
|
|
1,934,871
|
Net sales per average total square
foot(6)
|
|
$
|
357
|
|
$
|
366
|
|
$
|
398
|
|
$
|
370
|
|
$
|
400
|
Capital expenditures
|
|
|
34,807
|
|
|
41,607
|
|
|
62,331
|
|
|
5,304
|
|
|
17,757
|
Depreciation and amortization
|
|
|
18,304
|
|
|
22,285
|
|
|
29,736
|
|
|
6,048
|
|
|
9,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated balance sheet
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,004
|
|
$
|
2,839
|
|
$
|
3,645
|
|
$
|
2,926
|
|
$
|
3,161
|
Working capital
|
|
|
69,955
|
|
|
76,473
|
|
|
88,105
|
|
|
75,733
|
|
|
85,870
|
Property and equipment, net
|
|
|
114,912
|
|
|
133,003
|
|
|
162,080
|
|
|
131,603
|
|
|
174,916
|
Total assets
|
|
|
253,425
|
|
|
282,615
|
|
|
338,597
|
|
|
287,601
|
|
|
377,852
|
Total debt(7)
|
|
|
47,008
|
|
|
50,173
|
|
|
55,529
|
|
|
63,537
|
|
|
87,883
|
Total stockholders equity
|
|
|
105,308
|
|
|
123,015
|
|
|
148,760
|
|
|
128,221
|
|
|
153,359
|
|
|
|
|
(1)
|
|
Our fiscal year-end is the Saturday
closest to January 31 based on a 52/53-week year. Each fiscal
year consists of four 13-week quarters, with an extra week added
onto the fourth quarter every five or six years.
|
|
(2)
|
|
Fiscal 2006 was a 53-week operating
year and the 53rd week represented approximately
$16.4 million in net sales.
|
|
(3)
|
|
Comparable store sales increase
reflects sales for stores beginning on the first day of the 14th
month of operation. Remodeled stores are included in comparable
store sales unless the store was closed for a portion of the
current or comparable prior period.
|
|
(4)
|
|
Total square footage per store is
calculated by dividing total square footage at end of period by
number of stores at end of period.
|
|
(5)
|
|
Average total square footage
represents a weighted average which reflects the effect of
opening stores in different months throughout the period.
|
|
(6)
|
|
Net sales per average total square
foot was calculated by dividing net sales for the trailing
12-month
period by the average square footage for those stores open
during each period. The fiscal 2006 and first quarter fiscal
2007 net sales per average total square foot amounts were
adjusted to exclude the net sales effects of the 53rd week.
|
|
|
|
(7)
|
|
Total debt includes approximately
$4.8 million related to the Series III redeemable preferred
stock, which is presented between the liabilities section and
the equity section of our consolidated balance sheet for all
periods presented.
|
8
Risk
factors
Investment in our common stock involves a high degree of risk
and uncertainty. You should carefully consider the following
risks and all of the other information contained in this
prospectus before making an investment decision. If any of the
following risks occur, our business, financial condition,
results of operations or future growth could suffer. In these
circumstances, the market price of our common stock could
decline, and you may lose all or part of your investment. The
risks described below are not the only ones facing our company.
Additional risks not presently known to us or which we currently
consider immaterial also may adversely affect our company.
Risks related to
our business
We may be
unable to compete effectively in our highly competitive
markets.
The markets for beauty products and salon services are highly
competitive with few barriers to entry. We compete against a
diverse group of retailers, both small and large, including
regional and national department stores, specialty retailers,
drug stores, mass merchandisers, high-end and discount salon
chains, locally owned beauty retailers and salons, Internet
businesses, catalog retailers and direct response television,
including television home shopping retailers and infomercials.
We believe the principal bases upon which we compete are the
quality of merchandise, our value proposition, the quality of
our customers shopping experience and the convenience of
our stores as one-stop destinations for beauty products and
salon services. Many of our competitors are, and many of our
potential competitors may be, larger and have greater financial,
marketing and other resources and therefore may be able to adapt
to changes in customer requirements more quickly, devote greater
resources to the marketing and sale of their products, generate
greater national brand recognition or adopt more aggressive
pricing policies than we can. As a result, we may lose market
share, which could have a material adverse effect on our
business, financial condition and results of operations.
If we are
unable to gauge beauty trends and react to changing consumer
preferences in a timely manner, our sales will
decrease.
We believe our success depends in substantial part on our
ability to:
|
|
|
recognize and define product and beauty trends;
|
|
|
anticipate, gauge and react to changing consumer demands in a
timely manner;
|
|
|
translate market trends into appropriate, saleable product and
service offerings in our stores and salons in advance of our
competitors;
|
|
|
develop and maintain vendor relationships that provide us access
to the newest merchandise on reasonable terms; and
|
|
|
distribute merchandise to our stores in an efficient and
effective manner and maintain appropriate in-stock levels.
|
If we are unable to anticipate and fulfill the merchandise needs
of the regions in which we operate, our net sales may decrease
and we may be forced to increase markdowns of slow-moving
merchandise, either of which could have a material adverse
effect on our business, financial condition and results of
operations.
9
If we fail to
retain our existing senior management team and continue to
attract qualified new personnel, such failure could have a
material adverse effect on our business, financial condition and
results of operations.
Our business requires disciplined execution at all levels of our
organization. This execution requires an experienced and
talented management team. Ms. Kirby, our President and
Chief Executive Officer since December 1999, is of key
importance to our business, including her relationships with our
vendors and influence on our sales and marketing. If we lost
Ms. Kirbys services or if we were to lose the benefit
of the experience, efforts and abilities of other key executive
and buying personnel, it could have a material adverse effect on
our business, financial condition and results of operations. We
have entered into employment agreements with Ms. Kirby and
Mr. Barkus, our Chief Operating Officer, expiring in
February 2008 and February 2009, respectively. For more
information on our management team and their employment
agreements and severance agreements, see Management.
Furthermore, our ability to manage our retail expansion will
require us to continue to train, motivate and manage our
associates and to attract, motivate and retain additional
qualified managerial and merchandising personnel and store
associates. Competition for this type of personnel is intense,
and we may not be successful in attracting, assimilating and
retaining the personnel required to grow and operate our
business profitably.
We intend to
continue to open new stores, which could strain our resources
and have a material adverse effect on our business and financial
performance.
Our continued and future growth largely depends on our ability
to successfully open and operate new stores on a profitable
basis. During 2006, we opened 31 new stores, and we are on track
to open approximately 50 new stores in 2007. We intend to
continue to grow our number of stores for the foreseeable
future, and believe we have the long-term potential to grow our
store base to over 1,000 stores in the United States over the
next 10 years. During fiscal 2006, the average investment
required to open a typical new store was approximately
$1.4 million. This continued expansion could place
increased demands on our financial, managerial, operational and
administrative resources. For example, our planned expansion
will require us to increase the number of people we employ as
well as to monitor and upgrade our management information and
other systems and our distribution infrastructure. These
increased demands and operating complexities could cause us to
operate our business less efficiently, have a material adverse
effect on our operations and financial performance and slow our
growth.
The capacity
of our distribution and order fulfillment infrastructure may not
be adequate to support our recent growth and expected future
growth plans, which could prevent the successful implementation
of these plans or cause us to incur costs to expand this
infrastructure, which could have a material adverse effect on
our business, financial condition and results of
operations.
We currently operate a single distribution facility (including
an overflow facility), which houses the distribution operations
for ULTA retail stores together with the order fulfillment
operations of our Internet business. We have identified the need
for a second distribution facility, which we expect will be
operational in the first half of 2008, as well as the need to
upgrade our existing information systems in order to support the
addition of the second distribution facility. If we are unable
to successfully implement the expansion of our distribution
infrastructure and upgrade of our information systems, the
efficient flow of our merchandise could be disrupted. In order
to support our recent and expected future growth and to maintain
the efficient operation of our business, additional distribution
centers may need to be added in the future.
10
Our failure to expand our distribution capacity on a timely
basis to keep pace with our anticipated growth in stores could
have a material adverse effect on our business, financial
condition and results of operations.
Any
significant interruption in the operations of our distribution
and order fulfillment infrastructure could disrupt our ability
to deliver our merchandise and to process customer orders in a
timely manner, which could have a material adverse effect on our
business, financial condition and results of
operations.
We currently distribute products to our stores from only one
distribution facility, without supplementing such deliveries
with direct-to-store arrangements from vendors or wholesalers.
This dependence on one distribution facility, combined with the
fact that we are a retailer carrying approximately
21,000 beauty products that change on a regular basis in
response to beauty trends, makes the success of our operations
particularly vulnerable to disruptions in our distribution
system. Any significant interruption in the operation of our
distribution infrastructure, including an interruption caused by
our failure to successfully open our second distribution
facility in the first half of 2008 or events beyond our control,
such as disruptions in our information systems, disruptions in
operations due to fire or other catastrophic events, labor
disagreements, or shipping problems, could drastically reduce
our ability to receive and process orders and provide products
and services to our stores. Given our merchandising strategy and
our dependence on only one distribution facility, this could
result in lost sales and a loss of customer loyalty, which could
have a material adverse effect on our business, financial
condition and results of operations.
Any material
disruption of our information systems could negatively impact
financial results and materially adversely affect our business
operations.
We are increasingly dependent on a variety of information
systems to effectively manage the operations of our growing
store base and fulfill customer orders from our Internet
business. In addition, we have identified the need to expand and
upgrade our information systems to support recent and expected
future growth, including the planned opening of our second
distribution facility in the first half of 2008. As part of this
planned expansion of our information systems, we expect to
construct a new data center and modify our warehouse management
system software to support our second distribution facility. Any
interruption during the transition of our information systems to
the new data center and the modification of our warehouse
management system software could have a material adverse effect
on our business, financial condition and results of operations.
The failure of our information systems to perform as designed,
including the failure of our warehouse management software
system to operate as expected during the holiday season or to
support our planned second distribution facility, could have an
adverse effect on our business and results of our operations.
Any material disruption of our systems could disrupt our ability
to track, record and analyze the merchandise that we sell and
could negatively impact our operations, shipment of goods,
ability to process financial information and credit card
transactions, and our ability to receive and process Internet
orders or engage in normal business activities. Moreover,
security breaches or leaks of proprietary information, including
leaks of customers private data, could result in
liability, decrease customer confidence in our company, and
weaken our ability to compete in the marketplace, which could
have a material adverse effect on our business, financial
condition and results of operations.
Our Internet operations, while relatively small, are
increasingly important to our business. We plan to go live with
a new version of our website in the first half of 2008 or
earlier. In addition
11
to changing consumer preferences and buying trends relating to
Internet usage, the re-launch of our website will occur before a
peak holiday season and before we have had time to conduct full
and extensive testing, which makes us particularly vulnerable to
website downtime and other technical failures. The re-launch of
our website is important to our marketing efforts because the
new website will serve as a more effective extension of
ULTAs marketing and prospecting strategies (beyond
catalogs, newspaper inserts and national advertising) by better
exposing potential new customers to the ULTA brand and product
offerings. Our failure to successfully respond to these risks
and uncertainties could reduce Internet sales and damage our
brands reputation.
A downturn in
the economy may affect consumer purchases of discretionary items
such as prestige beauty products and premium salon services,
which could delay our growth strategy and have a material
adverse effect on our business, financial condition,
profitability and cash flows.
We appeal to a wide demographic consumer profile and offer a
broad selection of prestige beauty products at higher price
points than mass beauty products. We also offer a wide selection
of premium salon services. A downturn in the economy could
adversely impact consumer purchases of discretionary items such
as prestige beauty products and premium salon services. Factors
that could affect consumers willingness to make such
discretionary purchases include general business conditions,
levels of employment, interest rates and tax rates, the
availability of consumer credit and consumer confidence in
future economic conditions. In the event of an economic
downturn, consumer spending habits could be adversely affected
and we could experience lower than expected net sales, which
could force us to delay or slow our growth strategy and have a
material adverse effect on our business, financial condition,
profitability and cash flows.
Increased
costs or interruption in our third-party vendors overseas
sourcing operations could disrupt production, shipment or
receipt of some of our merchandise, which would result in lost
sales and could increase our costs.
We directly source the majority of our gift-with-purchase and
other promotional products through third-party vendors using
foreign factories. In addition, many of our vendors use overseas
sourcing to varying degrees to manufacture some or all of their
products. Any event causing a sudden disruption of manufacturing
or imports from such foreign countries, including the imposition
of additional import restrictions, unanticipated political
changes, increased customs duties, legal or economic
restrictions on overseas suppliers ability to produce and
deliver products, and natural disasters, could materially harm
our operations. We have no long-term supply contracts with
respect to such foreign-sourced items, many of which are subject
to existing or potential duties, tariffs or quotas that may
limit the quantity of certain types of goods that may be
imported into the United States from such countries. Our
business is also subject to a variety of other risks generally
associated with sourcing goods from abroad, such as political
instability, disruption of imports by labor disputes and local
business practices.
Our sourcing operations may also be hurt by health concerns
regarding infectious diseases in countries in which our
merchandise is produced, adverse weather conditions or natural
disasters that may occur overseas or acts of war or terrorism in
the United States or worldwide, to the extent these acts affect
the production, shipment or receipt of merchandise. Our future
operations and performance will be subject to these factors,
which are beyond our control, and these factors could materially
hurt our business, financial condition and results of operations
or may require us to modify our current business practices and
incur increased costs.
12
Recent volatility in the global oil markets has resulted in
rising fuel and freight prices, which many shipping companies
are passing on to their customers. Our shipping costs have
increased, and these costs may continue to increase. We may be
unable to pass these increased costs on to our customers, which
will reduce our profitability. Additionally, recent increased
demand for shipping capacity between the United States and Asia
will further increase our costs for merchandise sourced from
Asia, which could have a material adverse effect on our
business, financial condition and results of operations.
A reduction in
traffic to, or the closing of, the other destination retailers
in the shopping areas where our stores are located could
significantly reduce our sales and leave us with unsold
inventory, which could have a material adverse effect on our
business, financial condition and results of
operations.
As result of our real estate strategy, most of our stores are
located in off-mall shopping areas known as power centers or
lifestyle centers, which also accommodate other well-known
destination retailers. Power centers typically contain three to
five big-box anchor stores along with a variety of smaller
specialty tenants, while lifestyle centers typically contain a
variety of high-end destination retailers but no large anchor
stores. As a consequence of most of our stores being located in
such shopping areas, our sales are derived, in part, from the
volume of traffic generated by the other destination retailers
and the anchor stores in the lifestyle centers and power centers
where our stores are located. Customer traffic to these shopping
areas may be adversely affected by the closing of such
destination retailers or anchor stores, or by a reduction in
traffic to such stores resulting from a regional economic
downturn, a general downturn in the local area where our store
is located, or a decline in the desirability of the shopping
environment of a particular power center or lifestyle center.
Such a reduction in customer traffic would reduce our sales and
leave us with excess inventory, which could have a material
adverse effect on our business, financial condition and results
of operations. We may respond by increasing markdowns or
initiating marketing promotions to reduce excess inventory,
which would further decrease our gross profits and net income.
Diversion of
exclusive salon products, or a decision by manufacturers of
exclusive salon products to utilize other distribution channels,
could negatively impact our revenue from the sale of such
products, which could have a material adverse effect on our
business, financial condition and results of
operations.
The retail products that we sell in our salons are meant to be
sold exclusively by professional salons and authorized
professional retail outlets. However, incidents of product
diversion occur, which involve the selling of salon exclusive
haircare products to unauthorized channels such as drug stores,
grocery stores or mass merchandisers. Diversion could result in
adverse publicity that harms the commercial prospects of our
products (if diverted products are old, tainted or damaged), as
well as lower product revenues should consumers choose to
purchase diverted product from these channels rather than
purchasing from one of our salons. Additionally, the various
product manufacturers could in the future decide to utilize
other distribution channels for such products, therefore
widening the availability of these products in other retail
channels, which could negatively impact the revenue we earn from
the sale of such products.
13
We rely on our
good relationships with vendors to purchase prestige, mass and
salon beauty products on reasonable terms. If these
relationships were to be impaired, we may not be able to obtain
a sufficient selection or volume of merchandise on reasonable
terms, and we may not be able to respond promptly to changing
trends in beauty products, either of which could have a material
adverse effect on our competitive position, our business and
financial performance.
We have no long-term supply agreements or exclusive arrangements
with vendors and, therefore, our success depends on maintaining
good relationships with our vendors. Our business depends to a
significant extent on the willingness and ability of our vendors
to supply us with a sufficient selection and volume of products
to stock our stores. We also have strategic partnerships with
certain core brands, which has allowed us to benefit from the
growing popularity of such brands. Any of our other core brands
could in the future decide to scale back or end its partnership
with us and strengthen its relationship with our competitors,
which could negatively impact the revenue we earn from the sale
of such products. If we fail to maintain strong relationships
with our existing vendors, or fail to continue acquiring and
strengthening relationships with additional vendors of beauty
products, our ability to obtain a sufficient amount and variety
of merchandise on reasonable terms may be limited, which could
have a negative impact on our competitive position.
During fiscal 2006, merchandise supplied to ULTA by our top ten
vendors accounted for approximately 35% of our net sales. The
loss of or a reduction in the amount of merchandise made
available to us by any one of these key vendors, or by any of
our other vendors, could have an adverse effect on our business.
If we fail to
maintain the value of our brand, our sales are likely to decline
and our growth strategy could be jeopardized.
Our success depends on the value of the ULTA brand. The ULTA
name is integral not only to our business but also to the
continuation of our growth strategy. A primary component of our
strategy involves expanding into other geographic markets in the
United States. As we expand into new geographic markets,
consumers in these markets may not accept our brand image.
Maintaining, promoting and positioning our brand will depend
largely on the success of our marketing and merchandising
efforts and our ability to provide a consistent, high quality
customer experience. We anticipate that, as our business expands
into new markets and as the market becomes increasingly
competitive, maintaining and enhancing our brand may become
increasingly difficult and expensive. Our brand could be
adversely affected if we fail to achieve these objectives or if
our public image or reputation were to be tarnished by negative
publicity. Any of these events could result in a decrease in
sales and jeopardize our growth strategy.
If we are
unable to protect our intellectual property rights, our brand
and reputation could be harmed, which could have a material
adverse effect on our business, financial condition and results
of operations.
We regard our trademarks, trade dress, copyrights, trade
secrets, know-how and similar intellectual property as critical
to our success. Our principal intellectual property rights
include registered trademarks on our name, ULTA,
copyrights in our website content, rights to our domain name
www.ulta.com and trade secrets and know-how with respect to our
ULTA branded product formulations, product sourcing,
sales and marketing and other aspects of our business. As such,
we rely on trademark and copyright law, trade secret protection
and confidentiality agreements with certain of our employees,
consultants, suppliers and others to protect our proprietary
rights. If we are unable to protect or preserve the value of our
14
trademarks, copyrights, trade secrets or other proprietary
rights for any reason, or if other parties infringe on our
intellectual property rights, our brand and reputation could be
impaired and we could lose customers.
If our
manufacturers are unable to produce products manufactured
uniquely for ULTA, including ULTA branded products and
gift-with-purchase and other promotional products, consistent
with applicable regulatory requirements, we could suffer lost
sales and be required to take costly corrective action, which
could have a material adverse effect on our business, financial
condition and results of operations.
We do not own or operate any manufacturing facilities and
therefore depend upon independent third-party vendors for the
manufacture of all products manufactured uniquely for
ULTA, including ULTA branded products and
gift-with-purchase and other promotional products. Our
third-party manufacturers of ULTA products may not
maintain adequate controls with respect to product
specifications and quality and may not continue to produce
products that are consistent with applicable regulatory
requirements. If we or our third-party manufacturers fail to
comply with applicable regulatory requirements, we could be
required to take costly corrective action. In addition,
sanctions under the FDC Act may include seizure of products,
injunctions against future shipment of products, restitution and
disgorgement of profits, operating restrictions and criminal
prosecution. The Food and Drug Administration, or FDA, does not
have a pre-market approval system for cosmetics, and we believe
we are permitted to market our cosmetics and have them
manufactured without submitting safety or efficacy data to the
FDA. However, the FDA may in the future determine to regulate
our cosmetics or the ingredients included in our cosmetics as
drugs. These events could interrupt the marketing and sale of
our ULTA products, severely damage our brand reputation
and image in the marketplace, increase the cost of our products,
cause us to fail to meet customer expectations or cause us to be
unable to deliver merchandise in sufficient quantities or of
sufficient quality to our stores, any of which could result in
lost sales, which could have a material adverse effect on our
business, financial condition and results of operations.
We, as well as
our vendors, are subject to laws and regulations that could
require us to modify our current business practices and incur
increased costs, which could have a material adverse effect on
our business, financial condition and results of
operations.
In our U.S. markets, numerous laws and regulations at the
federal, state and local levels can affect our business. Legal
requirements are frequently changed and subject to
interpretation, and we are unable to predict the ultimate cost
of compliance with these requirements or their effect on our
operations. If we fail to comply with any present or future laws
or regulations, we could be subject to future liabilities, a
prohibition on the operation of our stores or a prohibition on
the sale of our ULTA branded products. In particular,
failure to adequately comply with the following legal
requirements could have a material adverse effect on our
business, financial conditions and results of operations:
|
|
|
Our rapidly expanding workforce, growing in pace with our number
of stores, makes us vulnerable to changes in labor and
employment laws. In addition, changes in federal and state
minimum wage laws and other laws relating to employee benefits
could cause us to incur additional wage and benefits costs,
which could hurt our profitability and affect our growth
strategy.
|
|
|
|
Ensuring compliance with local zoning and real estate land use
restrictions is increasingly challenging as we grow the number
of our stores in new cities and states.
|
15
|
|
|
Our salon business is subject to state board regulations and
state licensing requirements for our stylists and our salon
procedures. Failure to maintain compliance with these regulatory
and licensing requirements could jeopardize the viability of our
salons.
|
|
|
|
We operate stores in California, which has enacted legislation
commonly referred to as Proposition 65 requiring
that clear and reasonable warnings be given to
consumers who are exposed to chemicals known to the State of
California to cause cancer or reproductive toxicity. Although we
have sought to comply with Proposition 65 requirements, there
can be no assurance that we will not be adversely affected by
litigation relating to Proposition 65.
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In addition, the formulation, manufacturing, packaging,
labeling, distribution, sale and storage of our vendors
products and our ULTA products are subject to extensive
regulation by various federal agencies, including the FDA, the
Federal Trade Commission, or FTC, and state attorneys general in
the United States. If we, our vendors or the manufacturers of
our ULTA products fail to comply with those regulations,
we could become subject to significant penalties or claims,
which could harm our results of operations or our ability to
conduct our business. In addition, the adoption of new
regulations or changes in the interpretations of existing
regulations may result in significant compliance costs or
discontinuation of product sales and may impair the
marketability of our vendors products or our ULTA
products, resulting in significant loss of net sales. Our
failure to comply with FTC or state regulations that cover our
vendors products or our ULTA product claims and
advertising, including direct claims and advertising by us, may
result in enforcement actions and imposition of penalties or
otherwise harm the distribution and sale of our products.
Our ULTA
products and salon services may cause unexpected and undesirable
side effects that could result in their discontinuance or expose
us to lawsuits, either of which could result in unexpected costs
and damage to our reputation, which could have a material
adverse effect on our business, financial condition and results
of operations.
Unexpected and undesirable side effects caused by our ULTA
products for which we have not provided sufficient label
warnings, or salon services which may have been performed
negligently, could result in the discontinuance of sales of our
products or of certain salon services or prevent us from
achieving or maintaining market acceptance of the affected
products and services. Such side effects could also expose us to
product liability or negligence lawsuits. Any claims brought
against us may exceed our existing or future insurance policy
coverage or limits. Any judgment against us that is in excess of
our policy limits would have to be paid from our cash reserves,
which would reduce our capital resources. Further, we may not
have sufficient capital resources to pay a judgment, in which
case our creditors could levy against our assets. These events
could cause negative publicity regarding our company, brand or
products, which could in turn harm our reputation and net sales,
which could have a material adverse effect on our business,
financial condition and results of operations.
Legal
proceedings or third-party claims of intellectual property
infringement may require us to spend time and money and could
prevent us from developing certain aspects of our business
operations, which could have a material adverse effect on our
business, financial condition and results of
operations.
Our technologies, promotional products purchased from
third-party vendors, or ULTA products or potential
products in development may infringe rights under patents,
patent applications, trademark, copyright or other intellectual
property rights of third parties in the United States and
abroad. These third parties could bring claims against us that
would cause us to incur
16
substantial expenses and, if successful, could cause us to pay
substantial damages. Further, if a third party were to bring an
intellectual property infringement suit against us, we could be
forced to stop or delay development, manufacturing, or sales of
the product that is the subject of the suit.
As a result of intellectual property infringement claims, or to
avoid potential claims, we may choose to seek, or be required to
seek, a license from the third party and would most likely be
required to pay license fees or royalties or both. These
licenses may not be available on acceptable terms, or at all.
Ultimately, we could be prevented from commercializing a product
or be forced to cease some aspect of our business operations if,
as a result of actual or threatened intellectual property
infringement claims, we are unable to enter into licenses on
acceptable terms. Even if we were able to obtain a license, the
rights may be nonexclusive, which would give our competitors
access to the same intellectual property. The inability to enter
into licenses could harm our business significantly.
In addition to infringement claims against us, we may become a
party to other patent or trademark litigation and other
proceedings, including interference proceedings declared by the
United States Patent and Trademark Office, or USPTO, proceedings
before the USPTOs Trademark Trial and Appeal Board and
opposition proceedings in the European Patent Office, regarding
intellectual property rights with respect to promotional
products purchased from third-party vendors or our ULTA
branded products and technology. Some of our competitors may
be able to sustain the costs of such litigation or proceedings
better than us because of their substantially greater financial
resources. Uncertainties resulting from the initiation and
continuation of intellectual property litigation or other
proceedings could impair our ability to compete in the
marketplace. Intellectual property litigation and other
proceedings may also absorb significant management time and
resources, which could have a material adverse effect on our
business, financial condition and results of operations.
Increases in
the demand for, or the price of, raw materials used to build and
remodel our stores could hurt our profitability.
The raw materials used to build and remodel our stores are
subject to availability constraints and price volatility caused
by weather, supply conditions, government regulations, general
economic conditions and other unpredictable factors. As a
retailer engaged in an active building and remodeling program,
we are particularly vulnerable to increases in construction and
remodeling costs. As a result, increases in the demand for, or
the price of, raw materials could hurt our profitability.
Increases in
costs of mailing, paper and printing will affect the cost of our
catalog and promotional mailings, which will reduce our
profitability.
Postal rate increases and paper and printing costs affect the
cost of our catalog and promotional mailings. In fiscal 2006,
approximately 23% of our selling, general, and administrative
expenses were attributable to such costs. Recent changes in
postal rates resulted in an average 14% increase in the cost of
our catalog mailings and a 5% increase in the cost of mailing
our newspaper inserts. In response to any future increases in
mailing costs, we may consider reducing the number and size of
certain catalog editions. In addition, we rely on discounts from
the basic postal rate structure, such as discounts for bulk
mailings and sorting by zip code and carrier routes. We are not
a party to any long-term contracts for the supply of paper. The
cost of paper fluctuates significantly, and our future paper
costs are subject to supply and demand forces that we cannot
control. Future additional increases in postal rates or in paper
or printing costs would reduce our profitability to
17
the extent that we are unable to pass those increases directly
to customers or offset those increases by raising selling prices
or by reducing the number and size of certain catalog editions.
Our secured
revolving credit facility contains certain restrictive covenants
that could limit our operational flexibility, including our
ability to open stores.
We have a $150 million secured revolving credit facility,
or credit facility (expandable under an accordion option to a
maximum of $200 million), with a term expiring May 2011.
Substantially all of our assets are pledged as collateral for
outstanding borrowings under the agreement. Outstanding
borrowings bear interest at the prime rate or the Eurodollar
rate plus 1.00% up to $100 million and 1.25% thereafter.
The credit facility agreement contains usual and customary
restrictive covenants relating to our management and the
operation of our business. These covenants, among other things,
restrict our ability to grant liens on our assets, incur
additional indebtedness, pay cash dividends and redeem our
stock, enter into transactions with affiliates and merge or
consolidate with another entity. These covenants could restrict
our operational flexibility, including our ability to open
stores, and any failure to comply with these covenants or our
payment obligations would limit our ability to borrow under the
credit facility and, in certain circumstances, may allow the
lenders thereunder to require repayment. For more information
regarding our credit facility, see Description of
indebtedness.
We will need
to raise additional funds to pursue our growth strategy or
continue our operations, and we may be unable to raise capital
when needed, which could have a material adverse effect on our
business, financial condition and results of
operations.
From time to time, in addition to this offering, we will seek
additional equity or debt financing to provide for capital
expenditures and working capital consistent with our growth
strategy. Based on our current growth strategy, we expect it to
be necessary to exercise the $50 million accordion option
of our credit facility during fiscal 2008. In addition, if
general economic, financial or political conditions in our
markets change, or if other circumstances arise that have a
material effect on our cash flow, the anticipated cash needs of
our business as well as our belief as to the adequacy of our
available sources of capital could change significantly. Any of
these events or circumstances could result in significant
additional funding needs, requiring us to raise additional
capital to meet those needs. If financing is not available on
satisfactory terms or at all, we may be unable to execute our
growth strategy as planned and our results of operations may
suffer.
Failure to
maintain adequate financial and management processes and
controls could lead to errors in our financial reporting and
could harm our ability to manage our expenses.
Reporting obligations as a public company and our anticipated
growth are likely to place a considerable strain on our
financial and management systems, processes and controls, as
well as on our personnel. In addition, as a public company we
will be required to document and test our internal controls over
financial reporting pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002 so that our management can
periodically certify as to the effectiveness of our internal
controls over financial reporting. Our independent registered
public accounting firm will be required to render an opinion on
managements assessment and on the effectiveness of our
internal controls over financial reporting by the time our
annual report for fiscal 2008 is due and thereafter, which will
require us to further document and make additional changes to
our internal controls over financial reporting. As a result, we
have been required to improve our financial and managerial
controls, reporting systems and procedures and have incurred and
will continue to incur expenses to test our systems and to make
such improvements. If our
18
management is unable to certify the effectiveness of our
internal controls or if our independent registered public
accounting firm cannot render an opinion on managements
assessment and on the effectiveness of our internal control over
financial reporting, or if material weaknesses in our internal
controls are identified, we could be subject to regulatory
scrutiny and a loss of public confidence, which could have a
material adverse effect on our business and our stock price. In
addition, if we do not maintain adequate financial and
management personnel, processes and controls, we may not be able
to accurately report our financial performance on a timely
basis, which could cause a decline in our stock price and
adversely affect our ability to raise capital.
Risks related to
this offering
The market
price for our common stock may be volatile, and you may not be
able to sell our stock at a favorable price or at
all.
The market price of our common stock is likely to fluctuate
significantly from time to time in response to factors including:
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differences between our actual financial and operating results
and those expected by investors;
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fluctuations in quarterly operating results;
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our performance during peak retail seasons such as the holiday
season;
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market conditions in our industry and the economy as a whole;
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changes in the estimates of our operating performance or changes
in recommendations by any research analysts that follow our
stock or any failure to meet the estimates made by research
analysts;
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investors perceptions of our prospects and the prospects
of the beauty products and salon services industries;
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the performance of our key vendors;
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announcements by us, our vendors or our competitors of
significant acquisitions, divestitures, strategic partnerships,
joint ventures or capital commitments;
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introductions of new products or new pricing policies by us or
by our competitors;
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recruitment or departure of key personnel; and
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the level and quality of securities research analyst coverage
for our common stock.
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In addition, public announcements by our competitors and vendors
concerning, among other things, their performance, strategy, or
accounting practices could cause the market price of our common
stock to decline regardless of our actual operating performance.
Our comparable
store sales and quarterly financial performance may fluctuate
for a variety of reasons, which could result in a decline in the
price of our common stock.
Our comparable store sales and quarterly results of operations
have fluctuated in the past, and we expect them to continue to
fluctuate in the future. A variety of other factors affect our
comparable store sales and quarterly financial performance,
including:
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changes in our merchandising strategy or mix;
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performance of our new and remodeled stores;
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19
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the effectiveness of our inventory management;
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timing and concentration of new store openings, including
additional human resource requirements and related pre-opening
and other
start-up
costs;
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cannibalization of existing store sales by new store openings;
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levels of pre-opening expenses associated with new stores;
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timing and effectiveness of our marketing activities, such as
catalogs and newspaper inserts;
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seasonal fluctuations due to weather conditions;
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actions by our existing or new competitors; and
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general U.S. economic conditions and, in particular, the
retail sales environment.
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Accordingly, our results for any one fiscal quarter are not
necessarily indicative of the results to be expected for any
other quarter, and comparable store sales for any particular
future period may decrease. In that event, the price of our
common stock would likely decline. For more information on our
quarterly results of operations, see Managements
discussion and analysis of financial condition and results of
operations.
No public
market for our common stock currently exists, and we cannot
assure you that an active, liquid trading market will develop or
be sustained following this offering.
Prior to this offering, there has been no public market for our
common stock. An active, liquid trading market for our common
stock may not develop or be sustained following this offering.
As a result, you may not be able to sell your shares of our
common stock quickly or at the market price. The initial public
offering price of our common stock will be determined by
negotiations between us and the underwriters based upon a number
of factors and may not be indicative of prices that will prevail
following the consummation of this offering. The market price of
our common stock may decline below the initial public offering
price, and you may not be able to resell your shares of our
common stock at or above the initial offering price and may
suffer a loss on your investment.
You will
experience an immediate and substantial book value dilution
after this offering, and will experience further dilution with
the future exercise of stock options.
The initial public offering price of our common stock will be
substantially higher than the pro forma net tangible book value
per share of the outstanding common stock based on the
historical adjusted net book value per share as of May 5,
2007. Based on an assumed initial public offering price of
$ per share (the midpoint of the
range set forth on the cover of this prospectus) and our net
tangible book value as of May 5, 2007, if you purchase our
common stock in this offering you will pay more for your shares
than existing stockholders paid for their shares and you will
suffer immediate dilution of approximately
$ per share in pro forma net
tangible book value. As a result of this dilution, investors
purchasing stock in this offering may receive significantly less
than the full purchase price that they paid for the shares
purchased in this offering in the event of a liquidation.
As of May 5, 2007, there were outstanding options to
purchase 6,050,401 shares of our common stock, of which
3,255,294 were vested, at a weighted average exercise price for
all outstanding options of $2.34 per share. From time to time,
we may issue additional options to associates, non-employee
directors and consultants pursuant to our equity incentive
plans. These options generally vest commencing one year from the
date of grant and continue vesting over a four-year period. You
will experience further dilution as these stock options are
exercised.
20
Approximately %
of our total outstanding shares are restricted from immediate
resale, but may be sold into the market in the near future. The
large number of shares eligible for public sale or subject to
rights requiring us to register them for public sale could
depress the market price of our common stock.
The market price of our common stock could decline as a result
of sales of a large number of shares of our common stock in the
market after this offering, and the perception that these sales
could occur may also depress the market price. Upon completion
of this offering, we will
have shares
of our common stock outstanding. Of these shares, the common
stock sold in this initial public offering will be freely
tradable, except for any shares purchased by our
affiliates as defined in Rule 144 under the
Securities Act of 1933. The holders of
approximately % of our outstanding
common stock are obligated, subject to certain exceptions, not
to dispose of or hedge any of their common stock during the
180-day
period following the date of this prospectus. After the
expiration of the
lock-up
period, these shares may be sold in the public market, subject
to prior registration or qualification for an exemption from
registration, including, in the case of shares held by
affiliates, compliance with the volume restrictions of
Rule 144.
Upon the consummation of this offering, stockholders owning
68,411,623 shares are entitled, under contracts providing
for registration rights, to require us to register our common
stock owned by them for public sale.
Sales of our common stock as restrictions end or pursuant to
registration rights may make it more difficult for us to sell
equity securities in the future at a time and at a price that we
deem appropriate. These sales also could cause our stock price
to fall and make it more difficult for you to sell shares of our
common stock.
Our current
principal stockholders will continue to have significant
influence over us after this offering, and they could delay,
deter, or prevent a change of control or other business
combination or otherwise cause us to take action with which you
might not agree.
Upon the consummation of this offering, our principal
stockholders will own, in the aggregate,
approximately
of our outstanding common stock. As a result, these stockholders
will be able to exercise control over all matters requiring
stockholder approval, including the election of directors,
amendment of our certificate of incorporation and approval of
significant corporate transactions and will have significant
control over our management and policies. Such concentration of
voting power could have the effect of delaying, deterring, or
preventing a change of control or other business combination
that might otherwise be beneficial to our stockholders. In
addition, the significant concentration of share ownership may
adversely affect the trading price of our common stock because
investors often perceive disadvantages in owning shares in
companies with controlling stockholders.
We did not
register our stock options as required under the Securities
Exchange Act of 1934 and, as a result, we may face potential
claims under federal and state securities laws.
As of the last day of fiscal 2001, options granted under the Old
Plan and the Restricted Stock Option PlanConsultants, or
the Consultants Plan, were held by more than 500 holders.
Subsequently, these options also included options granted under
the 2002 Plan. As a result, we were required to file a
registration statement registering the options pursuant to
Section 12(g) of the Securities Exchange Act of 1934 no
later than 120 days following the last day of fiscal 2001.
We did not file a registration statement within this time period.
21
If we had filed a registration statement pursuant to
Section 12(g), we would have become subject to the periodic
reporting requirements of Section 13 of the Securities
Exchange Act of 1934 upon the effectiveness of that registration
statement. We have not filed any periodic reports, including
annual or quarterly reports on
Form 10-K
or
Form 10-Q,
and periodic reports on
Form 8-K,
during the period since 120 days following the last day of
fiscal 2001.
Our failure to file these periodic reports could give rise to
potential claims by present or former option holders based on
the theory that such holders were harmed by the absence of such
public reports. If any such claim or action were to be asserted,
we could incur significant expenses and managements
attention could be diverted in defending these claims.
Anti-takeover
provisions in our organizational documents, stockholder rights
agreement and Delaware law may discourage or prevent a change in
control, even if a sale of the company would be beneficial to
our stockholders, which could cause our stock price to decline
and prevent attempts by our stockholders to replace or remove
our current management.
Our amended and restated certificate of incorporation and
by-laws contain provisions that may delay or prevent a change in
control, discourage bids at a premium over the market price of
our common stock and harm the market price of our common stock
and diminish the voting and other rights of the holders of our
common stock. These provisions include:
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dividing our board of directors into three classes serving
staggered three-year terms;
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authorizing our board of directors to issue preferred stock and
additional shares of our common stock without stockholder
approval;
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prohibiting stockholder actions by written consent;
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prohibiting our stockholders from calling a special meeting of
stockholders;
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prohibiting our stockholders from making certain changes to our
amended and restated certificate of incorporation or amended and
restated bylaws except with
662/3%
stockholder approval; and
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requiring advance notice for raising business matters or
nominating directors at stockholders meetings.
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As permitted by our amended and restated certificate of
incorporation and by-laws, upon the consummation of this
offering we will have a stockholder rights agreement, sometimes
known as a poison pill, which provides for the
issuance of a new series of preferred stock to holders of common
stock. In the event of a takeover attempt, this preferred stock
gives rights to holders of common stock other than the acquirer
to buy additional shares of common stock at a discount, leading
to the dilution of the acquirers stake.
We are also subject to provisions of Delaware law that, in
general, prohibit any business combination with a beneficial
owner of 15% or more of our common stock for three years after
the stockholder becomes a 15% stockholder, subject to specified
exceptions. Together, these provisions of our certificate of
incorporation, by-laws and stockholder rights agreement and of
Delaware law could make the removal of management more difficult
and may discourage transactions that otherwise could involve
payment of a premium over prevailing market prices for our
common stock.
22
Special note
regarding forward-looking statements
Some of the statements under Prospectus summary,
Risk factors, Managements discussion and
analysis of financial condition and results of operations,
Business and elsewhere in this prospectus may
contain forward-looking statements which reflect our current
views with respect to, among other things, future events and
financial performance. You can identify these forward-looking
statements by the use of forward-looking words such as
outlook, believes, expects,
potential, continues, may,
will, should, seeks,
approximately, predicts,
project, intends, plans,
estimates, anticipates,
future or the negative version of those words or
other comparable words. Any forward-looking statements contained
in this prospectus are based upon our historical performance and
on current plans, estimates and expectations. The inclusion of
this forward-looking information should not be regarded as a
representation by us, the underwriters or any other person that
the future plans, estimates or expectations contemplated by us
will be achieved. Such forward-looking statements are subject to
various risks and uncertainties. Accordingly, there are or will
be important factors that could cause our actual results to
differ materially from those indicated in these statements. We
believe these factors include but are not limited to those
described under Risk factors. These factors should
not be construed as exhaustive and should be read in conjunction
with the other cautionary statements that are included in this
prospectus. We do not undertake any obligation to publicly
update or review any forward-looking statement, whether as a
result of new information, future developments or otherwise.
If one or more of these or other risks or uncertainties
materialize, or if our underlying assumptions prove to be
incorrect, actual results may vary materially from what we may
have projected. Any forward-looking statements you read in this
prospectus reflect our current views with respect to future
events and are subject to these and other risks, uncertainties
and assumptions relating to our operations, results of
operations, financial condition, growth strategy and liquidity.
You should specifically consider the factors identified in this
prospectus that could cause actual results to differ before
making an investment decision.
23
Use of
proceeds
We estimate that the net proceeds from our sale
of shares
of common stock in this offering will be approximately
$ million, based on the
initial public offering price of $
per share and after deducting estimated underwriting discounts
and commissions and estimated offering expenses, which are
payable by us. We intend to use the net proceeds from this
offering to pay in full the approximately $91.9 million of
accumulated dividends in arrears on our preferred stock, which
will satisfy all amounts due with respect to accumulated
dividends, and the approximately $4.8 million redemption
price of the Series III preferred stock, and to use any
remaining proceeds to reduce our borrowings under our third
amended and restated loan and security agreement. We will not
receive any of the proceeds from the sale of shares of common
stock by the selling stockholders.
Dividend
policy
We do not anticipate paying any dividends in the foreseeable
future. We currently intend to retain all of our future
earnings, if any, to repay existing indebtedness and to fund the
operation, development and growth of our business. In addition,
the terms of our credit facility currently, and any future debt
or credit facility may, restrict our ability to pay dividends.
As a result, capital appreciation, if any, of our common stock
will be your sole source of gain from your purchase of our
common stock for the foreseeable future.
24
Capitalization
The following table shows our capitalization as of May 5,
2007:
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on a pro forma basis, giving effect to (i) the filing, and
effectiveness prior to the consummation of this offering, of an
amended and restated certificate of incorporation to provide for
authorized capital stock of 400,000,000 shares of common
stock and 70,000,000 shares of undesignated preferred
stock, (ii) the automatic conversion on a one-for-one basis
of all outstanding shares of our preferred stock, other than our
Series III preferred stock, into an aggregate of
65,702,530 shares of common stock, (iii) the payment
in full of the approximately $91.9 million of accumulated
dividends in arrears on our preferred stock upon the
consummation of this offering, (iv) the redemption of our
Series III preferred stock for approximately
$4.8 million concurrently with the closing of this
offering, and (v) the sale by us
of shares
of common stock in this offering, at an initial public offering
price of $ per share, after
deducting underwriting discounts and commissions and estimated
offering expenses; as if such amendment, conversion, payment,
redemption and sale had occurred on, or was effective as of,
May 5, 2007
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This table should be read in conjunction with the consolidated
financial statements and notes to those consolidated financial
statements included elsewhere in this prospectus.
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(unaudited)
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As of May 5,
2007
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(Dollars in
thousands, except per share data)
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Actual
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Pro
forma
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Long-term debt (including current
maturities)
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$
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83,091
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Series III Preferred Stock;
4,792,302 shares authorized, actual; no shares authorized,
pro forma; 4,792,302 shares issued and outstanding, actual;
no shares issued and outstanding, pro forma(1)
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4,792
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Stockholders equity:
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Preferred stock, par value $.01
per share, 101,500,000 shares authorized, actual;
70,000,000 shares authorized, pro forma:
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Series I Convertible
Preferred Stock, par value $.01 per share;
17,207,532 shares authorized, actual; no shares authorized,
pro forma; 16,768,882 shares issued and outstanding,
actual; no shares issued and outstanding, pro forma(2)
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44,405
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Series II Convertible
Preferred Stock, par value $.01 per share; 7,634,207 shares
authorized, actual; no shares authorized, pro forma;
7,420,130 shares issued and outstanding, actual; no shares
issued and outstanding, pro forma
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74,455
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Series IV Convertible
Preferred Stock, par value $.01 per share;
19,183,653 shares authorized, actual; no shares authorized,
pro forma; 19,145,558 shares issued and outstanding,
actual; no shares issued and outstanding, pro forma(2)
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48,044
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25
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(unaudited)
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As of May 5,
2007
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(Dollars in
thousands, except per share data)
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Actual
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Pro forma
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Series V Convertible
Preferred Stock, par value $.01 per share;
22,500,000 shares authorized, actual; no shares authorized,
pro forma; 21,447,959.34 shares issued and outstanding,
actual; no shares issued and outstanding, pro forma(2)
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57,502
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Series V-1
Convertible Preferred Stock, par value $.01 per share;
4,600,000 shares authorized, actual; no shares authorized,
pro forma; 920,000 shares issued and outstanding, actual;
no shares issued and outstanding, pro forma(2)
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2,397
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Total preferred stock:
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$
|
226,803
|
|
|
|
|
Treasury stockpreferred, at
cost:
|
|
|
(1,815
|
)
|
|
|
|
Common stock, par value $.01 per
share, 106,500,000 shares authorized, actual;
400,000,000 shares authorized, pro forma;
11,709,217 shares issued and outstanding,
actual; shares issued and
outstanding, pro forma
|
|
|
121
|
|
|
|
|
Treasury stockcommon, at
cost:
|
|
|
(2,244
|
)
|
|
|
|
Additional paid-in capital:
|
|
|
16,333
|
|
|
|
|
Related party notes receivable:(3)
|
|
|
(4,094
|
)
|
|
|
|
Accumulated deficit:
|
|
|
(81,665
|
)
|
|
|
|
Accumulated other comprehensive
loss:
|
|
|
(80
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity:
|
|
|
153,359
|
|
|
|
|
|
|
|
|
|
|
Total capitalization:
|
|
$
|
241,242
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Upon consummation of this offering,
the company is required to redeem all Series III preferred
stock. The company has determined that the Series III preferred
stock should be presented between the liabilities section and
the equity section of the balance sheet as provided by guidance
contained in EITF
Topic D-98,
Classification and Measurement of Redeemable
Securities. Under this guidance, classification in the
permanent equity section is not considered appropriate because
the Series III preferred stock is redeemable upon majority
vote of the board of directors to authorize this offering and
the board of directors is controlled by the holders of our
preferred stock.
|
|
|
|
(2)
|
|
Preferred stock as presented in the
table above includes accumulated dividends in arrears as of
May 5, 2007 as follows (in thousands):
|
|
|
|
|
|
Series I
|
|
$
|
28,826
|
|
Series IV
|
|
|
28,884
|
|
Series V
|
|
|
26,745
|
|
Series V-I
|
|
|
1,073
|
|
|
|
|
|
|
|
|
$
|
85,528
|
|
|
|
|
|
|
|
|
|
(3)
|
|
The note was paid in full on
June 29, 2007.
|
The outstanding share information set forth above is as of
May 5, 2007, and excludes:
|
|
|
861,011 shares of common stock issuable upon exercise of
outstanding options under the Old Plan, at a weighted average
exercise price of $0.48 per share. No further awards will be
made under the Old Plan; and
|
|
|
5,189,390 shares of common stock issuable upon exercise of
outstanding options under the 2002 Plan, at a weighted average
exercise price of $2.65.
|
26
Dilution
If you invest in our common stock, your interest will be diluted
to the extent of the difference between the initial public
offering price per share of our common stock and the net
tangible book value per share of common stock upon the
completion of this offering.
Calculations relating to shares of common stock in the following
discussion and tables assume the following have occurred as of
May 5, 2007: (i) the conversion of all outstanding
shares of our preferred stock, other than our Series III
preferred stock, into 65,702,530 shares of common stock and
(ii) the redemption of all outstanding shares of our
Series III preferred stock.
Our net tangible book value as of May 5, 2007 equaled
approximately $153.4 million, or $1.98 per share of common
stock. Net tangible book value per share represents the amount
of our total tangible assets less total liabilities, divided by
the total number of shares of common stock outstanding. After
giving effect to the sale
of shares
of common stock offered by us in this offering at the initial
public offering price of $ per
share and after deducting the estimated underwriting discounts
and commissions and offering expenses payable by us, our net
tangible book value, as adjusted, as of May 5, 2007, would
have equaled approximately
$ million, or
$ per share of common stock. This
represents an immediate increase in net tangible book value of
$ per share to our existing
stockholders and an immediate dilution in net tangible book
value of $ per share to new
investors of common stock in this offering. The following table
illustrates this per share dilution to new investors purchasing
our common stock in this offering. The table assumes no issuance
of shares of common stock under our stock plans after
May 5, 2007. As of May 5, 2007, 6,050,401 shares
were subject to outstanding options, of which 3,255,294 were
vested, at a weighted average exercise price for all outstanding
options of $2.34 per share. To the extent outstanding options
are exercised, there will be further dilution to new investors.
|
|
|
|
|
|
|
Assumed initial public offering
price per share
|
|
|
|
|
$
|
|
Net tangible book value per share
as of May 5, 2007
|
|
$
|
|
|
|
|
Increase in net tangible book
value per share attributable to new investors
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net tangible book value
per share after this offering
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution in net tangible book
value per share to new investors
|
|
|
|
|
$
|
|
|
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share
would increase (decrease) the adjusted net tangible book value
per share after this offering by approximately
$ million, and dilution in
net tangible book value per share to new investors by
approximately $ assuming that
the number of shares offered by us, as set forth on the cover
page of this prospectus, remains the same and after deducting
estimated underwriting discounts and commissions and estimated
offering expenses.
27
The following table as of May 5, 2007 summarizes the
differences between our existing stockholders and new investors
with respect to the number of shares of common stock issued in
this offering, the total consideration paid and the average
price per share paid. The calculations with respect to shares
purchased by new investors in this offering reflect the initial
public offering price of $ per
share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
purchased
|
|
Total
consideration
|
|
Average price
|
|
|
Number
|
|
Percentage
|
|
Amount
|
|
Percentage
|
|
per
share
|
|
|
Existing stockholders
|
|
|
|
|
|
%
|
|
$
|
|
|
|
%
|
|
$
|
|
New investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
%
|
|
$
|
|
|
|
%
|
|
$
|
|
|
|
28
Selected
consolidated financial data
The following selected income statement data for each of the
fiscal years ended January 29, 2005, January 28, 2006
and February 3, 2007 and the selected balance sheet data as
of January 28, 2006 and February 3, 2007 have been
derived from our audited consolidated financial statements
included elsewhere in this prospectus. The selected income
statement data for the fiscal years ended February 1, 2003
and January 31, 2004 and the balance sheet data as of
February 1, 2003 and January 31, 2004, have been
derived from unaudited consolidated financial statements not
included in this prospectus. The selected balance sheet data as
of January 29, 2005 has been derived from our audited
financial statements not included in this prospectus. The
selected balance sheet data as of April 29, 2006 has been
derived from our unaudited consolidated financial statements
that are not included in this prospectus. The selected balance
sheet data as of May 5, 2007 and the selected income
statement data for the three months ended April 29, 2006
and May 5, 2007 have been derived from our unaudited
consolidated financial statements included elsewhere in this
prospectus.
Our unaudited selected consolidated financial data as of
April 29, 2006 and May 5, 2007 and for the three
months then ended, have been prepared on the same basis as the
annual audited consolidated financial statements and includes
all adjustments, consisting of only normal recurring adjustments
necessary for the fair presentation of this data in all material
respects. The results for any interim period are not necessarily
indicative of the results of operations to be expected for a
full fiscal year.
The following selected consolidated financial data should be
read in conjunction with our Managements discussion
and analysis of financial condition and results of
operations and consolidated financial statements and
related notes, included elsewhere in this prospectus.
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in
thousands, except
|
|
Fiscal year
ended(1)
|
|
|
Three months
ended
|
per share and per
square
|
|
February 1,
|
|
January 31,
|
|
|
January 29,
|
|
|
January 28,
|
|
February 3,
|
|
|
April 29,
|
|
May 5,
|
foot
data)
|
|
2003
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
2007
|
|
|
2006
|
|
2007
|
|
|
|
|
Consolidated income statement
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales(2)
|
|
$
|
362,217
|
|
$
|
423,863
|
|
|
$
|
491,152
|
|
|
$
|
579,075
|
|
$
|
755,113
|
|
|
$
|
159,468
|
|
$
|
194,113
|
Cost of sales
|
|
|
259,836
|
|
|
312,203
|
|
|
|
346,585
|
|
|
|
404,794
|
|
|
519,929
|
|
|
|
108,813
|
|
|
134,600
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
102,381
|
|
|
111,660
|
|
|
|
144,567
|
|
|
|
174,281
|
|
|
235,184
|
|
|
|
50,655
|
|
|
59,513
|
Selling, general, and
administrative expenses
|
|
|
86,382
|
|
|
98,446
|
|
|
|
121,999
|
|
|
|
140,145
|
|
|
188,000
|
|
|
|
41,316
|
|
|
47,982
|
Pre-opening expenses
|
|
|
2,751
|
|
|
2,318
|
|
|
|
4,072
|
|
|
|
4,712
|
|
|
7,096
|
|
|
|
826
|
|
|
1,656
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
13,248
|
|
|
10,896
|
|
|
|
18,496
|
|
|
|
29,424
|
|
|
40,088
|
|
|
|
8,513
|
|
|
9,875
|
Interest expense
|
|
|
2,349
|
|
|
2,789
|
|
|
|
2,835
|
|
|
|
2,951
|
|
|
3,314
|
|
|
|
742
|
|
|
996
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
10,899
|
|
|
8,107
|
|
|
|
15,661
|
|
|
|
26,473
|
|
|
36,774
|
|
|
|
7,771
|
|
|
8,879
|
Income tax expense
|
|
|
1,203
|
|
|
3,023
|
|
|
|
6,201
|
|
|
|
10,504
|
|
|
14,231
|
|
|
|
3,071
|
|
|
3,560
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,696
|
|
$
|
5,084
|
|
|
$
|
9,460
|
|
|
$
|
15,969
|
|
$
|
22,543
|
|
|
$
|
4,700
|
|
$
|
5,319
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
$
|
(1.49
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
0.47
|
|
$
|
0.87
|
|
|
$
|
0.18
|
|
$
|
0.14
|
Diluted
|
|
$
|
0.01
|
|
$
|
(1.49
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
0.21
|
|
$
|
0.29
|
|
|
$
|
0.06
|
|
$
|
0.07
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,063,950
|
|
|
3,688,093
|
|
|
|
5,032,612
|
|
|
|
6,478,217
|
|
|
9,130,697
|
|
|
|
6,960,640
|
|
|
11,368,805
|
Diluted
|
|
|
6,267,232
|
|
|
3,688,093
|
|
|
|
5,032,612
|
|
|
|
76,297,969
|
|
|
79,026,350
|
|
|
|
76,617,578
|
|
|
80,652,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable store sales increase(3)
|
|
|
6.9%
|
|
|
6.2%
|
|
|
|
8.0%
|
|
|
|
8.3%
|
|
|
14.5%
|
|
|
|
12.8%
|
|
|
9.2%
|
Number of stores end of period
|
|
|
112
|
|
|
126
|
|
|
|
142
|
|
|
|
167
|
|
|
196
|
|
|
|
170
|
|
|
203
|
Total square footage end of period
|
|
|
1,127,708
|
|
|
1,285,857
|
|
|
|
1,464,330
|
|
|
|
1,726,563
|
|
|
2,023,305
|
|
|
|
1,755,280
|
|
|
2,096,275
|
Total square footage per store(4)
|
|
|
10,069
|
|
|
10,205
|
|
|
|
10,312
|
|
|
|
10,339
|
|
|
10,323
|
|
|
|
10,325
|
|
|
10,326
|
Average total square footage(5)
|
|
|
1,046,793
|
|
|
1,216,777
|
|
|
|
1,374,005
|
|
|
|
1,582,935
|
|
|
1,857,885
|
|
|
|
1,650,697
|
|
|
1,934,871
|
Net sales per average total square
foot(6)
|
|
$
|
346
|
|
$
|
348
|
|
|
$
|
357
|
|
|
$
|
366
|
|
$
|
398
|
|
|
$
|
370
|
|
$
|
400
|
Capital expenditures
|
|
|
27,430
|
|
|
30,354
|
|
|
|
34,807
|
|
|
|
41,607
|
|
|
62,331
|
|
|
|
5,304
|
|
|
17,757
|
Depreciation and amortization
|
|
|
12,522
|
|
|
15,411
|
|
|
|
18,304
|
|
|
|
22,285
|
|
|
29,736
|
|
|
|
6,048
|
|
|
9,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated balance sheet
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,628
|
|
$
|
3,178
|
|
|
$
|
3,004
|
|
|
$
|
2,839
|
|
$
|
3,645
|
|
|
$
|
2,926
|
|
$
|
3,161
|
Working capital
|
|
|
59,589
|
|
|
60,751
|
|
|
|
69,955
|
|
|
|
76,473
|
|
|
88,105
|
|
|
|
75,733
|
|
|
85,870
|
Property and equipment, net
|
|
|
85,180
|
|
|
99,577
|
|
|
|
114,912
|
|
|
|
133,003
|
|
|
162,080
|
|
|
|
131,603
|
|
|
174,916
|
Total assets
|
|
|
195,059
|
|
|
206,420
|
|
|
|
253,425
|
|
|
|
282,615
|
|
|
338,597
|
|
|
|
287,601
|
|
|
377,852
|
Total debt(7)
|
|
|
37,229
|
|
|
42,906
|
|
|
|
47,008
|
|
|
|
50,173
|
|
|
55,529
|
|
|
|
63,537
|
|
|
87,883
|
Total stockholders equity
|
|
|
87,359
|
|
|
92,778
|
|
|
|
105,308
|
|
|
|
123,015
|
|
|
148,760
|
|
|
|
128,221
|
|
|
153,359
|
|
|
|
|
|
(1)
|
|
Our fiscal year-end is the Saturday
closest to January 31 based on a 52/53-week year. Each fiscal
year consists of four 13-week quarters, with an extra week added
onto the fourth quarter every five or six years.
|
|
(2)
|
|
Fiscal 2006 was a 53-week operating
year and the 53rd week represented approximately
$16.4 million in net sales.
|
30
|
|
|
(3)
|
|
Comparable store sales increase
reflects sales for stores beginning on the first day of the 14th
month of operation. Remodeled stores are included in comparable
store sales unless the store was closed for a portion of the
current or comparable prior period.
|
|
(4)
|
|
Total square footage per store is
calculated by dividing total square footage at end of period by
number of stores at end of period.
|
|
(5)
|
|
Average total square footage
represents a weighted average which reflects the effect of
opening stores in different months throughout the period.
|
|
(6)
|
|
Net sales per average total square
foot was calculated by dividing net sales for the trailing
12-month
period by the average square footage for those stores open
during each period. The fiscal 2006 and first quarter fiscal
2007 net sales per average total square foot amounts were
adjusted to exclude the net sales effects of the 53rd week.
|
|
|
|
(7)
|
|
Total debt includes approximately
$4.8 million related to the Series III preferred stock,
which is presented between the liabilities section and the
equity section of our consolidated balance sheet for all periods.
|
31
Managements
discussion and analysis of
financial condition and results of operations
You should read the following discussion and analysis of our
financial condition and results of operations in conjunction
with the Selected consolidated financial data
section of this prospectus and our consolidated financial
statements and related notes included elsewhere in this
prospectus. This discussion and analysis contains
forward-looking statements based on current expectations that
involve risks and uncertainties. As a result of many factors,
such as those set forth under Risk factors and
elsewhere in this prospectus, our actual results may differ
materially from those anticipated in these forward-looking
statements.
Overview
We were founded in 1990 as a discount beauty retailer at a time
when prestige, mass and salon products were sold through
separate distribution channels. In 1999, we embarked on a
multi-year strategy to understand and embrace what women want in
a beauty retailer and transform ULTA into the shopping
experience that it is today. We pioneered our unique combination
of beauty superstore and specialty store attributes. We believe
our strategy provides us with the competitive advantages that
have contributed to our strong financial performance.
We are currently the largest beauty retailer that provides
one-stop shopping for prestige, mass and salon products and
salon services in the United States. We combine the unique
elements of a beauty superstore with the distinctive environment
and experience of a specialty retailer. Key aspects of our
beauty superstore strategy include our ability to offer our
customers a broad selection of over 21,000 beauty products
across the categories of cosmetics, fragrance, haircare,
skincare, bath and body products and salon styling tools, as
well as salon haircare products. We focus on delivering a
compelling value proposition to our customers across all of our
product categories. Our stores are conveniently located in
high-traffic, off-mall locations such as power centers and
lifestyle centers with other destination retailers. As of
May 31, 2007, we operated 207 stores across 26 states.
In addition to these fundamental elements of a beauty
superstore, we strive to offer an uplifting shopping experience
through what we refer to as The Four Es:
Escape, Education, Entertainment and
Esthetics.
Over the past seven years, we believe we have demonstrated our
ability to deliver profitable sales and square footage growth.
From fiscal 1999 to fiscal 2006, we grew our net sales and
square footage at a compounded annual growth rate of 20.3% and
16.0%, respectively, while delivering increases in net income at
a compounded annual growth rate of 51.6%. In addition, we have
achieved 29 consecutive quarters of positive comparable sales
growth since fiscal 2000. In fiscal 2006, we achieved net sales
and net income of $755.1 million and $22.5 million,
respectively.
The continued growth of our business and any future increases in
net sales, net income, and cash flows is dependent on our
ability to execute our growth strategy, including growing our
store base, expanding our prestige brand offerings, driving
incremental salon traffic, expanding our online business, and
continuing to enhance our brand awareness. We believe that the
steadily expanding U.S. beauty products and services
industry, the shift in distribution of prestige beauty products
from department stores to specialty retail stores, coupled with
ULTAs competitive strengths, positions us to capture
additional market share in the industry through successful
execution of our growth strategy.
32
With the successful development and execution of ULTAs
consumer experience strategy over the last several years, we
began to accelerate our store unit growth in fiscal 2007 to
approximately 25%, compared to the average growth rate of 17%
achieved in fiscal 2005 and 2006, respectively. In fiscal 2007,
we implemented our remodel program. To support this rate of
store unit growth in fiscal 2007 and execute our future growth
strategy, we have made and will continue to make the necessary
infrastructure investments and therefore do not expect to
sustain the net income growth rates of 68% and 40%,
respectively, achieved in fiscal 2005 and 2006. We plan to
finance investments in new and remodeled ULTA stores and our
infrastructure with cash flows from operations and borrowings
under our credit facility, when necessary. Several factors,
including the availability of the appropriate real estate
locations could impact our ability to open new stores
contemplated by our growth strategy on a timely and consistent
basis.
Comparable store sales is a key metric that is monitored closely
within the retail industry. We do not expect our future
comparable store sales increases to reflect the levels
experienced in the fourth fiscal quarter 2005 and in fiscal
2006. This is due in part to the difficulty in improving on such
significant increases in subsequent periods.
We seek to increase our total net sales through increases in our
comparable store sales and by opening new stores. Gross profit
as a percentage of net sales is expected to be consistent with
historical rates given our planned distribution infrastructure
investments and the impact of the rate of new store growth. We
plan to continue to improve our operating results by leveraging
our fixed costs and decreasing our selling, general, and
administrative expenses, as a percentage of our net sales.
First quarter fiscal 2007 net sales increased
$34.6 million, or 21.7%, to $194.1 million, compared
to $159.5 million in first quarter fiscal 2006. During
first quarter fiscal 2007, we opened seven new stores and our
comparable store sales increase was 9.2%. Gross profit as a
percentage of net sales decreased 1.1 percentage points to
30.7% in first quarter fiscal 2007 compared to 31.8% in first
quarter fiscal 2006. The decease is primarily due to accelerated
depreciation on store assets as a result of our remodel
strategy. The decrease in gross profit as a percentage of net
sales was partially offset by a 1.2 percentage points
improvement in our selling, general, and administrative expense
as a percentage of net sales. Net income was $5.3 million
in first quarter fiscal 2007 representing an increase of
$0.6 million, or 13.2%, compared to $4.7 million in
first quarter fiscal 2006. Net income in first quarter fiscal
2007 was negatively impacted by $2.1 million of planned
accelerated depreciation related to our store remodel program.
Fiscal 2006 net sales increased $176.0 million, or
30.4%, to $755.1 million, compared to $579.1 million
in fiscal 2005. Fiscal 2006 was a 53-week operating year and the
53rd week represented approximately $16.4 million of
the net sales increase. Adjusted for the 53rd week, fiscal
2006 net sales increased $159.6 million, or 27.6%,
compared to fiscal 2005. We added 31 new stores in fiscal 2006
and our comparable store sales increase was $82.4 million,
or 14.5%. Our gross profit as a percentage of net sales
increased 1.0 percentage point to 31.1% and total gross
profit increased 34.9% to $235.2 million in fiscal 2006
compared to $174.3 million in fiscal 2005. Selling,
general, and administrative expenses were $188.0 million,
representing a $47.9 million, or 34.2%, increase compared
to $140.1 million in fiscal 2005. Selling, general, and
administrative expenses in fiscal 2006 included a non-recurring
stock compensation charge of $2.8 million
($1.7 million net of income taxes). Net income was
$22.5 million, a $6.5 million, or 41.2%, increase over
fiscal 2005. Cash flow from operations increased
$18.0 million, or 48.0%, to $55.6 million in fiscal
2006 compared to $37.6 million in fiscal 2005.
33
Fiscal 2005 net sales increased $87.9 million, or
17.9%, to $579.1 million compared to $491.2 million in
fiscal 2004. We added 25 new stores in fiscal 2005 and our
comparable store sales increase was 8.3%. Gross profit as a
percentage of net sales increased 0.7 percentage point to
30.1% and total gross profit increased $29.7 million, or
20.5%, to $174.3 million compared to $144.6 million in
fiscal 2004. Selling, general, and administrative expenses
increased $18.1 million or 14.9% to $140.1 million,
compared to $122.0 million in fiscal 2004. Cash flow from
operations increased $8.3 million, or 28.5%, to
$37.6 million in fiscal 2005 compared to $29.3 million
in fiscal 2004.
Basis of
presentation
Net sales include store and Internet merchandise sales as well
as salon service revenue. Salon service revenue represents less
than 10% of our combined product sales and services revenues and
therefore, these revenues are combined with product sales. We
recognize merchandise revenue at the point of sale, or POS, in
our retail stores and the time of shipment in the case of
Internet sales. Merchandise sales are recorded net of estimated
returns. Salon service revenue is recognized at the time the
service is provided. Gift card sales revenue is deferred until
the customer redeems the gift card. Company coupons and other
incentives are recorded as a reduction of net sales.
Comparable store sales reflect sales for stores beginning on the
first day of the 14th month of operation. Therefore, a
store is included in our comparable store base on the first day
of the period after it has cycled its grand opening sales period
which generally covers the first month of operation.
Non-comparable store sales include sales from new stores that
have not yet completed their 13th month of operation and
stores that were closed for part or all of the period in either
year as a result of remodel activity. Remodeled stores are
included in comparable store sales unless the store was closed
for a portion of the current or prior period. There may be
variations in the way in which some of our competitors and other
retailers calculate comparable or same store sales. As a result,
data herein regarding our comparable store sales may not be
comparable to similar data made available by our competitors or
other retailers.
Comparable store sales is a critical measure that allows us to
evaluate the performance of our store base as well as several
other aspects of our overall strategy. Several factors could
positively or negatively impact our comparable store sales
results:
|
|
|
the introduction of new products or brands;
|
|
|
the location of new stores in existing store markets;
|
|
|
competition;
|
|
|
our ability to respond on a timely basis to changes in consumer
preferences;
|
|
|
the effectiveness of our various marketing activities; and
|
|
|
the number of new stores opened and the impact on the average
age of all of our comparable stores.
|
Cost of sales includes:
|
|
|
the cost of merchandise sold, including all vendor allowances,
which are treated as a reduction of merchandise costs;
|
34
|
|
|
warehousing and distribution costs including labor and related
benefits, freight, rent, depreciation and amortization, real
estate taxes, utilities, and insurance;
|
|
|
store occupancy costs including rent, depreciation and
amortization, real estate taxes, utilities, repairs and
maintenance, insurance, licenses, and cleaning expenses;
|
|
|
salon payroll and benefits; and
|
|
|
shrink and inventory valuation reserves.
|
Our cost of sales may be impacted as we open an increasing
number of stores. We also expect that cost of sales as a
percentage of net sales will be negatively impacted in the next
several years as a result of accelerated depreciation related to
our store remodel program. The program was adopted in third
quarter fiscal 2006. We have accelerated depreciation expense on
assets to be disposed of during the remodel process such that
those assets will be fully depreciated at the time of the
planned remodel. Changes in our merchandise mix may also have an
impact on cost of sales.
This presentation of items included in cost of sales may not be
comparable to the way in which our competitors or other
retailers compute their cost of sales.
Selling, general, and administrative expenses include:
|
|
|
payroll, bonus, and benefit costs for retail and corporate
employees;
|
|
|
advertising and marketing costs;
|
|
|
occupancy costs related to our corporate office facilities;
|
|
|
public company expense including Sarbanes-Oxley compliance
expenses;
|
|
|
stock-based compensation expense related to option exercises
which will result in increases in expense as we implemented a
structured stock option compensation program in 2007;
|
|
|
depreciation and amortization for all assets except those
related to our retail and warehouse operations which is included
in cost of sales; and
|
|
|
legal, finance, information systems and other corporate overhead
costs.
|
This presentation of items in selling, general, and
administrative expenses may not be comparable to the way in
which our competitors or other retailers compute their selling,
general, and administrative expenses.
Pre-opening expenses includes non-capital expenditures during
the period prior to store opening for new and remodeled stores
including store
set-up
labor, management and employee training, and grand opening
advertising. Pre-opening expenses also includes rent during the
construction period related to new stores.
Interest expense includes interest costs associated with our
credit facility which is structured as an asset based lending
instrument. Our interest expense will fluctuate based on the
seasonal borrowing requirements associated with acquiring
inventory in advance of key holiday selling periods and
fluctuation in the variable interest rates we are charged on
outstanding balances. Our credit facility is used to fund
seasonal inventory needs and new and remodel store capital
requirements in excess of our cash flow from operations. Our
credit facility interest is based on
35
a variable interest rate structure which can result in increased
cost in periods of rising interest rates.
Income tax expense reflects the federal statutory tax rate and
the weighted average state statutory tax rate for the states in
which we operate stores.
Results of
operations
Our fiscal year is the 52 or 53 weeks ending on the
Saturday closest to January 31. The companys fiscal
years ended January 29, 2005, January 28, 2006, and
February 3, 2007, were 52, 52, and 53 week years,
respectively, and are hereafter referred to as fiscal 2004,
fiscal 2005, and fiscal 2006.
Our quarterly periods are the 13 or 14 weeks ending on the
Saturday closest to April 30, July 31,
October 31, and January 31. Our first quarters ended
April 29, 2006 and May 5, 2007, were 13 weeks and
are hereafter referred to as first quarter fiscal 2006 and first
quarter fiscal 2007.
The following tables present the components of our results of
operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
ended
|
|
Three months
ended
|
|
|
January 29,
|
|
January 28,
|
|
February 3,
|
|
April 29,
|
|
May 5,
|
(Dollars
in thousands)
|
|
2005
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
|
|
|
Net sales
|
|
$
|
491,152
|
|
$
|
579,075
|
|
$
|
755,113
|
|
$
|
159,468
|
|
$
|
194,113
|
Cost of sales
|
|
|
346,585
|
|
|
404,794
|
|
|
519,929
|
|
|
108,813
|
|
|
134,600
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
144,567
|
|
|
174,281
|
|
|
235,184
|
|
|
50,655
|
|
|
59,513
|
Selling, general, and
administrative expenses
|
|
|
121,999
|
|
|
140,145
|
|
|
188,000
|
|
|
41,316
|
|
|
47,982
|
Pre-opening expenses
|
|
|
4,072
|
|
|
4,712
|
|
|
7,096
|
|
|
826
|
|
|
1,656
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
18,496
|
|
|
29,424
|
|
|
40,088
|
|
|
8,513
|
|
|
9,875
|
Interest expense
|
|
|
2,835
|
|
|
2,951
|
|
|
3,314
|
|
|
742
|
|
|
996
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
15,661
|
|
|
26,473
|
|
|
36,774
|
|
|
7,771
|
|
|
8,879
|
Income tax expense
|
|
|
6,201
|
|
|
10,504
|
|
|
14,231
|
|
|
3,071
|
|
|
3,560
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,460
|
|
$
|
15,969
|
|
$
|
22,543
|
|
$
|
4,700
|
|
$
|
5,319
|
|
|
|
|
|
|
|
|
|
|
Other operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stores end of period
|
|
|
142
|
|
|
167
|
|
|
196
|
|
|
170
|
|
|
203
|
Comparable store sales increase
|
|
|
8.0%
|
|
|
8.3%
|
|
|
14.5%
|
|
|
12.8%
|
|
|
9.2%
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
ended
|
|
Three months
ended
|
|
|
January 29,
|
|
January 28,
|
|
February 3,
|
|
April 29,
|
|
May 5,
|
(Percentage
of net sales)
|
|
2005
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
|
|
|
Net sales
|
|
|
100.0%
|
|
|
100.0%
|
|
|
100.0%
|
|
|
100.0%
|
|
|
100.0%
|
Cost of sales
|
|
|
70.6%
|
|
|
69.9%
|
|
|
68.9%
|
|
|
68.2%
|
|
|
69.3%
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
29.4%
|
|
|
30.1%
|
|
|
31.1%
|
|
|
31.8%
|
|
|
30.7%
|
Selling, general, and
administrative expenses
|
|
|
24.8%
|
|
|
24.2%
|
|
|
24.9%
|
|
|
25.9%
|
|
|
24.7%
|
Pre-opening expenses
|
|
|
0.8%
|
|
|
0.8%
|
|
|
0.9%
|
|
|
0.5%
|
|
|
0.9%
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
3.8%
|
|
|
5.1%
|
|
|
5.3%
|
|
|
5.4%
|
|
|
5.1%
|
Interest expense
|
|
|
0.6%
|
|
|
0.5%
|
|
|
0.4%
|
|
|
0.5%
|
|
|
0.5%
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
3.2%
|
|
|
4.6%
|
|
|
4.9%
|
|
|
4.9%
|
|
|
4.6%
|
Income tax expense
|
|
|
1.3%
|
|
|
1.8%
|
|
|
1.9%
|
|
|
1.9%
|
|
|
1.8%
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1.9%
|
|
|
2.8%
|
|
|
3.0%
|
|
|
3.0%
|
|
|
2.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
fiscal 2007 versus first quarter fiscal 2006
Net
sales
Net sales increased $34.6 million, or 21.7%, to
$194.1 million in first quarter fiscal 2007 compared to
$159.5 million in first quarter fiscal 2006. This increase
is due to an additional 34 stores operating since first quarter
fiscal 2006, one store closure and a 9.2% increase in comparable
store sales. Non-comparable stores contributed
$20.8 million of the net sales increase while comparable
stores contributed $13.8 million of the total net sales
increase. Our comparable store sales growth in first quarter
fiscal 2007 was driven by growth in existing brands, as well as
new brands which were introduced in fiscal 2006 and resulted in
increased customer traffic and growth in average transaction
value.
Gross
profit
Gross profit increased $8.8 million, or 17.5%, to
$59.5 million in first quarter fiscal 2007 compared to
$50.7 million in first quarter fiscal 2006. Gross profit as
a percentage of net sales decreased 1.1 percentage points
to 30.7% in first quarter fiscal 2007 compared to 31.8% in first
quarter fiscal 2006. The 1.1 percentage points decrease in
the gross profit percentage primarily resulted from
$2.1 million of planned accelerated depreciation related to
our store remodel program. The store remodel program was adopted
late in third quarter fiscal 2006. Our fiscal 2007 second
quarter gross margin will include a similar accelerated
depreciation variance as there was no similar expense in the
prior year period.
Selling, general,
and administrative expenses
Selling, general, and administrative expenses increased
$6.7 million, or 16.1%, to $48.0 million in first
quarter fiscal 2007 compared to $41.3 million in first
quarter fiscal 2006. As a percentage of net sales, selling,
general, and administrative expenses decreased
1.2 percentage points to 24.7% in first quarter fiscal 2007
compared to 25.9% in first quarter fiscal 2006. The decrease as
37
a percentage of net sales is primarily due to a shift in
advertising expense as compared to first quarter fiscal 2006.
Pre-opening
expenses
Pre-opening expenses increased $0.9 million, or 100.5%, to
$1.7 million in first quarter fiscal 2007 compared to
$0.8 million in first quarter fiscal 2006. During first
quarter fiscal 2007, we opened seven new stores and remodeled
three stores as compared to four new store openings in first
quarter fiscal 2006.
Interest
expense
Interest expense increased by $0.3 million, or 34.2%, to
$1.0 million in first quarter fiscal 2007 compared to
$0.7 million in first quarter fiscal 2006. This increase is
due to an increase to the average debt outstanding on our credit
facility compared to the same period in fiscal 2006.
Income tax
expense
Income tax expense of $3.6 million in first quarter fiscal
2007 represents an effective tax rate of 40.1%, compared to
$3.1 million of tax expense representing an effective tax
rate of 39.5% for first quarter fiscal 2006. The increase in the
effective tax rate is primarily due to the increasing number of
stores in states with higher income tax rates.
Net
income
Net income increased $0.6 million, or 13.2%, to
$5.3 million in first quarter fiscal 2007, compared to
$4.7 million in first quarter fiscal 2006. The increase
resulted from an increase in gross profit of $8.9 million
driven by a comparable store sales increase of 9.2%, net of
increased expenses of $2.1 million of planned accelerated
depreciation for our remodel store program. The increase in
gross profit was partially offset by a $6.7 million
increase in selling, general, and administrative expenses
primarily related to operating costs for new stores opened in
first quarter fiscal 2006 and first quarter fiscal 2007.
Fiscal year 2006
versus fiscal year 2005
Net
sales
Net sales increased $176.0 million, or 30.4%, to
$755.1 million in fiscal 2006 compared to
$579.1 million in fiscal 2005. Fiscal 2006 was a 53-week
operating year and the 53rd week represented approximately
$16.4 million in net sales. Adjusted for the
53rd week, fiscal 2006 net sales increased
$159.6 million, or 27.6% compared to fiscal 2005. This
increase is due to the opening of 31 new stores in 2006, two
store closures, and a 14.5% increase in comparable store sales.
Non-comparable stores, which include stores opened in fiscal
2006 as well as stores opened in fiscal 2005 which have not yet
turned comparable, contributed $77.3 million of the net
sales increase while comparable stores contributed
$82.3 million of the total net sales increase. Our
comparable store sales growth in fiscal 2006 was driven by
strong performance of existing and new brands. We introduced
several new fragrance brands in the first half of the year which
resulted in increased customer traffic and growth in average
transaction value.
38
Gross
profit
Gross profit increased $60.9 million, or 34.9%, to
$235.2 million in fiscal 2006, compared to
$174.3 million, in fiscal 2005. Gross profit as a
percentage of net sales increased 1.0 percentage point to
31.1% in fiscal 2006 from 30.1% in fiscal 2005. The increase in
gross profit resulted from:
|
|
|
an increase of $176.0 million in net sales from new stores
and comparable sales growth;
|
|
|
a 0.6 percentage point improvement in salon payroll and
benefits as a percentage of net sales driven by improved salon
stylist productivity resulting from a continued focus on
training programs and other strategic initiatives;
|
|
|
a 0.5 percentage point decrease due to $3.5 million of
planned accelerated depreciation related to our store remodel
program;
|
|
|
a 0.3 percentage point improvement resulting from a
reduction in merchandise shrink as a result of continued focus
and improvement in overall store and supply chain inventory
controls and specific in-store initiatives targeted at
controlling merchandise loss, and improvement in our
distribution and supply chain costs as we focus on increasing
the efficiency of these operations and leverage the growth in
our store base; and
|
|
|
a 0.3 percentage point improvement in leverage of store
occupancy costs as a result of comparable store sales growth.
|
Selling, general,
and administrative expenses
Selling, general, and administrative expenses increased
$47.9 million, or 34.2%, to $188.0 million in fiscal
2006 compared to $140.1 million in fiscal 2005. As a
percentage of net sales, selling, general, and administrative
expenses increased 0.7 percentage point to 24.9% for fiscal
2006 compared to 24.2% in fiscal 2005. This increase in the
selling, general, and administrative percentage resulted from:
|
|
|
operating expenses from new stores opened in fiscal 2005 and
fiscal 2006;
|
|
|
a non-recurring stock compensation charge of $2.8 million,
or 0.4 percentage point of net sales, primarily related to
a former executive of the company;
|
|
|
$0.7 million of share-based compensation expense related to
our adoption of Statement of Financial Accounting Standards
(SFAS) 123R in fiscal 2006 which increased selling, general, and
administrative expenses by 0.1 percentage point of net
sales; and
|
|
|
$0.6 million of incremental asset write-offs related to
closed or remodeled stores representing 0.1 percentage
point of net sales.
|
Pre-opening
expenses
Pre-opening expenses increased $2.4 million, or 50.6%, to
$7.1 million in fiscal 2006 compared to $4.7 million
in fiscal 2005. During fiscal 2006, we opened 31 new stores and
remodeled seven stores. During fiscal 2005, we opened 25 new
stores and remodeled one store.
39
Interest
expense
Interest expense increased $0.3 million, or 12.3%, to
$3.3 million in fiscal 2006 compared to $3.0 million
in fiscal 2005 primarily due to an increase in the interest
rates on our variable rate credit facility.
Income tax
expense
Income tax expense of $14.2 million in fiscal 2006
represents an effective tax rate of 38.7%, compared to fiscal
2005 tax expense of $10.5 million which represents an
effective tax rate of 39.7%. The decrease in the effective tax
rate is primarily due to an adjustment to reflect the state tax
effects of our net operating loss carry forwards.
Net
income
Net income increased $6.5 million, or 41.2%, to
$22.5 million in fiscal 2006 compared to $16.0 million
in fiscal 2005. The after-tax impact of the non-recurring stock
compensation charge was approximately $1.7 million. The
increase in net income of $6.5 million resulted from an
increase in gross profit of $60.9 million driven by a
comparable store sales increase of 14.5% and a
1.0 percentage point increase in gross profit as a
percentage of sales. The increase in gross profit was partially
offset by a $47.9 million (including the $2.8 million
non-recurring stock compensation charge) increase in selling,
general, and administrative expenses related to operating costs
for new stores opened in fiscal 2005 and fiscal 2006 as well as
costs incurred to support the infrastructure necessary to manage
current and future store growth.
Fiscal year 2005
versus fiscal year 2004
Net
sales
Net sales increased $87.9 million, or 17.9%, to
$579.1 million in fiscal 2005 compared to
$491.2 million in fiscal 2004. This increase is due to the
addition of 25 new stores in fiscal 2005 and an 8.3% increase in
comparable store sales. Our comparable store growth for fiscal
2004 was 8.0%. Non-comparable stores, which include stores
opened in fiscal 2005 as well as stores opened in fiscal 2004
which have not yet turned comparable, contributed
$48.5 million of the net sales increase while comparable
stores contributed $39.4 million of the total net sales
increase. Our comparable store sales growth was primarily due to
increased penetration of the prestige, salon styling tools, and
private label product categories, which drove increased traffic
and an increase in average transaction value.
Gross
profit
Gross profit increased $29.7 million, or 20.5%, to
$174.3 million in fiscal 2005 compared to
$144.6 million in fiscal 2004. Gross profit as a percentage
of net sales increased 0.7 percentage point to 30.1% in
fiscal 2005 compared to 29.4% in fiscal 2004. The increase in
gross profit resulted from:
|
|
|
an increase of $87.9 million in net sales from new store
sales and comparable sales growth;
|
|
|
a 0.4 percentage point improvement due to reduction in
merchandise shrink resulting from specific supply chain and
in-store initiatives targeted at controlling merchandise loss,
and improvement in our distribution and supply-chain costs as we
focus on increasing the efficiency of those operations and
leverage the growth in our store base; and
|
40
|
|
|
a 0.4 percentage point improvement in salon payroll and
benefits as a percentage of net sales driven by improved salon
stylist productivity resulting from focused training programs
and other strategic initiatives.
|
Selling, general,
and administrative expenses
Selling, general, and administrative expenses increased
$18.1 million, or 14.9%, to $140.1 million in fiscal
2005 compared to $122.0 million in fiscal 2004. As a
percentage of net sales, selling, general, and administrative
expenses decreased 0.6 percentage point to 24.2% in fiscal
2005 compared to 24.8% in fiscal 2004, respectively. This
increase in expenses resulted from:
|
|
|
operating expenses from new stores opened in fiscal 2004 and
fiscal 2005; and
|
|
|
a 0.4 percentage point decrease in corporate and field
overhead, advertising, and store operating expenses as a
percentage of sales driven by leverage from the net sales
increase.
|
Pre-opening
expenses
Pre-opening expenses increased $0.6 million, or 15.7%, to
$4.7 million in fiscal 2005 compared to $4.1 million
in fiscal 2004. During fiscal 2005, we opened 25 new stores and
remodeled one store. During fiscal 2004, we opened 20 new stores
and remodeled none.
Interest
expense
Interest expense increased $0.2 million, or 4.1%, to
$3.0 million in fiscal 2005 compared to $2.8 million
in fiscal 2004 primarily due to an increase in the interest
rates on our variable rate credit facility.
Income tax
expense
Income tax expense of $10.5 million in fiscal 2005
represents an effective tax rate of 39.7%, compared to income
tax expense of $6.2 million in fiscal 2004 which represents
an effective tax rate of 39.6%.
Net
income
Net income increased $6.5 million, or 68.8%, to
$16.0 million in fiscal 2005 compared to $9.5 million
in fiscal 2004. The increase in net income of $6.5 million
resulted from an increase in gross profit of $29.7 million
driven by a comparable store sales increase of 8.3% and
additional sales from new stores opened during fiscal 2004 and
fiscal 2005 as well as a 0.7 percentage point increase in
gross profit as a percentage of net sales. The increase in gross
profit was partially offset by an $18.1 million increase in
selling, general, and administrative expenses which resulted
from expenses to operate new stores opened in fiscal 2004 and
fiscal 2005 as well as costs incurred to support the
infrastructure necessary to manage current and future store
growth.
Seasonality and
unaudited quarterly statements of operations
Our business is subject to seasonal fluctuation. Significant
portions of our net sales and profits are realized during the
fourth quarter of the fiscal year due to the holiday selling
season. To a lesser extent, our business is also affected by
Mothers Day as well as the Back to School
period and Valentines Day. Any decrease in sales during
these higher sales volume periods could have an adverse effect
on our business, financial condition, or operating results for
the entire fiscal year.
41
The following tables set forth our unaudited quarterly results
of operations for each of the quarters in fiscal 2005 and fiscal
2006. The information for each of these periods has been
prepared on the same basis as the audited consolidated financial
statements included in this prospectus. This information
includes all adjustments, which consist only of normal and
recurring adjustments that management considers necessary for
the fair presentation of such data. We use a 13 week
(14 week in fourth quarter fiscal 2006) fiscal quarter
ending on the last Saturday of the quarter. The data should be
read in conjunction with the audited and unaudited consolidated
financial statements included elsewhere in this prospectus. Our
quarterly results of operations have varied in the past and are
likely to do so again in the future. As such, we believe that
period-to-period comparisons of our results of operations should
not be relied upon as an indication of our future performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
quarter
|
|
|
2005
|
|
2006
|
(Dollars in
thousands)
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
|
Net sales
|
|
$
|
127,583
|
|
$
|
131,485
|
|
$
|
129,949
|
|
$
|
190,058
|
|
$
|
159,468
|
|
$
|
162,558
|
|
$
|
166,075
|
|
$
|
267,012
|
Cost of sales
|
|
|
89,707
|
|
|
93,783
|
|
|
91,313
|
|
|
129,991
|
|
|
108,813
|
|
|
113,093
|
|
|
115,332
|
|
|
182,691
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
37,876
|
|
|
37,702
|
|
|
38,636
|
|
|
60,067
|
|
|
50,655
|
|
|
49,465
|
|
|
50,743
|
|
|
84,321
|
Selling, general, and
administrative expenses
|
|
|
32,833
|
|
|
31,958
|
|
|
32,239
|
|
|
43,115
|
|
|
41,316
|
|
|
39,605
|
|
|
40,797
|
|
|
66,282
|
Pre-opening expenses
|
|
|
864
|
|
|
1,002
|
|
|
1,641
|
|
|
1,205
|
|
|
826
|
|
|
1,601
|
|
|
2,901
|
|
|
1,768
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
4,179
|
|
|
4,742
|
|
|
4,756
|
|
|
15,747
|
|
|
8,513
|
|
|
8,259
|
|
|
7,045
|
|
|
16,271
|
Interest expense
|
|
|
755
|
|
|
770
|
|
|
700
|
|
|
726
|
|
|
742
|
|
|
715
|
|
|
1,031
|
|
|
826
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
3,424
|
|
|
3,972
|
|
|
4,056
|
|
|
15,021
|
|
|
7,771
|
|
|
7,544
|
|
|
6,014
|
|
|
15,445
|
Income tax expense
|
|
|
1,353
|
|
|
1,568
|
|
|
1,607
|
|
|
5,976
|
|
|
3,071
|
|
|
2,980
|
|
|
2,397
|
|
|
5,783
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,071
|
|
$
|
2,404
|
|
$
|
2,449
|
|
$
|
9,045
|
|
$
|
4,700
|
|
$
|
4,564
|
|
$
|
3,617
|
|
$
|
9,662
|
|
|
|
|
|
|
|
|
|
|
Other operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stores end of period
|
|
|
147
|
|
|
150
|
|
|
158
|
|
|
167
|
|
|
170
|
|
|
177
|
|
|
188
|
|
|
196
|
Comparable store sales increase
|
|
|
7.3%
|
|
|
7.2%
|
|
|
7.9%
|
|
|
10.0%
|
|
|
12.8%
|
|
|
13.0%
|
|
|
16.8%
|
|
|
15.0%
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
quarter
|
|
|
2005
|
|
2006
|
(Percentage of
net sales)
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
|
Net sales
|
|
|
100.0%
|
|
|
100.0%
|
|
|
100.0%
|
|
|
100.0%
|
|
|
100.0%
|
|
|
100.0%
|
|
|
100.0%
|
|
|
100.0%
|
Cost of sales
|
|
|
70.3%
|
|
|
71.3%
|
|
|
70.3%
|
|
|
68.4%
|
|
|
68.2%
|
|
|
69.6%
|
|
|
69.4%
|
|
|
68.4%
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
29.7%
|
|
|
28.7%
|
|
|
29.7%
|
|
|
31.6%
|
|
|
31.8%
|
|
|
30.4%
|
|
|
30.6%
|
|
|
31.6%
|
Selling, general, and
administrative expenses
|
|
|
25.7%
|
|
|
24.3%
|
|
|
24.8%
|
|
|
22.7%
|
|
|
25.9%
|
|
|
24.4%
|
|
|
24.6%
|
|
|
24.8%
|
Pre-opening expenses
|
|
|
0.7%
|
|
|
0.8%
|
|
|
1.3%
|
|
|
0.6%
|
|
|
0.5%
|
|
|
1.0%
|
|
|
1.7%
|
|
|
0.7%
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
3.3%
|
|
|
3.6%
|
|
|
3.6%
|
|
|
8.3%
|
|
|
5.4%
|
|
|
5.0%
|
|
|
4.3%
|
|
|
6.1%
|
Interest expense
|
|
|
0.6%
|
|
|
0.6%
|
|
|
0.5%
|
|
|
0.4%
|
|
|
0.5%
|
|
|
0.4%
|
|
|
0.6%
|
|
|
0.3%
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
2.7%
|
|
|
3.0%
|
|
|
3.1%
|
|
|
7.9%
|
|
|
4.9%
|
|
|
4.6%
|
|
|
3.7%
|
|
|
5.8%
|
Income tax expense
|
|
|
1.1%
|
|
|
1.2%
|
|
|
1.2%
|
|
|
3.1%
|
|
|
1.9%
|
|
|
1.8%
|
|
|
1.4%
|
|
|
2.2%
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1.6%
|
|
|
1.8%
|
|
|
1.9%
|
|
|
4.8%
|
|
|
3.0%
|
|
|
2.8%
|
|
|
2.3%
|
|
|
3.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
43
Liquidity and
capital resources
Our primary cash needs are for capital expenditures for new,
relocated, and remodeled stores, increased merchandise
inventories related to store expansion, planned expansion of our
headquarters, new second distribution facility, and for
continued improvement in our information technology systems.
Our primary sources of liquidity are cash flows from operations,
changes in working capital, and borrowings under our credit
facility. The most significant component of our working capital
is merchandise inventories reduced by related accounts payable
and accrued expenses. Our working capital position benefits from
the fact that we generally collect cash from sales to customers
the same day or within several days of the related sale, while
we typically have up to 30 days to pay our vendors.
During fiscal 2006, the average investment required to open a
new ULTA store was approximately $1.4 million, which
includes capital investments, net of landlord contributions, and
initial inventory, net of payables. We began to implement our
remodel program and accelerate our store unit growth in fiscal
2007 to approximately 25% compared to the average growth rate of
17% in fiscal 2005 and 2006. We plan to finance the capital
expenditures related to our new and remodeled stores from
operating cash flows and borrowings under our credit facility,
including the accordion option.
Our working capital needs are greatest from August through
November each year as a result of our inventory
build-up
during this period for the approaching holiday season. This is
also the time of year when we are at maximum investment levels
in our new store class and have not yet collected the landlord
allowances due us as part of our lease agreement. Based on past
performance and current expectations, we believe that cash
generated from operations and borrowings under the credit
facility, with the accordion option exercised, will satisfy the
companys working capital needs, capital expenditure needs,
commitments, and other liquidity requirements through at least
the next 12 months.
Credit
facility
Our credit facility is with LaSalle Bank National Association as
the administrative agent, Wachovia Capital Finance Corporation
as collateral agent, and JPMorgan Chase Bank, N.A. as
documentation agent. The credit facility, as amended with our
existing bank group on June 29, 2007, provides for a
maximum credit of $150 million and a $50 million
accordion option through May 31, 2011. Substantially all of
the companys assets are pledged as collateral for
outstanding borrowings under the facility. Outstanding
borrowings bear interest at the prime rate or the Eurodollar
rate plus 1.00% up to $100 million and 1.25% thereafter.
The advance rates on owned inventory are 80% (85% from September
1 to January 31). The interest rate on the outstanding balances
under the facility as of January 28, 2006 and
February 3, 2007 was 6.146% and 7.025%, respectively. We
had approximately $49.0 million and $48.9 million of
availability as of January 28, 2006 and February 3,
2007, respectively, excluding the accordion option. The credit
facility agreement contains a restrictive financial covenant on
tangible net worth and also requires us to provide financial
statements and other related information to our lenders. We have
been in compliance with all covenants during the three fiscal
years ended February 3, 2007. We also have an ongoing
letter of credit that renews annually. The balance was $326,000
at January 28, 2006 and February 3, 2007.
44
As of May 5, 2007, we have classified $55,038,000 of
outstanding borrowings under the facility as long-term, as this
is the minimum amount we believe will remain outstanding for an
uninterrupted period over the next year.
Operating
activities
Operating activities consist primarily of net income adjusted
for certain non-cash items, including depreciation and
amortization, deferred income taxes, realized gains and losses
on disposal of property and equipment, non-cash stock-based
compensation, and the effect of working capital changes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
ended
|
|
|
Three months
ended
|
|
|
|
January 29,
|
|
|
January 28,
|
|
|
February 3,
|
|
|
April 29,
|
|
|
May 5,
|
|
(Dollars
in thousands)
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,460
|
|
|
$
|
15,969
|
|
|
$
|
22,543
|
|
|
$
|
4,700
|
|
|
$
|
5,319
|
|
Items not affecting cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
18,304
|
|
|
|
22,285
|
|
|
|
29,736
|
|
|
|
6,048
|
|
|
|
9,840
|
|
Deferred income taxes
|
|
|
961
|
|
|
|
(3,037
|
)
|
|
|
(3,080
|
)
|
|
|
|
|
|
|
(822
|
)
|
Non-cash stock compensation charges
|
|
|
634
|
|
|
|
468
|
|
|
|
983
|
|
|
|
228
|
|
|
|
289
|
|
Excess tax benefits from
stock-based compensation
|
|
|
|
|
|
|
(213
|
)
|
|
|
(5,360
|
)
|
|
|
|
|
|
|
|
|
Loss on disposal of property and
equipment
|
|
|
1,167
|
|
|
|
1,230
|
|
|
|
3,518
|
|
|
|
656
|
|
|
|
135
|
|
Changes in working capital items
|
|
|
(1,265
|
)
|
|
|
899
|
|
|
|
7,290
|
|
|
|
(19,838
|
)
|
|
|
(28,932
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operations
|
|
$
|
29,261
|
|
|
$
|
37,601
|
|
|
$
|
55,630
|
|
|
$
|
(8,206
|
)
|
|
$
|
(14,171
|
)
|
|
|
Net cash provided by operating activities was
$29.3 million, $37.6 million, and $55.6 million
in fiscal 2004, 2005, and 2006, respectively. The increase in
net cash from operating activities of $18.0 million in
fiscal 2006 compared to fiscal 2005 is primarily attributed to
the following:
|
|
|
an increase in depreciation and amortization of
$7.5 million attributed to new stores opened in fiscal 2006
and fiscal 2005 and accelerated depreciation related to our
remodel program;
|
|
|
an increase in net income of $6.6 million;
|
|
|
an increase of $6.4 million in net working capital changes
mainly attributed to a combination of increases in deferred rent
related to new store lease terms ($2.8 million), an
increase in accrued liabilities ($4.0 million), a decrease
in prepaid and other assets ($2.1 million), and an increase
in landlord allowances receivable related to additional new
stores opened in fiscal 2006 ($2.5 million);
|
|
|
a decrease of $5.1 million related to increased volume of
excess tax benefits recognized from stock-based compensation
(described further below); and
|
45
|
|
|
an increase of $2.3 million on loss on disposal of property
and equipment representing write-offs of remodel store assets
and other store fixtures.
|
The increase in net cash from operating activities of
$8.3 million in fiscal 2005 compared to fiscal 2004 is
primarily attributed to the following:
|
|
|
an increase in net income of $6.5 million;
|
|
|
an increase in depreciation and amortization of
$4.0 million attributed to new stores opened in fiscal 2005
and fiscal 2004;
|
|
|
a deduction from operating cash flows for the effects of
deferred income taxes of $4.0 million; and
|
|
|
an increase of $2.2 million in net working capital changes
mainly related to the increase in deferred rent related to new
store lease terms.
|
The increase in net cash used in operating activities of
$6.0 million in first quarter fiscal 2007 compared to first
quarter fiscal 2006 is primarily attributed to the following:
|
|
|
an increase of $9.1 million used for working capital items
mainly attributed to merchandise inventories; and
|
|
|
an increase in depreciation and amortization of
$3.8 million attributed to new stores and accelerated
depreciation related to our remodel program.
|
Prior to the adoption of SFAS 123R, we presented all tax
benefits related to tax deductions resulting from the exercise
of stock options as operating activities in the consolidated
statement of cash flows. SFAS 123R requires that cash flows
resulting from tax benefits related to tax deductions in excess
of compensation expense recognized for those options (excess tax
benefits) be classified as financing cash flows. As a result, we
classified $5.4 million and $0.2 million in fiscal
2006 and fiscal 2005, respectively, as an operating cash outflow
and a financing cash inflow. There was no corresponding amount
in fiscal 2004.
Investing
activities
Investing activities consist primarily of capital expenditures
for new and remodeled stores as well as investments in
information technology systems.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
ended
|
|
|
Three months
ended
|
|
|
|
January 29,
|
|
|
January 28,
|
|
|
February 3,
|
|
|
April 29,
|
|
May 5,
|
|
(Dollars
in thousands)
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
$
|
(34,807
|
)
|
|
$
|
(41,607
|
)
|
|
$
|
(62,331
|
)
|
|
$
|
5,304
|
|
$
|
(17,757
|
)
|
Issuance of related party notes
receivable
|
|
|
|
|
|
|
|
|
|
|
(2,414
|
)
|
|
|
|
|
|
|
|
Receipt of related party notes
receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
373
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
$
|
(34,807
|
)
|
|
$
|
(41,607
|
)
|
|
$
|
(64,745
|
)
|
|
$
|
5,304
|
|
$
|
(17,384
|
)
|
|
|
46
Net cash used in investing activities was $34.8 million,
$41.6 million, and $64.7 million in fiscal 2004, 2005,
and 2006, respectively. During fiscal 2006, our Chief Executive
Officer exercised stock options in exchange for a promissory
note for $4.1 million. The company withheld
$2.4 million of payroll-related taxes in connection with
the exercised options and that portion of the note has been
classified as an investing activity. The remainder of the
promissory note of $1.7 million related to exercise
proceeds of the options and was classified as a non-cash
financing activity. The note was paid in full on June 29,
2007.
Net cash used in investing activities was $5.3 million and
$17.4 million in first quarter fiscal 2006 and first
quarter fiscal 2007, respectively, primarily representing new
store and information technology investments. In addition, two
related party notes receivable were settled during first fiscal
quarter 2007.
Financing
activities
Financing activities consist principally of borrowings and
payments on our credit facility and capital stock transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
ended
|
|
|
Three months
ended
|
|
|
|
January 29,
|
|
|
January 28,
|
|
|
February 3,
|
|
|
April 29,
|
|
|
May 5,
|
|
(Dollars
in thousands)
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
Proceeds on long-term borrowings
|
|
$
|
532,002
|
|
|
$
|
644,817
|
|
|
$
|
851,468
|
|
|
$
|
184,053
|
|
|
$
|
239,123
|
|
Payments on long-term borrowings
|
|
|
(528,010
|
)
|
|
|
(641,652
|
)
|
|
|
(846,112
|
)
|
|
|
(170,689
|
)
|
|
|
(206,769
|
)
|
Excess tax benefits from
stock-based compensation
|
|
|
|
|
|
|
213
|
|
|
|
5,360
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common
stock
|
|
|
1,801
|
|
|
|
615
|
|
|
|
1,422
|
|
|
|
233
|
|
|
|
547
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
(2,217
|
)
|
|
|
|
|
|
|
(1,830
|
)
|
Principal payments under capital
lease obligations
|
|
|
(421
|
)
|
|
|
(167
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of
preferred stock
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
$
|
5,372
|
|
|
$
|
3,841
|
|
|
$
|
9,921
|
|
|
$
|
13,597
|
|
|
$
|
31,071
|
|
|
|
Net cash provided by financing activities was $5.4 million,
$3.8 million, and $9.9 million in fiscal 2004, 2005,
and 2006, respectively.
The increase in net cash provided by financing activities in
fiscal 2006 of $6.1 million is due to the $5.1 million
increase in excess tax benefits from stock-based compensation,
$0.8 million increase in proceeds recognized by the company
resulting from the exercise of stock options by employees, net
of a $2.2 million outflow related to a treasury stock
transaction with an investor.
47
The decrease in net cash provided by financing activities in
fiscal 2005 of $1.5 million is mainly attributed to the
decrease in the amount of proceeds resulting from stock option
exercises from the dollar levels in fiscal 2004.
The increase in net cash provided by financing activities in
first quarter fiscal 2007 of $17.5 million, compared to
first quarter fiscal 2006, is mainly attributed to the
$19.0 million net increase in long-term borrowings.
As discussed above, the statement of cash flow presentation of
tax benefits related to tax deductions in excess of compensation
expense recognized for those options was modified by
SFAS 123R. Accordingly, we classified $5.4 million and
$0.2 million in fiscal 2006 and 2005, respectively, as
financing cash inflows. There was no corresponding amount in
fiscal 2004.
Leases and other
commitments
We lease retail stores, warehouses, corporate offices, and
certain equipment under operating leases with various expiration
dates through fiscal 2019. Our store leases generally have
initial lease terms of 10 years and include renewal options
under substantially the same terms and conditions as the
original leases. In addition to future minimum lease payments,
most of our lease agreements include escalating rent provisions
which we recognize straight-line over the term of the lease,
including any lease renewal periods deemed to be probable. For
certain locations, we receive cash tenant allowances and we
report these amounts as deferred rent, which is amortized into
rent expense over the term of the lease, including any lease
renewal periods deemed to be probable. While a number of our
store leases include contingent rentals, contingent rent amounts
are insignificant.
The following table summarizes our contractual arrangements and
the timing and effect that such commitments are expected to have
on our liquidity and cash flows in future periods. The table
below excludes contingent rent, common area maintenance charges,
and real estate taxes. The table below includes obligations for
executed agreements for which we do not yet have the right to
control the use of the property as of February 3, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
1 to 3
|
|
4 to 5
|
|
After 5
|
(Dollars
in thousands)
|
|
Total
|
|
1 year
|
|
years
|
|
years
|
|
years
|
|
|
Contractual cash obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations(1)
|
|
$
|
421,641
|
|
$
|
53,494
|
|
$
|
115,026
|
|
$
|
97,228
|
|
$
|
155,893
|
Revolving credit facility(2)
|
|
|
50,737
|
|
|
|
|
|
|
|
|
50,737
|
|
|
|
|
|
|
|
|
|
Total(3)
|
|
$
|
472,378
|
|
$
|
53,494
|
|
$
|
115,026
|
|
$
|
147,965
|
|
$
|
155,893
|
|
|
|
|
|
(1)
|
|
Operating lease obligations consist
primarily of future minimum lease commitments related to store
operating leases (see Note 4 of the Notes to the
Consolidated Financial Statements). Operating lease obligations
do not include common area maintenance, or CAM, insurance, or
tax payments for which the Company is also obligated. Total
expense related to CAM, insurance and taxes for the 2006 fiscal
year was $11.7 million.
|
|
(2)
|
|
Interest payments on the variable
rate revolving credit facility are not included in the table
above. Outstanding borrowings bear interest at the prime rate or
the Eurodollar rate plus 1.25% up to $50 million and 1.50%
thereafter. The interest rate on the outstanding balances under
the facility as of January 28, 2006 and February 3,
2007 was 6.146% and 7.025%, respectively.
|
|
(3)
|
|
In June 2007, we finalized a lease
for a second distribution facility located in Phoenix, Arizona.
The lease expires in March 2019. Minimum lease payments,
excluding CAM, insurance, and real estate taxes, are
approximately $18.4 million over the lease term.
|
In April 2007, we finalized a lease for additional office space
in Romeoville, Illinois. The lease expires in August 2018.
Minimum lease payments, excluding CAM, insurance, and real
estate taxes, are approximately $15.6 million over the
lease term.
48
Effects of
inflation
Although we do not believe that inflation has had a material
impact on our financial position or results of operations to
date, a high rate of inflation in the future may have an adverse
effect on our ability to maintain current levels of gross margin
and selling, general, and administrative expenses as a
percentage of net sales if the selling prices of our products do
not increase with these increased costs. In addition, inflation
could materially increase the interest rates on our debt.
Quantitative and
qualitative disclosures about market risk
Market risk represents the risk of loss that may impact our
financial position due to adverse changes in financial market
prices and rates. Our market risk exposure is primarily the
result of fluctuations in interest rates. We do not hold or
issue financial instruments for trading purposes.
Interest rate
sensitivity
We are exposed to interest rate risks primarily through
borrowing under our credit facility. Interest on our borrowings
is based upon variable rates. We have an interest rate swap
agreement in place with a notional amount of $25 million
which effectively converts variable rate debt to fixed rate debt
at an interest rate of 5.11%. The interest rate swap is
reflected in the consolidated financial statements at negative
fair value of $80,000 and a positive fair value of $32,000 at
January 28, 2006 and February 3, 2007, respectively.
The interest rate swap is designated as a cash flow hedge, the
effective portion of which is recorded as an unrecognized
gain/(loss) in other comprehensive income in stockholders
equity. Our weighted average debt for fiscal 2006 was
$30 million adjusted for the $25 million hedged
amount. A hypothetical 1% increase or decrease in interest rates
would have resulted in a $0.3 million change to our
interest expense in fiscal 2006.
Critical
accounting policies and estimates
Managements discussion and analysis of financial condition
and results of operations is based upon our consolidated
financial statements, which have been prepared in accordance
with U.S. GAAP. The preparation of these financial
statements required the use of estimates and judgments that
affect the reported amounts of our assets, liabilities, revenues
and expenses. Management bases estimates on historical
experience and other assumptions it believes to be reasonable
under the circumstances and evaluates these estimates on an
on-going basis. Actual results may differ from these estimates.
A discussion of our more significant estimates follows.
Management has discussed the development, selection, and
disclosure of these estimates and assumptions with the audit
committee of the board of directors.
Inventory
valuation
Merchandise inventories are carried at the lower of average cost
or market value. Cost is determined using the weighted-average
cost method and includes costs incurred to purchase and
distribute goods as well as related vendor allowances including
co-op advertising, markdowns, and volume discounts. We record
valuation adjustments to our inventories if the cost of a
specific product on hand exceeds the amount we expect to realize
from the ultimate sale or disposal of the
49
inventory. These estimates are based on managements
judgment regarding future demand, age of inventory, and analysis
of historical experience. If actual demand or market conditions
are different than those projected by management, future
merchandise margin rates may be unfavorably or favorably
affected by adjustments to these estimates.
Inventories are adjusted for the results of periodic physical
inventory counts at each of our locations. We record a shrink
reserve representing managements estimate of inventory
losses by location that have occurred since the date of the last
physical count. This estimate is based on managements
analysis of historical results and operating trends.
Adjustments to earnings resulting from revisions to
managements estimates of the lower of cost or market and
shrink reserves have been insignificant during fiscal 2004, 2005
and 2006.
Self-insurance
We are self-insured for certain losses related to health,
workers compensation, and general liability insurance. We
maintain stop loss coverage with third-party insurers to limit
our liability exposure. Current stop loss coverage is $150,000
for health claims, $100,000 for general liability claims, and
$250,000 for workers compensation claims. Management
estimates undiscounted loss reserves associated with these
liabilities in part by considering historical claims experience,
industry factors, and other actuarial assumptions including
information provided by third parties. Self-insurance reserves
for fiscal 2004, 2005, and 2006 were $2.2 million,
$2.1 million, and $2.3 million, respectively.
Adjustments to earnings resulting from revisions to
managements estimates of these reserves have been
insignificant for fiscal 2004, 2005, and 2006.
Impairment of
long-lived tangible assets
We review long-lived tangible assets whenever events or
circumstances indicate these assets might not be recoverable
based on undiscounted future cash flows. Assets are reviewed at
the lowest level for which cash flows can be identified, which
is the store level. Significant estimates are used in
determining future operating results of each store over its
remaining lease term. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the
fair value of the assets. We have not recorded an impairment
charge in any of the periods presented in the accompanying
consolidated financial statements.
Stock-based
compensation
Effective January 29, 2006, we adopted the fair value
method of accounting for stock-based compensation arrangements
in accordance with Financial Accounting Standards Board, or
FASB, Statement No. 123(R), Share-Based Payment
(FAS 123(R)), using the prospective method of transition.
We use the Black-Scholes option pricing model which requires the
input of assumptions. The assumptions include estimating the
fair value of the companys common shares, the length of
time employees will retain their vested stock options before
exercising them (expected term), the estimated future volatility
of the companys common stock over the expected term, and
the number of options that will ultimately not complete their
vesting requirements (forfeitures). Stock-based compensation
expense is recognized on a straight-line basis over the
requisite employee service period. Changes in assumptions can
materially affect the estimate of fair value of stock-based
compensation and consequently, the related amounts recognized in
the consolidated financial statements.
50
The fair value of our common shares at the time of option grants
is determined by our board of directors based on all known facts
and circumstances, including valuations prepared by a nationally
recognized independent third-party appraisal firm. Future
volatility estimates are based on the historical volatility of a
peer group of publicly-traded companies. The expected term is
based on the shortcut approach in accordance with SAB 107,
Share-Based Payment. During fiscal 2006, we recorded
$665,000 of share-based compensation expense pursuant to the
provisions of FAS 123(R). Managements valuation model
weighted-average assumptions are summarized in Note 11 of
our consolidated financial statements. A 10% increase or
decrease in the volatility assumption would have impacted the
actual expense recorded by approximately $100,000. At
February 3, 2007, there was approximately $2.2 million
of total unrecognized compensation expense related to unvested
options. The cost is expected to be recognized over a
weighted-average period of approximately three years.
Prior to January 29, 2006, we accounted for stock-based
compensation using the intrinsic value method of accounting in
accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB25), and
related interpretations. Under APB25, no compensation expense
was recognized when stock options were granted with exercise
prices equal to or greater than market value on the date of
grant.
Recent accounting
pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxesan
Interpretation of FASB Statement No. 109 (FIN 48).
FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a
tax return, and provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN 48 is effective
for fiscal years beginning after December 15, 2006. We
adopted FIN 48 on February 4, 2007. The adoption of
FIN 48 had no impact on the companys consolidated
financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair
value in accordance with U.S. GAAP and expands disclosures
about fair value measurements. SFAS 157 is effective for
financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. The company does not expect the adoption of SFAS 157
to have a material effect on the companys consolidated
financial position or results of operations.
In September 2006, the Securities and Exchange Commission
released Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements
(SAB 108). SAB 108 provides guidance on how the
effects of the carryover or reversal of prior year financial
statement misstatements should be considered in quantifying a
current year misstatement. The adoption of SAB 108 by the
company as of February 3, 2007, did not have any impact on
the companys consolidated financial position or results of
operations.
In February 2007, the FASB issued SFAS 159, The Fair
Value Option for Financial Assets and Financial Liabilities,
which permits all entities to choose to measure eligible items
at fair value on specified election dates. The associated
unrealized gains and losses on the items for which the fair
value option has been elected shall be reported in earnings.
SFAS 159 is effective for financial statements issued for
fiscal years beginning after November 15, 2007. Currently,
we are not able to estimate the impact SFAS 159 will have
on our financial statements.
51
Business
Overview
We are the largest beauty retailer that provides one-stop
shopping for prestige, mass and salon products and salon
services in the United States. We provide affordable indulgence
to our customers by combining the product breadth, value and
convenience of a beauty superstore with the distinctive
environment and experience of a specialty retailer. Key aspects
of our business include:
One-Stop Shopping. Our customers can satisfy
all of their beauty needs at ULTA. We offer a unique combination
of over 21,000 prestige and mass beauty products organized by
category in bright, open, self-service displays to encourage our
customers to play, touch, test, learn and explore. We believe we
offer the widest selection of categories across prestige and
mass cosmetics, fragrance, haircare, skincare, bath and body
products and salon styling tools. We also offer a full-service
salon and a wide range of salon haircare products in all of our
stores.
Our Value Proposition. We believe our focus
on delivering a compelling value proposition to our customers
across all of our product categories is fundamental to our
customer loyalty. For example, we run frequent promotions and
gift certificates for our mass brands, gift-with-purchase offers
and multi-product gift sets for our prestige brands, and a
comprehensive customer loyalty program.
An Off-Mall Location. We are conveniently
located in high-traffic, off-mall locations such as power
centers and lifestyle centers with other destination retailers.
Our typical store is approximately 10,000 square feet,
including approximately 950 square feet dedicated to our
full-service salon. Our displays, store design and open layout
allow us the flexibility to respond to consumer trends and
changes in our merchandising strategy. As of May 31, 2007,
we operated 207 stores across 26 states.
While our stores appeal to a wide demographic, our typical
customer is in her early 30s, trend focused and actively uses a
mixture of prestige, mass and salon products. She is college
educated and has an annual household income of approximately
$73,000. She understands her beauty needs and seeks a retail
partner that can deliver convenience and great value.
In addition to the fundamental elements of a beauty superstore,
we strive to offer an uplifting shopping experience through what
we refer to as The Four Es: Escape,
Education, Entertainment and Esthetics.
Escape. We offer our customers a timely
escape from the stresses of daily life in a welcoming and
approachable environment. Our customer can immerse herself in
our extensive product selection, indulge herself in our hair or
skin treatments, or discover new and exciting products in an
interactive setting. We provide a shopping experience without
the intimidating, commission-oriented and brand-dedicated sales
approach found in most department stores and with a level of
service typically unavailable in drug stores and mass
merchandisers.
Education. We staff our stores with a team of
well-trained beauty consultants and professionally licensed
estheticians and stylists whose mission is to educate, inform
and advise our customers regarding their beauty needs. We also
provide product education
52
through demonstrations, in-store videos and informational
displays. Our focus on educating our customer reinforces our
authority as her primary resource for beauty products and our
credibility as a provider of consistent, high-quality salon
services. Our beauty consultants are trained to service
customers across all prestige lines and within our prestige
boutiques where customers can receive a makeover or
skin analysis.
Entertainment. The entertainment experience
for our customer begins at home when she receives our catalogs.
Our catalogs are designed to introduce our customers to our
newest products and promotions and to be invitations to come to
ULTA to play, touch, test, learn and explore. A significant
percentage of our sales throughout the year is derived from new
products, making every visit to ULTA an opportunity to discover
something new and exciting. In addition to providing
approximately 3,900 testers in categories such as fragrance,
cosmetics, skincare, and salon styling tools, we further enhance
the shopping experience and store atmosphere through live
demonstrations from our licensed salon professionals and beauty
consultants, and through customer makeovers and in-store videos.
Esthetics. We strive to create a visually
pleasing and inviting store and salon environment that
exemplifies and reinforces the quality of our products and
services. Our stores are brightly lit, spacious and attractive
on the inside and outside of the store. Our store and salon
design features sleek, modern lines that reinforce our status as
a fashion authority, together with wide aisles that make the
store easy to navigate and pleasant lighting to create a
luxurious and welcoming environment. This strategy enables us to
provide an extensive product selection in a well-organized store
and to offer a salon experience that is both fashionable and
contemporary.
We were founded in 1990 as a discount beauty retailer at a time
when prestige, mass and salon products were sold through
distinct channels department stores for prestige
products, drug stores and mass merchandisers for mass products,
and salons and authorized retail outlets for professional hair
care products. When Lyn Kirby, our current President and Chief
Executive Officer, joined us in December 1999, we embarked on a
multi-year strategy to understand and embrace what women want in
a beauty retailer and transform ULTA into the shopping
experience that it is today. We conducted extensive research and
surveys to analyze customer response and our effectiveness in
areas such as in-store experience, merchandise selection, salon
services and marketing strategies. We believe we pioneered a
unique retail approach that focuses on all aspects of how women
prefer to shop for beauty products by combining the fundamental
elements of a beauty superstore, including one-stop shopping, a
compelling value proposition and convenient locations, together
with an uplifting specialty retail experience through our
emphasis on The Four Es. While we are
currently executing on the core elements of our business
strategy, we plan to continually refine our approach in order to
further enhance the shopping experience for our customers.
The success of our strategy has been recognized by various
industry organizations. In October 2005, Ms. Kirby was
recognized by Cosmetics Executive Women (CEW), a leading trade
organization in the beauty industry, with a 2005 Achiever Award
for professional achievement in the beauty industry. In May
2007, we received a 2007 Hot Retailer Award from the
International Council of Shopping Centers (ICSC), a global trade
association of the shopping center industry, for being an
innovative retail concept.
We believe our strategy provides us with competitive advantages
that have contributed to our strong financial performance. Our
net sales have increased from $206.5 million in fiscal 1999
to
53
$755.1 million in fiscal 2006, representing a 20.3%
compounded annual growth rate. In that same period, we grew our
store base from 75 to 196 stores while growing our net income
from $1.2 million in fiscal 1999 to $22.5 million in
fiscal 2006, representing a 51.6% compounded annual growth rate.
In addition, we have achieved 29 consecutive quarters of
positive comparable store sales growth since fiscal 2000.
Our competitive
strengths
We believe the following competitive strengths differentiate us
from our competitors and are critical to our continuing success:
Differentiated merchandising strategy with broad
appeal. We believe our broad selection of
merchandise across categories, price points and brands offers a
unique shopping experience for our customers. While the products
we sell can be found in department stores, specialty stores,
salons, drug stores and mass merchandisers, we offer all of
these products in one retail format so that our customer can
find everything she needs in one shopping trip. We appeal to a
wide range of customers by offering over 500 brands, such as
Bare Escentuals cosmetics, Chanel and
Estée Lauder fragrances, LOréal
haircare and cosmetics and Paul Mitchell haircare. We
also have private label ULTA offerings in key categories.
Because our offerings span a broad array of product categories
in prestige, mass and salon, we appeal to a wide range of
customers including women of all ages, demographics, and
lifestyles.
Our unique customer experience. We combine
the value and convenience of a beauty superstore with the
distinctive environment and experience of a specialty retailer.
The Four Es provide the foundation for our
operating strategy. We cater to the woman who loves to indulge
in shopping for beauty products as well as the woman who is time
constrained and comes to the store knowing exactly what she
wants. Our distribution infrastructure consistently delivers a
greater than 95% in-stock rate, so our customers know they will
find the products they are looking for. Our well-trained beauty
consultants are not commission-based or brand-dedicated and
therefore can provide unbiased and customized advice tailored to
our customers needs. Together with our customer service
strategy, our store locations, layout and design help create our
unique retail shopping experience, which we believe increases
both the frequency and length of our customers visits.
Retail format poised to benefit from shifting channel
dynamics. Over the past several years, the
approximately $75 billion beauty products and salon
services industry has experienced significant changes, including
a shift in how manufacturers distribute and customers purchase
beauty products. This has enabled the specialty retail channel
in which we operate to grow at a greater rate than the industry
overall since at least 2000. We are capitalizing on these trends
by offering an off-mall, service-oriented specialty retail
concept with a comprehensive product mix across categories and
price points.
Loyal and active customer base. We have
approximately six million customer loyalty program members, the
majority of whom have shopped at one of our stores within the
past 12 months. We utilize this valuable proprietary
database to drive traffic, better understand our customers
purchasing patterns and support new store site selection. We
regularly distribute catalogs and newspaper inserts to entertain
and educate our customers and, most importantly, to drive
traffic to our stores.
Strong vendor relationships across product
categories. We have strong, active relationships
with over 300 vendors, including Estée Lauder, Bare
Escentuals, Coty, LOréal and
Procter &
54
Gamble. We believe the scope and extent of these relationships,
which span the three distinct beauty categories of prestige,
mass and salon and have taken years to develop, create a
significant impediment for other retailers to replicate our
model. These relationships also frequently afford us the
opportunity to work closely with our vendors to market both new
and existing brands in a collaborative manner.
Experienced management team. Our senior
management team averages over 25 years of combined beauty
and retail experience and brings a creative merchandising
approach and a disciplined operating philosophy to our business.
Our senior management team is led by Lyn Kirby, our President
and Chief Executive Officer. Other key senior executives include
Bruce Barkus, our Chief Operating Officer, and Gregg Bodnar, our
Chief Financial Officer. Additionally, over the past three
years, we have significantly expanded the depth of our
management team at all levels and in all functional areas to
support our growth strategy.
Growth
strategy
We intend to expand our presence as a leading retailer of beauty
products and salon services by:
Growing our store base to our long-term potential of over
1,000 stores. We believe our successful track
record of opening new stores in diverse markets throughout the
United States demonstrates the portability and growth potential
of our retail concept.
|
|
|
Based on the broad demographic appeal of our retail concept, the
significant size of the market in which we operate and our
internal real estate planning model which we use to evaluate
potential new store growth opportunities, we believe we have the
potential to grow our store base to over 1,000 ULTA stores in
the United States over the next 10 years. Our internal real
estate model takes into account a number of variables, including
demographic and sociographic data as well as population density
relative to maximum drive times, economic and competitive
factors. We plan to open stores both in markets in which we
currently operate and in new markets.
|
We opened 31 stores in fiscal 2006 and plan to open
approximately 50 stores in fiscal 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
year
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
2006
|
|
|
|
|
Total stores beginning of period
|
|
|
112
|
|
|
|
126
|
|
|
|
142
|
|
|
167
|
|
Stores opened
|
|
|
15
|
|
|
|
20
|
|
|
|
25
|
|
|
31
|
|
Stores closed
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
Total stores end of period
|
|
|
126
|
|
|
|
142
|
|
|
|
167
|
|
|
196
|
|
Total square footage
|
|
|
1,285,857
|
|
|
|
1,464,330
|
|
|
|
1,726,563
|
|
|
2,023,305
|
|
Total square footage per store
|
|
|
10,205
|
|
|
|
10,312
|
|
|
|
10,339
|
|
|
10,323
|
|
|
|
|
|
|
In addition, we developed and initiated a store remodel program
in 2006 to update our older stores to provide a modern and
consistent shopping experience across all of our locations. We
remodeled seven stores in fiscal 2006 and plan to remodel
approximately 18 stores in fiscal 2007. We believe this program
will improve the appeal of our stores, drive additional traffic
and increase our sales and profitability.
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
year
|
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
|
Stores remodeled
|
|
|
2
|
|
|
0
|
|
|
1
|
|
|
7
|
|
|
Increasing our sales and profitability by expanding our
prestige brand offerings. Our strategy is to
continue to expand our portfolio of products and brands, in
particular to enhance our offering of prestige brands, both by
capitalizing on the success of our existing vendor relationships
and by identifying and developing new supply sources. We plan to
continue to expand and attract additional prestige brands to our
stores by increasing education for our beauty consultants,
providing high levels of customer service, and tailoring the
presentation and merchandising of these products in our stores
to appeal to prestige vendors. For example, by the end of 2007,
we will have installed boutique areas of
approximately 200 square feet in over 90 of our stores to
showcase and build brand equity for key vendors and to provide
our customers with a place to experiment and learn about these
products. We intend to install this feature in most of our
stores over time. Over the past two years, we have added several
prestige brands including Estée Lauder fragrance,
Frédéric Fekkai haircare, Smashbox
cosmetics and T3 salon styling tools. We believe this
strategy will result in a continued increase in our number of
transactions and our average transaction value.
Improving our profitability by leveraging our fixed
costs. We plan to continue to improve our operating
results by leveraging our existing infrastructure and
continually optimizing our operations. We will continue to make
investments in our information systems to enable us to enhance
our efficiency in such areas as merchandise planning and
allocation, inventory management, distribution and point of
sale, or POS, functions. We believe we will continue to improve
our profitability by reducing our operating expenses, in
particular general corporate overhead and fixed costs, as a
percentage of sales.
Continuing to enhance our brand awareness to generate
sales growth. We believe a key component of our
success is the brand exposure we get from our marketing
initiatives. Our direct mail advertising programs are designed
to drive additional traffic to our stores by highlighting
current promotional events and new product offerings. Our
national magazine print advertising campaign exposes potential
new customers to our retail concept by conveying an attractive
and sophisticated brand message. We believe we have an
opportunity to increase our in-store marketing efforts as an
additional means of educating our customers and increasing the
frequency of their visits to our stores.
Driving increased customer traffic to our
salons. We are committed to establishing ULTA as a
leading salon authority. We seek to increase salon traffic and
grow salon revenues by providing high quality and consistent
services from our licensed stylists, who are knowledgeable about
the newest hair fashion trends. Our objective is to create
customer loyalty, increase conversion of our retail customers to
our salon services, encourage referrals and distinguish our
salons from those of our competitors. Our stylists are trained
to sell haircare products to their customers by demonstrating
the products while styling their customers hair.
Additionally, we have refined our recruiting methods, hiring
procedures and training programs to enhance stylist retention,
which is an important factor in salon productivity.
Expanding our online business. We plan to go
live with a new version of our website in the first half of 2008
or earlier to enhance the overall ULTA experience with greater
functionality, ease-of-use and integration with our customer
loyalty program. We also intend to establish
56
ourselves as a leading online beauty resource for women by
providing our customers with information on key trends and
products, including editorial content and links to our vendor
partners. Through the re-launch of our website, we believe we
will be well positioned to capitalize on the growth of Internet
sales of beauty products. We believe our website and retail
stores will provide our customers with an integrated
multi-channel shopping experience and increased flexibility for
their beauty buying needs.
Our
market
We operate within the large and steadily growing
U.S. beauty products and salon services industry. This
market represented approximately $75 billion in retail
sales, according to Kline & Company and IBISWorld Inc.
The approximately $35 billion beauty products industry
includes color cosmetics, haircare, fragrance, bath and body,
skincare, salon styling tools and other toiletries. Within this
market, we compete across all major categories as well as a
range of price points by offering prestige, mass and salon
products. The approximately $40 billion salon services
industry consists of hair, face and nail services.
Distribution for beauty products is varied. Prestige products
are typically purchased in department or specialty stores, while
mass products and staple items are generally purchased at drug
stores, food retail stores and mass merchandisers. In addition,
salon haircare products are sold in salons and authorized
professional retail outlets. From 2000 to 2006, changes in
consumer shopping preferences and industry consolidation have
resulted in declines in the market share of department stores
from 18% to 15% and of food retail stores and other channels
from 33% to 31%, while the specialty retail channel has
increased its share of the beauty retail market from 7% to 9%,
according to Kline & Company. Distribution for salon
products and services is highly fragmented, with approximately
230,000 salons in the United States, according to
Professional Consultants & Resources, a market research
firm.
The following table represents retail sales of beauty products
by channel in the United States:
Source: Kline & Company
|
|
|
*
|
|
Other includes the
following categories: food stores, salons and spas, direct
sales, and all other.
|
57
Key
trends
We believe an important shift is occurring in the distribution
of beauty products. Department stores, which have traditionally
been the primary distribution channel for prestige beauty
products, have been meaningfully affected by changing consumer
preferences and industry consolidation over the past decade. We
believe women, particularly younger generations, tend to find
department stores intimidating, high-pressured and hinder a
multi-brand shopping experience and, as such, are choosing to
shop elsewhere for their beauty care needs. According to NPD,
55% of women aged 18 to 24 shop in specialty stores, compared to
40% of women aged 18 to 64. Over the past ten years, department
stores have lost significant market share to specialty stores in
apparel, and we believe the beauty category is undergoing a
similar shift in retail channels. We believe women are seeking a
shopping experience that provides something different, a place
to experiment, learn about various products, find what they want
and indulge themselves. A recent NPD study found that nine out
of ten women who shop at specialty retailers for beauty products
do so because they can touch, feel and smell the products.
As a result of this market transformation, there has been an
increase in the number of prestige beauty brands pursuing new
distribution channels for their products, such as specialty
retail, spas and salons, direct response television (i.e., home
shopping and infomercials) and the Internet. In addition, many
smaller prestige brands are selling their products through these
channels due to the high fixed costs associated with operating
in most department stores and to capitalize on consumers
growing propensity to shop in these channels. According to
industry sources, color cosmetics sales through these channels
are projected to grow at a higher rate than sales of color
cosmetics in total. We believe that, based on our recent success
in attracting new prestige brands, we are well-positioned to
continue to capture additional prestige brands as they expand
into specialty stores. Also, there are a growing number of
brands that have built significant consumer awareness and sales
by initially offering their products on direct response
television. We benefit from offering brands that sell their
products through this channel, as we experience increased store
traffic and sales after these brands appear on television.
Historically, manufacturers have distributed their products
through distinct channelsdepartment stores for prestige
products, drug stores and mass merchandisers for mass products,
and salons and authorized retail outlets for professional hair
care products. We believe women are increasingly shopping across
retail channels as well as purchasing a combination of prestige
and mass beauty products. We attribute this trend to a number of
factors, including the growing availability of prestige brands
outside of department stores and increased innovation in mass
products. Based on the competitive environment in which we
operate, we believe that we have been at the forefront of
breaking down the industrys historical distribution
paradigm by combining a wide range of beauty products,
categories and price points under one roof. Our strategy
reflects a more customer-centric model of how women prefer to
shop today for their beauty needs.
Major growth drivers for the industry include favorable consumer
spending trends, product innovation and growth of certain
population segments.
|
|
|
Baby Boomers (currently
41-60 years
old): Baby Boomers have large disposable incomes and
are increasing their spending on personal care as well as health
and wellness. The aging of the Baby Boomer generation is also
influencing product innovation and demand for anti-aging
products and cosmetic procedures.
|
|
|
Generation X (currently 31-40 years
old): Generation X is entering their peak earning years
and represents a significant contributor to overall consumer
spending, including beauty
|
58
|
|
|
products. A recent survey by American Express showed that
Generation X spends 60% more on beauty products than Baby
Boomers. In addition, Generation X has grown up shopping in
specialty stores and seeks a retail environment that combines a
compelling experience, functionality, variety and location.
|
|
|
|
Generation Y (currently 13-30 years
old): According to U.S. Census Bureau data, the 20
to 34 year-old age group is expected to grow by
approximately 10% from 2003 to 2015. As Generation Y continues
to enter the workforce, they will have increased disposable
income to spend on beauty products.
|
We believe we are well positioned to capitalize on these trends
and capture additional market share in the industry. We believe
we have demonstrated an ability to provide a differentiated
store experience for customers as well as offer a breadth and
depth of merchandise previously unavailable from more
traditional beauty retailers.
Stores
We are conveniently located in high-traffic, off-mall locations
such as power centers and lifestyle centers with other
destination retailers. Our typical store is approximately
10,000 square feet, including approximately 950 square
feet dedicated to our full-service salon. As of May 31,
2007, we operated 207 stores in 26 states, as shown in the
table below:
|
|
|
|
|
|
Number of
|
State
|
|
stores
|
|
Arizona
|
|
|
19
|
California
|
|
|
25
|
Colorado
|
|
|
9
|
Delaware
|
|
|
1
|
Florida
|
|
|
9
|
Georgia
|
|
|
11
|
Illinois
|
|
|
27
|
Indiana
|
|
|
4
|
Iowa
|
|
|
1
|
Kansas
|
|
|
1
|
Kentucky
|
|
|
2
|
Maryland
|
|
|
3
|
Michigan
|
|
|
4
|
Minnesota
|
|
|
6
|
Nevada
|
|
|
5
|
New Jersey
|
|
|
9
|
New York
|
|
|
6
|
North Carolina
|
|
|
8
|
Oklahoma
|
|
|
4
|
Oregon
|
|
|
1
|
Pennsylvania
|
|
|
11
|
South Carolina
|
|
|
3
|
Texas
|
|
|
27
|
Virginia
|
|
|
7
|
Washington
|
|
|
3
|
Wisconsin
|
|
|
1
|
|
|
|
|
Total
|
|
|
207
|
We believe we have the long-term potential to grow our store
base to over 1,000 stores in the United States over the next 10
years. We opened 31 stores in fiscal 2006 and plan to open
approximately 50 stores in fiscal 2007. All of our stores are
leased. During fiscal 2006, the average investment required to
open a new ULTA store was approximately $1.4 million, which
includes capital investments, net of landlord contributions, and
initial inventory, net of payables. However, our net investment
required to open new stores and the net sales generated by new
stores may vary depending on a number of factors, including
geographic location.
59
Store remodel
program
Our retail store concept, including physical layout, displays,
lighting and quality of finishes, has continued to evolve over
time to match the rising expectations of our customers and to
keep pace with our merchandising and operating strategies. In
recent years, our strategic focus has been on refining our new
store model, improving our real estate selection process, and
executing on our new store opening program. As a result, we
decided to limit the investments made in our existing store base
from fiscal 2000 to fiscal 2005. In fiscal 2006, we developed
and initiated a store remodel program to update our older stores
to provide a consistent shopping experience across all of our
locations. We remodeled seven stores in fiscal 2006 and plan to
remodel approximately 18 stores in fiscal 2007. We believe
this program will improve the appeal of our stores, drive
additional customer traffic and increase our sales and
profitability.
The remodel store selection process is subject to the same
discipline as our new store real estate decision process. Our
focus is to remodel the oldest, highest performing stores first,
subject to criteria such as rate of return, lease terms, market
performance and quality of real estate. We expect to remodel the
majority of our older stores (those opened prior to fiscal
2000) by the end of 2008. The average investment to remodel
a store in fiscal 2006 was approximately $1 million. Each
remodel takes approximately 13 weeks to complete, during
which time we typically keep the store open.
Salon
We operate full-service salons in all of our stores. Our current
ULTA store format includes an open and modern salon area with
eight to ten stations. The entire salon area is approximately
950 square feet with a concierge desk, esthetics room,
semi-private shampoo and hair color processing areas. Each salon
is a full-service salon offering hair cuts, hair coloring,
permanent texture, with most salons also providing facials and
waxing. We employ licensed professional stylists and
estheticians that offer highly skilled services as well as an
educational experience, including consultations, styling
lessons, skincare regimens, and
at-home care
recommendations.
ULTA.com
We established ULTA.com to give our customers an integrated
multi-channel buying experience by providing them with an
opportunity to access our product offerings beyond our
brick-and-mortar
retail stores. We plan to go live with a new version of our
website in 2008 or earlier. The new version of ULTA.com will
more effectively support the key elements of the ULTA brand
proposition by providing access to over 9,000 beauty products
from over 400 brands. We also intend to establish ourselves as a
leading online beauty resource for women by providing our
customers with information on key trends and products, including
editorial content and links to our vendor partners.
Additionally, ULTA.com will serve as an extension of ULTAs
marketing and prospecting strategies (beyond catalogs, newspaper
inserts and national advertising) by exposing potential new
customers to the ULTA brand and product offerings. This role for
ULTA.com will be implemented through online marketing strategies
such as banner advertising and paid and natural search vehicles.
ULTA.coms email marketing programs are also effective in
communicating with and driving sales from online and retail
store customers. As ULTA.com continues to grow in terms of
functionality and content, it will become an important element
in ULTAs customer loyalty programs and a valued resource
for customers to access product information and beauty trends
and techniques.
60
Merchandising
Strategy
We focus on offering one of the most extensive product and brand
selections in our industry, including a broad assortment of
branded and private label beauty products in cosmetics,
fragrance, haircare, skincare, bath and body products and salon
styling tools. A typical ULTA store carries over
19,000 basic and over 2,000 promotional products. We
present these products in an assisted self-service environment
using centrally produced planograms (detailed schematics showing
product placement in the store) and promotional merchandising
planners. Our merchandising team continually monitors current
fashion trends, historical sales trends and new product launches
to keep ULTAs product assortment fresh and relevant to our
customers.
We believe our broad selection of merchandise, from
moderate-priced brands to higher-end prestige brands, offers a
unique shopping experience for our customers. The products we
sell can also be found in department stores, specialty stores,
salons, mass merchandisers and drug stores, but we offer all of
these products in one retail format so that our customer can
find everything she needs in one stop.
We believe we offer a compelling value proposition to our
customers across all of our product categories. For example, we
run frequent promotions and gift certificates for our mass
brands, gift-with-purchase offers and multi-product gift sets
for our prestige brands, and a comprehensive customer loyalty
program.
We believe our private label products are a strategically
important category for growth and profit contribution. Our
objective is to provide quality, trend-right private label
products at a good value to continue to strengthen our
customers perception of ULTA as a contemporary beauty
destination. ULTA manages the full development cycle of these
products from concept through production in order to deliver
differentiated packaging and formulas to build brand image.
Current ULTA cosmetics and bath brands have a strong
following and we have plans to expand our private label products
into additional categories.
Category
mix
We offer products in the following categories:
|
|
|
Cosmetics, which includes products for the face, eyes,
cheeks, lips and nails;
|
|
|
Haircare, which includes shampoos, conditioners, styling
products, and hair accessories;
|
|
|
Salon styling tools, which includes hair dryers, curling
irons and flat irons;
|
|
|
Skincare and bath and body, which includes products for
the face, hands and body;
|
|
|
Fragrance for both men and women;
|
|
|
Private label, consisting of ULTA branded
cosmetics, skincare, bath and body products; and
|
|
|
Other, including candles, home fragrance products,
exercise accessories, educational DVDs and other miscellaneous
health and beauty products.
|
61
Organization
Our merchandising team reports directly to our Chief Executive
Officer and consists of a Vice President of Prestige Cosmetics,
Skin & Fragrance; a Vice President of Mass Cosmetics,
Skincare & Haircare; a Vice President of Salon
Products, Styling Tools & Bath; and a Senior Vice
President of Private Brand Development. The vice presidents have
one or two divisional merchandise managers reporting to them,
and the divisional merchandise managers have a buyer
and/or
associate/assistant buyer reporting to them. There are
approximately 17 divisional merchandise managers, buyers
and/or
associate/assistant buyers on the merchandising team. Our
merchandising team works directly with our centralized planning
and replenishment group to ensure a consistent delivery of
products across our store base.
Our planogram department assists the merchants to keep new
products flowing into stores on a timely basis. All major
product categories undergo planogram revisions once or twice a
year and adjustments are made to assortment mix and product
placement based on current sales trends.
Our visual department works with our merchandising team on every
advertising event regarding strategic placement of promotional
merchandise, along with functional signage and creative product
presentation standards, in all of our stores. All stores receive
a centrally produced promotional planner for each event to
ensure consistent implementation.
Planning and
allocation
We have developed a disciplined approach to buying and a dynamic
inventory planning and allocation process to support our
merchandising strategy. We centrally manage product
replenishment to our stores through our planning and
replenishment group. This group serves as a strategic partner
to, and provides financial oversight of, the merchandising team.
The merchandising team creates a sales forecast by category for
the year. Our planning and replenishment group creates an
open-to-buy plan, approved by senior executives, for each
product category. The open-to-buy plan is updated weekly with
point of sale, or POS, data, receipts and inventory levels and
is used throughout the year to balance buying opportunities and
inventory return on investment. We believe this structure
maximizes our buying opportunities while maintaining
organizational and financial control.
Regularly replenished products are presented consistently in all
stores utilizing a merchandising planogram process. POS data is
used to calculate sales forecasts and to determine replenishment
levels. We determine promotional product replenishment levels
using sales histories from similar or comparable events. To
ensure our inventory remains productive, our planning and
replenishment group, along with senior executives, monitors the
levels of clearance and aged inventory in our stores on a weekly
basis. In addition, we have structured our accounting policies
to ensure appropriate clearance and movement of aged inventory.
Vendor
relationships
We work with over 300 vendors. Each merchandising vice
president has over 15 years of experience developing
relationships in the industry with which he or she works. We
have no long-term supply agreements or exclusive arrangements
with our vendors. Our top ten vendors represent approximately
35% of our total annual sales. These include vendors across all
product categories, such as Bare Essentials, Farouk Systems,
Helen of Troy, LOréal and Procter &
Gamble, among others. We have top-to-top
meetings with each of these vendors at least once a year, which
in most instances includes our Chief Executive Officer and the
vendors senior
62
management team. We believe our vendors view us as a significant
distribution channel for growth and brand enhancement.
Marketing and
advertising
Marketing
strategy
We employ a multi-faceted marketing strategy to increase brand
awareness and drive traffic to our stores. Our marketing
strategy complements a basic tenet of our business strategy,
which is to provide our customers with a satisfying and
uplifting experience. We communicate this vision through a
multi-media approach. Our primary media expenditure is in direct
mail catalogs and free-standing newspaper inserts. These
vehicles allow the customer to see the breadth of our selection
of prestige, mass and salon beauty products.
In order to reach new customers and to establish ULTA as a
national brand, we advertise in national magazines such as
InStyle, Allure, Lucky, Cosmopolitan
and Vanity Fair. These advertising channels have proven
successful in raising our brand awareness on a national level
and driving additional sales from both existing and new
customers. In conjunction with our national brand advertising,
we have initiated a public relations strategy that focuses on
reaching top tier magazine editors to ensure consistent
messaging in beauty magazines as well as direct-to-customer
efforts through multi-media channels.
Our Internet advertising strategy complements our print media
strategy. We send out email distributions to our key customers,
and we integrate promotional messaging in banner advertising
during certain times of the year.
Our gross advertising budget over the next five years is
decreasing as a percentage of sales, due in part to the
effectiveness of our strategy of opening new stores in existing
markets as well as the cost efficiencies we are able to achieve
as our catalogs and newspaper inserts circulate more widely.
Customer loyalty
programs - The Club at ULTA
The strategy of our customer loyalty program, which we initiated
in 1996, is to engage, motivate and reward existing ULTA
customers while increasing our customer count and sales. We have
approximately six million customer loyalty program members, the
majority of whom have shopped at one of our stores within the
past 12 months. Customers sign up to become members
in-store and receive free gifts four times a year, with the
value of such gifts based on customers spending levels. We
also send reward certificates to members in our catalogs.
Staffing and
operations
Retail
Our current ULTA store format is typically staffed with a
general manager, a salon manager, four assistant managers, and
approximately 20 full and part-time associates, including
approximately six to eight beauty consultants and eight to
fifteen licensed salon professionals. The management team in
each store reports to the general manager. The general manager
oversees all store activities and salon management, which
include inventory management, merchandising, cash management,
scheduling, hiring and guest services. Members of store
management receive bonuses depending on their position and on
sales, shrink, payroll, or a
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combination of these three factors. Each general manager reports
to a district manager, who in turn reports to the Vice President
of Operations East, the Vice President of Operations West or the
Senior Vice President of Operations. The Senior Vice President
of Operations reports to our Chief Operating Officer. Each store
team receives additional support from time to time from
recruiting specialists for the retail and salon operations, a
field loss prevention team, market trainers, and management
trainers.
ULTA stores are open seven days a week, 11 hours a day,
Monday through Saturday, and seven hours on Sunday. Our stores
have extended hours during the holiday season.
Salon
A typical salon is staffed with eight to 15 licensed salon
professionals, including one salon manager, eight to
12 stylists, and one to two estheticians. Our higher
producing salons may also have a salon coordinator and assistant
manager. Our training teams, vendor education classes and
leadership conferences create a comprehensive educational
program for our approximately 1,900 salon professionals.
Training and
development
Our success is dependent in part on our ability to attract,
train, retain and motivate qualified employees at all levels of
the organization. We have developed a corporate culture that
enables individual store managers to make store-level operating
decisions and consistently rewards their success. We are
committed to improving the skills and careers of our workforce
and providing advancement opportunities for our associates. Our
associates and regional managers are essential to our store
expansion strategy. We primarily use existing managers or
promote from within to support our new stores, although many
outlying stores have all-new teams.
All of our associates participate in an interactive new-hire
orientation through which each associate becomes acquainted with
ULTAs vision and mission. Training for new store managers,
beauty consultants and sales associates familiarizes them with
opening and closing routines, guest service expectations, our
loss prevention policy and procedures, and our culture. We also
have ongoing development programs that include operational
training for hourly associates, beauty consultants, management
and stylists. We provide continuing education to both salon
professionals and retail associates throughout their careers at
ULTA to enable them to deliver the Four Es to
our customers. In contrast to the sales teams at traditional
department stores, our sales teams are not commissioned or
brand-dedicated. Our beauty consultants are trained to work
across all prestige lines and within our prestige
boutiques, where customers can receive a makeover or
skin analysis.
Distribution
Our distribution facility (including an overflow facility) is
located in an approximately 317,000 square foot facility in
Romeoville, Illinois. We have negotiated a lease for a second
distribution facility in Phoenix, Arizona that is approximately
330,000 square feet in size. This new facility, which we
expect will be completed and operational in the first half of
2008, will service our Western region and accommodate our
anticipated growth by providing support for our current
distribution facility.
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Inventory is shipped from our suppliers to our distribution
facility. We carry over 21,000 products and replenish our stores
with such products primarily in eaches (i.e., less-than-case
quantities), which allows us to ship less than an entire case
when only one or two of a particular product is needed. Our
distribution facility uses a WM software system, which was
upgraded in early 2007. Products are bar-coded and scanned using
handheld radio-frequency devices as they move within the
warehouse to ensure accuracy. Product is delivered to stores
using contract carriers. One vendor currently provides
store-ready orders that can be quickly forwarded to our stores.
We use advance ship notices, or ASNs, and carton barcode labels
to facilitate these shipments. We expect to increase the number
of vendors using ASNs and carton barcodes to expedite our
receiving process.
Information
technology
We are committed to using technology to enhance our competitive
position. We depend on a variety of information systems and
technologies to maintain and improve our competitive position
and to manage the operations of our growing store base. We rely
on computer systems to provide information for all areas of our
business, including supply chain, merchandising, POS, electronic
commerce, finance, accounting and human resources. Our core
business systems consist mostly of a purchased software program
that integrates with our internally developed software
solutions. Our technology also includes a company-wide network
that connects all corporate users, stores, and our distribution
infrastructure and provides communications for credit card and
daily polling of sales and merchandise movement at the store
level. We intend to leverage our technology infrastructure and
systems where appropriate to gain operational efficiencies
through more effective use of our systems, people and processes.
We update the technology supporting our stores, distribution
infrastructure and corporate headquarters on a continual basis.
From fiscal 2006 through fiscal 2007, we will have invested
$22.6 million to improve the technology in our distribution
infrastructure, stores and corporate headquarters. We will
continue to make investments in our information systems to
facilitate our growth and enable us to enhance our competitive
position.
We use a POS system that includes registers with full scanning
capabilities in order to maintain speed and accuracy at customer
checkouts. Our POS system is integrated with our customer
loyalty program and has the ability to look up our
customers loyalty numbers. We are planning to upgrade the
POS system to enable the acceptance of debit cards by the end of
2007.
During 2007, we have launched several initiatives to support our
expected growth, including the transition of a legacy WM
software system to the core purchased software program,
construction of a modern, secure data center, a technical
upgrade of the same purchased software program system and an
update of our website technology. In anticipation of our planned
second distribution facility, our WM software system was
recently upgraded to make it capable of supporting multiple
distribution facilities. Further development and testing of our
WM software system is necessary before it will be ready to
operate a second distribution facility. We believe these
initiatives will provide the needed functionality and capacity
to support the business and will provide the foundation for
future stores and distribution facilities.
Competition
Distribution for beauty products is varied. Prestige products
are typically purchased in department or specialty stores, while
mass products and staple items are generally purchased at drug
stores, grocery stores and mass merchandisers. In addition,
salon haircare products are sold
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in salons and authorized professional retail outlets. From 2000
to 2006, changes in consumer shopping preferences and industry
consolidation have resulted in declines in the market share of
department stores from 18% to 15% and of food retail stores and
other channels from 33% to 31%, while the specialty retail
channel has increased its share of the beauty retail market from
7% to 9%, according to Kline & Company. Our major
competitors for prestige and mass products include traditional
department stores such as Macys and
Nordstrom, specialty stores such as Sephora and
Bath & Body Works, drug stores such as
CVS/pharmacy and Walgreens and mass merchandisers
such as Target and Wal-Mart. We believe the
principal bases upon which we compete are the quality of
merchandise, our value proposition, the quality of our
customers shopping experience and the convenience of our
stores as one-stop destinations for beauty products and salon
services.
The market for salon services and products is highly fragmented,
with approximately 230,000 salons in the United States,
according to Professional Consultants & Resources, a market
research firm. Our competitors for salon services and products
include Regis Corp., Sally Beauty, JCPenney
salons and independent salons.
Intellectual
property
We have registered a number of trademarks in the United States,
including Ulta 3 (and design), Ulta Salon Cosmetics and
Fragrances (and design), ULTA.com, and several brands and
service marks. The renewal dates for these marks are
December 29, 2008, January 22, 2012 and
October 8, 2012, respectively. The application for ULTA
Beauty and design is pending. All marks that are deemed material
to our business have been protected in the United States, Canada
and select foreign countries.
We believe our trademarks, especially those related to the ULTA
concept, have significant value and are important to building
brand recognition.
Government
regulation
In our U.S. markets, we are affected by extensive laws,
governmental regulations, administrative determinations, court
decisions and similar constraints. Such laws, regulations and
other constraints may exist at the federal, state or local
levels in the United States. Our ULTA branded products
are subject to regulation by the FDA, the FTC and State
Attorneys General in the United States. Such regulations
principally relate to the safety of our ingredients, proper
labeling, advertising, packaging and marketing of our products.
Products classified as cosmetics (as defined in the FDC Act) are
not subject to pre-market approval by the FDA, but the products
and the ingredients must be tested to ensure safety. The FDA
also utilizes an intended use doctrine to determine
whether a product is a drug or cosmetic by the labeling claims
made for the product. Certain ingredients commonly used in
cosmetics products such as sunscreens and acne treatment
ingredients are classified as over-the-counter drugs which have
specific label requirements and allowable claims. The labeling
of cosmetic products is subject to the requirements of the FDC
Act, the Fair Packaging and Labeling Act and other FDA
regulations.
The government regulations that most impact our day-to-day
operations are the labor and employment and taxation laws to
which most retailers are typically subject. We are also subject
to typical zoning and real estate land use restrictions and
typical advertising and consumer
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protection laws (both federal and state). Our salon business is
subject to state board regulations and state licensing
requirements for our stylists and our salon procedures.
In our store leases, we require our landlords to obtain all
necessary zoning approvals and permits for the site to be used
as a retail site and we also ask them to obtain any zoning
approvals and permits for our specific use (but at times the
responsibility of obtaining zoning approvals and permits for our
specific use falls to us). We require our landlords to deliver a
certificate of occupation for any work they perform on our
buildings or the shopping centers in which our stores are
located. We are responsible for delivering a certificate of
occupation for any remodeling or build-outs that we perform and
are responsible for complying with all applicable laws in
connection with such construction projects or build-outs.
Associates
As of May 5, 2007, we employed approximately
3,400 people on a full-time basis and approximately 3,700
on a part-time basis. We have no collective bargaining
agreements. We have not experienced any work stoppages and
believe we have good relationships with our associates.
Properties
All ULTA retail stores, our principal executive offices and all
of our distribution, warehouse and other office facilities are
leased or subleased. Most of our retail store leases provide for
a fixed minimum annual rent and have a fixed term with options
for two or three extension periods of five years each,
exercisable at our option. As of May 31, 2007, we operated
207 ULTA retail stores.
As of May 31, 2007, we operated one distribution facility
(including an overflow facility), or the Arbor Drive warehouse,
which is located in Romeoville, Illinois. The Arbor Drive
warehouse contains approximately 317,000 square feet. The
lease for the Arbor Drive warehouse expires as of April 30,
2010 and has two renewal options with terms of five years each.
We have negotiated a lease for a second distribution facility
located in Phoenix, Arizona for approximately
330,000 square feet to be operational in the first half of
2008.
Our principal executive offices are currently located in two
separate buildings. One portion of our executive offices, or the
Arbor Drive offices, is located on the site of the Arbor Drive
warehouse. Our remaining executive offices, or the Windham
Parkway offices, are located in a separate building in
Romeoville, Illinois. The lease for the Arbor Drive offices
expires as of April 30, 2010 and the lease for the Windham
Parkway offices expires as of January 31, 2008. We have
secured additional office space in Romeoville, Illinois for
corporate use to accommodate future human resource requirements
over the next several years.
Legal
proceedings
We are involved in various legal proceedings that are incidental
to the conduct of our business, including, but not limited to,
employment discrimination claims. In the opinion of management,
the amount of any liability with respect to these proceedings,
either individually or in the aggregate, will not be material.
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Management
Executive
officers and directors
Upon the consummation of this offering, our executive officers
and directors will be as follows:
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Name
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Age
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Position
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Lyn P. Kirby
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President, Chief Executive Officer
and Director
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Bruce E. Barkus
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Chief Operating Officer and
Assistant Secretary
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Gregg R. Bodnar
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Chief Financial Officer and
Assistant Secretary
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Hervé J.F. Defforey
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Director
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Robert F. DiRomualdo
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Director
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Dennis K. Eck
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Non-Executive Chairman of the
Board of Directors
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Gerald R. Gallagher
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Director
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Terry J. Hanson
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Director
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Charles Heilbronn
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Director
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Steven E. Lebow
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Director
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Yves Sisteron
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Director
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Lyn P. Kirby: Ms. Kirby has been our President,
Chief Executive Officer and Director since December 1999. Prior
to joining ULTA, Ms. Kirby was President of Circle of
Beauty, a subsidiary of Sears, from March 1998 to December 1999;
Vice President and General Manager of new business for Gryphon
Development, a subsidiary of Limited Brands, Inc. from 1995 to
March 1998; and Vice President of Avon Products Inc. and general
manager of the gift business, the in-house creative agency and
color cosmetics prior to 1995. Ms. Kirby holds a Bachelor
degree (honors) in commerce and marketing from the University of
New South Wales in Sydney, Australia.
Bruce E. Barkus: Mr. Barkus has been our Chief
Operating Officer since December 2005, our Corporate Secretary
from April 2006 to August 2007, an Assistant Corporate Secretary
since August 2007, and served as our Acting Chief Financial
Officer from April 2006 to October 2006. Prior to joining ULTA,
Mr. Barkus was President and Chief Executive Officer of GNC
and its wholly owned subsidiary, General Nutrition Centers, Inc.
from May 2005 to November 2005. Prior to that, Mr. Barkus
was an executive at Family Dollar Stores, Inc., as Executive
Vice President from October 2003 to May 2005; Senior Vice
President of Store Operations from August 2000 to October 2003;
and Vice President of Store Operations from June 1999 to July
2000. Prior to June 1999, Mr. Barkus served in various
executive roles at Eckerd Corporation, where he was Vice
President of Operations for the North Texas Region.
Mr. Barkus holds a Doctorate degree in business
administration from Nova Southeastern University School of
Business.
Gregg R. Bodnar: Mr. Bodnar has been our Chief
Financial Officer and Assistant Corporate Secretary since
October 2006. Prior to joining ULTA, Mr. Bodnar was Senior
Vice President and Chief Financial Officer of Borders
International from January 2003 to June 2006; Vice President
Group Financial Reporting and Planning of Borders Group, Inc.
from January 2000 to December 2002; Director of Finance of
Borders Group, Inc. from January 1996 to December 1999; Vice
President, Finance and Chief Financial Officer of Rao Group Inc.
from 1993 to 1996; and as an
68
auditor and certified public accountant at the public accounting
firm of Coopers & Lybrand from 1988 to 1993.
Mr. Bodnar holds a Bachelor degree in finance and
accounting from Wayne State University in Detroit, Michigan.
Hervé J.F. Defforey: Mr. Defforey has been a
director of ULTA since July 2004. Mr. Defforey has been an
operating partner of GRP, a venture capital firm, in Los
Angeles, California since September 2006. Prior to September
2006, Mr. Defforey was a partner in GRP Europe Ltd. from
November 2001 to September 2006; Chief Financial Officer and
Managing Director of Carrefour S.A. from 1993 to 2004; and
Treasurer at BMW Group and General Manager of various BMW AG
group subsidiaries and also held senior positions at Chase
Manhattan Bank, EBRO Agricolas, S.A. and Nestlé S.A. prior
to 1993. Mr. Defforey holds a business degree in marketing
from HEC St. Gall (Switzerland). Mr. Defforey is a director
of X5 Retail Group (chairman of the supervisory board), IFCO
Systems (member of the audit committee), PrePay Technologies
Ltd. and Kyriba Corporation.
Robert F. DiRomualdo: Mr. DiRomualdo has been a
director of ULTA since February 2004. Mr. DiRomualdo is
Chairman and Chief Executive Officer of Naples Ventures, LLC, a
private investment company that he formed in 2002. Prior to
2002, Mr. DiRomualdo was Chairman of the Board of Directors
of Borders Group, Inc. and its predecessor companies from August
1994 to January 2002; Chief Executive Officer of Borders Group,
Inc. and its predecessor companies from 1989 to December 1999;
and President and Chief Executive Officer of Hickory Farms, the
food store chain, prior to 1989. Mr. DiRomualdo holds a
Bachelor degree from Drexel Institute of Technology and a Master
of Business Administration degree from the Harvard Business
School. Mr. DiRomualdo is a director of Bill Me Later, Inc.
(chairman of the compensation committee and member of the audit
committee).
Dennis K. Eck: Mr. Eck has been our
Non-Executive Chairman of the Board of Directors and a director
of ULTA since October 2003. Prior to that, Mr. Eck served
in various executive roles with Coles Myer, one of
Australias largest retailers, where he was Chief Executive
Officer and a member of the board of Coles Myer LTD Australia
from November 1997 to September 2001; Chief Operating Officer
and a member of the board of Coles Myer LTD from April 1997 to
November 1997; Managing Director-Basic Needs of Coles Myer LTD
from November 1996 to April 1997; and Managing Director of Coles
Myer Supermarkets from May 1994 to November 1996. Prior to 1994,
Mr. Eck was Chief Operating Officer and a member of the
board of The Vons Companies Inc. from February 1990 to November
1993. From 1988 to February 1990, Mr. Eck served as Vice
Chairman of the Board and Executive Vice President of American
Stores, Inc. and Chairman and Chief Executive Officer of
American Food and Drug, a subsidiary of American Stores, Inc.
From 1987 to 1988, Mr. Eck was President and Chief
Executive Officer and a member of the board of American Food and
Drug. Prior to that, he served as President and Chief Operating
Officer of Acme Markets, Inc. from 1985 to 1987; Senior Vice
President Marketing of Acme Markets, Inc. from 1984 to 1985;
Executive Vice President Drug Buying / Marketing and
General Manager Superstores of American Stores Sav-On
Drugs division in southern California from 1982 to 1984; and,
from 1968 to 1982, served in various positions with Jewel
Companies Inc. Mr. Eck holds a Bachelor degree in history
and political science from the University of Montana.
Mr. Eck is a director of eStyle (babystyle).
Gerald R. Gallagher: Mr. Gallagher has been a
director of ULTA since December 1998. Mr. Gallagher has
been a General Partner of Oak Investment Partners, a venture
capital partnership, since 1987. Prior to 1987,
Mr. Gallagher was Vice Chairman of Dayton Hudson
Corporation where, he served in both operating and staff
positions from 1977 to 1987; and a retail industry analyst at
Donaldson,
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Lufkin & Jenrette prior to 1977. Mr. Gallagher
holds a Bachelor degree from Princeton University and a Master
of Business Administration from the University of Chicago.
Mr. Gallagher is a director of Cheddars Casual
Café (member of the compensation committee), eStyle (member
of the compensation committee), Lucy Activewear (member of the
audit committee) and Xiotech.
Terry J. Hanson: Mr. Hanson has been a director
of ULTA since January 1990 and is one of ULTAs
co-founders. He served as President and Chief Operating Officer
from January 1990 until September 1994 and as President and
Chief Executive Officer from September 1994 until December 1999.
From December 1999 until July 2000, Mr. Hanson served as
Chairman of the board of directors. He also served as
ULTA.coms Chairman of the board of directors, Chief
Executive Officer and as a director from August 2000 until
February 2002. Subsequently, Mr. Hanson served as President
of Pearle Vision, Inc. from May 2003 until October 2004 and has
been Managing Partner of RIMC LLC since December 2004. He also
held positions at American Drugstores, Inc.
(Osco-Sav-On)
from September 1969 to October 1989, where he served as
President from 1988 until 1989 and as Executive Vice President,
Vice President Chicagoland Operations, and Vice President
Personnel from 1977 until 1988. Mr. Hanson holds a Bachelor
degree and a Master of Science degree from North Dakota State
University.
Charles Heilbronn: Mr. Heilbronn has been a
director of ULTA since July 1995. Mr. Heilbronn has been
Executive Vice President and Secretary of Chanel, Inc. since
1998, and, since December 2004, Executive Vice President of
Chanel Limited, a privately-held international luxury goods
company selling fragrance and cosmetics, womens clothing,
shoes and accessories, leather goods, fine jewelry and watches.
Prior to that, Mr. Heilbronn was Vice President and General
Counsel of Chanel Limited and Senior Vice President, General
Counsel and Secretary of Chanel, Inc. from 1987 to December
2004. Mr. Heilbronn served as a director of RedEnvelope
from October 2002 to August 2006, and is currently a director of
Doublemousse B.V., Chanel, Inc. (U.S.) and various other Chanel
companies or their affiliates in the United States and
worldwide, as well as several unrelated private companies. He is
also a Membre du Conseil de Surveillance (a non-executive
board of trustees) of Bourjois SAS, a French company.
Mr. Heilbronn received a Master in Law from Universite de
Paris V, Law School and an LLM from New York University Law
School.
Steven E. Lebow: Mr. Lebow has been a director
of ULTA since May 1997. Mr. Lebow has been a Managing
Partner and Co-Founder of GRP Partners, a venture capital firm,
since 2000. Prior to 2000, Mr. Lebow spent 21 years at
Donaldson, Lufkin & Jenrette in a variety of positions,
most recently as Chairman of Global Retail Partners, and as
Managing Director and head of the Retail Group within the
Investment Banking Division. Mr. Lebow holds a Bachelor
degree in political science and economics from the University of
California Los Angeles and a Master of Business Administration
from the Wharton School of Business at the University of
Pennsylvania. Mr. Lebow is a director of eStyle
(babystyle), EnvestNet Asset Management and Bill Me
Later, Inc.
Yves Sisteron: Mr. Sisteron has been a director
of ULTA since July 1993. Mr. Sisteron has been a Managing
Partner and Co-Founder of GRP Partners, a venture capital firm,
since 2000. Prior to that, Mr. Sisteron was a managing
director at Donaldson Lufkin & Jenrette overseeing the
operations of Global Retail Partners, which he started with
Mr. Lebow in 1996. From 1989 to 1996, Mr. Sisteron
managed the U.S. investments of Fourcar B.V., a division of
Carrefour S.A. Mr. Sisteron holds a Juris Doctorate degree
and LLM degree from the University of Law (Lyon) and a LLM
degree (MCJ) from the New York University School of
Law. Mr. Sisteron is a director of UGO, Inc. (member of
compensation committee), EnvestNet Asset Management
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(member of compensation committee), HealthDataInsights, Kyriba,
Inc., Qualys, Inc., Netsize, S.A., and Actimagine, Inc.
Board of
directors composition
Our board of directors currently has nine members. Each director
was elected to the board of directors to serve until a successor
is duly elected and qualified or until his or her earlier death,
resignation or removal. Our Second Amended and Restated Voting
Agreement, or the voting agreement, entered into as of
December 18, 2000, which by its terms will terminate upon
the consummation of this offering, designates that
Mr. Sisteron is to be elected as a director of the company
representing GRP II, L.P. and its affiliates and
Mr. Heilbronn is to be elected as a director of the company
representing Doublemousse B.V., and if either of them are
unwilling or unable to serve as director, Mr. Lebow is to
be elected in his place. The voting agreement also provides that
Oak Investment Partners has the right to elect one member of the
board of directors, with Mr. Gallagher currently serving as
Oak Investment Partners director. Upon the consummation of
this offering, a majority of our board of directors, consisting
of Messrs. Defforey, DiRomualdo, Eck, Gallagher, Hanson,
Heilbronn, Lebow and Sisteron, will satisfy the current
independence requirements of the NASDAQ Global Select Market and
the SEC.
Upon the consummation of this offering, our bylaws will provide
that our board of directors consists of no less than three
persons. The exact number of members of our board of directors
will be determined from time to time by resolution of a majority
of our full board of directors. Our board of directors will be
divided into three classes as described below, with each
director serving a three-year term and one class being elected
at each years annual meeting of stockholders.
Messrs. Eck, Sisteron and Hanson will serve initially as
Class I directors (with a term expiring in 2008).
Messrs. Gallagher, Defforey and DiRomualdo will serve
initially as Class II directors (with a term expiring in
2009). Messrs. Heilbronn and Lebow and Ms. Kirby will
serve initially as Class III directors (with a term
expiring in 2010).
Board of
directors committees
Our board of directors has an audit committee, a compensation
committee and a nominating and corporate governance committee.
Upon the consummation of this offering, the composition and
functioning of all of our committees will comply with all
applicable requirements of the NASDAQ and the SEC.
Audit committee. Upon the consummation of this
offering, the audit committee will consist of
Messrs. Defforey (Chairman), DiRomualdo and Hanson. The
board of directors has determined that each committee member
qualifies as a nonemployee director under SEC rules
and regulations, as well as the independence requirements of the
NASDAQ. The board of directors has determined that
Mr. Defforey qualifies as an audit committee
financial expert under SEC rules and regulations. The
audit committee assists the board of directors in monitoring the
integrity of our financial statements, our independent
auditors qualifications and independence, the performance
of our audit function and independent auditors, and our
compliance with legal and regulatory requirements. The audit
committee has direct responsibility for the appointment,
compensation, retention (including termination) and oversight of
our independent auditors, and our independent auditors report
directly to the audit committee.
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Compensation committee. Upon the consummation of
this offering, the compensation committee will consist of
Messrs. Eck (Chairman), Lebow and Heilbronn. The board of
directors has determined that each committee member qualifies as
a nonemployee director under SEC rules and
regulations, as well as the independence requirements of the
NASDAQ. The primary duty of the compensation committee is to
discharge the responsibilities of the board of directors
relating to compensation practices for our executive officers
and other key associates, as the committee may determine, to
ensure that managements interests are aligned with the
interests of our equity holders. The compensation committee also
reviews and makes recommendations to the board of directors with
respect to our employee benefits plans, compensation and
equity-based plans and compensation of directors. The
compensation committee approves the compensation and benefits of
the chief executive officer and all other executive officers.
The board of directors ratifies the compensation of the Chief
Executive Officer.
Nominating and corporate governance committee. Upon
the consummation of this offering, the nominating and corporate
governance committee will consist of Messrs. Heilbronn
(Chairman), Lebow and Gallagher. The board of directors has
determined that each committee member qualifies as a
nonemployee director under SEC rules and
regulations, as well as the independence requirements of the
NASDAQ. The primary responsibility of the nomination and
corporate governance committee is to recommend to the board of
directors candidates for nomination as directors. The committee
reviews the performance and independence of each director, and
in appropriate circumstances, may recommend the removal of a
director for cause. The committee oversees the evaluation of the
board of directors and management. The committee also recommends
to the board of directors policies with respect to corporate
governance.
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Compensation
Compensation
discussion and analysis
Philosophy and
overview of compensation
Our executive compensation philosophy is to provide compensation
opportunities that attract, retain and motivate talented key
executives. We accomplish this by:
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evaluating the competitiveness and effectiveness of our
compensation programs by benchmarking against other comparable
businesses based on industry, size, results and other relevant
business factors;
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linking annual incentive compensation to the companys
performance on key financial, operational and strategic goals
that support stockholder value;
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focusing a significant portion of the executives
compensation on equity based incentives to align interests
closely with stockholders; and
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managing pay for performance such that pay is tied to business
and individual performance.
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Our compensation program consists of a fixed base salary,
variable cash bonus and stock option awards, with a significant
portion weighted towards the variable components. This mix of
compensation is intended to ensure that total compensation
reflects our overall success or failure and to motivate
executive officers to meet appropriate performance measures.
Because we have been a private company, historically our
compensation committee has made compensation recommendations to
the board of directors and the full board of directors has
approved the compensation of our executive officers. After
completion of this offering, the compensation committee will
determine the compensation of our executive officers.
From time to time, the compensation committee has used
compensation consultants in order to determine whether our
compensation programs and pay levels are competitive in the
marketplace. However, the compensation committee did not rely
upon any compensation consultant in setting compensation for our
named executive officers, or NEOs, for 2006. Rather compensation
decisions in 2006 were, in part, driven by company discussions
with recruiting consultants and experiences with the hiring of
certain key executives, including our Chief Operating Officer
and Chief Financial Officer. Based on their compensation levels,
which the compensation committee determined were necessary to
hire talented executives, and in a review of general and retail
industry surveys, the compensation committee determined that the
compensation of our Chief Executive Officer, as well as that of
other executives, should be increased to reflect the competitive
marketplace, and to achieve a level of internal pay consistency.
Consequently, we entered into a new employment agreement with
our Chief Executive Officer, as described below.
In 2007, in order to assist the compensation committee in its
responsibilities (including evaluating the competitiveness of
executive compensation levels), the compensation committee
retained an independent outside consultant (Towers Perrin). This
outside consultant was engaged directly by the compensation
committee. Specifically, the consultants role was to work
with the compensation committee to benchmark our compensation to
the marketplace, develop an ongoing equity based program and
provide advice with respect to the overall structure of our
compensation programs. The consultants competitive market data
was based on a review of a
73
peer group of 18 retail industry companies, including: Guitar
Center, Inc., The Childrens Place; CHICOS FAS Inc.;
Timberland Co.; Revlon Inc.; DSW, Inc.; Urban Outfitters; Guess,
Inc.; J.Crew Group Inc.; Fossil Inc.; Coldwater Creek; Panera
Bread Co.; Oakley Inc.; Sharper Image Corp.; Kenneth Cole Prod.
Inc.; Lifetime Fitness Inc.; Hibbert Sports, Inc.; and K-Swiss
Inc. To assist us in our 2007 equity program grants, our
consultant also prepared a binomial option valuation model.
In making its individual compensation determinations, the
Compensation Committee considers the report of individual
performances prepared by Ms. Kirby in her capacity of Chief
Executive Officer. The compensation committee also considers the
accounting and tax impact of each element of compensation and in
the past has tried to minimize the compensation expense impact
of equity grants on our financial statements, while minimizing
the tax consequences to executives.
The following briefly describes each element of our executive
compensation program:
Base salary
Base salaries are reviewed annually and are set based on
individual performance, individual contract negotiation,
competitiveness versus the external market, and internal merit
increase budgets. Factors that are taken into account to
increase or decrease compensation include significant changes in
individual job responsibilities, performance
and/or our
growth.
Annual bonuses
Each year the compensation committee recommends, and the board
of directors approves, performance targets for Ms. Kirby
and Mr. Barkus. If 100% of these pre-established
performance targets are met, then Ms. Kirby will earn a
target bonus of $812,500 per year and Mr. Barkus will earn
a bonus of $725,000. At least 91% of the performance targets
must be achieved in order for Ms. Kirby or Mr. Barkus
to receive any bonus. In fiscal 2006, Ms. Kirbys and
Mr. Barkus performance targets were based on an
internally defined operating earnings target, or bonus operating
earnings, with a target of $43,792,000. Actual fiscal 2006 bonus
operating earnings was $51,406,000, or an achievement of 117.4%
of the target.
The established bonus operating earnings targets for 2007
represent a substantial stretch beyond the actual results
achieved in 2006. In setting these performance objectives, and
based on 2007 results to date, we realize that the achievement
of the planned performance will be challenging. However, we
believe that stretch performance objectives are appropriate in
pursuit of continuous improvement.
Mr. Bodnar became an employee on October 22, 2006, and
has a target bonus of 40% of his base salary.
Based on achievement of 117.4% of the bonus operating earnings
performance target, Ms. Kirby and Mr. Barkus each were
entitled to 100% of their target bonus. Based on the terms of
his employment, Mr. Bodnar was entitled to 100% of his
target bonus, pro rated to reflect the period of his employment.
Because they exceeded their performance targets, the
compensation committee determined in its discretion as approved
by the Board, to pay Ms. Kirby $100,000, Mr. Barkus
$75,000 and Mr. Bodnar $10,000 as discretionary bonuses.
Based on the terms of employment for Ms. Kirby and
Messrs. Barkus and Bodnar, the board has the discretion to
increase awards in the event the targets are either not achieved
or exceeded.
In addition to his annual performance bonus, as long as
Mr. Barkus is employed on the last day of each fiscal year,
he will receive a bonus of $100,000 beginning with the 2006
fiscal year and ending with the 2011 fiscal year. Such bonus was
agreed to in June of 2006, as a means of
74
allowing Mr. Barkus the opportunity to receive compensation
he would have otherwise lost because the exercise price of his
options was higher than originally intended under the terms of
his employment agreement. In particular, Mr. Barkus was to
receive his options on the date of the first board of directors
meeting following his start date with us, which would have been
in January 2006. Mr. Barkus accepted employment and the
number of options with the expectation that such an option grant
would have a certain value. However, such grant was delayed by
the board of directors until April 2006. Between such dates, the
board of directors, based on all known facts and circumstances,
determined that the fair market value of our stock had
increased, and correspondingly the exercise price of his options
also increased. This increase in the exercise price diminished
the ultimate value of the option grant. As a result, the board
of directors elected to provide the bonus as a means of
providing Mr. Barkus with potential total compensation on
the level anticipated at the time of his employment agreement.
Mr. Weber did not receive a bonus for fiscal 2006, as his
employment terminated during the year.
Stock options
We have historically granted stock options to a broad group of
employees. Employees receive grants of stock options upon hire
or promotion. We have also made grants to executives from time
to time, at the discretion of the board of directors, based on
performance and for retention purposes. Grants made to senior
executives such as Ms. Kirby, Messrs. Barkus and
Bodnar, however, are not determined based on a set formula.
Rather the amount of their option grants is separately
determined by the compensation committee. In particular,
Messrs. Barkus and Bodnars option grants in fiscal
2006 were negotiated as part of their initial compensation
packages at the time of their hire. In determining the amount of
such grants, the compensation committee assessed the potential
value that it thought such options would deliver to
Messrs. Barkus and Bodnar over a period of years based on
its assumptions as to the growth in the value of our common
stock. It then determined whether the potential value realizable
was reasonable given the executives level of
responsibility and experience.
In making such assessment, the compensation committee considered
competitive data available to it through its consultants and
reviewed various hypothetical results based on a variety of
potential appreciation rates for the value of our stock over the
vesting period, recognizing that there was no certainty there
would be any material appreciation or that the company would
become a public company, and that fundamentally the judgment of
what level of options is reasonable for the particular person or
position is related to the executives level of
responsibility and experience, but is still subjective. The
timing of these grants was in each case a function of the date
of the individuals hire, the completion of a stock
valuation, and the date of the next following board of directors
meeting.
Option grants to executive officers have the following
characteristics:
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all options have an exercise price equal to the fair market
value of our common stock on the date of grant, which is
determined by our board of directors based on all known facts
and circumstances, including valuations prepared by a nationally
recognized independent third-party appraisal firm;
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Except for grants to Ms. Kirby described below and the
grants to Mr. Barkus under his employment agreement,
options vest ratably, on an annual basis over a three or
four-year period; and
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options granted under the 2002 Plan expire ten years after the
date of grant. Options granted under the Old Plan expire
14 years after the date of grant.
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Pursuant to the terms of his employment agreement,
Mr. Barkus was to receive a grant of 1,000,000 stock
options at the first board of directors meeting following
commencement of his employment. Of those 1,000,000 options,
198,000 options were to vest on the date of grant and
198,000 and 204,000 options were to vest on the first and
second anniversaries of the date of grant, respectively, for a
total of 600,000 of the 1,000,000 options. In addition,
400,000 of the options vest only after an initial public
offering of our common stock, with 50% of such options vesting
on each of the first and second anniversaries of an initial
public offering. The intention of these options was to provide
Mr. Barkus with an incentive to complete an initial public
offering and provide our investors with a means of realizing
value. Because of a delay in the board of directors being able
to determine the fair market value of our common stock,
Mr. Barkus did not receive his option grants until April of
2006. As a result of this delay, the exercise price of the
options increased. Accordingly, the board of directors
determined to grant Mr. Barkus additional guaranteed bonus
compensation of $100,000 each year, as described above. The
board of directors also later determined to change the reference
date for vesting in his first 600,000 options from the grant
date to the commencement date of his employment,
December 12, 2005.
Upon his commencement of employment in October 2006,
Mr. Bodnar was granted 200,000 options that vest over four
years as described above. In addition, the board of directors
agreed to grant to Mr. Bodnar at its July 2007 meeting an
additional 70,000 options. Such options will vest over four
years as described and will have an exercise price equal to the
fair market value of our common stock on the date of grant.
Until June of 2006, Ms. Kirby held 3,000,000 stock options,
all of which were fully vested. In June 2006, Ms. Kirby
exercised all of these options. At that time, we loaned
Ms. Kirby $4,094,340, which was the amount necessary for
her to exercise all of her stock options and pay associated
taxes. This loan was intended to allow Ms. Kirby to gain
favorable tax treatment by exercising the options while the
value of our common stock was relatively low and begin her
capital gain holding period. The terms of the loan are more
fully described below in the description of
Ms. Kirbys employment agreement. On June 29,
2007 Ms. Kirby repaid all outstanding balances on such loan.
As Ms. Kirby did not have any equity compensation subject
to vesting, the board of directors granted Ms. Kirby up to
1,300,000 options at its July 2007 meeting, as follows:
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500,000 options with an exercise price equal to the fair
market value of our common stock on the date of grant, and which
vest in four installments starting with 25% at the effective
date of an initial public offering and 25% per year for the next
three anniversary dates of an initial public offering;
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500,000 options with an exercise price of
$ , which is
anticipated to be in excess of the fair market value of our
common stock on the date of grant. These options will also vest
in four installments starting with 25% at the effective date of
an initial public offering and 25% per year for the next three
anniversary dates of the initial public offering; and
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up to an additional 300,000 options to be granted one-third
annually starting one year after an initial public offering, but
only if a sustained 25% plus increase in share price is achieved
that year. Vesting will be ratable over two years beginning on
the first anniversary of the grant. The exercise price will be
equal to the fair market value on the date the options are
granted.
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76
As a result, Ms. Kirby will realize value only if there is
an initial public offering, and with respect to a majority
portion of such options only if stockholders also receive
additional value on their investment following an initial public
offering.
Our policy is to set the exercise price of options based on
their fair market value on the date of grant and all options
have been granted at meetings of the board of directors after
consideration and determination of the fair market value of our
common stock based on all known facts and circumstances,
including valuations prepared by a nationally recognized
independent third-party appraisal firm.
Benefits and perquisites
None of the NEOs is eligible for special perquisites or other
benefits that are not available to all of our employees. We
offer a 401(k) plan with matching contributions equal to 40% of
contributions made up to 3% of compensation, group health, life,
accident and disability insurance. In addition, all employees
are entitled to a discount on purchases at our stores.
Summary
compensation table
The following table sets forth the compensation of our Chief
Executive Officer, our Chief Operating Officer, our Chief
Financial Officer and our former Chief Financial Officer for our
fiscal year ending February 3, 2007. We refer to these four
individuals collectively as the NEOs.
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Non-equity
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Option
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incentive plan
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All other
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Name and
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Year
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Salary
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Bonus
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awards(1)
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compensation
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compensation
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Total
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principal
position
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($)
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($)
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($)
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($)
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($)
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($)
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($)
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Lyn P. Kirby
President, Chief Executive Officer and Director (Principal
Executive Officer)
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2006
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598,651
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100,000
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750,000
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1,448,651
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Bruce E. Barkus
Chief Operating Officer(2)
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2006
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580,008
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175,000
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296,530
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725,000
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102,896
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1,879,434
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Gregg R. Bodnar
Chief Financial Officer (Principal Financial Officer)(3)
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2006
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74,043
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10,000
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37,006
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30,335
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58,572
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209,956
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Charles R. Weber
Former Chief Financial Officer(4)
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2006
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230,525
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2,640
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233,165
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(1)
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Represents the aggregate expense
recognized for financial statement reporting purposes in 2006,
disregarding the purposes of forfeitures related to vesting
conditions, in accordance with the FASBs SFAS No.
123(R), Share-Based Payment, for stock option awards
granted during 2006 and prior to 2006 for which we continue to
recognize expense in 2006. The assumptions we used for
calculating the grant date fair values are set forth in
Note 11 to our consolidated financial statements included
in this prospectus.
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(2)
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Mr. Barkus received $102,896
as reimbursement for relocation expenses.
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(3)
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Mr. Bodnars salary is
from his commencement of employment in October of 2006. His
annual base salary for 2006 was set at $275,000. He received
$58,572 as reimbursement for relocation expenses.
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(4)
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Mr. Weber terminated his
employment on October 7, 2006. He received $2,640 in
matching contributions to our 401(k) plan.
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Grants of
plan-based awards
The following table sets forth certain information with respect
to grants of plan-based awards for fiscal 2006 to the NEOs.
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Number of
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Exercise or
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Grant date
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Estimated future
payouts under
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securities
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base price
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fair value
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non-equity
incentive plan awards
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underlying
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of option
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of option
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Name
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Grant
Date
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Threshold
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Target
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Maximum
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options
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awards(2)
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award(3)
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Lyn P. Kirby
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2/23/2006
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(1)
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$
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75,000
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$
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750,000
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$
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750,000
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Bruce E. Barkus
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2/23/2006
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(1)
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72,500
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725,000
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725,000
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4/26/2006
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400,000
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$
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2.60
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4/26/2006
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600,000
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2.60
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$
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296,530
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Gregg R. Bodnar
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10/24/2006
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(1)
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3,033
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30,335
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30,335
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10/24/2006
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200,000
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5.80
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37,006
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Charles R. Weber
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(1)
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Amounts shown represent ranges of
potential payouts under annual performance-based bonus program
as of the award date. Actual bonus amounts paid for 2006
performance are shown in the Summary compensation table under
Non-equity incentive plan compensation.
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(2)
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The exercise price of all the
option grants was the price determined to be the fair market
value of our common stock on the grant date by our board of
directors in light of all the facts and circumstances known to
the board of directors, including valuation reports presented by
a nationally recognized independent third-party appraisal firm.
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(3)
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In determining the estimated fair
value of our option awards as of the grant date, we used the
Black-Scholes option-pricing model. The assumptions underlying
our model are described in the notes to our consolidated
financial statements (Note 11Share-based awards),
included in this prospectus.
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Outstanding
equity awards to Named Executive Officers as of end of fiscal
2006
The following table presents information concerning options to
purchase shares of our common stock held by the NEOs as of the
end of fiscal 2006.
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Option
awards
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Number of
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Number of
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securities
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securities
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underlying
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underlying
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Option
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unexercised
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unexercised
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exercise
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Option
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options
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options
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price per
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expiration
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Name
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exercisable
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unexercisable
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share
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date
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Lyn P. Kirby
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Bruce E. Barkus(1)
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346,000
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604,000
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$
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2.60
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4/26/2016
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Gregg R. Bodnar(2)
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200,000
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5.80
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10/24/2016
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Charles R. Weber
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(1)
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Mr. Barkus received 1,000,000
options on April 26, 2006, of which 198,000 shares
were vested on the date of grant, 198,000 vested on
December 12, 2006, 204,000 vest on December 12, 2007,
200,000 vest on the first anniversary of an initial public
offering and 200,000 vest on the second anniversary of an
initial public offering. Mr. Barkus transferred these
options to a revocable trust of which he is the beneficiary.
Such transfer was made for estate planning purposes by gift
without any payment therefor.
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(2)
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Mr. Bodnars options were
granted on October 24, 2006 and vest 25% on each
anniversary of the date of grant. Mr. Bodnar transferred these
options to a revocable trust of which he is the beneficiary.
Such transfer was made for estate planning purposes by gift
without any payment therefor.
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Option exercises
during fiscal 2006
The following table sets forth information regarding options
held by the NEOs that were exercised during fiscal 2006.
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Number of
shares
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acquired on
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Value realized
on
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Name
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exercise
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exercise
(1)
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Lyn P. Kirby
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3,000,000
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$
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6,120,000
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Bruce E. Barkus
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50,000
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160,000
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Gregg R. Bodnar
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Charles R. Weber
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1,214,894
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6,307,190
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(1)
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There was no public trading of our
common stock on the dates of exercise. Accordingly, these values
are calculated based on the aggregate difference between the
exercise price of the option and the last determination of fair
market value of our common stock by our board of directors based
on all known facts and circumstances, including valuations
prepared by a nationally recognized independent third-party
appraisal firm.
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Employment
contracts
We have entered into employment agreements only with our CEO and
COO. No other executives have employment agreements and all are
employed on an at will basis.
Lyn P.
Kirby
On June 23, 2006, we entered into a new employment
agreement with Ms. Kirby. Under such agreement,
Ms. Kirby serves as our President and Chief Executive
Officer, but may transition such duties to a successor and
assume the role of Executive Chairman. The term of the agreement
is through the last day of the fiscal year ending in February
2008, but with annual renewals thereafter unless 60 days
prior notice of non-renewal is given. By the terms of her
agreement, Ms. Kirby is entitled to receive an annual base
salary of $600,000, as may be adjusted from time to time. For
the current fiscal year, Ms. Kirbys adjusted salary
is $650,000. Ms. Kirby may also earn annual cash bonus
targeted at 125% of her base salary based upon the attainment of
pre-established performance criteria.
Ms. Kirby was eligible for a loan from us up to $4,094,340
for her to exercise previously granted and vested options. In
June 2006, we made such a loan, which was secured by the shares
purchased upon exercise of her options and was fully recourse
against her other assets. The loan carried interest at 5.06% per
year. Ms. Kirby was required to pay the outstanding
interest with any bonus compensation that she received while the
loan remained outstanding. Ms. Kirby was able to prepay the
loan at anytime, but was required to repay the loan in full
(i) immediately prior to our becoming an issuer
under the Sarbanes-Oxley Act of 2002, (ii) expiration of
the time period provided under the terms of her option
agreements and our stockholders agreements for the
repurchase of shares following her termination of employment; or
(iii) after five years. On June 29, 2007,
Ms. Kirby repaid the outstanding balance on the loan.
Under the employment agreement, if her employment is terminated
by us without cause, by her for good
reason, or upon the non-renewal of her employment
agreement, Ms. Kirby will
79
receive severance equal to one years base salary (at the
rate in effect on her termination date) payable over twelve
months. Such severance is subject to her delivery of a general
release of claims. In the event of her death or disability,
Ms. Kirby will receive a cash payment equal to one
years base salary (at the rate in effect at that time)
less any amounts she is eligible to receive from any company
provided disability insurance.
Ms. Kirby also has signed our companys policy
regarding non-competition, non-solicitation, and confidential
information that will apply during her employment and for a
period of one year following her termination.
Bruce E.
Barkus
We entered into an employment agreement with Mr. Barkus as
of December 12, 2005. Under this agreement, Mr. Barkus
serves as our Chief Operating Officer. The term of such
agreement is through the last day of the fiscal year ending in
February 2009, but will renew annually thereafter unless
60 days notice of non-renewal is given. By the terms of
this agreement, Mr. Barkus is entitled to receive an annual
base salary of $580,000, as may be adjusted from time to time.
Mr. Barkus may also earn an annual cash bonus beginning
with the 2006 fiscal year, targeted at $725,000 based upon the
attainment of pre-established performance criteria. On
June 28, 2006, we amended his employment agreement to
provide an additional guaranteed annual cash bonus of $100,000
each year beginning in fiscal 2006 until the fiscal year ending
in 2012, provided he is employed by us on such date.
On April 26, 2006 we granted Mr. Barkus options to
purchase up to 1,000,000 shares of our common stock,
198,000 of which vested on the date of grant and 198,000 and
204,000 of which were to vest on the first and second
anniversaries of December 12, 2005, respectively, for a
total of 600,000 of the 1,000,000 options. In addition, 400,000
of the options vest only after an initial public offering of our
common stock, with 50% of such options vesting on each of the
first and second anniversaries of an initial public offering.
These options were all granted with an exercise price per share
equal to the fair market value of our common stock on the date
of grant, as determined by our board of directors based on all
known facts and circumstances, including valuations prepared by
a nationally recognized independent third-party appraisal firm.
All shares of common stock acquired upon exercise of such option
are subject to repurchase rights upon the termination of
employment at the then fair market value as described in the
2002 Plan, however, such repurchase rights will expire upon the
closing of this offering.
If we terminate Mr. Barkus, without cause, he
resigns for good reason, or his employment
terminates upon the non-renewal of his employment agreement, he
will receive severance equal to one years base salary (at
the rate in effect on termination) payable over twelve months.
Such severance is subject to his delivery of a general release
of claims. In the event of his death or disability,
Mr. Barkus will receive a cash payment equal to one
years base salary (at the rate in effect at that time)
less any amount he is eligible to receive from any company
provided disability insurance.
Mr. Barkus has also signed our policy regarding
non-competition, non-solicitation, and confidential information
that will apply during his employment and for a period of one
year following termination.
80
Potential
payments upon termination or change in control
The following chart set forth the amount that each of the NEOs
would receive assuming that their employment was terminated
involuntarily on the last day of the 2006 fiscal year,
February 3, 2007. The amount set forth below regarding
change in control is based on the acceleration of the vesting of
otherwise unvested stock options and assuming the fair market
value of our common stock as of February 3, 2007 of $5.80,
which was the last determination of fair market value of our
common stock by our board of directors prior to such date.
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Involuntary
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not for cause
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termination/
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Death/
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Change in
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Name
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good
reason
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disability
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control
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Lyn P. Kirby
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$
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600,000
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$
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600,000
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Bruce E. Barkus
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580,000
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580,000
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$
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1,932,800
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Gregg R. Bodnar
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Charles R. Weber(1)
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(1)
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Mr. Webers employment
terminated on October 7, 2006 and he received no severance
in connection therewith.
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Non-executive
director compensation for fiscal 2006
During fiscal 2006, no fees, options or shares of stock were
paid or awarded to any of the non-executive members of our board
of directors. The following table provides information related
to the compensation of our non-employee directors for fiscal
2006:
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Director
compensation
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Stock
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Fees earned or
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compensation
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Option
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All other
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Name
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paid
in cash
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(1)(2)
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compensation
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compensation
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Total
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Hervé J.F. Defforey
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Robert F. DiRomualdo
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$
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83,856
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$
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83,856
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Dennis K. Eck
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209,640
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209,640
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Gerald R. Gallagher
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Terry J. Hanson
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Charles Heilbronn
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Steven E. Lebow
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Yves Sisteron
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(1)
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Represents the aggregate expense
recognized for financial statement reporting purposes in 2006,
disregarding the purposes of forfeitures related to vesting
conditions, in accordance with the FASBs SFAS No.
123(R), Share-Based Payment, for stock option awards
granted prior to 2006 for which we continue to recognize expense
in 2006. The assumptions we used for calculating the grant date
fair values are set forth in Note 11 to our consolidated
financial statements included in this prospectus.
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(2)
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On June 21, 2004, we issued
500,000 shares of common stock to Mr. Eck, pursuant to
a restricted stock agreement. As of February 3, 2007,
125,000 shares remained unvested, but vested in full on
May 1, 2007. On June 21, 2004, we issued
200,000 shares of common stock to Mr. DiRomualdo,
pursuant to a restricted stock agreement under which 25% of the
shares vest annually beginning February 26, 2005, with full
vesting on February 26, 2008. As of February 3, 2007,
Mr. DiRomualdo held 100,000 unvested shares.
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81
Equity Incentive
Plans
We have granted options pursuant to three plans: the 2002 Plan,
the Old Plan and the Consultants Plan. We will refer to the 2002
Plan, the Old Plan and the Consultants Plan together as the
Prior Plans.
2007 Incentive
Award Plan
We recently adopted the 2007 Incentive Award Plan, or the 2007
Plan. Following its adoption, awards are only being made under
the 2007 Plan, and no further awards will be made under the
Prior Plans.
The 2007 Plan provides for the grant of incentive stock options
as defined in section 422 of the Internal Revenue Code of
1986, as amended, nonstatutory stock options, restricted stock,
restricted stock units, stock appreciation rights, or SARs,
deferred stock, dividend equivalents, performance based awards
(including performance share awards, performance stock units and
performance bonus awards) and stock payments, (collectively
referred to as Awards) to our employees, consultants
and directors.
Share
reserve
The 2007 Plan reserves for issuance upon grant or exercise of
Awards up to 6,500,000 shares of our common stock plus any
shares which are not issued under the Prior Plans. After our
common stock is listed on a securities exchange, and other
subsequent conditions are met, no more than
4,550,000 shares will be granted or $5,000,000 paid in cash
pursuant to Awards which are intended to be performance based
compensation within the meaning of Internal Revenue Code
Section 162(m) to any one participant in a calendar year.
The shares subject to the 2007 Plan, the limitations on the
number of shares that may be awarded under the 2007 Plan and
shares and option prices subject to awards outstanding under the
2007 Plan will be adjusted as the plan administrator deems
appropriate to reflect stock dividends, stock splits,
combinations or exchanges of shares, merger, consolidation, or
other distributions of company assets. As of the date hereof, no
shares of common stock or Awards have been granted under the
2007 Plan.
Shares withheld for taxes, shares used to pay the exercise price
of an option in a net exercise and shares tendered to us to pay
the exercise price of an option or other Award may be available
for future grants of Awards under the 2007 Plan. In addition,
shares subject to stock Awards that have expired, been forfeited
or otherwise terminated without having been exercised may be
subject to new Awards. Shares issued under the 2007 Plan may be
previously authorized but unissued shares or reacquired shares
bought on the open market or otherwise.
Administration
Generally, the board of directors will administer the 2007 Plan,
unless the board delegates this task to a committee of outside
directors. Pursuant to its charter, the board has delegated
administration of our equity incentive plans to the compensation
committee. However, with respect to Awards made to our
non-employee directors or to individuals subject to
Section 16 of the Securities Exchange Act of 1934, the full
board will act as the administrator of the 2007 Plan. The
compensation committee or the full board, as appropriate, has
the authority to:
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select the individuals who will receive Awards;
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82
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determine the type or types of Awards to be granted;
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determine the number of Awards to be granted and the number of
shares to which the Award relates;
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determine the terms and conditions of any Award, including the
exercise price and vesting;
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determine the terms of settlement of any Award;
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prescribe the form of Award agreement;
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establish, adopt or revise rules for administration of the 2007
Plan;
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interpret the terms of the 2007 Plan and any matters arising
under the 2007 Plan; and
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make all other decisions and determinations as may be necessary
to administer the 2007 Plan.
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The board may delegate its authority to grant or amend Awards
with respect to participants other than senior executive
officers, employees covered by Section 162(m) of the
Internal Revenue Code or the officers to whom the authority to
grant or amend Awards has been delegated.
The compensation committee, with the approval of the board, may
also amend the 2007 Plan. Amendments to the 2007 Plan are
subject to stockholder approval to the extent required by law,
or The Nasdaq National Market rules or regulations.
Additionally, stockholder approval will be specifically required
to increase the number of shares available for issuance under
the 2007 Plan or to extend the term of an option beyond ten
years.
Eligibility
Awards under the 2007 Plan may be granted to individuals who are
our employees or employees of our subsidiaries, our non-employee
directors and our consultants and advisors. However, options
which are intended to qualify as incentive stock options may
only be granted to employees.
Awards
The following will briefly describe the principal features of
the various Awards that may be granted under the 2007 Plan.
OptionsOptions provide for the right to purchase
our common stock at a specified price, and usually will become
exercisable in the discretion of the compensation committee in
one or more installments after the grant date. The option
exercise price may be paid in cash, shares of our common stock
which have been held by the option holder for a period of time
as determined by the compensation committee, other property with
value equal to the exercise price, through a broker assisted
cash-less exercise or such other methods as the compensation
committee may approve from time to time. Options may take two
forms, nonqualified options, or NQOs, and incentive stock
options, or ISOs.
NQOs may be granted for any term specified by the compensation
committee, but shall not exceed ten years. NQOs may not be
granted at an exercise price that is less than 100% of the fair
market value of our common stock on the date of grant.
83
ISOs will be designed to comply with the provisions of the
Internal Revenue Code and will be subject to certain
restrictions contained in the Internal Revenue Code in order to
qualify as ISOs. Among such restrictions, ISOs must:
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have an exercise price not less than the fair market value of
our common stock on the date of grant, or if granted to certain
individuals who own or are deemed to own at least 10% of the
total combined voting power of all of our classes of stock (10%
stockholders), then such exercise price may not be less than
110% of the fair market value of our common stock on the date of
grant;
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be granted only to our employees and employees of our subsidiary
corporations;
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expire with a specified time following the option holders
termination of employment;
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be exercised within ten years after the date of grant, or with
respect to 10% stockholders, no more than five years after the
date of grant;
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not be first exercisable for more than $100,000 worth,
determined based on the exercise price.
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No ISO may be granted under the 2007 Plan after ten years from
the date the 2007 Plan is approved by our stockholders.
Restricted StockA restricted stock award is the
grant of shares of our common stock at a price determined by the
compensation committee (which price may be zero), is
nontransferable and unless otherwise determined by the
compensation committee at the time of award, may be forfeited
upon termination of employment or service during a restricted
period. The compensation committee shall also determine in the
award agreement whether the participant will be entitled to vote
the shares of restricted stock and or receive dividends on such
shares.
Stock Appreciation RightsSARs provide for payment
to the holder based upon increases in the price of our common
stock over a set base price. SARs may be granted in connection
with stock options or other Awards or separately. SARs granted
in connection with options will be exercisable only when and to
the extent the option is exercisable and will only entitle the
holder to the difference between the option exercise price and
the fair market value of our common stock on the date of
exercise. Payment for SARs may be made in cash, our common stock
or any combination of the two.
Restricted Stock UnitsRestricted stock units
represent the right to receive shares of our common stock at a
specified date in the future, subject to forfeiture of such
right. If the restricted stock unit has not been forfeited, then
on the date specified in the restricted stock we shall deliver
to the holder of the restricted stock unit, unrestricted shares
of our common stock which will be freely transferable.
Dividend EquivalentsDividend equivalents represent
the value of the dividends per share we pay, calculated with
reference to the number of shares covered by an Award (other
than a dividend equivalent award) held by the participant.
Performance Based AwardsPerformance based awards
are denominated in shares of our common stock, stock units or
cash, and are linked to the satisfaction of performance criteria
established by the compensation committee. If the compensation
committee determines that the performance based award to an
employee is intended to meet the requirements of qualified
performance based compensation and therefore is deductible
under Section 162(m) of the Internal Revenue Code, then the
performance based criteria upon which the Awards will be based
84
shall be with reference to any one or more of the following:
net earnings (either before or after interest, taxes,
depreciation and amortization), economic value-added, sales or
revenue, net income (either before or after taxes), operating
earnings, cash flow (including, but not limited to, operating
cash flow and free cash flow), cash flow, return on capital,
return on invested capital, return on net assets, return on
stockholders equity, return on assets, stockholder
returns, return on sales, gross or net profit margin,
productivity, expense, margins, operating efficiency, customer
satisfaction, working capital, earnings per share, price per
share of our common stock, market capitalization and market
share, any of which may be measured either in absolute terms or
as compared to any incremental increase or as compared to
results of a peer group.
Stock PaymentsPayments to participants of bonuses
or other compensation may be made under the 2007 Plan in the
form our common stock.
Deferred StockDeferred stock typically is awarded
without payment of consideration and is subject to vesting
conditions, including satisfaction of performance criteria. Like
restricted stock, deferred stock may not be sold or otherwise
transferred until the vesting conditions are removed or expire.
Unlike restricted stock, deferred stock is not actually issued
until the deferred stock award has vested. Recipients of
deferred stock also will have no voting or dividend rights prior
to the time when the vesting conditions are met and the deferred
stock is delivered.
Changes in
Control
All Awards granted under the 2007 Plan will be exercisable in
full upon the occurrence of a change in control unless the Award
is assumed by any successor in such change in control, or the
award agreement otherwise provides. In connection with a change
in control, the compensation committee may cause the Awards to
terminate but shall give the holder of the Awards the right to
exercise their outstanding Awards or receive their other rights
under the Awards outstanding for some period of time prior to
the change in control, even though the Awards may not be
exercisable or otherwise payable.
Adjustments
upon Certain Events
The number and kind of securities subject to an Award and the
exercise price or base price may be adjusted in the discretion
of the compensation committee to reflect any stock dividends,
stock split, combination or exchange of shares, merger,
consolidation, or other distribution (other than normal cash
dividends) of company assets to stockholders, or other similar
changes affecting the shares. In addition, upon such events the
compensation committee may provide for (i) the termination
of any Awards in exchange for cash equal to the amount the
holder would otherwise be entitled if they had exercised the
Award, (ii) the full vesting, exercisability or payment of
any Award, (iii) the assumption of such Award by any
successor, (iv) the replacement of such Award with other
rights or property, (v) the adjustment of the number, type
of shares
and/or the
terms and conditions of the Awards which may be granted in the
future, or (v) that Awards cannot vest, be exercised or
become payable after such event.
Awards Not
Transferable
Generally the Awards may not be pledged, assigned or otherwise
transferred other than by will or by laws of descent and
distribution. The compensation committee may allow Awards other
than ISOs to be transferred for estate or tax planning purposes
to members of the holders family, charitable institutions
or trusts for the benefit of family members. In addition, the
85
compensation committee may allow Awards to be transferred to
so-called blind trusts by a holder of an Award who
is terminating employment in connection with the holders
service with the government, an educational or other non-profit
institution.
Miscellaneous
As a condition to the issuance or delivery of stock or payment
of other compensation pursuant to the exercise or lapse of
restrictions on any Award, the company requires participants to
discharge all applicable withholding tax obligations. Shares
held by or to be issued to a participant may also be used to
discharge tax withholding obligations, subject to the discretion
of the compensation committee to disapprove of such use.
The 2007 Plan will expire and no further Awards may be granted
after the tenth anniversary of its approval by our stockholders
or if later the approval by our board of directors.
Prior
Plans
Our board of directors administers the Prior Plans and as such
has the power to determine the terms and conditions of the
options and rights granted, including:
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the exercise price;
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the number of shares to be covered by each option;
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the vesting and exercisability of the options; and
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any restrictions regarding the options.
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Shares purchased by exercise of options granted under the Prior
Plans are generally subject to a repurchase right in our favor,
and then our preferred stockholders, consecutively. These
repurchase rights are exercisable only upon certain specified
events, including, without limitation, an option holders
termination, divorce, bankruptcy or insolvency. The repurchase
right gives us, and then our preferred stockholders, the
opportunity to purchase shares acquired upon exercise of options
at a price per share equal to the fair market value of our
common stock as of the date of repurchase, as determined by the
board of directors based on all known facts and circumstances,
including valuations prepared by a nationally recognized
independent third-party appraisal firm. The repurchase right
terminates upon a sale of the company or a qualified public
offering such as this offering.
We and then the preferred stockholders, consecutively, also have
a right of first refusal to purchase all, but not less than all,
of any shares acquired upon exercise of options proposed to be
transferred by the original option holder to third parties. This
right is not applicable to transfers (i) pursuant to
applicable laws of descent and distribution or (ii) among a
participants spouse and descendants, and any trust,
partnership or entity solely for the benefit of the option
holder
and/or the
option holders spouse
and/or
descendants. Any transferee must become a party to and agree to
be bound by the terms of the applicable Prior Plan. The right of
first refusal terminates on the first to occur of (i) the
ninth anniversary of the date of issuance of the restricted
stock, (ii) a qualified public offering (such as this
offering), and (iii) a sale of the company.
Options are generally not transferable. However, upon death,
options may be transferred by the participants will or by
the laws of descent and distribution. Each option is exercisable
during the lifetime of the participant, only by such
participant. However, with the consent of the board
86
of directors, options may be transferred by gift, without
receipt of any consideration, to a member of the option
holders immediate family, including ancestors or siblings,
or to a trust, partnership or entity for the benefit of the
option holder
and/or such
immediate family members.
The following briefly describes the other unique features of
each of the Prior Plans:
2002 Equity
Incentive Plan
We adopted the 2002 Plan in September 2002 to replace the Old
Plan and the Consultants Plan. The 2002 Plan provides for the
grant of stock options to our employees, directors, and
consultants. Under the 2002 Plan, we may grant both incentive
stock options that qualify for favorable tax treatment under
Section 422 of the Internal Revenue Code, and options that
do not so qualify. The maximum aggregate number of shares of
common stock issuable under the 2002 Plan is 5,686,799, plus any
shares subject to options cancelled under the Old Plan, subject
to adjustments to reflect certain transactions affecting the
number of our common shares outstanding. As of May 5, 2007,
we have 5,189,390 outstanding options under the 2002 Plan.
To date, all options granted under the 2002 Plan have a ten-year
term. Unless otherwise specified at the time of the option
grant, options under the 2002 Plan vest and become exercisable
over four years at a rate of 25% per year provided the optionee
remains employed. In addition, options become 100% vested and
fully exercisable upon death or disability. Options are
immediately cancelled and forfeited upon termination for cause.
Options under the 2002 Plan only accelerate and become vested
and exercisable in connection with a change in control of the
company if they are not assumed by any successor entity in the
transaction.
Options granted under the 2002 Plan must generally be exercised,
to the extent vested, within twelve months of the
optionees termination by reason of death, disability or
retirement, or within three months after such optionees
termination other than for death, disability, retirement or
cause, but in no event later than the expiration of the ten-year
option term.
Second Amended
and Restated Restricted Stock Option Plan
We adopted the Old Plan in December, 1998. It has
subsequently been amended from time to time, including an
amendment that provides that no further grants will be made
under the Old Plan after March 22, 2002. The maximum
aggregate number of shares of common stock issuable under the
Old Plan is 10,143,156, subject to adjustment in the event of
certain corporate transactions affecting the number of shares
outstanding. As of May 5, 2007, we have
861,011 outstanding options under the Old Plan.
Pursuant to the Old Plan, options have a fourteen-year term.
Options granted under the Old Plan vested over four years in 25%
installments on each anniversary of the date of grant. At this
time, all options granted under the Old Plan are fully vested.
However, options may be immediately cancelled and forfeited upon
termination for cause.
In the case of a merger, consolidation, dissolution or
liquidation of the company, the board of directors may
accelerate the expiration date of any option granted under the
Old Plan so long as participants receive a reasonable period of
time to exercise any outstanding options prior to the
accelerated expiration date. In the event of certain corporate
transactions, such as a merger or sale of substantially all of
our assets, the Old Plan provides that (i) all stock
holders will receive the same form and amount of consideration
per share of our common stock, or if any
87
holders are given an option as to the form or amount of
consideration to be received, all holders will receive the same
option; (ii) all common stock holders will, after
considering the conversion price then in effect on our preferred
stock, receive the same form and amount of consideration per
share of our preferred stock; and (iii) all holders of then
exercisable rights to acquire common stock will be given an
opportunity to exercise their rights prior to the consummation
of the corporate transaction and participate in the transaction
as a common stock holder or receive consideration in exchange
for such rights.
Restricted Stock
Option PlanConsultants
We adopted the Consultants Plan in July, 1999, to provide for
grants of options to consultants. A total of 525,000 shares
of common stock were reserved for issuance under the Consultants
Plan, subject to adjustment to reflect certain corporate
transactions affecting the number of shares outstanding. As of
May 5, 2007, there are no outstanding options under the
Consultants Plan. We ceased making grants under the Consultants
Plan on March 12, 2002 upon adoption of the 2002 Plan.
In the case of a merger, consolidation, dissolution or
liquidation of the company, the board of directors may
accelerate the expiration date of any option so long as
participants receive a reasonable period of time to exercise any
outstanding options prior to the accelerated expiration date.
The board of directors may also accelerate the dates on which
any option shall be exercisable under the above circumstances or
in any other case in our best interests. In the event of certain
corporate transactions, such as a merger or sale of
substantially all of our assets, the Consultants Plan provides
that (i) all restricted stock holders will receive the same
form and amount of consideration per share of our common stock,
or if any holders are given an option as to the form or amount
of consideration to be received, all holders will receive the
same option; (ii) all common stock holders will, after
considering the conversion price then in effect on our preferred
stock, receive the same form and amount of consideration per
share of our preferred stock; and (iii) all holders of then
exercisable rights to acquire common stock will be given an
opportunity to exercise their rights prior to the consummation
of the corporate transaction and participate in the transaction
as a common stock holder or receive consideration in exchange
for such rights.
Compensation
committee interlocks and insider participation
None of the members of our compensation committee has at any
time been one of our officers or employees. None of our
executive officers currently serves, or in the past year has
served, as a member of the board of directors or compensation
committee, or other committee serving an equivalent function, of
any entity that has one or more executive officers serving on
our board of directors or compensation committee.
Limitation of
liability and indemnification of officers and
directors
Our amended and restated certificate of incorporation provides
that to the fullest extent permitted by Delaware law our
directors will not be liable to the company or its stockholders
for monetary damages for a breach of fiduciary duty as a
director. The duty of care generally requires that, when acting
on behalf of the corporation, directors exercise an informed
business judgment based on all material information reasonably
available to them. Consequently, a
88
director will not be personally liable to us or our stockholders
for monetary damages for breach of fiduciary duty as a director,
except for liability for:
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any breach of the directors duty of loyalty to us or our
stockholders;
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any act or omission not in good faith or that involves
intentional misconduct or a knowing violation of law;
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any act related to unlawful stock repurchases, redemptions or
other distributions or payment of dividends; or
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any transaction from which the director derived an improper
personal benefit.
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If Delaware law is amended to authorize corporate action further
eliminating or limiting the personal liability of a director,
then the liability of our directors will be eliminated or
limited to the fullest extent permitted by Delaware law, as so
amended. These limitations of liability do not generally affect
the availability under Delaware law of equitable remedies such
as injunctive relief, rescission, or other forms of non-monetary
relief. and do not generally affect a directors
responsibilities under any other laws, such as the federal
securities laws or other state or federal laws.
As permitted by Delaware law, our amended and restated bylaws
provide that:
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we shall indemnify our directors and officers, and may indemnify
our employees and other agents, to the fullest extent permitted
by the Delaware law and we may advance expenses to our
directors, officers, and other agents in connection with a legal
proceeding, subject to limited exceptions; and
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we may purchase and maintain insurance on behalf of our current
or former directors, officers, employees, fiduciaries or agents
against any liability asserted against them and incurred by them
in any such capacity, or arising out of their status as such.
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At present, there is no pending litigation or proceeding
involving any of our directors, officers, employees or agents in
which indemnification by us is sought, nor are we aware of any
threatened litigation or proceeding that may result in a claim
for indemnification.
89
Certain
relationships and related party transactions
Since the beginning of fiscal 2004, we have engaged in the
following transactions with our directors, executive officers,
and holders of five percent or more of our common stock.
Stock option loan
and transactions relating to our common stock
Pursuant to the terms of Ms. Kirbys employment
agreement with ULTA, upon Ms. Kirbys request, the
company loaned $4,094,340 to Ms. Kirby pursuant to a
secured promissory note, dated June 30, 2006, to allow
Ms. Kirby to exercise previously granted options to
purchase shares of our common stock. This loan was secured by
the shares purchased upon exercise of the options and was with
recourse against Ms. Kirbys other assets. The loan
carried interest at 5.06% per year. Ms. Kirby was required
to pay the outstanding interest with any bonus compensation that
she received while the loan remained outstanding. Ms. Kirby
was able to prepay the loan at anytime, but was required to
repay the loan in full (i) immediately prior to our
becoming an issuer under the Sarbanes-Oxley Act of
2002, (ii) prior to expiration of the time period provided
under the terms of her option agreements and our
stockholders agreements for the repurchase of shares
following her termination of employment; or (iii) after
five years. Ms. Kirby repaid the loan in full on
June 29, 2007.
In December 2006, in connection with the retirement of Charles
R. Weber, our former Chief Financial Officer, we made a payment
of $759,932 to Mr. Weber pursuant to a stock purchase
agreement. This payment was for our net obligation to
Mr. Weber resulting from the following transactions:
(i) our purchase from Mr. Weber, at $5.80 per share,
of 334,680 previously-issued shares of our common stock;
(ii) the exercise by Mr. Weber of 1,214,894
previously-granted stock options, applying proceeds from the
above stock sale toward the exercise price; (iii) our
purchase from Mr. Weber, at $5.80 per share, of 414,894 of
the shares of common stock resulting from the above options
exercise; and (iv) our withholding of $2,486,261, an amount
requested by Mr. Weber, for taxes due upon exercise of his
stock options. After the consummation of this transaction,
Mr. Weber continued to own and hold 800,000 shares of
our common stock, which, pursuant to the stock purchase
agreement, he will be restricted from selling or otherwise
transferring for 180 days following this offering.
On June 21, 2004, we issued 500,000 shares of common
stock to one of our directors, Dennis Eck, pursuant to a
restricted stock agreement under which 100% of the shares were
vested as of May 1, 2007. Mr. Eck did not pay any
consideration for this stock, and we recognized an aggregate
expense of $209,640 for financial statement reporting purposes.
See CompensationNon-Executive director compensation
for fiscal 2006.
On June 21, 2004, we issued an additional
484,848 shares of common stock to Mr. Eck in exchange
for $799,999.
On June 21, 2004, we issued 200,000 shares of common
stock to one of our directors, Bob DiRomualdo, pursuant to a
restricted stock agreement under which 25% of the shares vest
annually beginning February 26, 2005. Mr. DiRomualdo
will be 100% vested with respect to this stock as of
February 26, 2008. Mr. DiRomualdo did not pay any
consideration for this stock, and we recognized an aggregate
expense of $83,856 for financial statement reporting purposes.
See CompensationNon-Executive director compensation
for fiscal 2006.
On June 21, 2004, we issued an additional
424,242 shares of common stock to Mr. DiRomualdo in
exchange for $699,999.
90
Registration
rights agreement
Upon the consummation of this offering, the holders of five
percent or more of our common stock and certain of our
directors, among others, will enter into a Third Amended and
Restated Registration Rights Agreement with us relating to the
shares of common stock they hold. See Description of
capital stockRegistration rights and Shares
eligible for future saleRegistration rights.
Transactions with
vendors
Charles Heilbronn, one of our directors, is Executive Vice
President and Secretary, as well as a director, of Chanel, Inc.
In 2004, 2005 and 2006, Chanel, Inc. sold to ULTA
$3.8 million, $3.9 million and $4.6 million of
fragrance, respectively, on an arms length basis pursuant
to Chanels standard wholesale terms, and is expected to
sell approximately $5.2 million of fragrance to ULTA during
2007.
Mr. Heilbronn is also a Membre du Conseil de
Surveillance (a non-executive board of trustees) of Bourjois
SAS (France), the parent company of Bourjois, Ltd. (U.S.). In
2004, 2005 and 2006, Bourjois, Ltd. sold to ULTA
$2.1 million, $2.2 million and $2.6 million of
beauty products, respectively, on an arms length basis
pursuant to Bourjois standard wholesale terms, and is
expected to sell approximately $3.0 million of beauty
products to ULTA during 2007.
Review and
approval of related party transactions
Our current policy regarding the review and approval of
related-party transactions, which is not written, is for such
transactions to be approved by a majority of the members of our
board of directors who are not party to the transaction and do
not have a direct or indirect material economic interest in an
entity that is party to the transaction. With one exception, all
of the transactions set forth above were approved by the board
in accordance with this policy. Only the transactions involving
Chanel, Inc., described above under Transactions with
vendors, were not approved pursuant to this policy because
the board believed the transactions were so clearly
arms-length in nature that doing so was unnecessary.
Upon the consummation of this offering, our audit committee,
pursuant to its amended charter, will review and approve all
related-party transactions. For a discussion of the composition
and responsibilities of our audit committee, see
ManagementBoard of directors committees.
91
Principal
stockholders
The following table presents information concerning the
beneficial ownership of the shares of our common stock as of
May 5, 2007 by:
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each person we know to be the beneficial owner of 5% of more of
our outstanding shares of common stock;
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each of our NEOs;
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each of our directors; and
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all of our executive officers and directors as a group.
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Beneficial ownership is determined in accordance with the rules
of the SEC and generally includes voting or investment power
with respect to securities. Unless otherwise indicated below, to
our knowledge, the persons and entities named in the table have
sole voting and sole investment power with respect to all shares
beneficially owned by them, subject to community property laws
where applicable. Shares of our common stock subject to options
that are currently exercisable or exercisable within
60 days of May 5, 2007 are deemed to be outstanding
and to be beneficially owned by the person holding the options
for the purpose of computing the percentage ownership of that
person but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person.
This table lists applicable percentage ownership based on
77,411,747 shares of common stock outstanding as of
May 5, 2007, after giving effect to the conversion of our
outstanding convertible preferred stock into
65,702,530 shares of common stock concurrently with the
closing of this offering. Unless otherwise indicated, the
address for each of the beneficial owners in the table below is
c/o Ulta
Salon, Cosmetics & Fragrance, Inc., 1135 Arbor Drive,
Romeoville, Illinois 60446.
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Number of
shares
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Percentage
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beneficially
owned
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beneficially
owned
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Prior to
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After
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Prior to
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After
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Name
and address of beneficial owner
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offering
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offering
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offering
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offering
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Five percent
stockholders:
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GRP II, L.P. and affiliated
entities(1)
2121 Avenue of the Stars
31st Floor
Los Angeles, California
90067-5014
Attn: Steven Dietz
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20,386,989
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26.34
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%
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Doublemousse B.V.(2)
Boerhaavelaan 22
2713 HX Zoetermeer
The Netherlands
Attn: Charles Heilbronn
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17,451,696
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22.54
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%
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|
92
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|
|
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|
|
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Number of
shares
|
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Percentage
|
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beneficially
owned
|
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beneficially
owned
|
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|
Prior to
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After
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Prior to
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After
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Name
and address of beneficial owner
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offering
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offering
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offering
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offering
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Five percent stockholders
(continued):
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Oak Investment
Partners VII, L.P. and affiliated entities(3)
Oak Management Corporation
Wells Fargo Center
90 South 7th Street
Suite 4550
Minneapolis, Minnesota 55402
Attn: Gerald R. Gallagher
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10,039,113
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12.97
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%
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NEOs and directors:
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Lyn P. Kirby
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4,000,000
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5.17
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%
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Bruce E. Barkus(4)
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396,000
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*
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Gregg R. Bodnar
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*
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Charles R. Weber(5)
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800,000
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1.03
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%
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Hervé J.F. Defforey(6)
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20,511,989
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26.50
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%
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Robert F. DiRomualdo
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942,750
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1.22
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%
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Dennis K. Eck(7)
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1,109,848
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1.43
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%
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Gerald R. Gallagher(8)
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10,039,113
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12.97
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%
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Terry J. Hanson(9)
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1,627,329
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2.10
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%
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Charles Heilbronn(10)
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17,576,696
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22.71
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%
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Steven E. Lebow(11)
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21,798,242
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|
|
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28.16
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%
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Yves Sisteron(12)
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20,692,868
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26.73
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%
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All current directors and
executive officers as a group (11 persons)(13)
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57,920,857
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74.82
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%
|
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|
|
|
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(1)
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Consists of
(i) 10,961,224 shares held by GRP II, L.P. (GRP
II), (ii) 4,641,753 shares held by Global Retail
Partners, L.P. (GRP I),
(iii) 1,383,146 shares held by DLJ Diversified
Partners, L.P. (DLJ Diversified);
(iv) 915,022 shares held by GRP Management Services
Corp. (GRPMSC) as escrow agent for GRP II;
(v) 846,586 shares held by GRP II Investors, L.P.
(GRP II Investors); (v) 513,546 shares
held by DLJ Diversified Partners A, L.P. (DLJ
Diversified A); (vi) 319,573 shares held by
Global Retail Partners Funding, Inc. (GRP Funding);
(vii) 311,299 shares held by GRP II Partners, L.P.
(GRP II Partners); (viii) 301,417 shares
held by GRP Partners, L.P. (GRP I Partners);
(ix) 82,249 shares held by GRPMSC as escrow agent for
GRP II Investors; (x) 80,330 shares held by DLJ ESC
II, L.P. (DLJ ESC) and (xi) 30,844 shares
held by GRPMSC as escrow agent for GRP II Partners. Each of GRP
II, GRP II Investors and GRP II Partners may be deemed to share
beneficial ownership of all of its shares held by GRPMSC as
escrow agent (as described above). GRPVC, L.P.
(GRPVC) is the general partner of each of GRP II and
GRP II Partners, and GRPMSC is the general partner of GRPVC.
Merchant Capital, Inc. (Merchant Capital) is the
general partner of GRP II Investors. Global Retail Partners,
Inc. (GRP Inc) and Retail Capital Partners, L.P.
(Retail Capital) are the general partners of
GRP I, and GRP Inc is the general partner of Retail
Capital. GRP Inc is also the general partner of GRP I Partners.
DLJ Diversified Partners, Inc. (DLJ Diversified Inc)
is the general partner of DLJ Diversified A and DLJ Diversified,
and DLJ LBO Plans Management Corporation (DLJLBO) is
the general partner of DLJ ESC. Merchant Capital, GRP Inc, GRP
Funding, DLJLBO and DLJ Diversified Inc (collectively, the
CS Entities) are each wholly-owned subsidiaries of
Credit Suisse First Boston Private Equity, Inc.
(CSFBPE), and CSFBPE is a wholly-owned subsidiary of
Credit Suisse (USA), Inc. (CS USA). Credit Suisse
Holdings (USA), Inc. (CS Holdings) owns all of the
voting stock of CS USA. Credit Suisse, a Swiss bank, owns a
majority of the voting stock, and all of the non-voting stock,
of CS Holdings. Credit Suisses subsidiaries to the extent
that they constitute the Investment Banking division, the
Alternative Investments business within the Asset Management
division and the U.S. private client services business
within the Private Banking division of Credit Suisse
(collectively, the CS Reporting Person) may be
deemed to share indirect beneficial ownership of the shares
beneficially owned by the CS Entities. Therefore, the CS
Reporting Person may be deemed to beneficially own
8,168,600 shares, which is 10.6% of the shares of common
stock outstanding as of May 5, 2007 (after giving effect to
the conversion of ULTAs outstanding convertible preferred
stock into 65,702,530 shares of common stock concurrently
with the closing of this offering). Pursuant to a services
agreement, GRPMSC appoints a majority of the investment
committee members of GRP I (which also controls the investment
decisions of GRP I Partners). Mr. Lebow, Mr. Sisteron
and Mr. Defforey are members of the investment committee of
GRPMSC and, together with the other members, Steven Dietz and
Brian McLoughlin
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93
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(collectively, the GRP
Principals), may be deemed to possess indirect shared
beneficial ownership of the shares owned by each of the
foregoing entities. However, none of the GRP Principals, acting
alone, has voting or investment power with respect to such
shares and, as a result, each of them disclaims beneficial
ownership of all such shares except to the extent of their
pecuniary interest in such shares.
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(2)
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Mr. Heilbronn has been granted
a power of attorney and proxy to exercise voting and investment
power with respect to all of the shares shown as beneficially
owned by Doublemousse B.V. Pursuant to this authority,
Mr. Heilbronn makes all voting and investment decisions
with respect to all such shares and may be deemed to
beneficially own all such shares.
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(3)
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Of the 10,039,113 shares of
common stock shown as beneficially owned by entities affiliated
with Oak Investment Partners VII, L.P., Oak Investment Partners
VII, L.P. holds 9,671,223 shares and 121,938 shares
issuable pursuant to options exercisable at $0.40 per share, and
Oak VII Affiliates Fund, L.P. holds 242,890 shares and
3,062 shares issuable pursuant to options exercisable at
$0.40 per share. Oak Associates VII, LLC is the general partner
of Oak Investment Partners VII, L.P. and Oak VII Affiliates, LLC
is the general partner of Oak VII Affiliates Fund, L.P.
Mr. Gallagher and four other individuals, Bandel L. Carano,
Edward F. Glassmeyer, Fredric W. Harman and Anne H. Lamont, are
the managing members of both Oak Associates VII, LLC and Oak VII
Affiliates, LLC, and as such, may be deemed to possess shared
beneficial ownership of the shares of common stock held by Oak
Investment Partners VII, L.P. and Oak VII Affiliates Fund, L.P.
However, none of the five individuals named above, acting alone,
has voting or investment power with respect to such shares and,
as a result, disclaim beneficial ownership of all such shares
except to the extent of their pecuniary interest in such shares.
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(4)
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Includes 125,000 shares held
by Elaine M. Barkus and Bruce E. Barkus, as co-trustees of the
Elaine M. Barkus Revocable Trust, and 271,000 shares
issuable pursuant to options exercisable at $2.60 per share,
over all of which Mr. Barkus has shared voting power and
shared investment power.
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(5)
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Mr. Weber is no longer an
employee of ULTA. His address is Rec Room Inc., 1600 E.
Algonquin Road, Algonquin, Illinois 60102-9669.
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(6)
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Of the 20,511,989 shares of
common stock shown as beneficially owned by Mr. Defforey,
Mr. Defforey holds directly 125,000 shares issuable
pursuant to options exercisable at $1.65 per share, over which
he has sole voting power and sole investment power. The
remaining 20,386,989 shares are held by the entities
affiliated with GRP II, L.P. listed above in footnote (1). With
the exception of the 125,000 shares held directly by
Mr. Defforey, Mr. Defforey has shared voting power and
shared investment power with respect to all remaining shares of
common stock shown as beneficially owned by him, as indicated in
footnote (1). Mr. Defforey disclaims beneficial ownership
of all such remaining shares of common stock, and this
prospectus shall not be deemed an admission that
Mr. Defforey is a beneficial owner of such shares for
purposes of the Securities Exchange Act of 1934, except to the
extent of his pecuniary interest in such shares.
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(7)
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Of the 1,109,848 shares of
common stock shown as beneficially owned by Mr. Eck,
Mr. Eck directly holds 928,598 shares and
31,250 shares issuable pursuant to options exercisable at
$1.65 per share, over which he has sole voting power and sole
investment power, and Sarah Louise Eck Thompson and Keith Lester
Eck hold 100,000 and 50,000 shares, respectively. Under the
terms of the Eck Family Trust, Mr. Eck has shared voting
power and shared investment power with respect to the
150,000 shares held by Sarah Louise Eck Thompson and Keith
Lester Eck. Mr. Eck disclaims beneficial ownership of all
such shares held by Sarah Louise Eck Thompson and Keith Lester
Eck, and this prospectus shall not be deemed an admission that
Mr. Eck is a beneficial owner of such shares for purposes
of the Securities Exchange Act of 1934.
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(8)
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Mr. Gallagher beneficially
owns all 10,039,113 shares of common stock and shares
issuable pursuant to options held by the entities affiliated
with Oak Investment Partners VII, L.P., as set forth above in
footnote (3). Mr. Gallagher shares voting and investment
power with respect to the 9,671,223 shares held by Oak
Investment Partners VII, L.P. and the 242,890 shares held
by Oak VII Affiliates Fund, L.P. with Bandel L. Carano, Edward
F. Glassmeyer, Fredric W. Harman and Anne H. Lamont. However,
none of these five individuals, acting alone, has voting or
investment power with respect to such shares and, as a result,
disclaim beneficial ownership of all such shares except to the
extent of their pecuniary interest in such shares.
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(9)
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Of the 1,627,329 shares of
common stock shown as beneficially owned by Mr. Hanson,
Mr. Hanson holds 1,227,329 shares directly and Hanson
Family Investments, L.P. holds 400,000 shares.
Mr. Hanson has sole voting power and sole investment power
with respect to all such shares.
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(10)
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Of the 17,576,696 shares of
common stock shown as beneficially owned by Mr. Heilbronn,
Mr. Heilbronn holds 125,000 shares directly and is
deemed to beneficially own all 17,451,696 shares of common
stock held by Doublemousse B.V. Mr. Heilbronn has sole
voting power and sole investment power with respect to the
125,000 shares he holds directly, and he has been granted a
power of attorney and proxy to exercise voting and investment
power with respect to all of the shares shown as beneficially
owned by Doublemousse B.V. Pursuant to this authority,
Me. Heilbronn makes all voting and investment decisions
with respect to all such shares and may be deemed to
beneficially own all such shares.
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(11)
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Of the 21,798,242 shares of
common stock shown as beneficially owned by Mr. Lebow,
Mr. Lebow holds 125,000 shares directly, Steven and
Susan Lebow Trust dated
12-16-02
holds 1,025,823 shares, The Michael Harvey Lebow
Irrevocable Trust holds 130,215 shares, and The Matthew
Allan Lebow Irrevocable Trust holds 130,215 shares. The
remaining 20,386,989 shares are held by the entities
affiliated with GRP II, L.P. listed above in footnote (1). With
the exception of the 125,000 shares held directly by
Mr. Lebow, with respect to which he has sole voting power
and sole investment power, Mr. Lebow has shared voting
power and shared investment power with respect to all remaining
shares of common stock shown as beneficially owned by him as
indicated in footnote (1). Mr. Lebow disclaims
beneficial ownership of all such remaining shares of common
stock, and this prospectus shall not be deemed an admission that
Mr. Lebow is a beneficial owner of such shares for purposes
of the Securities Exchange Act of 1934, except to the extent of
his pecuniary interest in such shares.
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(12)
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Of the 20,692,868 shares of
common stock shown as beneficially owned by Mr. Sisteron,
Mr. Sisteron holds 282,945 shares directly and SEP for
the benefit of Yves Sisteron, Donaldson Lufkin Jenrette
Securities Corporation as custodian holds 22,934 shares.
The remaining 20,386,989 shares are held by the entities
affiliated with GRP II, L.P. listed above in footnote (1). With
the exception of the 305,879 shares held directly by
Mr. Sisteron and by SEP for the benefit of Yves Sisteron,
Donaldson Lufkin Jenrette Securities Corporation as custodian,
over which he has sole voting power and sole investment
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94
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power, Mr. Sisteron shares
voting power and investment power with respect to all remaining
shares of common stock shown as beneficially owned by him as
indicated in footnote (1). Mr. Sisteron disclaims
beneficial ownership of all such remaining shares, and this
prospectus shall not be deemed an admission that
Mr. Sisteron is a beneficial owner of such shares for
purposes of the Securities Exchange Act of 1934, except to the
extent of his pecuniary interest in such shares.
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(13)
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Excludes shares beneficially owned
by Mr. Weber because he is not a current executive officer
of ULTA. Counts only once the 20,386,989 shares
beneficially owned by Messrs. Defforey, Lebow and Sisteron,
which are held by the entities affiliated with GRP II, L.P.
listed above in footnote (1).
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95
Selling
stockholders
The following table presents information concerning the
beneficial ownership of the shares of our common stock as of
[ ],
2007 by each selling stockholder.
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Total shares
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|
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|
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offered if
|
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Number of
shares
|
|
|
|
Percentage
|
|
over-
|
|
|
beneficially
owned
|
|
Number of
|
|
beneficially
owned
|
|
allotment
|
|
|
Prior to
|
|
After
|
|
shares
|
|
Prior to
|
|
After
|
|
option is
|
Name
of beneficial owner
|
|
offering
|
|
offering
|
|
offered
|
|
offering
|
|
offering
|
|
exercised
|
|
|
Appomattox Foundation
|
|
|
|
|
|
|
|
|
|
|
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*
|
|
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*
|
|
|
|
Bank of America Capital Corporation
|
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|
|
|
|
|
|
|
|
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*
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*
|
|
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|
Bankamerica Ventures
|
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|
|
|
|
|
|
|
|
|
|
*
|
|
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*
|
|
|
|
Bloomquist, Glynn
|
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*
|
|
|
*
|
|
|
|
DeGiaimo, Vincent
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
*
|
|
|
|
Dyvig, Peter
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
*
|
|
|
|
Eley, Stephen J.
|
|
|
|
|
|
|
|
|
|
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*
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*
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Fidas Business SA
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*
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*
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Fournier, Jacques
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*
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*
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Fournier, Marie-Pierre
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*
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*
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Goodrich, Hoyt J.
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*
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*
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Goodrich, Timothy
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*
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*
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Goodwin, J. Barton
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*
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*
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Hayes, Douglas and Connie
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*
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*
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Hewitt B. Shaw and R. Steven
Kestner, current
Co-Trustees
U/A Robert G. Markey Trust
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*
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*
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Horton Jr., Theodore
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*
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*
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JPMorgan Chase Bank, as Trustee
for General Motors Hourly Employees Pension Trust
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*
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*
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JPMorgan Chase Bank, as Trustee
for General Motors Salaried Employees Pension Trust
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*
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*
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Kully, Thomas R. Revocable Trust
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*
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*
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Lazarus Family Investments, LLC
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*
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*
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Meisenbach, John
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*
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*
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Miller, James
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*
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*
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Ritt, Steve
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*
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*
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96
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Total shares
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offered if
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Number of
shares
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Percentage
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over-
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beneficially
owned
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Number of
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beneficially
owned
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allotment
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Prior to
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After
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|
shares
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|
Prior to
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After
|
|
option is
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Name
of beneficial owner
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|
offering
|
|
offering
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offered
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|
offering
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|
offering
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|
exercised
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Roth, Roger Morse
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*
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*
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|
Remey, Donald P.
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*
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*
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|
Schultz, Howard
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*
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*
|
|
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|
SG Cowen
|
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*
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*
|
|
|
|
Smith, Orin
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*
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*
|
|
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|
Swift, Lisa Goodrich
|
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*
|
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*
|
|
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|
Woo, Warren
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*
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*
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97
Description of
capital stock
The following is a summary of the rights of our common stock and
preferred stock and related provisions of our amended and
restated certificate of incorporation, by-laws and stockholder
rights agreement, as they will be in effect upon the
consummation of this offering. This description is only a
summary. For more detailed information, please see our amended
and restated certificate of incorporation, by-laws and
stockholder rights agreement, which will be filed as exhibits to
the registration statement of which this prospectus is a part.
The descriptions of the common stock and preferred stock reflect
changes to our capital structure that will occur upon the
consummation of this offering.
General
As of May 5, 2007, there were 11,709,217 shares of
common stock, par value $.01 per share, issued and outstanding
and 70,494,831.34 shares of preferred stock issued and
outstanding, of which:
|
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|
16,768,882 were designated as Series I convertible
preferred stock, par value $.01 per share;
|
|
|
7,420,130 were designated as Series II convertible
preferred stock, par value $.01 per share;
|
|
|
4,792,302 were designated as Series III non-convertible
preferred stock, par value $.01 per share;
|
|
|
19,145,558 were designated as Series IV convertible
preferred stock, par value $.01 per share;
|
|
|
21,447,959.34 were designated as Series V convertible
preferred stock, par value $.01 per share; and
|
|
|
920,000 were designated as
Series V-1
convertible preferred stock, par value $.01 per share.
|
Upon the consummation of this offering, all outstanding shares
of our Series III non-convertible preferred stock will be
redeemed for an aggregate of approximately $4.8 million
(which will be paid using the proceeds from this offering) and
all other outstanding shares of our preferred stock will be
converted on a one-for-one basis into an aggregate of
65,702,530 shares of our common stock pursuant to our
amended and restated certificate of incorporation. Upon the
consummation of this offering, our authorized capital stock will
consist of 400,000,000 shares of common stock, par value
$.01 per share, and 70,000,000 shares of preferred stock,
par value $.01, per share, all of which preferred stock shall be
undesignated. Our board of directors may establish the rights
and preference of the preferred stock from time to time, without
stockholder approval.
Common
stock
Outstanding
shares
As of May 5, 2007, there were 1