-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U70+P+AlCCEkQDlOHA7Ga16H9vVJsRjxY2MnmeuxBRdHrrK35/UBEoKGdCtmB5Fe 6VcyjX724ws3aVnh6DMOPw== 0001104659-08-031872.txt : 20080509 0001104659-08-031872.hdr.sgml : 20080509 20080509161331 ACCESSION NUMBER: 0001104659-08-031872 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20080330 FILED AS OF DATE: 20080509 DATE AS OF CHANGE: 20080509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BARE ESCENTUALS INC CENTRAL INDEX KEY: 0001295557 STANDARD INDUSTRIAL CLASSIFICATION: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [2844] IRS NUMBER: 201062857 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-33048 FILM NUMBER: 08818601 BUSINESS ADDRESS: STREET 1: 71 STEVENSON STREET STREET 2: 22ND FLOOR CITY: SAN FRANCISCO STATE: CA ZIP: 94105 BUSINESS PHONE: 415-489-5000 MAIL ADDRESS: STREET 1: 71 STEVENSON STREET STREET 2: 22ND FLOOR CITY: SAN FRANCISCO STATE: CA ZIP: 94105 FORMER COMPANY: FORMER CONFORMED NAME: STB BEAUTY INC DATE OF NAME CHANGE: 20040625 10-Q 1 a08-11852_110q.htm 10-Q

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended March 30, 2008

 

 

 

Or

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from          to        

 

Commission file number: 001-33048

 

Bare Escentuals, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

20-1062857

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

71 Stevenson Street, 22nd Floor

San Francisco, CA 94105

(Address of principal executive offices with zip code)

 

(415) 489-5000

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   YES      x    NO      o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

 

Accelerated filer o

 

 

 

Non-accelerated filer   o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES      o   NO      x

 

At May 2, 2008, the number of shares outstanding of the registrant’s common stock, $0.001 par value, was 91,341,153.

 

 



 

Table of Contents

 

Bare Escentuals, Inc.

 

INDEX

 

PART I—FINANCIAL INFORMATION

 

Item 1

Financial Statements (unaudited):

3

 

Condensed Consolidated Balance Sheets — March 30, 2008 and December 30, 2007

3

 

Condensed Consolidated Statements of Income—Three Months Ended March 30, 2008 and April 1, 2007

4

 

Condensed Consolidated Statements of Cash Flows—Three Months Ended March 30, 2008 and April 1, 2007

5

 

Notes to Condensed Consolidated Financial Statements

6

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

Item 3

Quantitative and Qualitative Disclosures About Market Risk

27

Item 4

Controls and Procedures

27

 

 

PART II—OTHER INFORMATION

 

Item 1

Legal Proceedings

28

Item 1A

Risk Factors

28

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

29

Item 3

Defaults Upon Senior Securities

29

Item 4

Submission of Matters to a Vote of Security Holders

29

Item 5

Other Information

29

Item 6

Exhibits

29

Signatures

 

30

Exhibit Index

 

 

Certifications

 

 

 

2



 

PART I—FINANCIAL INFORMATION

 

ITEM 1.   FINANCIAL STATEMENTS

 

BARE ESCENTUALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

 

 

 

March 30,
2008

 

December 30,
2007(a)

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

37,662

 

$

32,117

 

Inventories

 

69,569

 

59,643

 

Accounts receivable, net of allowances of $4,746 and $7,638 at March 30, 2008 and December 30, 2007, respectively

 

37,846

 

43,369

 

Prepaid expenses and other current assets

 

9,169

 

9,393

 

Deferred tax assets, net

 

7,410

 

7,410

 

Total current assets

 

161,656

 

151,932

 

Property and equipment, net

 

46,228

 

43,876

 

Goodwill

 

15,409

 

15,409

 

Intangible assets, net

 

9,168

 

9,908

 

Deferred tax assets, net

 

765

 

 

Other assets

 

2,704

 

2,780

 

Total assets

 

$

235,930

 

$

223,905

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

 

$

17,216

 

$

17,901

 

Accounts payable

 

25,406

 

22,041

 

Accrued liabilities

 

17,696

 

25,141

 

Income taxes payable

 

2,238

 

2,648

 

Total current liabilities

 

62,556

 

67,731

 

 

 

 

 

 

 

Long-term debt, less current portion

 

234,137

 

247,032

 

Other liabilities

 

15,620

 

13,629

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

Preferred stock; $0.001 par value; 10,000 shares authorized; zero shares issued and outstanding

 

 

 

Common stock; $0.001 par value; 200,000 shares authorized; 91,341 and 91,159 shares issued and outstanding at March 30, 2008 and December 30, 2007, respectively

 

91

 

91

 

Additional paid–in capital

 

420,374

 

416,524

 

Accumulated other comprehensive loss

 

(3,073

)

(1,544

)

Accumulated deficit

 

(493,775

)

(519,558

)

Total stockholders’ deficit

 

(76,383

)

(104,487

)

Total liabilities and stockholders’ deficit

 

$

235,930

 

$

223,905

 

 


(a)          Condensed consolidated balance sheet as of December 30, 2007 has been derived from the audited consolidated financial statements as of that date.

 

See accompanying notes.

 

3



 

BARE ESCENTUALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

 

 

 

Three months ended

 

 

 

March 30,
2008

 

April 1,
2007

 

 

 

(unaudited)

 

Sales, net

 

$

140,358

 

$

115,613

 

Cost of goods sold

 

38,657

 

33,450

 

Gross profit

 

101,701

 

82,163

 

Expenses:

 

 

 

 

 

Selling, general and administrative

 

50,464

 

39,185

 

Depreciation and amortization, relating to selling, general and administrative

 

2,621

 

940

 

Stock-based compensation, relating to selling, general and administrative

 

1,912

 

1,611

 

Operating income

 

46,704

 

40,427

 

Interest expense

 

(4,644

)

(6,811

)

Other income, net

 

707

 

341

 

Income before provision for income taxes

 

42,767

 

33,957

 

Provision for income taxes

 

16,984

 

13,552

 

Net income

 

$

25,783

 

$

20,405

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

Basic

 

$

0.28

 

$

0.23

 

Diluted

 

$

0.28

 

$

0.22

 

 

 

 

 

 

 

Weighted-average shares used in per share calculations:

 

 

 

 

 

Basic

 

91,260

 

89,428

 

Diluted

 

93,277

 

92,632

 

 

See accompanying notes.

 

4



 

BARE ESCENTUALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Three months ended

 

 

 

March 30,
2008

 

April 1,
2007

 

 

 

(unaudited)

 

Operating activities

 

 

 

 

 

Net income

 

$

25,783

 

$

20,405

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation of property and equipment

 

1,881

 

940

 

Amortization of intangible assets

 

740

 

 

Amortization of debt issuance costs

 

67

 

63

 

Stock-based compensation

 

1,912

 

1,611

 

Excess tax benefit from stock option exercises and disqualifying disposition of shares

 

(1,180

)

(518

)

Deferred income tax benefit

 

(343

)

(482

)

Changes in assets and liabilities:

 

 

 

 

 

Inventories

 

(9,926

)

2,739

 

Accounts receivable

 

5,523

 

(6,962

)

Income taxes

 

588

 

7,182

 

Prepaid expenses and other current assets

 

224

 

797

 

Other assets

 

9

 

(746

)

Accounts payable and accrued liabilities

 

(4,080

)

(6,875

)

Other liabilities

 

101

 

(398

)

Net cash provided by operating activities

 

21,299

 

17,756

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Purchase of property and equipment

 

(5,532

)

(3,870

)

Proceeds from sale of property and equipment

 

1,299

 

 

Net cash used in investing activities

 

(4,233

)

(3,870

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Repayments on First Lien Term Loans

 

(13,580

)

(14,263

)

Proceeds from issuance of common stock in public offering

 

 

18,995

 

Payment of transaction costs in connection with the public offering

 

 

(891

)

Excess tax benefit from stock option exercises and disqualifying disposition of shares

 

1,180

 

518

 

Exercise of stock options

 

940

 

33

 

Net cash (used in) provided by financing activities

 

(11,460

)

4,392

 

Effect of foreign currency exchange rate changes on cash

 

(61

)

 

Net increase in cash and cash equivalents

 

5,545

 

18,278

 

Cash and cash equivalents, beginning of period

 

32,117

 

20,875

 

Cash and cash equivalents, end of period

 

$

37,662

 

$

39,153

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

Cash paid for interest

 

$

4,300

 

$

6,596

 

Cash paid for income taxes

 

$

14,895

 

$

7,858

 

 

See accompanying notes.

 

5



 

BARE ESCENTUALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1.    Business

 

Bare Escentuals, Inc., together with its subsidiaries (“Bare Escentuals” or the “Company”), develops, markets, and sells branded cosmetics, skin care and body care products under the bareMinerals, bareVitamins, RareMinerals, i.d., and namesake Bare Escentuals brands and professional skin care products under the md formulations brand. The bareMinerals cosmetics, particularly the core foundation products which are mineral-based, offer a highly differentiated, healthy alternative to conventional cosmetics. The Company uses a multi-channel distribution model consisting of infomercials; home shopping television on QVC; premium wholesale, including Sephora, Ulta and department stores; company-owned boutiques; spas and salons and online shopping. The Company also sells products internationally in the UK, Japan, France and Germany as well as in smaller international markets via distributors.

 

2.     Summary of Significant Accounting Policies

 

The Company’s significant accounting policies are disclosed in Note 2 in the Company’s Form 10-K for the year ended December 30, 2007.  Except as noted below, the Company’s significant accounting policies have not changed significantly as of March 30, 2008.

 

Unaudited Interim Financial Information

 

The accompanying condensed consolidated balance sheet as of March 30, 2008, the condensed consolidated statements of operations for the three months ended March 30, 2008 and April 1, 2007, and the condensed consolidated statements of cash flows for the three months ended March 30, 2008 and April 1, 2007, are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information, Form 10-Q and Article 10 of Regulation S-X. In the opinion of the Company’s management, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and include all adjustments of a normal recurring nature necessary for the fair presentation of the Company’s financial position as of March 30, 2008, its results of operations for the three months ended March 30, 2008 and April 1, 2007, and its cash flows for the three months ended March 30, 2008 and April 1, 2007. The results for the interim periods are not necessarily indicative of the results to be expected for any future period or for the fiscal year ending December 28, 2008.

 

These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s 2007 Annual Report on Form 10-K filed with the SEC on February 28, 2008.

 

Fiscal Quarter

 

The Company’s fiscal quarters end on the Sunday closest to March 31, June 30, September 30 and December 31. The three months ended March 30, 2008 and April 1, 2007 each contained 13 weeks.

 

6



 

Concentration of Credit Risk and Credit Risk Evaluation

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash and cash equivalents are held by or invested in various domestic financial institutions with high credit standing. Management believes that these financial institutions are financially sound and, accordingly, minimal credit risk exists with respect to these balances.

 

Sales generated through credit card purchases for the three months ended March 30, 2008 and April 1, 2007 were approximately 45.6% and 49.0% of total net sales, respectively. The Company uses third parties to collect its credit card receivables and, as a consequence, believes that its credit risks related to these channels of distribution are limited. The Company performs ongoing credit evaluations of its wholesale customers not paying by credit card and acquires credit insurance for certain international distributor customers. Generally, the Company does not require collateral. An allowance for doubtful accounts is determined with respect to those amounts that the Company has determined to be doubtful of collection using specific identification of doubtful accounts and an aging of receivables analysis based on invoice due dates. Actual collection losses may differ from management’s estimates, and such differences could be material to the Company’s consolidated financial position, results of operations, and cash flows. Uncollectible receivables are written off against the allowance for doubtful accounts when all efforts to collect them have been exhausted, and recoveries are recognized when they are received. Generally, accounts receivable are past due after 30 days of an invoice date unless special payment terms are provided.

 

The table below sets forth the percentage of consolidated accounts receivable, net for customers who represented 10% or more of consolidated accounts receivable, which are included in the wholesale segment:

 

 

 

March 30,
2008

 

December 30,
2007

 

Customer A

 

16

%

15

%

Customer B

 

21

%

17

%

Customer C

 

32

%

42

%

 

The table below sets forth the percentage of consolidated sales, net for customers who represented 10% or more of consolidated net sales, which are included in the wholesale segment:

 

 

 

Three months ended

 

 

 

March 30,
2008

 

April 1,
2007

 

Customer A

 

13

%

12

%

Customer B

 

13

%

15

%

Customer C

 

16

%

15

%

 

As of March 30, 2008 and December 30, 2007, the Company had no off-balance sheet concentrations of credit risk.

 

Derivative Financial Instruments

 

The Company accounts for derivative financial instruments in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS No. 133”), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities.  SFAS No. 133 also requires the recognition of all derivative instruments as either assets or liabilities on the balance sheet and that they be measured at fair value.

 

The Company is exposed to interest rate risks primarily through borrowings under its credit facilities. Interest on all of the Company’s borrowings under its senior secured credit facilities is based upon variable interest rates. As of March 30, 2008, the Company had borrowings of $251.4 million outstanding under its senior secured credit facilities which bear interest at a rate equal to, at the Company’s option, either LIBOR or the lenders’ base rate, plus an applicable margin varying based on the Company’s consolidated total leverage ratio. As of March 30, 2008, the interest rate on the First Lien Term Loan was accruing at 5.12%. Under its senior secured credit facilities, the Company is required to enter into interest rate swap or similar agreements with respect to at least 40% of the outstanding principal amount of all loans under its senior secured credit facilities, unless the Company satisfies specified coverage ratio tests. For the three months ended March 30, 2008, the Company satisfied these tests.

 

In August 2007, the Company entered into a two-year interest rate swap transaction in respect of the Company’s senior secured credit facilities. The interest rate swap has an initial notional amount of $200 million declining to $100 million after

 

7



 

one year under which, on a net settlement basis, the Company will make monthly fixed rate payments at the rate of 5.03% and the counterparty makes monthly floating rate payments based upon one-month U.S.D. LIBOR. As a result of the interest rate swap transaction, the Company has fixed the interest rate for a two-year period on $200 million of borrowings for the first year and $100 million of borrowings for the second year under its First Lien Credit Agreement. The Company’s obligations under the interest rate swap transaction as to the scheduled payments are guaranteed and secured on the same basis as is its obligations under the First Lien Credit Agreement. The fair value of the interest rate swap as of March 30, 2008 was a liability of $4,986,000, which was recorded in other liabilities in the condensed consolidated balance sheet.  In the quarter ended March 30, 2008, the Company recorded an unrealized loss on the interest rate swap of $1,468,000, net of tax, that was included in equity as a component of accumulated other comprehensive loss.

 

Earnings per Share

 

A calculation of earnings per share, as reported is as follows (in thousands, except per share data):

 

 

 

Three months ended

 

 

 

March 30,
2008

 

April 1,
2007

 

Numerator:

 

 

 

 

 

Net income

 

$25,783

 

$20,405

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Weighted average common shares used in per share calculations — basic

 

91,260

 

89,428

 

Add: Common stock equivalents from exercise of stock options

 

2,017

 

3,204

 

Weighted-average common shares used in per share calculations — diluted

 

93,277

 

92,632

 

Net income per share

 

 

 

 

 

Basic

 

$0.28

 

$0.23

 

Diluted

 

$0.28

 

$0.22

 

 

For the three months ended March 30, 2008 and April 1, 2007, options to purchase 408,975 and 175,625 shares of common stock, respectively, were excluded from the calculation of weighted average shares for diluted net income per share as they were anti-dilutive.

 

Comprehensive Income

 

Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive loss was $1,529,000 and zero for the three months ended March 30, 2008 and April 1, 2007, respectively.

 

Recent Accounting Pronouncements

 

 In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. Statement 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Statement 157 also applies under other accounting pronouncements that require or permit fair value measurements, but does not require any new fair value measurements. For financial assets and liabilities, the provisions of Statement 157 are effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157, which amends Statement 157 by delaying the effective date of Statement 157 to fiscal years ending after November 15, 2008 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis.  The Company adopted Statement 157 on December 31, 2007 for financial assets and financial liabilities. It did not have any impact on the Company’s results of operations or financial position (Note 12).  The Company will adopt Statement 157 for nonfinancial assets and liabilities during its fiscal year ending January 3, 2010.

 

8



 

In February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities. Statement 159 permits entities to choose to measure many financial instruments, and certain other items, at fair value. Statement 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The provisions of Statement 159 are effective for fiscal years beginning after November 15, 2007. The Company adopted Statement 159 on December 31, 2007. The Company did not elect the fair value option for any of its eligible financial assets or liabilities.

 

In December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB 110”). SAB 110 amends and replaces Question 6 of Section D.2 of Topic 14, “Share-Based Payment,” of the Staff Accounting Bulletin series. Question 6 of Section D.2 of Topic 14 expresses the views of the staff regarding the use of the “simplified” method in developing an estimate of the expected term of “plain vanilla” share options and allows usage of the “simplified” method for share option grants prior to December 31, 2007. SAB 110 allows public companies which do not have historically sufficient experience to provide a reasonable estimate to continue to use the “simplified” method for estimating the expected term of “plain vanilla” share option grants after December 31, 2007. The Company adopted SAB 110 on December 31, 2007. The Company is continuing to use the “simplified” method until it has enough historical experience to provide a reasonable estimate of expected term in accordance with SAB 110.

 

 In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations. Statement 141-R will significantly change the accounting for future business combinations after adoption. Statement 141-R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquired business. Statement 141-R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Statement 141-R is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company will adopt Statement 141-R beginning in its fiscal year ending January 3, 2010, as required.  The Company is still evaluating the impact Statement 141-R may have on its financial position or results of operations.

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.  Statement 161 amends and expands the disclosure requirements of Statement 133 with the intent to provide users of financial statements with an enhanced understanding of: 1) How and why an entity uses derivative instruments; 2) How derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations and 3) How derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company will adopt Statement 161 in its fiscal year ending January 3, 2010, as required.  The Company has not completed its evaluation of Statement 161 but it will not impact its financial position or results of operations as it is disclosure-only in nature.

 

3.              Acquisition

 

On April 3, 2007, the Company completed its acquisition of U.K.-based Cosmeceuticals Limited (“Cosmeceuticals”), which distributes Bare Escentuals’ bareMinerals, md formulations and MD Forte brands primarily to spas and salons and QVC U.K.  The acquired entity has been renamed Bare Escentuals UK Ltd.  The Company’s primary reason for the acquisition was to reacquire its distribution rights and to expand its market share.  The consideration for the purchase was cash of $23.1 million, comprised of $22.4 million in cash consideration and $0.7 million of transaction costs. The Company’s consolidated financial statements include the operating results of the business acquired from the date of acquisition. Pro forma results of operations have not been presented because the effect of the acquisition was not material.

 

The total purchase price of $23.1 million was allocated as follows: $12.6 million to goodwill included in the corporate segment (not deductible for income tax purposes), $8.9 million to identifiable intangible assets comprised of customer relationships of $8.0 million and $0.9 million for non-compete agreements, $4.4 million to net tangible assets acquired, and $2.8 million to deferred tax liability. The estimated useful economic lives of the identifiable intangible assets acquired are three years.  The significant factor that resulted in recognition of goodwill was that the purchase price was based on the ability to expand in trade areas beyond the acquired distribution rights at an accelerated rate.

 

During the three months ended March 30, 2008, the Company sold $1.3 million of the net tangible assets acquired to a third party for proceeds of $1.3 million.  There was no gain or loss recorded in this transaction.

 

9



 

4.              Inventories

 

Inventories consisted of the following (in thousands):

 

 

 

March 30,
2008

 

December 30,
2007

 

Raw materials and components

 

$

2,667

 

$

3,007

 

Finished goods

 

66,902

 

56,636

 

 

 

$

69,569

 

$

59,643

 

 

5.              Property and Equipment, Net

 

Property and equipment, net, consisted of the following (in thousands):

 

 

 

March 30,
2008

 

December 30,
2007

 

Furniture and equipment

 

$

9,783

 

$

8,719

 

Computers and software

 

14,922

 

13,890

 

Leasehold improvements

 

28,341

 

28,291

 

 

 

53,046

 

50,900

 

Accumulated depreciation and amortization

 

(11,250

)

(9,369

)

 

 

41,796

 

41,531

 

Construction-in-progress

 

4,432

 

2,345

 

Property and equipment, net

 

$

46,228

 

$

43,876

 

 

6.              Intangible Assets, Net

 

Intangible assets, net, consisted of the following (in thousands):

 

 

 

March 30,
2008

 

December 30,
2007

 

Customer relationships

 

$

8,000

 

$

8,000

 

Trademarks

 

3,233

 

3,233

 

Domestic customer base

 

939

 

939

 

International distributor base

 

820

 

820

 

Non-compete agreements

 

900

 

900

 

 

 

13,892

 

13,892

 

Accumulated amortization

 

(4,724

)

(3,984

)

Intangible assets, net

 

$

9,168

 

$

9,908

 

 

7.              Other Assets

 

Other assets consisted of the following (in thousands):

 

 

 

March 30,
2008

 

December 30,
2007

 

Debt issuance costs, net of accumulated amortization of $405 and $338 at March 30, 2008 and December 30, 2007, respectively

 

$

713

 

$

780

 

Other assets

 

1,991

 

2,000

 

 

 

$

2,704

 

$

2,780

 

 

10



 

8.              Accrued Liabilities

 

Accrued liabilities consisted of the following (in thousands):

 

 

 

March 30,
2008

 

December 30,
2007

 

Interest

 

$

822

 

$

971

 

Employee compensation and benefits

 

5,904

 

9,394

 

Purchase price for acquisition

 

 

2,526

 

Gift certificates and customer liabilities

 

2,038

 

2,500

 

Sales taxes and local business taxes

 

2,011

 

2,434

 

Royalties

 

2,184

 

2,146

 

Other

 

4,737

 

5,170

 

 

 

$

17,696

 

$

25,141

 

 

9.              Revolving Lines of Credit

 

At March 30, 2008, $24,900,000 was available under our revolving line of credit (the “Revolver”) and $100,000 was utilized for outstanding in letters of credit. Borrowings under the Revolver bear interest at a rate equal to, at the Company’s option, either LIBOR or the lenders’ base rate, plus an applicable margin based on a grid in which the pricing depends on the Company’s consolidated total leverage ratio and debt rating (2.25% plus LIBOR or 1.25% plus lenders’ base rate; actual rate of 5.12% at March 30, 2008 and 7.46% at December 30, 2007). The Company is also required to pay commitment fees of 0.5% per annum on any unused portions of the facility.

 

10.       Long-Term Debt

 

Long-term debt consisted of the following (in thousands):

 

 

 

March 30,
2008

 

December 30,
2007

 

First Lien Term Loan

 

$

251,353

 

$

264,933

 

Less current portion

 

(17,216

)

(17,901

)

Total long-term debt, net of current portion

 

$

234,137

 

$

247,032

 

 

First Lien Term Loans

 

The First Lien Term Loans have an original term of seven years expiring on February 18, 2012 and bear interest at a rate equal to, at the Company’s option, either LIBOR or the lenders’ base rate, plus an applicable margin varying based on the Company’s consolidated total leverage ratio. As of March 30, 2008 and December 30, 2007, the interest rates on the First Lien Term Loans were accruing at 5.12% and 7.46%, respectively (without giving effect to the interest rate swap transaction).

 

Borrowings under the Revolver (Note 9) and the First Lien Term Loans are secured by substantially all of the Company’s assets, including, but not limited to, all accounts receivable, inventory, property and equipment, and intangibles. The terms of the senior secured credit facilities require the Company to comply with financial covenants, including maintaining a leverage ratio, entering into interest rate swap or similar agreements with respect to 40% of the principal amounts outstanding under the Company’s senior secured credit facilities as of October 2, 2007. The secured credit facility also contains nonfinancial covenants that restrict some of the Company’s activities, including its ability to dispose of assets, incur additional debt, pay dividends, create liens, make investments, and engage in specified transactions with affiliates. As of March 30, 2008, the Company satisfied its financial and nonfinancial covenants

 

Scheduled Maturities of Long-Term Debt

 

At March 30, 2008, future scheduled principal payments on long-term debt were as follows (in thousands):

 

Year ending:

 

 

 

Remainder of the year ending December 28, 2008

 

$

13,773

 

January 3, 2010

 

13,773

 

January 2, 2011

 

13,773

 

January 1, 2012

 

158,386

 

December 30, 2012

 

51,648

 

 

 

$

251,353

 

 

11



 

11.  Commitments and Contingencies

 

Lease Commitments

 

The Company leases retail boutiques, distribution facilities, office space and certain office equipment under noncancelable operating leases with various expiration dates through January 2019. Additionally, the Company subleases certain real property to third parties. Portions of these payments are denominated in foreign currencies and were translated in the tables below based on their respective U.S. dollar exchange rates at March 30, 2008. These future payments are subject to foreign currency exchange rate risk. The future minimum annual payments and anticipated sublease income under such leases in effect at March 30, 2008, were as follows (in thousands):

 

 

 

Minimum
Rental
Payments

 

Sublease
Rental
Income

 

Net
Minimum
Lease
Payments

 

Year ending:

 

 

 

 

 

 

 

Remainder of the year ending December 28, 2008

 

$

6,240

 

$

22

 

$

6,218

 

January 3, 2010

 

10,672

 

30

 

10,642

 

January 2, 2011

 

10,340

 

30

 

10,310

 

January 1, 2012

 

10,105

 

30

 

10,075

 

December 30, 2012

 

10,261

 

1

 

10,260

 

Thereafter

 

41,795

 

 

41,795

 

 

 

$

89,413

 

$

113

 

$

89,300

 

 

Many of the Company’s retail boutique leases require additional contingent rents when certain sales volumes are reached. Total rent expense was $4,421,000 and $2,551,000 for the three months ended March 30, 2008 and April 1, 2007, respectively.  Total rent expense included contingent rentals of $556,000 and $531,000 for the three months ended March 30, 2008 and April 1, 2007, respectively.  Several leases entered into by the Company include options that may extend the lease term beyond the initial commitment period, subject to terms agreed to at lease inceptions. As of March 30, 2008, under the terms of its corporate office lease, the Company had outstanding an irrevocable standby letter of credit of $100,000 to the lessor for the term of the lease.

 

Royalty Agreements

 

The Company is a party to a license agreement (the “License”) for use of certain patents associated with some of the skin care products sold by the Company. The License requires that the Company pay a quarterly royalty of 4% of the net sales of certain skin care products for an indefinite period of time. The License also requires minimum annual royalty payments of $600,000 from the Company. The Company can terminate the agreement at any time with six months written notice. The Company’s royalty expense under the License for the three months ended March 30, 2008 and April 1, 2007 was $150,000 and $150,000, respectively.

 

The Company has obtained a worldwide exclusive right to license, develop, commercialize, and distribute certain licensed ingredients to be used in products to be sold by the Company. This agreement requires the Company to make payments upon achievement of certain product milestones. In addition, this agreement requires the Company to pay a royalty of 3.5% of the net sales upon successful launch of the first product, subject to certain minimum annual royalty amounts. The Company launched commercial sales of the products containing the licensed ingredients during the year ended December 31, 2006. The minimum royalty amount is $500,000 for 2008 after which time the Company may renegotiate the minimum royalties or other compensation within 120 days after the second anniversary of the commercial launch. The Company’s expense under this agreement for the three months ended March 30, 2008 and April 1, 2007 was $310,000 and $213,000, respectively.

 

Contingencies

 

The Company is involved in various legal and administrative proceedings and claims arising in the ordinary course of its business. The ultimate resolution of such claims would not, in the opinion of management, have a material effect on the Company’s financial position or results of operation.

 

12



 

12.  Fair Value Measurements

 

The Company adopted Statement 157 on December 31, 2007 for financial assets and liabilities. The Company also adopted Statement 159 in which entities are permitted to choose to measure many financial instruments and certain other items at fair value. The Company did not elect the fair value option for any of its eligible financial assets or liabilities under FAS 159.

 

SFAS No. 157 established a three-tier hierarchy for fair value measurements, which prioritizes the inputs used in measuring fair value as follows:

 

·                  Level 1 – observable inputs such as quoted prices for identical instruments in active markets.

·                  Level 2 – inputs other than quoted prices in active markets that are observable either directly or indirectly through corroboration with observable market data.

·                  Level 3 – unobservable inputs in which there is little or no market data, which would require the Company to develop its own assumptions.

 

As of March 30, 2008, the Company held certain assets that are required to be measured at fair value on a recurring basis.  These included the Company’s interest rate swap agreement and certain investments associated with the Company’s Long-Term Employee-Related Benefits Plan.  The fair value of the Company’s interest rate swap agreement is determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets.  Therefore, the Company has categorized the interest rate swap as Level 2.  The fair value of the Company’s investments associated with its Long-Term Employee-Related Benefits Plan is based primarily on third-party reported net asset values, which is primarily based on quoted market prices of the underlying assets of the funds and have been categorized as Level 2.

 

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis as of March 30, 2008 subject to the disclosure requirements of Statement 157 (in thousands):

 

 

 

 

 

Fair Value Measurements Using

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

 

Deferred compensation

 

$

1,443

 

$

 

$

1,443

 

$

 

 

 

 

 

 

 

 

 

 

 

Other liabilities:

 

 

 

 

 

 

 

 

 

Interest rate swap

 

$

4,986

 

$

 

$

4,986

 

$

 

Deferred compensation

 

1,340

 

 

1,340

 

 

Total liabilities

 

$

6,326

 

$

 

$

6,326

 

$

 

 

13.  Income Taxes

 

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS 109, Accounting for Income Taxes. FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on a tax return.  The Company adopted FIN 48 on January 1, 2007.

 

As of March 30, 2008, the total amount of net unrecognized tax benefits was $4,728,000.  This amount includes $1,690,000 of net unrecognized tax benefits that, if recognized, would affect the effective tax rate.  The Company accrues interest related to unrecognized tax benefits in its provision for income taxes.  As of March 30, 2008, the Company had approximately $463,000 of accrued interest, net of tax, related to uncertain tax positions.

 

Included in the balance of unrecognized tax benefits at March 30, 2008 are tax positions of $2,725,000 for which the ultimate recognition is highly certain but for which there is uncertainty about the timing of such recognition. Because of the impact of deferred income tax accounting, other than for interest and penalties, these items would not affect the effective income tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. Due to the expiration of various statutes of limitation, it is reasonably possible that the Company’s gross unrecognized tax benefits balance may change within the next twelve months by a range of zero to $634,000.

 

13



 

The Company files income tax returns in the United States and in various states, local and foreign jurisdictions. The tax years subsequent to 2002 remain open to examination by the major taxing jurisdictions in the United States. The State of California is currently in the process of auditing the Company’s California state income tax returns for the years 2005 and 2006. We expect that the outcome of this audit will have no material impact to the amounts recorded in the financial statements.

 

14.  Stock-Based Employee Compensation Plans

 

As of March 30, 2008, the Company had reserved 9,466,930 shares of common stock for future issuance.

 

2004 Equity Incentive Plan

 

On June 10, 2004, the board of directors adopted the 2004 Equity Incentive Plan (the “2004 Plan”). The 2004 Plan provides for the issuance of non-qualified stock options for common stock to employees, directors, consultants, and other associates. The options generally vest over a period of five years from the date of grant and have a maximum term of ten years.

 

In conjunction with the adoption of the 2006 Equity Incentive Plan in September 2006, no additional options are permitted to be granted under the 2004 Plan. In addition, any outstanding options cancelled under the 2004 Plan will become available to grant under the 2006 Equity Incentive Plan.

 

A summary of activity under the 2004 Plan is set forth below.

 

 

 

 

 

Options Outstanding

 

 

 

Options
Available
for Grant

 

Number of
Shares

 

Weighted-
Average
Exercise
Price

 

Balance at December 30, 2007

 

 

4,364,136

 

$

2.56

 

Exercised

 

 

(182,413

)

5.11

 

Canceled

 

70,792

 

(70,792

)

4.75

 

Rolled over to 2006 Plan

 

(70,792

)

 

 

Balance at March 30, 2008

 

 

4,110,931

 

$

2.41

 

 

At March 30, 2008, there were 599,948 total outstanding vested options under the 2004 Plan at a weighted-average exercise price of $1.95.

 

The total intrinsic value of options exercised under the 2004 Plan for the three months ended March 30, 2008 was $3,548,000.

 

2006 Equity Incentive Plan

 

On September 12, 2006, the Company’s stockholders approved the 2006 Equity Incentive Award Plan (the “2006 Plan”) for executives, directors, employees and consultants of the Company. A total of 4,500,000 shares of the Company’s Common Stock have been reserved for issuance under the 2006 Plan. Awards are granted with an exercise price equal to the closing market price of the Company’s Common Stock at the date of grant. Those awards generally vest over a period of four or five years from the date of grant and have a maximum term of ten years.

 

14



 

A summary of activity under the 2006 Plan is set forth below:

 

 

 

 

 

Options Outstanding

 

 

 

Options
Available
for Grant

 

Number of
Shares

 

Weighted-
Average
Exercise
Price

 

Balance at December 30, 2007

 

4,934,757

 

350,800

 

$

29.53

 

Rolled over from 2004 Plan

 

70,792

 

 

 

Granted

 

(216,150

)

216,150

 

23.82

 

Exercised

 

 

(350

)

22.00

 

Canceled

 

23,800

 

(23,800

)

33.11

 

Balance at March 30, 2008

 

4,813,199

 

542,800

 

$

27.11

 

 

At March 30, 2008, there were 26,825 total outstanding vested options under the 2006 Plan at a weighted-average exercise price of $30.40.

 

The total intrinsic value of options exercised under the 2006 Plan for the three months ended March 30, 2008 was $1,900.

 

The total cash received from employees as a result of employee stock option exercises under all plans for the three months ended March 30, 2008 was $940,000. In connection with these exercises, the tax benefits realized by the Company for the three months ended March 30, 2008 were $1,180,000.

 

15.          Segment and Geographic Information

 

Operating segments are defined as components of an enterprise engaging in business activities about where separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources and assessing performance. The Company’s Chief Executive Officer has been identified as the CODM as defined by Statement 131, Disclosures about Segments of an Enterprise and Related Information. The Company has determined that it operates in two business segments: Retail with sales to end users, and Wholesale with sales to resellers. These reportable segments are strategic business units that are managed separately based on the fundamental differences in their operations. The Retail segment consists of sales directly to end users through Company-owned boutiques and infomercials. The Wholesale segment consists of sales to resellers, home shopping television, specialty beauty retailers, spas and salons, and international distributors. The following table presents certain financial information for each segment. Operating income is the gross margin of the segment less direct expenses of the segment. Some direct expenses, such as media and advertising spend, do impact the performance of the other segment, but these expenses are recorded in the segment they directly relate to and are not allocated to each segment. The Corporate column includes unallocated selling, general and administrative expenses, depreciation and amortization and stock-based compensation expenses. Corporate selling, general and administrative expenses include headquarters facilities costs, distribution center costs, product development costs, corporate headcount costs and other corporate costs, including information technology, finance, accounting, legal and human resources costs.  These items, while often times related to the operations of a segment, are not considered by segment operating management and the CODM in assessing segment performance.

 

 

 

Retail

 

Wholesale

 

Corporate

 

Total

 

Three Months ended March 30, 2008

 

 

 

 

 

 

 

 

 

Sales, net

 

$

56,409

 

$

83,949

 

$

 

$

140,358

 

Cost of goods sold

 

11,253

 

27,404

 

 

38,657

 

Gross profit

 

45,156

 

56,545

 

 

101,701

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

24,253

 

3,881

 

22,330

 

50,464

 

Depreciation and amortization

 

553

 

97

 

1,971

 

2,621

 

Stock-based compensation

 

 

 

1,912

 

1,912

 

Total expenses

 

24,806

 

3,978

 

26,213

 

54,997

 

Operating income (loss)

 

20,350

 

52,567

 

(26,213

)

46,704

 

Interest expense

 

 

 

 

 

 

 

(4,644

)

Other income, net

 

 

 

 

 

 

 

707

 

Income before provision for income taxes

 

 

 

 

 

 

 

42,767

 

Provision for income taxes

 

 

 

 

 

 

 

16,984

 

Net income

 

 

 

 

 

 

 

$

25,783

 

 

15



 

 

 

Retail

 

Wholesale

 

Corporate

 

Total

 

Three Months ended April 1, 2007

 

 

 

 

 

 

 

 

 

Sales, net

 

$

51,408

 

$

64,205

 

$

 

$

115,613

 

Cost of goods sold

 

10,912

 

22,538

 

 

33,450

 

Gross profit

 

40,496

 

41,667

 

 

82,163

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

22,064

 

3,031

 

14,090

 

39,185

 

Depreciation and amortization

 

365

 

15

 

560

 

940

 

Stock-based compensation

 

 

 

1,611

 

1,611

 

Total expenses

 

22,429

 

3,046

 

16,261

 

41,736

 

Operating income (loss)

 

18,067

 

38,621

 

(16,261

)

40,427

 

Interest expense

 

 

 

 

 

 

 

(6,811

)

Other income, net

 

 

 

 

 

 

 

341

 

Income before provision for income taxes

 

 

 

 

 

 

 

33,957

 

Provision for income taxes

 

 

 

 

 

 

 

13,552

 

Net income

 

 

 

 

 

 

 

$

20,405

 

 

The Company’s long-lived assets, excluding goodwill and intangibles, by segment were as follows (in thousands):

 

 

 

March 30,
2008

 

December 30,
2007

 

Retail

 

$

20,499

 

$

17,327

 

Wholesale

 

1,021

 

925

 

Corporate

 

25,256

 

26,201

 

 

 

$

46,776

 

$

44,453

 

 

Long-lived assets allocated to the retail segment consist of fixed assets and deposits for retail stores. Long-lived assets allocated to the wholesale segment consist of fixed assets located at a wholesale customer. Long-lived assets in the corporate segment consist of fixed assets, tooling costs and deposits related to the Company’s corporate offices and distribution centers.

 

The Company’s long-lived assets, excluding goodwill and intangibles, by geographic area were as follows (in thousands):

 

 

 

March 30,
2008

 

December 30,
2007

 

United States

 

$

45,934

 

$

42,191

 

International

 

842

 

2,262

 

 

 

$

46,776

 

$

44,453

 

 

No individual geographical area outside of the United States accounted for more than 10% of net sales in any of the periods presented. The Company’s sales by geographic area were as follows (in thousands):

 

 

 

Three months ended

 

 

 

March 30,
2008

 

April 1,
2007

 

United States

 

$

126,290

 

$

107,265

 

International

 

14,068

 

8,348

 

Sales, net

 

$

140,358

 

$

115,613

 

 

16



 

ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties. In some cases, forward-looking statements can be identified by words such as “anticipates,” “expects,” “believes,” “plans,” “predicts,” and similar terms. Such forward-looking statements are based on current expectations, estimates and projections about our industry, management’s beliefs and assumptions made by management. Forward-looking statements are not guarantees of future performance and our actual results may differ materially from the results discussed below and in the forward-looking statements. Factors that might cause such differences include, but are not limited to those discussed in Part II, Item 1A, “Risk Factors” below and Item 1A of our Annual Report on Form 10-K for the year ended December 30, 2007 filed with the SEC on February 28, 2008. The following discussion should be read in conjunction with the Company’s consolidated financial statements and related notes hereto included elsewhere in this Quarterly Report on Form 10-Q. Except as required by law, we expressly disclaim any obligation to update publicly any forward-looking statements, whether as result of new information, future events or otherwise.

 

Executive Overview

 

Founded in 1976, Bare Escentuals is one of the fastest growing prestige beauty companies in the U.S. and a leader by sales and consumer awareness in mineral-based cosmetics. We develop, market and sell branded cosmetics, skin care and body care products under our bareMinerals, bareVitamins, RareMinerals, i.d., and namesake Bare Escentuals brands, and professional skin care products under our md formulations brand.

 

We utilize a distinctive marketing strategy and a multi-channel distribution model consisting of infomercials; home shopping television on QVC; premium wholesale, including Sephora, Ulta and department stores; company-owned boutiques; spas and salons and online shopping. We believe that this strategy provides not only convenience to our consumers but also allows us to reach the broadest possible spectrum of consumers.

 

Our business is comprised of two strategic business units constituting reportable segments that we manage separately based on fundamental differences in their operations:

 

                  Our retail segment, which is characterized by sales directly to end users, consists of our infomercials, which include sales through our websites www.bareminerals.com, and company-owned boutiques, which include sales through our websites www.bareescentuals.com and www.mdformulations.com. We believe that our infomercial business helps us to build brand awareness, communicate the benefits of our core products and establish a base of recurring revenue because a substantial percentage of new consumers participate in our continuity program. Our company-owned boutiques enhance our ability to build strong consumer relationships and promote additional product use through personal demonstrations and product consultations.

 

                  Our wholesale segment, which is characterized by sales to resellers, includes premium wholesale; home shopping television; spas and salons; and international distributors. Our sales through home shopping television help us to build brand awareness, educate consumers through live product demonstrations and develop close connections with our consumers. We also sell to retailers that we believe feature our products in settings that support and reinforce our brand image and provide a premium in-store experience. Similarly, our spa and salon customers provide an informative and treatment-focused environment in which aestheticians and spa professionals can communicate the benefits of our products. Finally, we sell our products in a number of major international markets including the UK, Japan, France and Germany as well as into other countries through a network of third-party distributors.

 

We manage our business segments to maximize sales growth and market share. We believe that our multi-channel distribution strategy maximizes convenience for our consumers, reinforces brand awareness, increases consumer retention rates, and drives corporate cash flow and profitability. Further, we believe that the broad diversification within our segments provides us with expanded opportunities for growth and reduces our dependence on any single distribution channel. Within individual distribution channels, particularly those in our wholesale segment, financial results are often affected by the timing of shipments as well as the impact of key promotional events.

 

17



 

Basis of Presentation

 

We recognize revenue in accordance with the requirements of Staff Accounting Bulletin No. 104 Revenue Recognition, and other applicable revenue recognition guidance and interpretations. The Company records revenue when all four of the following criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectibility is reasonably assured. Revenue is recognized when merchandise is shipped from a warehouse to wholesale customers, infomercial customers and online shopping customers or when purchased by consumers at company-owned boutiques, each net of estimated returns (except in the case of our consignment sales). For our consignment sales, we recognize sales, net of estimated returns, upon shipment from our consignment partners to their customers. We recognize postage and handling charges we bill to customers as revenue upon shipment of the related merchandise.

 

Our cost of goods sold consists of the costs associated with the sourcing of our products, including the cost of the product and associated manufacturing costs, inbound freight charges, royalties and internal transfer costs. Additionally, cost of goods sold includes postage and handling costs incurred upon shipment of merchandise. Our gross profit is dependent upon a variety of factors, including changes in the relative sales mix across our business segments, changes in the mix of products sold and fluctuations in material costs. Our gross margins differ significantly between product lines and our business segments, with sales in our retail segment generally yielding higher gross margins than our wholesale segment. These factors may cause gross profit and margins to fluctuate from quarter to quarter. We anticipate that our cost of goods sold will increase in absolute dollars as we increase our total sales but will remain generally consistent with historical periods on an annual basis as a percentage of net sales depending on the mix of sales among our distribution channels.

 

Selling, general and administrative expenses include infomercial production and media costs, advertising costs, rent and other store operating costs and corporate costs such as management salaries, information technology, professional fees, finance and accounting personnel, human resources personnel and other administrative functions. Selling, general, and administrative expenses also include all of our distribution center and fulfillment costs, including all warehousing costs associated with our third-party fulfillment provider and receiving and inspection costs that we do not include in cost of goods sold, which are comprised primarily of headcount-related costs at our own distribution centers and at our third-party fulfillment provider. Receiving and inspection costs and warehousing costs are excluded from our gross margins and, therefore, our gross margins may not be comparable to those of other companies that choose to include certain of these costs in cost of goods sold. We are unable to provide an estimate of these costs, but we believe these costs are not material. Fluctuations in selling, general and administrative expenses result primarily from changes in media and advertising expenditures, changes in fulfillment costs which increase proportionately with net sales, particularly infomercial sales, changes in store operating costs, which are affected by the number of stores opened in a period, and changes in corporate costs such as for headcount and infrastructure to support our operations. We anticipate that our selling, general and administrative expenses will increase in absolute dollars as we expect to continue to invest in corporate infrastructure and incur additional expenses associated with being a public company, such as increased legal and accounting costs, investor relations costs and higher insurance premiums.

 

Depreciation and amortization includes charges for the depreciation of property and equipment and the amortization of intangible assets. We anticipate that our depreciation and amortization expense will increase in absolute dollars as we continue to open new boutiques, invest in information systems and amortize intangible assets in connection with our  acquisition. We record our depreciation and amortization as a separate line item in our statement of operations because all of this expense relates to selling, general and administrative costs.

 

Stock-based compensation includes charges incurred in recognition of compensation expense associated with grants of stock options and stock purchases. We record our stock-based compensation on a separate operating expense line item in our statement of operations due to the fact that, to date, all of our stock-based awards have been made to employees whose salaries are classified as selling, general and administrative costs. We anticipate that our stock-based compensation expense will increase in absolute dollars as we continue to grant additional options in the future.

 

Interest expense includes interest costs associated with our credit facilities and the amortization of deferred financing costs associated with these credit facilities. We anticipate that our interest expense in the future will decrease in absolute terms and as a percentage of net sales as we continue to make scheduled repayments of our outstanding indebtedness.

 

18



 

Provision for income taxes depends on the statutory tax rates in the countries where we sell our products. Historically, we have only been subject to taxation in the United States, but as we have expanded our international operations we have become subject to foreign taxation at varying statutory rates. Therefore, our effective tax rate could fluctuate accordingly. For fiscal 2008, we anticipate that our effective tax rate will be approximately 40% of our income before provision for income taxes.

 

Results of Operations

 

The following is a discussion of our results of operations and percentage of net sales for the three months ended March 30, 2008 compared to the three months ended April 1, 2007.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

Three months ended

 

 

 

March 30,
2008

 

April 1,
2007

 

 

 

(in thousands, except percentages)

 

Sales, net

 

$

140,358

 

100.0

%

$

115,613

 

100.0

%

Cost of goods sold

 

38,657

 

27.5

 

33,450

 

28.9

 

Gross profit

 

101,701

 

72.5

 

82,163

 

71.1

 

Expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

50,464

 

35.9

 

39,185

 

33.9

 

Depreciation and amortization

 

2,621

 

1.9

 

940

 

0.8

 

Stock-based compensation

 

1,912

 

1.4

 

1,611

 

1.4

 

Operating income

 

46,704

 

33.3

 

40,427

 

35.0

 

Interest expense

 

(4,644

)

(3.3

)

(6,811

)

(5.9

)

Other income, net

 

707

 

0.5

 

341

 

0.3

 

Income before provision for income taxes

 

42,767

 

30.5

 

33,957

 

29.4

 

Provision for income taxes

 

16,984

 

12.1

 

13,552

 

11.7

 

Net income

 

$

25,783

 

18.4

%

$

20,405

 

17.7

%

 

Net sales by business segment and distribution channel and percentage of net sales for the three months ended March 30, 2008 and April 1, 2007 are as follows:

 

 

 

Three months ended

 

 

 

March 30,
2008

 

April 1,
2007

 

 

 

(in thousands, except percentages)

 

Retail

 

$

30,679

 

21.9

%

$

34,274

 

29.7

%

Infomercial

 

25,730

 

18.3

 

17,134

 

14.8

 

Boutiques

 

56,409

 

40.2

 

51,408

 

44.5

 

Total retail

 

 

 

 

 

 

 

 

 

Wholesale

 

44,974

 

32.0

 

35,580

 

30.8

 

Premium wholesale

 

17,877

 

12.7

 

13,694

 

11.8

 

Home shopping television

 

16,647

 

11.9

 

9,959

 

8.6

 

Spas and salons

 

4,451

 

3.2

 

4,972

 

4.3

 

International distributors

 

83,949

 

59.8

 

64,205

 

55.5

 

Total wholesale

 

$

140,358

 

100.0

%

$

115,613

 

100.0

%

Sales, net

 

 

 

 

 

 

 

 

 

 

19



 

Gross profit and gross margin by business segment for the three months ended March 30, 2008 and April 1, 2007 are as follows:

 

 

 

Three months ended

 

 

 

March 30,
2008

 

April 1,
2007

 

 

 

(in thousands, except percentages)

 

Retail

 

$

45,156

 

80.1

%

$

40,496

 

78.8

%

Wholesale

 

56,545

 

67.4

 

41,667

 

64.9

 

Gross profit/gross margin

 

$

101,701

 

72.5

%

$

82,163

 

71.1

%

 

Three months ended March 30, 2008 compared to three months ended April 1, 2007

 

Sales, net

 

Net sales for the three months ended March 30, 2008 increased to $140.4 million from $115.6 million in the three months ended April 1, 2007, an increase of $24.7 million, or 21.4%. This increase was primarily attributable to continued growth in sales of our bareMinerals line of cosmetics, as we continued to broaden our distribution throughout our sales channels both domestically and abroad. The increase in our net sales was realized within both our retail and wholesale segments.

 

Retail. Net retail sales increased 9.7% to $56.4 million in the three months ended March 30, 2008 from $51.4 million in the three months ended April 1, 2007. Net sales from boutiques increased 50.2% to $25.7 million in the three months ended March 30, 2008 from $17.1 million in the three months ended April 1, 2007, due primarily to a net increase of 20 boutiques open as of March 30, 2008 compared to April 1, 2007. As of March 30, 2008 and April 1, 2007, we had 53 and 33 open company owned boutiques, respectively. Offset against this was a decrease of 10.5% in net sales from infomercials to $30.7 million in the three months ended March 30, 2008 from $34.3 million in the three months ended April 1, 2007, due to a decline in the performance of our current infomercial compared to our prior infomercial.

 

Wholesale. Net wholesale sales increased 30.8% to $83.9 million in the three months ended March 30, 2008 from $64.2 million in the three months ended April 1, 2007. Net sales in our premium wholesale channel increased 26.4% to $45.0 million in the three months ended March 30, 2008 from $35.6 million in the three months ended April 1, 2007, resulting primarily from continued expansion into additional retail locations at Ulta, Sephora and department stores. Net sales to our home shopping television customer grew by 30.5% to $17.9 million in the three months ended March 30, 2008 from $13.7 million in the three months ended April 1, 2007, driven by the inclusion of home shopping television sales to the UK, Japan and Germany. Net sales to spas and salons increased 67.2% to $16.6 million in the three months ended March 30, 2008 from $10.0 million in the three months ended April 1, 2007, largely due to the continued growth in sales of our core bareMinerals cosmetics line and the inclusion of sales to spas and salons in the UK. Net sales to our international distributors decreased by 10.5% to $4.5 million in the three months ended March 30, 2008 from $5.0 million in the three months ended April 1, 2007, primarily as a result of the elimination of sales to our distributors in the UK and Japan in the current quarter.

 

Gross profit

 

Gross profit increased 23.8% to $101.7 million in the three months ended March 30, 2008 from $82.2 million in the three months ended April 1, 2007. Our retail segment gross profit increased 11.5% to $45.2 million in the three months ended March 30, 2008 from $40.5 million in the three months ended April 1, 2007, driven by growth in our boutiques sales channel. Our wholesale segment gross profit increased 35.7% to $56.5 million in the three months ended March 30, 2008 from $41.7 million in the three months ended April 1, 2007, due to increases in sales across our premium wholesale, home shopping television and spas and salons distribution channels.

 

Gross margin increased approximately 1.4% to 72.5% in the three months ended March 30, 2008 from 71.1% in the three months ended April 1, 2007 primarily due to increasing margins in both segments. Within the retail segment, gross margin increased to 80.1% in the three months ended March 30, 2008 from 78.8% in the three months ended April 1, 2007, primarily due to a change in channel sales mix as our boutiques channel consisted of a greater percentage of total retail segment sales relative to infomercial sales as well as a change in product mix. Within the wholesale segment, gross margin increased to 67.4% in the three months ended March 30, 2008 from 64.9% in the three months ended April 1, 2007, primarily as a result of a change in product mix and sales mix between channels and customers.

 

20



 

Selling, general and administrative expenses

 

Selling, general and administrative expenses increased 28.8% to $50.5 million in the three months ended March 30, 2008 from $39.2 million in the three months ended April 1, 2007. The increase was primarily due to a significant increase in investment in our corporate infrastructure of $8.2 million, including increased headcount costs, headquarters facilities costs, distribution center costs, costs associated with complying with the regulations applicable to a public company and other general corporate costs, corporate costs and infrastructure costs relating to our UK acquisition, as well as increased expenses to support sales growth, including $2.9 million in increased store operating costs, primarily as a result of the addition of 20 boutiques since the end of the first quarter of fiscal year 2007. As a percentage of net sales, selling, general and administrative expenses increased 2.0% to 35.9% from 33.9%, primarily due to corporate expenses increasing at a greater rate than net sales.

 

Depreciation and amortization

 

Depreciation and amortization expenses increased 178.8% to $2.6 million in the three months ended March 30, 2008 from $0.9 million in the three months ended April 1, 2007. This increase was primarily attributable to higher depreciation expense as a result of an increase in depreciable assets as we continue to increase the number of company-owned boutiques and invest in our corporate infrastructure as well as $0.7 million of amortization of intangible assets from our UK acquisition.

 

Stock-based compensation

 

Stock-based compensation expense increased 18.7% to $1.9 million in the three months ended March 30, 2008 from $1.6 million in the three months ended April 1, 2007. This increase resulted primarily from the granting of additional stock options.

 

Operating income

 

Operating income increased 15.5% to $46.7 million in the three months ended March 30, 2008 from $40.4 million in the three months ended April 1, 2007. This increase was largely due to increases in operating income in both our retail and wholesale segments, reflecting sales growth in both segments, partially offset by an increased operating loss in our corporate segment.

 

Our retail segment operating income increased 12.6% to $20.4 million in the three months ended March 30, 2008 from $18.1 million in the three months ended April 1, 2007, which was largely driven by sales growth in our boutiques sales channel. Our increased sales in the retail segment contributed to an increase in gross profit of $4.7 million which was offset by an increase in operating expenses of $2.4 million. The increase in operating expenses was largely due to increased store operating costs of $2.9 million primarily due to the opening of 20 boutiques since the end of the first quarter of fiscal year 2007.

 

Our wholesale segment operating income increased 36.1% to $52.6 million in the three months ended March 30, 2008 from $38.6 million in the three months ended April 1, 2007 due to increased sales across our premium wholesale, home shopping television and spas and salons sales channels. Our increased sales in the wholesale segment contributed to an increase in gross profit of $14.9 million which was partially offset by an increase in operating expenses of $0.9 million.

 

Our corporate segment operating loss increased 61.2% to $26.2 million in the three months ended March 30, 2008 from $16.3 million in the three months ended April 1, 2007. This increase was largely due to an increase in corporate segment selling, general and administrative expense of $8.2 million, an increase in depreciation and amortization of $1.4 million and stock-based compensation of $0.3 million. The increase in corporate selling, general and administrative expense was as a result of the increase in the investment in our corporate infrastructure to support sales growth and additional expenses associated with being a public company.

 

Interest expense

 

Interest expense decreased 31.8% to $4.6 million in the three months ended March 30, 2008 from $6.8 million in the three months ended April 1, 2007. The decrease was attributable to decreased debt balances in the three months ended March 30, 2008, primarily associated with repayment of outstanding indebtedness.

 

21



 

Other income, net

 

Other income, net increased 107.3% to $0.7 million in the three months ended March 30, 2008 from $0.3 million in the three months ended April 1, 2007. The increase was primary attributable to foreign currency gains resulting from the net effects of currency conversion transactions related to fluctuations in the value of the U.S. dollar as compared to foreign currency as well as higher interest income resulting from larger cash balances versus the prior year.

 

Provision for income taxes

 

The provision for income taxes was $17.0 million, or 39.7% of income before provision for income taxes, in the three months ended March 30, 2008 compared to $13.6 million, or 39.9% of income before provision for income taxes, in the three months ended April 1, 2007. The increase resulted from higher income before provision for income taxes offset by a lower effective rate in the three months ended March 30, 2008 compared to the three months ended April 1, 2007. The decrease in the effective rate is mainly due to an increase in foreign income before tax, which generally is subject to lower income tax rates than income taxable in the United States.

 

Seasonality

 

Because our products are largely purchased for individual use and are consumable in nature, we are not generally subject to significant seasonal variances in sales. However, fluctuations in sales and operating income in any fiscal quarter may be affected by the timing of wholesale shipments, home shopping television appearances and other promotional events. While we believe our overall business is not currently subject to significant seasonal fluctuations, we have experienced limited seasonality in our premium wholesale and company-owned boutique channels as a result of increased demand for our products in anticipation of, and during, the holiday season. To the extent our sales to specialty beauty retailers and through our boutiques increase as a percentage of our net sales, we may experience increased seasonality.

 

Liquidity and Capital Resources

 

Our primary liquidity and capital resource needs are to service our debt, finance working capital needs and fund ongoing capital expenditures. Through March 30, 2008, we have financed our operations through cash flows from operations, sales of common and preferred shares, borrowings under our credit facilities and issuances of senior subordinated notes.

 

Our operations provided us cash of $21.3 million in the three months ended March 30, 2008. At March 30, 2008, we had working capital of $99.1 million, including cash and cash equivalents of $37.7 million, compared to working capital of $84.2 million, including $32.1 million in cash and cash equivalents, as of December 30, 2007. The $5.5 million increase in cash and cash equivalents resulted from cash provided by operations of $21.3 million, as a result of net income for the three months ended March 30, 2008 of $25.8 million, partially offset by cash used in investment activities of $4.2 million and cash used in financing activities of $11.5 million. The $14.9 million increase in working capital was primarily driven by increases in cash and cash equivalents, inventories and a decrease in accrued liabilities partially offset by a decrease in accounts receivable and an increase in accounts payable.

 

Net cash used in investing activities was $4.2 million in the three months ended March 30, 2008, which consisted of $5.5 million primarily attributable to the opening of two company-owned boutiques and our continued investment in our corporate infrastructure, partially offset by proceeds of $1.3 million from the sale of property and equipment. Our future capital expenditures will depend on the timing and rate of expansion of our business, information technology investments, new store openings, store renovations and international expansion opportunities.

 

Net cash used in financing activities was $11.5 million in the three months ended March 30, 2008, which consisted of repayments of $13.6 million on our first-lien term loan, partially offset by an excess tax benefit of $1.2 million relating to stock option exercises.

 

Our revolving credit facility of $25.0 million, of which approximately $0.1 million was utilized for outstanding letters of credit as of March 30, 2008, and our first-lien term loan of $251.4 million, bear interest at a rate equal to, at our option, either LIBOR or the lender’s base rate, plus an applicable variable margin based on our consolidated total leverage ratio. The current applicable interest margin for the revolving credit facility and first-lien term loan is 2.25% for LIBOR loans and 1.25% for base rate loans based on our current Moody’s rating. As of March 30, 2008, interest on the first-lien term loan was accruing at 5.12% (without giving effect to the interest rate swap transaction discussed below).

 

22



 

Borrowings under our revolving credit facility and the first-lien term loan are secured by substantially all of our assets, including, but not limited to, all accounts receivable, inventory, property and equipment, and intangibles. The terms of the senior secured credit facilities require us to comply with financial covenants, including maintaining a leverage ratio, entering into interest rate swap or similar agreements with respect to 40% of the principal amounts outstanding under our senior secured credit facilities as of October 2, 2007.

 

In August 2007, we entered into a two-year interest rate swap transaction under our senior secured credit facilities. The interest rate swap has an initial notional amount of $200 million declining to $100 million after one year under which, on a net settlement basis, we will make monthly fixed rate payments at the rate of 5.03% and the counterparty makes monthly floating rate payments based upon one-month U.S.D. LIBOR. As a result of the interest rate swap transaction, we have fixed the interest rate for a two-year period subject to market based interest rate risk on $200 million of borrowings for the first year and $100 million for the second year under its First Lien Credit Agreement. Our obligations under the interest rate swap transaction as to the scheduled payments are guaranteed and secured on the same basis as is its obligations under the First Lien Credit Agreement. The fair value of the interest rate swap as of March 30, 2008 was $5.0 million, which was recorded in other liabilities in the condensed consolidated balance sheet, with the related $5.0 million unrealized loss recorded and included in equity as a component of accumulated other comprehensive loss, net of tax.

 

The terms of our senior secured credit facilities, require us to comply with financial covenants, including a maximum leverage ratio covenant. We are required to maintain a maximum leverage ratio (consolidated total debt to Adjusted EBITDA) of not greater than 4.5 to 1.0. As of March 30, 2008, our leverage ratio was 1.12 to 1.0. If we fail to comply with any of the financial covenants, the lenders may declare an event of default under the secured credit facility. An event of default resulting from a breach of a financial covenant may result, at the option of lenders holding a majority of the loans, in an acceleration of repayment of the principal and interest outstanding and a termination of the revolving credit facility. The secured credit facility also contains non-financial covenants that restrict some of our activities, including our ability to dispose of assets, incur additional debt, pay dividends, create liens, make investments and engage in specified transactions with affiliates. The secured credit facility also contains customary events of default, including defaults based on events of bankruptcy and insolvency, nonpayment of principal, interest or fees when due, subject to specified grace periods, breach of specified covenants, change in control and material inaccuracy of representations and warranties. We have been in compliance with all financial ratio and other covenants under our credit facilities during all reported periods and we were in compliance with these covenants as March 30, 2008.

 

Subject to specified exceptions, including for investment of proceeds in the case of asset sale proceeds and for permitted equity contributions for capital expenditures, we are required to prepay outstanding loans under our amended senior secured credit facilities with the net proceeds of certain asset dispositions, condemnation settlements and insurance settlements from casualty losses, issuances of certain debt and, if our consolidated leverage ratio is 2.25 to 1.0 or greater, a portion of excess cash flow.

 

Liquidity sources, requirements and contractual cash requirement and commitments

 

We believe that cash flow from operations, cash on hand and amounts available under our revolving credit facility will provide adequate funds for our foreseeable working capital needs and planned capital expenditures. As part of our business strategy, we intend to invest in making improvements to our systems. We opened eighteen boutiques in 2007 and we plan to open approximately forty new boutiques in 2008 (two of which were open as of March 30, 2008), which will require additional capital expenditures. Additionally, we also plan to continue to invest in our corporate infrastructure facilities. We will also look to acquire or invest in businesses or products complementary to our own. We anticipate that our capital expenditures in the year ending December 28, 2008 will be approximately $27.0 million. There can be no assurance that any such capital will be available on acceptable terms or at all. Our ability to fund our working capital needs, planned capital expenditures and scheduled debt payments, as well as to comply with all of the financial covenants under our debt agreements, depends on our future operating performance and cash flow, which in turn are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control.

 

23



 

Contractual commitments

 

We lease retail stores, warehouses, corporate offices and certain office equipment under noncancelable operating leases with various expiration dates through January 2019. Portions of these payments are denominated in foreign currencies and were translated in the tables below based on their respective U.S. dollar exchange rates at March 30, 2008. These future payments are subject to foreign currency exchange rate risk. As of March 30, 2008, the scheduled maturities of our long-term contractual obligations were as follows:

 

 

 

Remainder of
the year
ending
December 28,
2008

 

1 - 3
Years

 

4 - 5
Years

 

After 5
Years

 

Total

 

 

 

(amounts in millions)

 

Operating leases, net of sublease income

 

$

6.2

 

$

31.0

 

$

20.7

 

$

31.4

 

$

89.3

 

Principal payments on long-term debt, including the current portion

 

13.8

 

186.0

 

51.6

 

 

251.4

 

Interest payments on long-term debt, including the current portion(1)

 

11.7

 

32.2

 

0.4

 

 

44.3

 

Minimum royalties under licensing arrangements

 

1.3

 

 

 

 

1.3

 

Total

 

$

33.0

 

$

249.2

 

$

72.7

 

$

31.4

 

$

386.3

 

 


(1)         For purposes of the table, interest expense is calculated after giving effect to our interest rate swap as follows: (i) during the first year of the two-year term of the swap agreement, interest expense is based on $200 million of our first-lien term loan and based on the fixed rate of the swap of 5.03% plus a margin of 2.25% and interest expense on the remaining amount of the loan is estimated based on the rate in effect as of March 30, 2008, and (ii) during the second year of the two-year term of the swap agreement, interest expense is based on $100 million of our first-lien term loan and based on the fixed rate of the swap of 5.03% plus a margin of 2.25% and interest expense on the remaining amount of the loan is estimated based on the rate in effect as of March 30, 2008 and (iii) after the two-year term of the swap agreement, interest expense on the loan is estimated for all periods based on the rate in effect as of March 30, 2008. A 1% change in interest rates on our variable rate debt, including the effect of the interest rate swap, would result in a change of $6.3 million in our total interest payments, of which $0.7 million would be in the remainder of the year ended December 28, 2008, $5.5 million would be in years 1-3 and $0.1 million would be in years 4-5.

 

We adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) on January 1, 2007. As of March 30, 2008, we had approximately $4.7 million of total unrecognized tax benefits. Due to the expiration of various statutes of limitation, it is reasonably possible that our gross unrecognized tax benefits balance may change within the next twelve months by a range of zero to $0.6 million. As of March 30, 2008, the total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate was $1.7 million.

 

Off-balance-sheet arrangements

 

We do not have any off-balance-sheet financing or unconsolidated special purpose entities.

 

Effects of inflation

 

Our monetary assets, consisting primarily of cash and receivables, are not significantly affected by inflation because they are short-term in nature. Our non-monetary assets, consisting primarily of inventory, intangible assets, goodwill and prepaid expenses and other assets, are not currently affected significantly by inflation. We believe that replacement costs of equipment, furniture and leasehold improvements will not materially affect our operations. However, the rate of inflation affects our cost of goods sold and expenses, such as those for employee compensation, which may not be readily recoverable in the price of the products offered by us. In addition, an inflationary environment could materially increase the interest rates on our debt.

 

24



 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results may vary from estimates in amounts that may be material to the financial statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our consolidated financial statements. Our critical accounting policies and estimates are discussed in our recently filed Annual Report on Form 10-K for the fiscal year ended December 30, 2007, which was filed with the SEC on February 28, 2008. We believe that there have been no other significant changes during the three months ended March 30, 2008 to the items that we disclosed in our critical accounting policies and estimates with the exception of the adoption of Statement 157, Statement 159 and SAB 110 as noted below.

 

Fair Value Measurements

 

On December 31, 2007, we adopted SFAS No. 157, Fair Value Measurements (Note 12). Statement 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. Statement 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information.

 

New Accounting Standards

 

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. Statement 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Statement 157 also applies under other accounting pronouncements that require or permit fair value measurements, but does not require any new fair value measurements. For financial assets and liabilities, the provisions of Statement 157 are effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157, which amends Statement 157 by delaying the effective date of Statement 157 to fiscal years ending after November 15, 2008 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. We adopted Statement 157 on December 31, 2007 for financial assets and financial liabilities. It did not have any impact on our results of operations or financial position. We will adopt Statement 157 for nonfinancial assets and liabilities during our fiscal year ending January 3, 2010.

 

In February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities. Statement 159 permits entities to choose to measure many financial instruments, and certain other items, at fair value. Statement 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The provisions of Statement 159 are effective for fiscal years beginning after November 15, 2007. We adopted Statement 159 on December 31, 2007. We did not elect the fair value option for any of our eligible financial assets or liabilities.

 

In December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB 110”). SAB 110 amends and replaces Question 6 of Section D.2 of Topic 14, “Share-Based Payment,” of the Staff Accounting Bulletin series. Question 6 of Section D.2 of Topic 14 expresses the views of the staff regarding the use of the “simplified” method in developing an estimate of the expected term of “plain vanilla” share options and allows usage of the “simplified” method for share option grants prior to December 31, 2007. SAB 110 allows public companies which do not have historically sufficient experience to provide a reasonable estimate to continue to use the “simplified” method for estimating the expected term of “plain vanilla” share option grants after December 31, 2007. We adopted SAB 110 on December 31, 2007. We are continuing to use the “simplified” method until we have enough historical experience to provide a reasonable estimate of expected term in accordance with SAB 110.

 

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations. Statement 141-R will significantly change the accounting for future business combinations after adoption. Statement 141-R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquired business. Statement 141-R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Statement 141-R is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. We will adopt Statement 141-R beginning in our fiscal year ending

 

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January 3, 2010, as required. We are still evaluating the impact Statement 141-R may have on our financial position or results of operations, when it becomes effective.

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. Statement 161 amends and expands the disclosure requirements of Statement 133 with the intent to provide users of financial statements with an enhanced understanding of: 1) How and why an entity uses derivative instruments; 2) How derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations and 3) How derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We will adopt Statement 161 in our fiscal year ending January 3, 2010, as required. The Company has not completed its evaluation of  Statement 161 but it will not impact its financial position or results of operations as it is disclosure-only in nature.

 

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ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Interest rate sensitivity

 

We are exposed to interest rate risks primarily through borrowings under our credit facilities. We have reduced our exposure to interest rate fluctuations by entering into an interest rate swap agreement covering a portion of our variable rate debt. In August 2007, we entered into a two-year interest rate swap transaction under the Company’s senior secured credit facilities. The interest rate swap has an initial notional amount of $200 million declining to $100 million after one year under which, on a net settlement basis, we will make monthly fixed rate payments at the rate of 5.03% and the counterparty makes monthly floating rate payments based upon one-month U.S.D. LIBOR. Our weighted average borrowings outstanding during the three months ended March 30, 2008 were $258.0 million and the annual effective interest rate for the period was 7.1%, after giving effect to the interest swap agreement. A hypothetical 1% increase or decrease in interest rates would have resulted in a $0.6 million change to our interest expense in the three months ended March 30, 2008 and $2.6 million on an annualized basis.

 

Foreign currency risk

 

Most of our sales, expenses, assets, liabilities and cash holdings are currently denominated in U.S. dollars but a portion of the net revenues we receive from sales is denominated in currencies other than the U.S. dollar. Additionally, portions of our costs of goods sold and other operating expenses are incurred by our foreign operations and denominated in local currencies. While fluctuations in the value of these net revenues, costs and expenses as measured in U.S. dollars have not materially affected our results of operations historically, we cannot assure you that adverse currency exchange rate fluctuations will not have a material impact in the future. In addition, our balance sheet reflects non-U.S. dollar denominated assets and liabilities which can be adversely affected by fluctuations in currency exchange rates. We do not hedge against foreign currency risks and we currently believe that our foreign currency exchange risk is immaterial.

 

ITEM 4.   CONTROLS AND PROCEDURES

 

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports pursuant to the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management is responsible for establishing and maintaining adequate internal control over financial reporting. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, its Chief Executive Officer and Chief Financial Officer determined that disclosure controls and procedures were effective at a reasonable assurance level.

 

There has been no change in internal controls over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, internal controls over financial reporting.

 

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PART II—OTHER INFORMATION

 

ITEM 1.   LEGAL PROCEEDINGS

 

In the ordinary course of our business, we are subject to periodic lawsuits, investigations and claims. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe that any currently pending legal proceeding to which we are a party is likely to have a material adverse effect on our business, results of operations, cash flows or financial condition.

 

ITEM 1A.   RISK FACTORS

 

An investment in our common stock involves a high degree of risk. Our Annual Report on Form 10-K for the year ended December 30, 2007 includes a detailed discussion of our risk factors under the heading “Part I, Item 1A—Risk Factors.” Set forth below are certain changes from the risk factors previously disclosed in our Annual Report on Form 10-K. You should carefully consider the risk factors discussed in this report and our Annual Report on Form 10-K as well as the other information in this report, before making an investment decision. If any of the following risks or the risks discussed in the Annual Report on Form 10-K occur, our business, financial condition, results of operations or future growth could suffer.

 

If we are unable to retain key executives and other personnel, particularly Leslie Blodgett, our Chief Executive Officer and primary spokesperson, and recruit additional executives and personnel, we may not be able to execute our business strategy and our growth may be hindered.

 

Our success largely depends on the performance of our management team and other key personnel and our ability to continue to recruit qualified senior executives and other key personnel. Our future operations could be harmed if any of our senior executives or other key personnel ceased working for us. Competition for senior management personnel is intense and there can be no assurance that we will be able to retain our personnel or attract additional qualified personnel. The loss of a member of senior management may require the remaining executive officers to divert immediate and substantial attention to fulfilling his or her duties and to seeking a replacement. We are currently recruiting for a Senior Vice President of Retail Merchandising, Head of Sales and Head of Retail positions. We may not be able to continue to attract or retain such personnel in the future. Any inability to fill vacancies in our senior executive positions on a timely basis could harm our ability to implement our business strategy, which would harm our business and results of operations.

 

We are particularly dependent on Leslie Blodgett, our Chief Executive Officer and primary spokesperson, as her talents, efforts, personality and leadership have been, and continue to be, critical to our success. Many of our customers identify our products by their association with Ms. Blodgett, and she greatly enhances the success of our sales and marketing. There can be no assurance that we will be successful in retaining her services. We maintain key executive life insurance policies with respect to Ms. Blodgett totaling approximately $34 million, which is payable to the lenders under our senior secured credit facility in the event we collect payments on the policy. A diminution or loss of the services of Ms. Blodgett would significantly harm our net sales, and as a result, our business, prospects, financial condition and results of operations.

 

Our senior management team has limited experience working together as a group, and may not be able to manage our business effectively.

 

Many members of our senior management team, including our Chief Marketing Officer, Chief Information Officer, Senior Vice President of Direct to Consumer, Vice President of Real Estate, General Counsel, and Vice President of Stores have been hired since April 2007. As a result, our senior management team has limited experience working together as a group. This lack of shared experience could harm our senior management team’s ability to quickly and efficiently respond to problems and effectively manage our business. Our success also depends on our ability to continue to attract, manage and retain other qualified senior management members as we grow.

 

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ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

ITEM 5.   OTHER INFORMATION

 

None.

 

ITEM 6.   EXHIBITS

 

Exhibits

 

The following documents are incorporated by reference or filed as Exhibits to this report:

 

Exhibit Number

 

Description

 

 

 

3.2 (1)

 

Amended and Restated Certificate of Incorporation.

 

 

 

3.4 (1)

 

Amended and Restated Bylaws.

 

 

 

10.51 (2)

 

Employment Offer Letter to James Taschetta dated August 23, 2007.

 

 

 

10.52 (2)

 

Amendment to Employment Offer Letter to James Taschetta dated August 28, 2007.

 

 

 

10.53

 

Master Services Agreement between Registrant and DataPak Services Corporation dated January 1, 2008.

 

 

 

10.54

 

Amended and Restated Deferred Compensation Plan.

 

 

 

21.1

 

List of Subsidiaries.

 

 

 

31.1

 

Certification of the Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of the Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certification of the Chief Executive Officer and the Chief Financial Officer as required by Section 906 of the Sarbanes-   Oxley Act of 2002.

 


(1)              Incorporated by reference from our Quarterly Report on Form 10-Q for the period ended October 1, 2006 filed on November 15, 2006.

 

(2)              Incorporated by reference from our Current Report on Form 8-K filed on October 17, 2007.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

BARE ESCENTUALS, INC.

Date: May 9, 2008

By:

/s/ LESLIE A. BLODGETT

 

 

Leslie A. Blodgett

 

 

Chief Executive Officer and Director

 

By:

/s/ MYLES B. MCCORMICK

 

 

Myles B. McCormick

 

 

Executive Vice President, Chief Financial Officer
and Chief Operating Officer

 

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EX-10.53 2 a08-11852_1ex10d53.htm EX-10.53

Exhibit 10.53

 

Datapak Services Corporation

New Hudson ··· Phoenix ··· Reno

 

MASTER SERVICES AGREEMENT

 

                This MASTER SERVICES AGREEMENT (this “Agreement”) is made effective as of January 1, 2008, by and between Datapak Services Corporation, a Michigan corporation (“Datapak”), and Bare Escentuals Beauty , Inc. a Delaware corporation (“Bare Escentuals”).

 

RECITALS

 

                WHEREAS, Datapak provides comprehensive inventory warehousing, order fulfillment, call center and administrative services; and

 

                WHEREAS, Datapak desires to provide such services to Bare Escentuals, and Bare Escentuals wishes to purchase such services from Datapak, upon the terms and conditions set forth in this Agreement.

 

AGREEMENT

 

                NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises hereinafter set forth, the parties hereto agree as follows:

 

1.             SERVICES.  Datapak shall provide to Bare Escentuals all services (the “Services”) set forth on the Schedule of Work (“SOW”) attached as Schedule 1 to this Agreement.  The SOW may be amended or modified at any time during the Term (as defined in Section 4 of this Agreement) upon the mutual agreement of the parties, which shall be set forth in writing and executed by an authorized representative of each party.

 

PRICING; PAYMENT.  In consideration of the provision of services set forth on the SOW and otherwise in this Agreement, Bare Escentuals agrees to make payment to Datapak in accordance with the “Pricing Schedule” set forth on Schedule 1 to this Agreement. All payments shall be due within thirty (30) days of receipt by Bare Escentuals of an invoice from Datapak, except for invoices related solely to transportation costs, which invoices shall be paid within ten (10) days of receipt.

 

2.             AUDIT.  Datapak agrees to maintain complete records of each transaction involving the purchase, sale, or shipping of any Bare Escentuals merchandise by Datapak for a period of two (2) years following the transaction.  Upon reasonable notice, Bare Escentuals (or a certified public accountant appointed by Bare Escentuals in its sole discretion) shall have the right to audit Datapak’s invoices and business processes to verify that they are in compliance with the Pricing Schedule.  In the event that such audit indicates that Datapak has overcharged Bare Escentuals by more than two percent (2%), then such overpaid amount plus the costs of such audit, shall be immediately paid by Datapak to Bare Escentuals.

 



 

                TERM.  This Agreement shall become effective on January 1, 2008, and shall continue in effect until terminated by either party on 30 days written notice to the other.

 

3.             OWNERSHIP OF INVENTORY/CUSTOMER DATA.

 

a.             Bare Escentuals’ Proprietary Rights.  The Bare Escentuals’ merchandise warehoused or otherwise held by Datapak, and any and all customer data or other Confidential Information (as defined in Section 7 of this Agreement) obtained or learned by Datapak pursuant to this Agreement involve valuable patent, copyright, trade secret, trade name, trademark and other proprietary rights of Bare Escentuals.  No title to or ownership of any such proprietary right is transferred to Datapak under this Agreement or by use of any trademark, patent or other proprietary right.  Bare Escentuals reserves all such proprietary rights.  Datapak will not infringe, misappropriate or violate any proprietary rights of Bare Escentuals.  Without limiting the generality of the foregoing, Datapak will not register or attempt to register, directly or indirectly, any such patents, copyrights, trade names, trademarks or other proprietary rights other than in the name of Bare Escentuals.  Bare Escentuals shall own all of the merchandise and other inventory it deposits in Datapak’s warehouses (collectively, the “Inventory), and all of the customer data.

 

b.             Datapak’s Proprietary Rights.  Datapak is not authorizing, selling, transferring, licensing or permitting the use of any of its intellectual property, including but not limited to proprietary data, formulas, database structures, database format, computer applications, programming and software owned, licensed or developed by Datapak.  All computer applications, programming and software, either purchased, owned, licensed or developed by Datapak in connection with any services rendered by Datapak under this Agreement shall remain exclusive property of Datapak and the Bare Escentuals shall never have any right, entitlement or claim to said property, and Bare Escentuals disclaims all rights, claims, or entitlement to same.

 

4.             CONFIDENTIALITY.  “Confidential Information” means information that is provided by or on behalf of either party (the “Discloser”) to the other party (the “Recipient”), or to which a party otherwise gains access, in the course of or incidental to the performance of this Agreement, is of value to the Discloser and is not generally known to others, including, without limitation, customer lists, customer information, employee lists, technology, processes, marketing techniques, price lists, pricing policies, business methods, contracts and contractual relations with the Discloser’s customers and suppliers, know-how, software, future and proposed products and services, financial information, business forecasts, sales and merchandising, and marketing plans and information.  Confidential Information may be disclosed in written or other tangible form (including on magnetic media) or by oral, visual or other means.  The terms, conditions and provisions of this Agreement shall be deemed by the parties hereto to be

 

2



 

Confidential Information of both parties hereto.  The Recipient of Confidential Information shall use the Confidential Information only for the purposes of this Agreement or as otherwise expressly permitted by this Agreement.  Recipient of Confidential Information shall protect such Confidential Information from disclosure to others, using the same degree of care used to protect its own confidential or proprietary information of like importance, but in any case using no less than a reasonable degree of care.  Recipient may disclose Confidential Information received hereunder (a) to its affiliates, (b) to Recipient’s employees and independent contractors, and (c) to Recipient’s affiliate’s employees and independent contractors, and who in all of the foregoing cases have a need to know such information and are bound to protect the received Confidential Information from unauthorized use and disclosure under terms no less restrictive than those contained in this Agreement.  Confidential Information shall not otherwise be disclosed by Recipient to any third party without the prior written consent of the Discloser.  The restrictions herein on the use and disclosure of Confidential Information shall not apply to information that:  (i) was publicly known at the time of Discloser’s communication thereof to Recipient or becomes publicly known through no fault of Recipient subsequent to the time of such communication; (ii) was in Recipient’s possession free of any obligation of confidence at the time of Discloser’s communication to Recipient; (iii) is developed by Recipient independently of and without reference to any of Discloser’s Confidential Information or other information that Discloser disclosed in confidence to any third party; (iv) is rightfully obtained by Recipient from third parties authorized to make such disclosure without restriction; (v) is identified in writing by the Discloser as no longer proprietary or confidential.  In the event Recipient is required by law, regulation or court order to disclose any of Discloser’s Confidential Information, Recipient will promptly notify Discloser in writing prior to making any such disclosure and shall reasonably cooperate in any efforts of Discloser to seek a protective order or other appropriate remedy from the proper authority.  If Discloser is not successful in precluding the requested disclosure, Recipient will furnish only that portion of the Confidential Information that is legally required and will exercise all reasonable efforts to obtain reliable assurances that confidential treatment will be accorded the Confidential Information.  All Confidential Information disclosed under this Agreement (including information in computer software or held in electronic storage media) shall be and remain the property of Discloser or its licensors. All such information in any computer memory or data storage apparatus shall be erased or destroyed, and all such information in tangible form in the possession or under the control of the Recipient shall, at the discretion of the Recipient, either be destroyed or returned to the Discloser promptly upon the earlier of: (i) the written request of the Discloser or (ii) termination or expiration of this Agreement, and in any of such events and to the applicable extent shall not thereafter be retained in any form by or through Recipient unless otherwise expressly permitted hereunder.

 

5.             INSURANCE/RISK OF LOSS.

 

a.             Insurance.  Datapak shall maintain in full force and effect policies of insurance for the full replacement cost of all Bare Escentuals’ merchandise located in Datapak’s warehouses. Datapak shall likewise maintain in full force and effect policies of insurance on buildings and equipment at Datapak’s facilities, including commercial general liability insurance, property damage and personal injury insurance and fire and theft coverage with limits (in combination with excess liability insurance) of Two Million Dollars ($2,000,000) per occurrence combined single limit and Four Million Dollars ($4,000,000) in the aggregate, and shall maintain

 

3



 

workers’ compensation coverage as required by applicable law.  Such policies of insurance shall be issued by a responsible insurer satisfactory to Bare Escentuals, shall include Bare Escentuals as an additional insured, shall provide Bare Escentuals not less than thirty (30) days advance notice of cancellation or material change in the policy, and shall not include a policy deductible in excess of $10,000.  Upon Bare Escentuals’ request, Datapak shall provide (i) a copy of the insurance policies required to be carried under this Section 8.a of this Agreement, and (ii) a certificate of insurance from the insurer certifying that such coverage is in place.

 

b.             Risk of Loss.  Bare Escentuals shall be fully responsible for the Inventory until it is physically received at Datapak’s warehouses.  Datapak shall be responsible for the Inventory once delivered to its warehouses until such time as such Inventory is delivered by Datapak and accepted by a shipping company pursuant to an order for shipment.  Thereafter, Bare Escentuals shall bear the risk of loss unless and until such Inventory is returned to the custody of Datapak.

 

6.             INDEMNIFICATION.

 

a.             Datapak Indemnity.  Datapak shall defend, indemnify and hold Bare Escentuals harmless against all claims, losses, damages, costs, and expenses, including reasonable attorneys’ fees, arising out of or related to (i) Datapak’s breach or default under this Agreement; (ii) any personal injury, death or property damage, sustained by any person arising out of or resulting from Datapak’s activities contemplated by this Agreement, (iii) the negligence or misconduct of Datapak, or its employees, agents or contractors in the provision of call center services.

 

b.             Bare Escentuals Indemnity.  Bare Escentuals shall defend, indemnify and hold Datapak harmless against all claims, losses, damages, costs, and expenses, including reasonable attorneys’ fees, arising out of or related to Bare Escentuals’ products, provided that (i) Datapak notifies Bare Escentuals in writing within thirty (30) days of Datapak’s receipt of notice of the claim, (ii) Bare Escentuals has sole control of the defense and all related settlement negotiations, and (iii) Datapak provides Bare Escentuals with the assistance, information and authority necessary to perform the above.

 

7.             DATAPAK’S REPRESENTATIONS AND WARRANTIES.  Datapak represents and warrants to Bare Escentuals that (i) it has the full capacity and authority and all necessary licenses, permits and consents to enter into and to provide the services under this Agreement and any other documents to be entered into by it hereunder, (ii) all statements and representations in this Agreement are true and accurate, (iii) it will perform its obligations under this Agreement in good faith, (iv) its employees, agents and or contractors are appropriately qualified to perform their duties and responsibilities contemplated herein and will perform their obligations with all due skill, care and diligence, including without limitation all call center related activities, and (v) it will perform its obligations under this Agreement in compliance with all applicable laws and regulations now in effect or hereinafter promulgated or enacted.

 

8.             LIMITATION OF LIABILITY.  NEITHER PARTY WILL BE HELD LIABLE FOR ANY INDIRECT, SPECULATIVE, CONSEQUENTIAL, INCIDENTAL, AND/OR SPECIAL DAMAGES INCLUDING, BUT NOT LIMITED TO, LOSS OF USE, BUSINESS INTERRUPTIONS, AND LOSS OF PROFITS, REGARDLESS OF WHETHER SUCH PARTY HAS ADVANCE NOTICE OF THE POSSIBILITY OF SUCH DAMAGES.

 

4



 

9.             NOTICES.  All notices and other communications required or permitted hereunder will be in writing and will be mailed, hand delivered, sent by Federal Express or other recognized overnight courier service, or sent by facsimile transmission, to the parties as follows:

 

If to Datapak:

 

Datapak Services Corporation

55353 Lyon Industrial Drive

New Hudson, Michigan 48165

Attention:Larry W. Kinney, President

Telephone: (517) 552-1400

Facsimile: (517) 552-0400

Email: lkinney@datapakservices.com

 

With copy to:

 

Datapak Services Corporation

55353 Lyon Industrial Drive

New Hudson, Michigan 48165

Attention:Robert G. Lahiff, General Counsel

Telephone: (517) 552-1400

Facsimile: (517) 552-0400

Email: rlahiff@datapakservices.com

 

 

 

 

If to Bare Escentuals:

 

Bare Escentuals, Inc.

71 Stevenson Street, 16th Floor

San Francisco, California 94105

Attention: Myles McCormick, EVP, CFO and COO

Telephone: (415) 489-5558

Facsimile: (415) 489-5999

Email: mmcormick@bareescentuals.com

 

With a copy to:

 

Bare Escentuals, Inc.

71 Stevenson Street, 22nd Floor

San Francisco, California 94105

Attention: Deanna Chechile, VP and General Counsel

Telephone: (415) 489-5260

Facsimile: (415) 520-9795

Email: dchechile@bareescentuals.com

 

 

Any party may from time to time, by written notice to the others, designate a different address or additional persons that will be substituted for and/or added to the address(es) above specified.  Notices by mail will be sent by United States certified or registered mail, return receipt requested, postage prepaid, and will be deemed given and effective upon receipt or refusal of receipt.  Notices by hand delivery will be deemed given and effective upon the delivery thereof.  Notices by overnight courier will be deemed given and effective on the first business day following the delivery thereof to Federal Express or another recognized overnight courier service.  Notices by electronic mail or facsimile will be deemed given upon transmission (provided, in the case of facsimile transmission, a send confirmation is received and retained by the sending party).

 

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10.          MISCELLANEOUS.

 

a.             Assignment.  Datapak will not assign this Agreement, in whole or in part, directly, by operation of law, or otherwise, except with the prior written consent of Bare Escentuals.

 

b.             Attorneys’ Fees.  If any action will be instituted between Datapak and Bare Escentuals in connection with this Agreement or in connection with the enforcement of any indemnity under this Agreement (including appeals), the party prevailing in such action will be entitled to recover from the other party all of its costs of action, including actual consultants’ and attorneys’ fees and attorneys’ costs.  For purposes of this Agreement, the terms “attorneys’ fees” and “attorneys’ costs” will include the fees and expenses of counsel to the prevailing party, which may include printing, photocopying, duplicating and other expenses, air freight charges and fees billed for law clerks, paralegals and other persons not admitted to the bar but performing services under the supervision of an attorney.

 

c.             Construction.  This Agreement will not be construed more strictly against any party merely by virtue of the fact that the same has been prepared by such party or its counsel, it being recognized both of the parties hereto have contributed substantially and materially to the preparation of this Agreement.  All words in this Agreement that are expressed in the neuter gender will be deemed to include the masculine, feminine and neuter genders and any word in this Agreement that is expressed in the singular or plural will be deemed, whenever appropriate in the context, to include the plural and the singular.

 

d.             Counterparts.  This Agreement may be executed in any number of counterparts, each of which will be deemed an original, but all of which when taken together will constitute one and the same instrument.  The signature page of any counterpart may be detached therefrom without impairing the legal effect of the signature(s) thereon provided such signature page is attached to any other counterpart identical thereto except having additional signature pages executed by the other party or parties to this Agreement attached thereto.

 

e.             Governing Law/Venue.  This Agreement will be governed in all respects by the laws of the State of California.  The United Nations Convention on Contracts for the International Sale of Goods shall have no application whatsoever to this Agreement.  The parties submit to the personal jurisdiction of the Courts (Federal and State) in the State of California, with respect to all matters related to or arising out of this Agreement, including post judgment proceedings.  The parties agree that the venue for all disputes, claims or litigation arising out of or related to this contract shall be exclusively in the State or Federal Courts in the City and County of San Francisco, California.

 

6



 

f.              Headings.  Headings of Sections are for convenience of reference only, and will not be construed as a part of this Agreement.

 

g.             No Third Party Beneficiary.  This Agreement is solely for the benefit of the parties hereto and, to the extent provided in this Agreement, their respective partners, directors, officers, employees, agents and representatives, and no provision of this Agreement will be deemed to confer upon other third parties any remedy, claim, liability, reimbursement, cause of action or other right.

 

h.             Partial Invalidity.  In the event that any provision of this Agreement will be unenforceable in whole or in part, such provision will be limited to the extent necessary to render the same valid, or will be excised from this Agreement, as circumstances require, and this Agreement will be construed as if said provision had been incorporated in this Agreement as so limited, or as if said provision has not been included in this Agreement, as the case may be.

 

i.              Waiver.  No waiver of any provision or condition of this Agreement by any party will be valid unless in writing signed by such party.  No such waiver will be taken as a waiver of any other or similar provision or of any future event, act, or default.

 

j.              Relationship of the Parties.  Datapak is an independent contractor and not an agent, employee, franchisee or partner of Bare Escentuals, and is acting in the ordinary course of business.  Datapak has no authority to create or assume any obligation, express or implied, on behalf of Bare Escentuals.  This Agreement does not create or evidence any joint venture or partnership of the parties.

 

k.            Entire Agreement.  This Agreement, including all schedules and exhibits attached hereto and documents to be delivered pursuant hereto, will constitute the entire agreement and understanding of the parties from the effective date of this agreement (January 1, 2008) going forward, but only for the purposes of this Agreement.  The parties have entered into prior agreements.  The most recent prior agreement between the parties had an effective date of January 3, 2006, with an expiration date of December 31, 2007, along with continuing obligations after the December 31, 2007 expiration date.  This Agreement does not in any way affect the terms, conditions, validity or enforceability of any prior agreement nor affect the continuing obligations under any prior agreements between the parties. Each agreement shall be applied and enforced separately between the parties.   This Agreement may be amended only by a written amendment executed by both of the parties hereto.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

7



 

IN WITNESS WHEREOF, the parties have executed this Order Fulfillment and Administrative Services Agreement as of the date first set forth above:

 

DATAPAK SERVICES CORPORATION,

 

BARE ESCENTUALS BEAUTY, INC.,

A Michigan corporation:

 

A Delaware corporation:

 

 

 

By:

 

 

By:

 

Name:

 

 

Name:

 

Title:

 

 

Title:

 

 

 

 

 

By:

 

 

By:

 

Name:

 

 

Name:

 

Title:

 

 

Title:

 

 

8



 

SCHEDULE 1

 

Statement of Work

 

WAREHOUSING AND ORDER FULFILLMENT SERVICES

 

Datapak shall provide to Bare Escentuals a customized order fulfillment and administrative program in connection with the sale of Bare Escentuals’ products. This shall include the following:

 

(a)                                  Establishing customized programs and services to meet Bare Escentuals’ storage and order fulfillment needs related to the Bare Escentuals’ spa/professional markets and international distributor sales and infomercial business;

 

(b)                                 Processing orders daily via electronic transfer, email, fax and telephone; the orders will include among other things, the name of the customer, the shipping address, the goods to be shipped, the freight carrier to be used for shipping and any special packing instructions (the “Shipping Order”).

 

(c)                                  Arranging for the shipment of the ordered merchandise on behalf of the Bare Escentuals to customers, with Bare Escentuals customer invoices included for orders taken on account, and providing avenues for invoice payment and collections with an Aged Accounts Receivable (AAR) Report;

 

(d)                                 Providing adequate warehouse space for Bare Escentuals’ inventory, including appropriate temperature and humidity controls so as to avoid damage or mutation of the Inventory. Bare Escentuals shall (i) specifically identify each such SKU that requires particular temperature and humidity controls, and (ii) specify the specific temperature and humidity controls for each such SKU, and the parties will reach mutually agreeable price additions or modifications required for Datapak to implement such additional controls, which additions or modifications shall be reflected in a written amendment to the Pricing Schedule signed by both parties.

 

(e)                                  Providing to Bare Escentuals on a daily basis via electronic transfer, email, fax and telephone, tracking information and confirmation of shipping of all packages sent on behalf of Bare Escentuals.

 

(f)                                    Offering to Bare Escentuals full access to its program at Datapak through electronic data transfers, email or report facsimile.

 



 

(g)                                 Providing to Bare Escentuals on a monthly basis a complete detailed report on all project activity. This monthly report shall include:

 

(i)                         Inventory value status;

 

(ii)                      Aging accounts receivable status:

 

(iii)                   Item sales analysis:

 

(iv)                  Bank transaction report reconciliation:

 

(v)                     Sales tax information.

 

(vi)                  Other reports periodically requested by Bare Escentuals.

 

CALL CENTER SERVICES

 

I.              Datapak will provide Bare Escentuals with inbound customer contact services as follows:

 

(a)                                  Answer all inquiries received from Bare Escentuals customers via multiple communication methods (e.g., telephone, email, fax, voice message, web chat, etc.), including:

 

(i)            taking orders;

 

(ii)           checking the status of orders;

 

(iii)          processing credits;

 

(iv)          changing or canceling continuity shipment membership;

 

(v)           updating customer profile information;

 

(vi)                              addressing customers’ issues with their online accounts at bareminerals.com (or other web sites);

 

(vii)         providing product information;

 

(viii)        answering general questions about the company and its retail outlets;

 

(ix)                                or providing any other customer service related to Bare Escentuals’ products;

 

(x)                                   provide friendly, courteous customer service in accordance with Bare Escentuals’ customer service philosophy

 

II.            Datapak will provide Bare Escentuals with outbound customer contact services as follows:

 

(a)                                  Contact Bare Escentuals’ customers in order to rectify order issues such as incorrect address or declined credit card, etc.; and

 

(b)                                 Initiate outbound telephone and/or email campaigns as directed by Bare Escentuals.

 



 

SCHEDULE 1

 

Pricing Schedule

 


EX-10.54 3 a08-11852_1ex10d54.htm EX-10.54

 

(ii)           Specific reference to pertinent provisions of this Plan on which such denial of the appeal is based;

 

(iii)          A statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the Claimant’s benefits claim (and a document, record or other information shall be considered “relevant” to the benefits claims as provided in Department of Labor Regulation Section 2560.503-1(m)(8); and

 

(iv)          A statement describing the Claimant’s right to bring an action under ERISA Section 502(a).

 

(e)           Review Committee.  The Plan Administrator may from time to time appoint a review panel that may consist of two or more individuals who may, but need not, be employees of the Plan Sponsor (the “Review Committee”).  If no such Review Committee is named, the Board of Directors of the Plan Sponsor shall be deemed the Review Committee for purposes of this Section 8.2.  The Review Committee shall be the named fiduciary that has the authority to act with respect to any appeal from a denial of benefits or a determination of benefit rights.

 

8.3           Arbitration.  Any claim or controversy between the parties which the parties are unable to resolve themselves, and which is not resolved through the claims procedure set forth in Section 8.2, including any claim arising out of a Participant’s employment or the termination of that employment, and including any claim arising out of, connected with, or related to the formation, interpretation, performance or breach of any provision of this Plan, and any claim or dispute as to whether a claim is subject to arbitration, shall be submitted to and resolved exclusively by expedited arbitration by a single arbitrator in accordance with the following procedures:

 

(a)           In the event of a claim or controversy subject to this arbitration provision, the complaining party shall promptly send written notice to the other party identifying the matter in dispute and the proposed remedy.  Following the giving of such notice, the parties shall meet and attempt in good faith to resolve the matter. In the event the parties are unable to resolve the matter within 21 days, the parties shall meet and attempt in good faith to select a single arbitrator acceptable to both parties.  If a single arbitrator is not selected by mutual consent within 10 business days following the giving of the written notice of dispute, an arbitrator shall be selected from a list of nine persons each of whom shall be an attorney who is either engaged in the active practice of law or a recognized arbitrator and who, in either event, is experienced in serving as an arbitrator in disputes between employers and employees, which list shall be provided by the office of the American Arbitration Association (“AAA”) or of the Federal Mediation and Conciliation Service. If, within three business days of the parties’ receipt of such list, the parties are unable to agree upon an arbitrator from the list, then the parties shall each strike names alternatively from the list, with the first to strike being determined by the flip of a coin.  After each party has had four strikes, the remaining name on the list shall be the arbitrator.  If such person is unable to serve for any reason, the parties shall repeat this process until an arbitrator is selected.

 

(b)           Unless the parties agree otherwise, within 60 days of the selection of the arbitrator, a hearing shall be conducted before such arbitrator at a time and a place agreed upon

 

20



 

by the parties.  In the event the parties are unable to agree upon the time or place of the arbitration, the time and place shall be designated by the arbitrator after consultation with the parties.  Within 30 days of the conclusion of the arbitration hearing, the arbitrator shall issue an award, accompanied by a written decision explaining the basis for the arbitrator’s award.

 

(c)           In any arbitration hereunder, the Plan Sponsor shall pay all administrative fees of the arbitration and all fees of the arbitrator, except that the Participant or Beneficiary may, if he wishes, pay up to one-half of those amounts.  Each party shall pay its own attorneys’ fees, costs, and expenses, unless the arbitrator orders otherwise.  The prevailing party in such arbitration, as determined by the arbitrator, and in any enforcement or other court proceedings, shall be entitled, to the extent permitted by law, to reimbursement from the other party for all of the prevailing party’s costs (including but not limited to the arbitrator’s compensation), expenses, and attorneys’ fees; provided, however, that the prevailing party shall be reimbursed for such costs, expenses and fees within 45 days following any such award, but in no event later than the last day of the Executive’s taxable year following the taxable year in which the costs, expenses or fees were incurred; provided, further, that the parties’ obligations pursuant to this sentence shall terminate on the 10th anniversary of the date of the Participant’s Separation from Service.  The arbitrator shall have no authority to add to or to modify this Plan, shall apply all applicable law, and shall have no lesser and no greater remedial authority than would a court of law resolving the same claim or controversy. The arbitrator shall, upon an appropriate motion, dismiss any claim without an evidentiary hearing if the party bringing the motion establishes that it would be entitled to summary judgment if the matter had been pursued in court litigation.  The parties shall be entitled to reasonable discovery subject to the discretion of the arbitrator.

 

(d)           The decision of the arbitrator shall be final, binding, and non-appealable, and may be enforced as a final judgment in any court of competent jurisdiction.

 

(e)           This arbitration provision of the Plan shall extend to claims against any parent, subsidiary, or affiliate of each party, and, when acting within such capacity, any officer, director, shareholder, Participant, Beneficiary, or agent of each party, or of any of the above, and shall apply as well to claims arising out of state and federal statutes and local ordinances as well as to claims arising under the common law or under this Plan.

 

Notwithstanding the foregoing, and unless otherwise agreed between the parties, either party may, in an appropriate manner, apply to a court for provisional relief, including a temporary restraining order or preliminary injunction, on the ground that the arbitration award to which the applicant may be entitled may be rendered ineffectual without provisional relief.

 

Any arbitration hereunder shall be conducted in accordance with the employee benefit plan claims rules and procedures of the AAA then in effect; provided, however, that, (i) all evidence presented to the arbitrator shall be in strict conformity with the legal rules of evidence, and (ii) in the event of any inconsistency between the employee benefit plan claims rules and procedures of the AAA and the terms of this Plan, the terms of this Plan shall prevail.

 

If any of the provisions of this Section 8.3 are determined to be unlawful or otherwise unenforceable, in whole or in part, such determination shall not affect the validity of the remainder of this Section  8.3, and this Section  8.3 shall be reformed to the extent necessary to carry out its provisions to the greatest extent possible and to insure that the resolution of all conflicts between the parties, including those arising out of statutory claims, shall be resolved by

 

21



 

neutral, binding arbitration.  If a court should find that the provisions of this Section  8.3 are not absolutely binding, then the parties intend any arbitration decision and award to be fully admissible in evidence in any subsequent action, given great weight by any finder of fact, and treated as determinative to the maximum extent permitted by law.

 

8.4           Notice. Any notice, consent or demand required or permitted to be given under the provisions of this Plan shall be in writing and shall be signed by the party giving or making the same.  If such notice, consent or demand is mailed, it shall be sent by United States certified mail, postage prepaid, addressed to the addressee’s last known address as shown on the records of the Plan Sponsor.  The date of such mailing shall be deemed the date of notice consent or demand.  Any person may change the address to which notice is to be sent by giving notice of the change of address in the manner aforesaid.

 

ARTICLE NINE

 

AMENDMENT OR TERMINATION

 

9.1           Termination.  Although each Employer anticipates that it will continue the Plan for an indefinite period of time, there is no guarantee that any Employer will continue the Plan or will not terminate the Plan at any time in the future.  Accordingly, each Employer reserves the right to discontinue its sponsorship of the Plan and/or to terminate the Plan at any time with respect to any or all of its participating Employees, by action of its Board of Directors or other similar governing body.  Upon the termination of the Plan with respect to any Employer, the participation of the affected Participants who are employed by that Employer shall terminate.  However, after the Plan termination the Account Balances of such Participants shall continue to be credited with Participant Annual Deferral Amounts attributable to a deferral election that was in effect prior to the Plan termination to the extent deemed necessary to comply with Section 409A of the Code and related Treasury Regulations, and additional amounts shall continue to credited or debited to such Participants’ Account Balances pursuant to Section 3.4.  The Measurement Funds available to Participants following the termination of the Plan shall be comparable in number and type to those Measurement Funds available to Participants in the Plan Year preceding the Plan Year in which the Plan termination is effective.  In addition, following a Plan termination, Participant Account Balances shall remain in the Plan and shall not be distributed until such amounts become eligible for distribution in accordance with the other applicable provisions of the Plan.  Notwithstanding the preceding sentence, to the extent permitted by Section 1.409A-3(j)(4)(ix) of the Treasury Regulations, the Employer may provide that upon termination of the Plan, all Account Balances of the Participants shall be distributed, subject to and in accordance with any rules established by such Employer deemed necessary to comply with the applicable requirements and limitations of Section 1.409A-3(j)(4)(ix) of the Treasury Regulations.

 

9.2           Amendment.

 

(a)           An Employer may, at any time, amend or modify the Plan in whole or in part with respect to that Employer by the action of its Board of Directors or similar governing body; provided, however, that no amendment or modification shall be effective to decrease or restrict the value of a Participant’s Account Balance in existence at the time the amendment or modification is made or to cause the Plan to fail to meet the requirements of Section 409A of the Code with respect to any Participant without such Participant’s consent.  The amendment or

 

22



 

modification of the Plan shall not affect any Participant or Beneficiary who has become entitled to the payment of benefits under the Plan as of the date of the amendment or modification.  Notwithstanding any provisions of this Section 9.2 to the contrary, the Board may amend the Plan at any time, in any manner, if the Board determines any such amendment is required to ensure that the Plan is characterized as providing deferred compensation for a select group of management or highly compensated employees and as described in ERISA Sections 201(2), 301(a)(3) and 401(a)(1) or to otherwise conform the Plan to the provisions of any applicable law, including ERISA and the Code.

 

(b)           Notwithstanding anything to the contrary in the Plan, if and to the extent the Plan Administrator shall determine that the terms of the Plan may result in the failure of the Plan, or amounts deferred by or for any Participant under the Plan, to comply with the requirements of Section 409A of the Code, or any applicable regulations or guidance promulgated by the Secretary of the Treasury in connection therewith, the Plan Administrator shall have authority to take such action to amend, modify, cancel or terminate the Plan (effective with respect to all Employers) or distribute any or all of the amounts deferred by or for a Participant, as it deems necessary or advisable, including without limitation:

 

(i)            Any amendment or modification of the Plan to conform the Plan to the requirements of Section 409A of the Code or any regulations or other guidance thereunder (including, without limitation, any amendment or modification of the terms of any applicable to any Participant’s Accounts regarding the timing or form of payment).

 

(ii)           Any cancellation or termination of any unvested interest in a Participant’s Accounts without any payment to the Participant.

 

(iii)          Any cancellation or termination of any vested interest in any Participant’s Accounts, with immediate payment to the Participant of the amount otherwise payable to such Participant.

 

(iv)          Any such amendment, modification, cancellation, or termination of the Plan that may adversely affect the rights of a Participant without the Participant’s consent.

 

9.3           Effect of Payment.  The full payment of the applicable benefit under Article 5 of the Plan shall completely discharge all obligations to a Participant and his or her designated Beneficiaries under this Plan.

 

ARTICLE  TEN

 

THE TRUST

 

10.1         Establishment of Trust.  The Plan Sponsor may establish a grantor trust, of which the Plan Sponsor is the grantor, within the meaning of subpart E, part I, subchapter J, subtitle A of the Code, to pay benefits under this Plan (the “Trust”).  If the Plan Sponsor establishes a Trust, all benefits payable under this Plan to a Participant shall be paid directly by the Employer(s) from the Trust.  To the extent such benefits are not paid from the Trust, the benefits shall be paid from the general assets of the Employer(s).  The Trust, if any, shall be an irrevocable grantor trust which conforms to the terms of the model trust as described in IRS Revenue Procedure 92-64, I.R.B. 1992-33.  If the Plan Sponsor establishes a Trust, the assets of the Trust will be subject to the claims of each Employer’s creditors in the event of its insolvency. 

 

23



 

Except as may otherwise be provided under the Trust, neither the Plan Sponsor nor any Employer shall be obligated to set aside, earmark or escrow any funds or other assets to satisfy its obligations under this Plan, and the Participant and/or his or her designated Beneficiaries shall not have any property interest in any specific assets of the Plan Sponsor or an Employer other than the unsecured right to receive payments from the Employer, as provided in this Plan.

 

10.2         Interrelationship of the Plan and the Trust.  The provisions of the Plan shall govern the rights of a Participant to receive distributions pursuant to the Plan.  The provisions of the Trust (if established) shall govern the rights of the Participant and the creditors of the Employers to the assets transferred to the Trust. Each Employer shall at all times remain liable to carry out its obligations under the Plan.  Each Employer’s obligations under the Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust.

 

10.3         Contribution to the Trust.  Amounts may be contributed by an Employer to the Trust in the sole discretion of the Employer.

 

ARTICLE ELEVEN

 

MISCELLANEOUS

 

11.1         Entire Agreement.  The Plan and each executed Election Form, Beneficiary Designation Form, and other administrative forms shall constitute the total agreement between the Employers and the Participant. No oral statement regarding the Plan may be relied upon by the Participant. In the event that there is a discrepancy between the Plan and the administrative forms, summary descriptions, the Plan will control.

 

11.2         Invalidity of Provisions.  If any provision of this Plan shall be for any reason invalid or unenforceable, the remaining provisions shall nevertheless be carried into effect.

 

11.3         Unclaimed Benefits.  In the case of a benefit payable on behalf of such Participant, if the Plan Administrator is unable to locate the Participant or beneficiary to whom such benefit is payable, such Plan benefit may be forfeited to the Plan Sponsor upon the Plan Administrator’s determination.  Notwithstanding the foregoing, if, subsequent to any such forfeiture, the Participant or beneficiary to whom such Plan benefit is payable makes a valid claim for such Plan benefit, such forfeited Plan benefit shall be paid by the Plan Administrator to the Participant or beneficiary, without interest from the date it would have otherwise been paid.

 

11.4         Offset For Obligations To Plan Sponsor.  If, at such time as the Plan Participant becomes entitled to benefit payments hereunder, the Plan Participant has any debt, obligation or other liability representing an amount owing to the Plan Sponsor or an Affiliate of Plan Sponsor, and if such debt, obligation, or other liability is due and owing at the time benefit payments are payable hereunder, the Plan Sponsor may offset the amount owing it or an Affiliate against the amount of benefits otherwise distributable hereunder.

 

11.5         Governing LawThe Plan and the rights and obligations of all persons hereunder shall be governed by and construed in accordance with the laws of the State of California, other than its laws regarding choice of law, to the extent that such state law is not preempted by federal law.

 

24



 

11.6         Status of Plan.  The Plan is intended to be a plan that (i) is not qualified within the meaning of Section 401(a) of the Code, (ii) “is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees” within the meaning of ERISA Sections 201(2), 301(a)(3) and 401(a)(1), and (iii) is intended to comply with the requirements of Section 409A of the Code.  The Plan shall be administered and interpreted to the extent possible in a manner consistent with that intent.

 

11.7         Tax Withholding.

 

(a)           Annual Deferral Amounts.  For each Plan Year in which a Participant Annual Deferral Amount is being withheld from a Participant, the Participant’s Employer(s) shall be entitled to require payment by the Participant of any sums required by federal, state or local tax law to be withheld with respect to the deferral, in amounts and in a manner to be determined in the sole discretion of the Employer(s).

 

(b)           Corporate Contributions.  When a Participant becomes vested in a portion of his or her Corporate Contribution Account, the Participant’s Employer(s) shall be entitled to require payment by the Participant of any sums required by federal, state or local tax law to be withheld with respect to the deferral, in amounts and in a manner to be determined in the sole discretion of the Employer(s).

 

(c)           Distributions.  The Participant’s Employer(s), or the trustee of the Trust, shall withhold from any payments made to a Participant under this Plan all federal, state and local income, employment and other taxes required to be withheld by the Employer(s), or the trustee of the Trust, in connection with such payments, in amounts and in a manner to be determined in the sole discretion of the Employer(s) and the trustee of the Trust.

 

(d)           Satisfaction of Tax Obligations.  There shall be deducted from each payment made under the Plan or any other compensation payable to the Participant (or Beneficiary) all taxes which are required to be withheld by the Employer(s) in respect to such payment or this Plan.  The Company shall have the right to reduce any payment (or compensation) by the amount of such of cash sufficient to provide the amount of said taxes.  In addition, to the extent a Participant does not pay any sums required by federal, state or local tax law to be withheld with respect to any deferral or distribution hereunder, the Company shall be entitled to deduct such amounts from the Participant’s Accounts.

 

11.8         Coordination with Other Benefits.  The benefits provided for a Participant and Participant’s Beneficiary under the Plan are in addition to any other benefits available to such Participant under any other plan or program for Employees of the Participant’s Employer(s).  The Plan shall supplement and shall not supersede, modify or amend any other such plan or program except as may otherwise be expressly provided.

 

11.9         Compliance.  A Participant shall have no right to receive payment with respect to the Participant’s Account Balance until all legal and contractual obligations of the Employer(s) relating to establishment of the Plan and the making of such payments shall have been complied with in full.

 

25



 

11.10       Successors.  The provisions of this Plan shall bind and inure to the benefit of the Participant’s Employer and its successors and assigns and the Participant and the Participant’s designated Beneficiaries.

 

11.11       Court Order.  The Plan Administrator is authorized to make any payments directed by court order in any action in which the Plan or the Plan Administrator has been named as a party.  In addition, if a court determines that a spouse or former spouse of a Participant has an interest in the Participant’s benefits under the Plan in connection with a property settlement or otherwise, the Plan Administrator, in its sole discretion, shall have the right, notwithstanding any election made by a Participant, to immediately distribute the spouse’s or former spouse’s interest in the Participant’s benefits under the Plan to that spouse or former spouse.

 

11.12       Section 409A.

 

(a)           To the extent applicable, this Plan shall be interpreted in accordance with Section 409A of the Code and Department of Treasury regulations and other interpretive guidance issued thereunder.

 

(b)           If any portion of a Participant’s Account Balance under this Plan is required to be included in income by the Participant prior to receipt due to a failure of this Plan to comply with the requirements of Section 409A of the Code and related Treasury Regulations, the Plan Administrator may determine that such Participant shall receive a distribution from the Plan in an amount equal to the lesser of (i) the portion of his or her Account Balance required to be included in income as a result of the failure of the Plan to comply with the requirements of Section 409A of the Code and related Treasury Regulations, or (ii) the unpaid vested Account Balance.

 

26



 

IN WITNESS WHEREOF, the Plan Sponsor has executed this Plan as of the day and year first written above.

 

 

For:

STB Beauty, Inc.

 

 

 

 

 

 

 

By:

  /s/ Myles McCormick

 

 

 

 

Title:

COO

 

27



Exhibit 10.54

 

STB BEAUTY, INC.

 

DEFERRED COMPENSATION PLAN

 

Effective as of March 12, 2008

 

The purpose of this STB Beauty, Inc. Deferred Compensation Plan (the “Plan”) is to provide additional retirement benefits and income tax deferral opportunities for a select group of management and highly compensated employees of the Plan Sponsor and certain of its Affiliates.  The Plan was originally effective as of July 1, 2005.   This Plan is intended to be a “top hat plan,” exempt from certain requirements of ERISA, pursuant to Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA; and the Plan Sponsor intends that the Plan shall at all times be administered and interpreted in such a manner as to constitute an unfunded nonqualified deferred compensation plan for tax purposes and for purposes of Title I of ERISA.  This Plan is not intended to qualify for favorable tax treatment pursuant to Section 401(a) of the Code or any successor section or statute.

 

STB Beauty, Inc., a Delaware Corporation (the “Plan Sponsor”), now wishes to amend and restate the Plan on the terms and conditions set  forth herein.  This amendment and restatement of the Plan incorporates the Plan and the prior amendments thereto (except as further amended herein) and constitutes a complete amendment, restatement and continuation of the Plan.  This amendment and restatement of the Plan is intended to comply with the requirements of Sections 409A(a)(2), (3) and (4) of the Code and the Treasury Regulations thereunder.  As provided in Notice 2007-86, with respect to an election or amendment to change a time and form of payment under the Plan made on or after January 1, 2008 and on or before December 31, 2008, the election or amendment shall apply only to amounts that would not otherwise be payable in 2008 and shall not cause an amount to be paid in 2008 that would not otherwise be payable in 2008.

 

Pursuant to approval by the Board of the Plan Sponsor, the Plan is hereby amended, restated and continued, effective as of March 12, 2008, as follows:

 

ARTICLE ONE

 

DEFINITIONS

 

DEFINITION OF TERMS.  Certain words and phrases are defined when first used in later Articles of this Plan.  Whenever any words are used herein in the masculine, they shall be construed as though they were in the feminine in all cases where they would so apply; and whenever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or the singular, as the case may be, in all cases where they would so apply.  In addition, the following words and phrases when used herein, unless the context clearly requires otherwise, shall have the following respective meanings:

 

1.1.          Account Balance. With respect to a Participant, a credit on the records of the Employer equal to the sum of (i) the Participant’s Deferral Account balance, and (ii) the Corporate Contributions Account balance.  The Account Balance, and each other specified account balance, shall be a bookkeeping entry only and shall be utilized solely as a device for the

 



 

measurement and determination of the amounts to be paid to a Participant, or his or her designated Beneficiary, pursuant to this Plan.

 

1.2           Accounts. With respect to a Participant, as the context indicates, any or all of his or her Deferral Account and Corporate Contribution Account.

 

1.3.          Affiliate. Any corporation, partnership, joint venture, association, or similar organization or entity, which is a member of a controlled group of companies which includes, or which is under common control with, the Plan Sponsor under Section 414 of the Code.

 

1.4.          Annual Corporate Contribution Amount.  For any one Plan Year, the amount determined in accordance with Section 3.4(b).

 

1.5.          Base Salary. The annual cash compensation (excluding bonuses, commissions, overtime, incentive payments, non-monetary awards, directors fees and other fees, stock options and grants and any other form of equity-based compensation, and car allowances) paid to a Participant for services rendered during the Plan Year, before reduction for compensation deferred pursuant to all qualified, non-qualified and Code Section 125 plans of any Employer.

 

1.6.          Beneficiary. The Beneficiary designated by a Participant under Article 7, or, if the Participant has not designated a Beneficiary under Article 7, the person or persons entitled to receive distributions of benefits under Article 5.

 

1.7.          Beneficiary Designation Form.  The form established from time to time by the Plan Administrator that a Participant completes, signs and returns to the Plan Administrator to designate one or more Beneficiaries.

 

1.8.          Board.  The Board of Directors of the Plan Sponsor.

 

1.9.          Bonus.  Any cash compensation, in addition to Base Salary, paid in respect of a Plan Year to a Participant as an Employee, as a bonus paid by the Employer.

 

1.10.        CauseFor purposes of this Plan, “Cause” shall mean any of the following acts or circumstances:  (i) willful destruction by the Participant of property of the Plan Sponsor or an Affiliate having a material value to the Plan Sponsor or such Affiliate; (ii) fraud, embezzlement, theft, or comparable dishonest activity committed by the Participant (excluding acts involving a de minimis dollar value and not related to the Plan Sponsor or an Affiliate); (iii) the Participant’s conviction of or entering a plea of guilty or nolo contendere to any crime constituting a felony or any misdemeanor involving fraud, dishonesty or moral turpitude; (iv) the Participant’s breach, neglect, refusal, or failure to materially discharge the Participant’s duties (other than due to physical or mental illness) commensurate with the Participant’s title and function or the Participant’s failure to comply with the lawful directions of the Board or the Chief Executive Officer of the Plan Sponsor, or of the Board of Directors or the Chief Executive Officer of the Affiliate that employs the Participant, in any such case that is not cured within 15 days after the Participant has received written notice thereof from such Board or Chief Executive Officer; (v) any willful misconduct by the Participant which may cause economic or reputational injury to the Plan Sponsor or an Affiliate, including, but not limited to, sexual harassment, or (vi) a willful and knowing material misrepresentation to the Board or the Chief Executive Officer of the Plan Sponsor or to the Board of Directors or the Chief Executive Officer of the Affiliate that employs the Participant.

 

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1.11.        Change in Control.  “Change in Control” shall mean the occurrence of any of the following:

 

(a)           Any “Person” or “Group,” as such terms are defined in Section 13(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) and the rules and regulations promulgated thereunder, excluding any Excluded Stockholder, who is or becomes the “Beneficial Owner” (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Plan Sponsor, or of any entity resulting from a merger or consolidation involving the Plan Sponsor, representing more than 50% of the combined voting power of the then outstanding securities of the Plan Sponsor or such entity.

 

(b)           The individuals who, as of the Effective Date, are members of the Board (the “Existing Directors”), cease, for any reason, to constitute more than 50% of the number of authorized directors of the Plan Sponsor as determined in the manner prescribed in the Plan Sponsor’s Certificate of Incorporation and Bylaws; provided, however, that if the election, or nomination for election, by the Plan Sponsor’s stockholders of any new director was approved by a vote of at least 50% of the Existing Directors, such new director shall be considered an Existing Director; provided further, however, that no individual shall be considered an Existing Director if such individual initially assumed office as a result of either an actual or threatened “Election Contest” (as described in Rule 14a-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies by or on behalf of anyone other than the Board (a “Proxy Contest”), including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or

 

(c)           The consummation of (x) a merger, consolidation or reorganization to which the Plan Sponsor is a party, whether or not the Plan Sponsor is the Person surviving or resulting therefrom, or (y) a sale, assignment, lease, conveyance or other disposition of all or substantially all of the assets of the Plan Sponsor, in one transaction or a series of related transactions, to any Person other than the Plan Sponsor, where any such transaction or series of related transactions as is referred to in clause (x) or clause (y) above in this subparagraph (c) (singly or collectively, a “Transaction”) does not otherwise result in a “Change in Control” pursuant to subparagraph (a) of this definition of “Change in Control”; provided, however, that no such Transaction shall constitute a “Change in Control” under this subparagraph (c) if the Persons who were the stockholders of the Plan Sponsor immediately before the consummation of such Transaction are the Beneficial Owners, immediately following the consummation of such Transaction, of 50% or more of the combined voting power of the then outstanding voting securities of the Person surviving or resulting from any merger, consolidation or reorganization referred to in clause (x) above in this subparagraph (c) or the Person to whom the assets of the Plan Sponsor are sold, assigned, leased, conveyed or disposed of in any transaction or series of related transactions referred in clause (y) above in this subparagraph (c), in substantially the same proportions in which such stockholders held voting stock in the Plan Sponsor immediately before such Transaction.

 

1.12.        Code.  The Internal Revenue Code of 1986, as amended from time to time.  Reference to a section of the Code shall include that section and any comparable section or sections of any future legislation that amends, supplements or supersedes such section.

 

1.13.        Compensation. The Base Salary and Bonus paid to a Participant for the relevant period.

 

3



 

1.14.        Corporate Contribution.  Any contribution made and credited to Corporate Contribution Accounts by the Plan Sponsor in accordance with Section 3.4(b).

 

1.15.        Corporate Contribution Account. The sum of (i) all of a Participant’s Annual Corporate Contribution Amounts, plus (ii) the hypothetical deemed investment earnings and losses credited or charged in accordance with all the applicable provisions of this Plan that relate to the Participant’s Corporate Contribution Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to the Participant’s Corporate Contribution Account.  A Participant’s Corporate Contribution Account shall be divided into subaccounts as determined by the Plan Administrator to properly account for distribution elections attributable to a Participant’s Annual Corporate Contribution Amounts, and the deemed investment earnings and losses attributable thereto.

 

1.16.        Deferral Account. The sum of (i) all of a Participant’s Participant Annual Deferral Amounts, plus (ii) the hypothetical deemed investment earnings and losses credited or charged in accordance with all the applicable provisions of this Plan that relate to the Participant’s Deferral Account, less (iii) all distributions made to the Participant or his or her Beneficiary pursuant to this Plan that relate to his or her Deferral Account.  A Participant’s Deferral Account shall be divided into subaccounts as determined by the Plan Administrator to properly account for distribution elections attributable to a Participant Annual Deferral Amount, and the deemed investment earnings and losses attributable thereto.

 

1.17.        Disability.  A Participant shall be considered disabled if the Participant: (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan, if any, covering employees of the Participant’s employer.

 

1.18.        Disability Date shall mean the date on which the Plan Administrator confirms that the Participant has a qualifying Disability and is eligible to receive payment hereunder.

 

1.19.        Effective Date March 12, 2008.

 

1.20.        Election FormThe form established from time to time by the Plan Administrator that a Participant completes, signs and returns to the Plan Administrator.

 

1.21.        Eligible Employee.  Any employee of the Plan Sponsor or an Affiliate who is selected to participate herein in accordance with the provisions of Section 2.1 hereof, and one of a select group of management or highly compensated employees, as defined by ERISA.

 

1.22.        Employer(s).

 

(a)           Except as otherwise provided in part (b) of this Section 1.23, any of the Plan Sponsor’s subsidiaries or Affiliates (now in existence or hereafter formed or acquired) that have been selected by the Board to participate in the Plan and have adopted the Plan as a sponsor, and

 

4



 

(b)           For the purpose of determining whether a Participant has experienced a Separation from Service:

 

(i)            the entity for which the Participant performs services and with respect to which the legally binding right to compensation deferred or contributed under this Plan arises; and
 
(ii)           all other entities with which the entity described above would be aggregated and treated as a single employer under Section 414(b) of the Code, or as applicable, however substituting 50% for wherever 80% appears in, and otherwise must be used when applying, the applicable provisions of (A) Section 1563 of the Code for determining a controlled group of corporations under Section 414(b) of the Code, and (B) Section 1.414(c)-2 of the Treasury Regulations for determining the trades or businesses that are under common control under Section 414(c) of the Code.
 

1.23.        ERISA.  The Employee Retirement Income Security Act of 1974, as amended from time to time.  Reference to a section of ERISA shall include that section and any comparable section or sections of any future legislation that amends, supplements or supersedes such section.

 

1.24.        Good Reason means the occurrence, on or after the occurrence of a Change in Control, of any of the following:

 

(a)           The Plan Sponsor or any of its Affiliates materially reduces the Participant’s Base Salary.

 

(b)           The Plan Sponsor discontinues its bonus plan in which the Participant participates as in effect immediately before the Change in Control without immediately replacing such bonus plan with a plan that is the substantial economic equivalent of such bonus plan, or a successor to the Plan Sponsor fails or refuses to assume the obligations of the Plan Sponsor under such bonus plan as in effect immediately before the Change in Control or under a plan that is the substantial economic equivalent of such bonus plan.

 

(c)           Without the Participant’s express written consent, the Plan Sponsor or any of its Affiliates requires the Participant to change the location of the Participant’s job or office, so that the Participant will be based at a location more than 100 miles from the former location of the Participant’s job or office.

 

(d)           Without the Participant’s express written consent, the Plan Sponsor or any of its Affiliates reduces the Participant’s responsibilities or directs the Participant to report to a person of lower rank or responsibilities than the person to whom the Participant reported before the Change in Control.

 

1.25.        Measurement Fund. The investment fund or funds selected by the Plan Administrator from time to time.

 

1.26.        Participant.  Any Employee (i) who is selected to participate in the Plan, (ii) who elects to participate in the Plan, (iii) who signs an Election Form, (iv) whose signed Election Form is accepted by the Administrator, and (v) who commences participation in the Plan.  A spouse or former spouse of a Participant shall not be treated as a Participant in the Plan or have an account balance under the Plan, even if he or she has an interest in the Participant’s benefits

 

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under the Plan as a result of applicable law or property settlements resulting from legal separation or divorce.

 

1.27.      Participant.  An Eligible Employee designated as a participant by the Plan Administrator.

 

1.28.      Participant Annual Deferral Amount.  The portion of a Participant’s Compensation, which he or she elects to defer, and is deferred, for the Plan Year in question. In the event of a Participant’s termination from participation in the Plan prior to the end of a Plan Year, such year’s Participant Annual Deferral Amount shall be the actual amount withheld prior to such event.

 

1.29.      Plan.  This Plan, together with any and all amendments or supplements thereto.

 

1.30.      Plan Administrator. The Board or its designee. A Participant in the Plan should not serve as a singular Plan Administrator. If a Participant is part of a group or committee designated as Plan Administrator, then the Participant may not participate in any activity or decision relating solely to his or her individual benefits under the Plan; matters solely affecting the applicable Participant will be resolved by the remaining committee members or by the Board.

 

1.31.        Plan Retirement Date.  The date the Participant attains 65 years of age.

 

1.32.        Plan Year.  The calendar year.

 

1.33.        Quarterly Installment Method.  A quarterly installment payment over two, five or ten years selected by the Participant in accordance with this Plan, calculated as follows:  the Account Balance of the Participant determined immediately prior to the date the distribution is to be made under Section 5.1 shall be multiplied by a fraction, the numerator of which is one, and the denominator of which is the remaining number of quarterly payments due the Participant.  By way of example, if the Participant elects a two year Quarterly Installment Method, the first payment shall be 1/8 of the Account Balance, calculated as described in this definition.  The following quarter, the payment shall be 1/7 of the Account Balance, calculated as described in this definition.  Each quarterly installment shall be paid within 60 days following each anniversary of the day the distributions are scheduled to commence.

 

1.34.        Retirement. A Participant’s Separation from Service after the Participant has reached his or her Plan Retirement Date.

 

1.35.        Separation from Service.  With respect to a Service Provider, his or her “separation from service,” as defined in Section 1.409A-1(h) of the Treasury Regulations, with respect to the Service Recipient.  The Plan Administrator shall have full and final authority, which shall be exercised in its discretion, to determine conclusively whether a Participant has had a “Separation from Service,” and the date of such “Separation from Service.”

 

1.36.        Service Provider.  A Participant or any other “service provider,” as defined in Section 1.409A-1(f) of the Treasury Regulations.

 

1.37.        Service Recipient.  With respect to a Participant, the Employer and all persons considered part of the “service recipient,” as defined in Section 1.409A-1(g) of the Treasury Regulations, as determined from time to time.  As provided in Section 1.409A-1(g) of the Treasury Regulations, the “Service Recipient” shall mean the person for whom the services are

 

6



 

performed and with respect to whom the legally binding right to compensation arises, and all persons with whom such person would be considered a single employer under Section 414(b) or 414(c) of the Code.

 

1.38.      Specified Employee.  A Service Provider who, as of the date of the Service Provider’s “separation from service,” as defined in Section 1.409A-1(h) of the Treasury Regulations, is a “Key Employee” of the Service Recipient any stock of which is publicly traded on an established securities market or otherwise.  For purposes of this definition, a Service Provider is a “Key Employee” if the Service Provider meets the requirements of Section 416(i)(1)(A)(i), (ii) or (iii) of the Code (applied in accordance with the Treasury Regulations thereunder and disregarding Section 416(i)(5) of the Code) at any time during the Testing Year.  If a Service Provider is a “Key Employee” (as defined above) as of a Specified Employee Identification Date, the Service Provider shall be treated as “Key Employee” for the entire twelve (12) month period beginning on the Specified Employee Effective Date.  For purposes of this definition, a Service Provider’s compensation for a Testing Year shall mean such Service Provider’s compensation, as determined under Section 1.415(c)-2(a) of the Treasury Regulations (and applied as if the Service Recipient were not using any safe harbor provided in Section 1.415(c)-2(d) of the Treasury Regulations, were not using any of the elective special timing rules provided in Section 1.415(c)-2(e) of the Treasury Regulations, and were not using any of the elective special rules provided in Section 1.415(c)-2(g)) of the Treasury Regulations, from the Service Recipient for such Testing Year.  The “Specified Employees” shall be determined in accordance with Section 409A(a)(2)(B)(i) of the Code and Section 1.409A-1(i) of the Treasury Regulations.

 

1.39.        Specified Employee Effective Date.   The first day of the fourth month following the Specified Employee Identification Date.  The Specified Employee Effective Date may be changed by the Service Recipient, in its discretion, in accordance with Section 1.409A-1(i)(4) of the Treasury Regulations.

 

1.40.        Specified Employee Identification Date.  For purposes of Section 1.409A-1(i)(3) of the Treasury Regulations, shall mean December 31.  The “Specified Employee Identification Date” shall apply to all “nonqualified deferred compensation plans” (as defined in Section 1.409A-1(a) of the Treasury Regulations) of the Service Recipient and all affected Service Providers.  The “Specified Employee Identification Date” may be changed by the Company, in its discretion, in accordance with Section 1.409A-1(i)(3) of the Treasury Regulations.

 

1.41.        Testing Year.  The twelve (12) month period ending on the Specified Employee Identification Date, as determined from time to time.

 

1.42.        Year of Plan Participation.  Each twelve (12) month period during which the Participant is employed on a full-time basis by an Employer, with a minimum of 1,000 hours of service, inclusive of any approved leaves of absence, beginning on the Participant’s date of entry into this Plan.

 

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ARTICLE TWO

 

ELIGIBILITY AND PARTICIPATION

 

2.1           Selection.  Participation in the Plan shall be limited to each Employee of the Employers who for any Plan Year is expected to be a “highly compensated employee” as defined in Section 414(q) of the Code and a member of a “select group of management and highly compensated employees” within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA, as determined by the Plan Administrator in its sole discretion.

 

2.2           Enrollment Requirements.  As a condition to participation, each selected Employee shall complete, execute and return to the Plan Administrator an Election Form.  In addition, the Plan Administrator shall establish from time to time such other enrollment requirements as it determines in its sole discretion are necessary.

 

2.3           Eligibility; Commencement of Participation.  Provided an Employee selected to participate in the Plan has met all enrollment requirements set forth in this Plan and required by the Plan Administrator, including returning all required documents to the Plan Administrator within the specified time period, that Employee shall commence participation in the Plan on the day on which his or her Election Form first becomes effective.

 

2.4           Termination of Participation and/or Deferrals.  Once an Employee is designated as a Participant, he or she shall continue as such for all future Plan Years unless and until:  (a) the Participant terminates from employment with the Employer and receives a full distribution of his Accounts, (b) is no longer categorized as an individual entitled to participate in the Plan pursuant to Section 2.1 above, or (c) the Plan Administrator specifically acts to discontinue the Participant’s participation.  If a Participant’s participation is discontinued, to the extent permissible under Section 409A of the Code, the Plan Administrator shall (i) terminate any deferral election the Participant has made for the remainder of the Plan Year in which the Participant’s membership status changes, (ii) prevent the Participant from making future deferral elections and/or (iii) immediately distribute the balance of the Participant’s Accounts and terminate the Participant’s participation in the Plan.  If distribution of the balance of the Participant’s Accounts is not permissible under Section 409A of the Code, then such Accounts shall be held until distributable under the terms of Article 5 as originally elected by the Participant.

 

2.5           Reemployment.   If a former Employee is rehired by an Employer and is again selected as eligible to participate in the Plan, he or she shall reenter the Plan on the first day of any Plan Year commencing after the date he or she is selected in accordance with the provisions of Section 2.1, provided that he or she will be treated as initially eligible to participate in the Plan pursuant to Section 1.409A-2(a)(7) of the Treasury Regulations as of such reentry date.  Such Employee’s reentry into the Plan shall have no impact on any distributions that have been made or are being made in accordance with Article 5.  Any amounts previously forfeited from the Participant’s Accounts pursuant to this Plan shall not be restored or reinstated upon the Participant’s subsequent reentry into the Plan.

 

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ARTICLE THREE

 

CONTRIBUTIONS AND CREDITS

 

3.1           Election to Defer.

 

(a)           In General.  Except as otherwise provided in this Section 3.1, in order for a Participant to make a valid election to defer Base Salary or Bonus the Participant must submit an Election Form on or before the deadline established by the Plan Administrator, which in no event shall be later than the December 31st preceding the Plan Year in which such compensation will be earned.  Any deferral election made in accordance with this Section 3.1(a) shall be irrevocable; provided, however, that if the Plan Administrator permits or requires Participants to make a deferral election by the deadline described above for an amount that qualifies as Performance-Based Compensation (as defined in Section 3.1(c) below), the Plan Administrator may permit a Participant to subsequently change his or her deferral election for such compensation by submitting a new Election Form in accordance with Section 3.1(c) below.  If no Election Form is timely delivered for a Plan Year, no Participant Annual Deferral Amount shall be withheld for that Plan Year.

 

(b)           Timing of Deferral Elections for Newly Eligible Participants.  Notwithstanding anything to the contrary in this Section 3.1, an Eligible Employee who first becomes eligible to participate in the Plan on or after the beginning of a Plan Year may be permitted to make an election to defer Base Salary and Bonus attributable to services to be performed after such election, provided that the Participant submits an Election Form on or before the deadline established by the Plan Administrator, which in no event shall be later than 30 days after the Participant first becomes eligible to participate in the Plan.  Any deferral election made in accordance with this Section 3.1(b) shall become irrevocable no later than the 30th day after the date the Participant becomes eligible to participate in the Plan.

 

(c)           Timing of Deferral Elections for Performance-Based Compensation.  Notwithstanding anything to the contrary in this Section 3.1, and subject to the limitations below and any terms and conditions imposed by the Plan Administrator, in the case of any Bonus that constitutes performance-based compensation (within the meaning of Section 409A(a)(4)(b)(iii) of the Code) (“Performance-Based Compensation”) deferrable under this Plan, which Bonus is based on services performed over a period of at least 12 months, an election to defer such Bonus compensation may be made by timely completing and submitting to the Plan Administrator an Election Form no later than six (6) months before the end of the service period during such period as may be established by the Plan Administrator in its discretion for such elections.

 

In order for a Participant to be eligible to make a deferral election for Performance-Based Compensation in accordance with the deadline established pursuant to this Section 3.1(c), the Participant must have performed services continuously from the later of (i) the beginning of the performance period for such compensation, or (ii) the date upon which the performance criteria for such compensation are established, through the date upon which the Participant makes the deferral election for such compensation.  In no event shall a deferral election submitted under this Section 3.1(c) be permitted to apply to any amount of Performance-Based Compensation that has become readily ascertainable.

 

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3.2           Minimum Participant Annual Deferral Amount.  For each Plan Year, the aggregate minimum Participant Annual Deferral Amount for each Participant is $2,500.  If an election is made for less than such minimum amount, or if no election is made, the amount deferred shall be zero.

 

3.3           Maximum Deferral.  For each Plan Year, a Participant may elect to defer, as his or her Participant Annual Deferral Amount, up to 50% of his or her Base Salary and up to 100% of his or her Bonus, subject to the limitations set forth in this Section 3.3.  Notwithstanding the foregoing, a Participant Annual Deferral Amount shall be limited in any Plan Year, if necessary, to satisfy the Participant’s income and employment tax withholding obligations (including Social Security, unemployment and Medicare), and the Participant’s employee benefit plan contribution requirements, determined on the first day of the election period for such Plan Year, as determined by the Plan Administrator.

 

3.4           Accounts; Crediting of Deferrals.  Solely for record keeping purposes, the Plan Administrator shall establish a Deferral Account and a Corporate Contributions Account for each Participant.  A Participant’s Accounts shall be credited with the deferrals made by him or her or on his or her behalf by his or her Employer under this Article 3 and shall be credited (or charged, as the case may be) with the hypothetical or deemed investment earnings and losses determined pursuant to Article 4, and charged with distributions made to or with respect to him or her.

 

(a)           Participant Annual Deferral Amounts.  For each Plan Year, the Base Salary portion of the Participant Annual Deferral Amount shall be withheld from each payroll period in equal amounts from the Participant’s Base Salary.  The Bonus portion of the Participant Annual Deferral Amount shall be withheld at the time the Bonus is or would otherwise be paid to the Participant.  The Participant Annual Deferral Amount shall be credited to the Participant’s Deferral Account.

 

(b)           Corporate Contributions.  Each Plan Year, the Plan Sponsor may make contributions (either discretionary, matching or both) to the Plan as it may determine from time to time and may direct that such contributions be allocated among the Corporate Contribution Accounts of those Participants that it may select.  The amount so credited to a Participant may be smaller or larger than the amount credited to any other Participant, and the amount credited to any Participant for a Plan Year may be zero.  The Corporate Contribution, if any, shall be credited as of the last day of a Plan Year.  If a Participant is not employed by an Employer as of the last day of a Plan Year other than by reason of his or her Retirement, Disability or death while employed, the Discretionary Company Contribution for such Participant for that Plan Year shall be zero.  In the event of Retirement, Disability or death, a Participant shall be credited with the Corporate Contribution(s) (if any) for the Plan Year in which he or she Retires, becomes Disabled or dies.  A Corporate Contribution, if any, shall be credited to Participants’ Corporate Contribution Accounts on the date declared by the Plan Sponsor.  No Participant shall have a right to compel the Plan Sponsor to make a contribution under this Section 3.4(b) and no Participant shall have the right to share in the allocation of any such contribution for any Plan Year unless selected by the Plan Sponsor, in its sole discretion.

 

3.5           Vesting.

 

(a)           Deferral Account.  A Participant shall at all times be 100% vested in his or her Deferral Account.

 

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(b)           Corporate Contribution Account.  Plan Sponsor contributions credited to a Participant’s Corporate Contribution Account under Section 3.4(b) of the Plan and any hypothetical or deemed investment earnings and losses attributable to these contributions shall become vested or nonforfeitable based on the Participant’s Years of Plan Participation according to the following schedule:

 

Years of Plan Participation

 

Percentage Vested

 

Less than 2

 

0

%

2 but less than 3

 

25

%

3 but less than 4

 

50

%

4 but less than 5

 

75

%

5 or more

 

100

%

 

Notwithstanding the foregoing, a Participant’s Corporate Contribution Account shall be fully vested and nonforefeitable upon (i) the Participant’s attainment of the Plan Retirement Age, (ii) the Participant’s death, (iii) the Participant’s Disability, or (iv) termination of the Plan.

 

(c)           Forfeiture.  A Participant shall forfeit any unvested portion of his or her Corporate Contribution Account determined as of the most recent determination date preceding his or her termination of employment with the Employers.  Any portion of a Participant’s Corporate Contribution Account which is not vested shall be forfeited and shall cease to be liabilities of the Employer or the Plan.  All forfeited amounts shall be immediately deducted from the Participant’s Corporate Contribution Accounts and credited to such Employer.

 

ARTICLE FOUR

 

ACCOUNTS AND ALLOCATION OF FUNDS

 

4.1           Earnings Credits or Losses.  In accordance with, and subject to, the rules and procedures that are established from time to time by the Plan Administrator, in its sole discretion, amounts shall be credited or debited to a Participant’s Account Balance in accordance with the following rules:

 

(a)           Measurement Funds.  The Plan Administrator shall from time to time select one or more types of Measurement Funds and one or more specific Measurement Funds for deemed investment designation by Participants for the purpose of crediting or charging hypothetical or deemed investment earnings and losses to his or her Account Balance.  As necessary, the Plan Administrator may, in its sole discretion, discontinue, substitute or add a Measurement Fund.  The Plan Administrator shall notify the Participants of the types of Measurement Funds and the specific Measurement Funds selected from time to time.

 

(b)           Election of Measurement Funds.  A Participant may elect one or more Measurement Fund(s) (as described in Section 4.1(c) below) to be used to determine the additional amounts to be credited (or charged, as the case may be) to his or her Account Balance, in accordance with such rules as the Plan Administrator may provide.

 

(c)           Crediting or Debiting Method.  The performance of each elected Measurement Fund (either positive or negative) will be determined by the Plan Administrator, in its sole discretion, based on the performance of the Measurement Funds themselves.  A

 

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Participant’s Account Balance shall be credited or debited as frequently as is administratively feasible, but no less often than monthly, based on the performance of each Measurement Fund selected by the Participant, as determined by the Plan Administrator in its sole discretion.

 

(d)           No Actual Investment.  Notwithstanding any other provision of this Plan that may be interpreted to the contrary, the Measurement Funds are to be used for measurement purposes only, and a Participant’s election of any such Measurement Fund, the allocation to his or her Account Balance thereto, the calculation of additional amounts and the crediting or debiting of such amounts to a Participant’s Account Balance shall not be considered or construed in any manner as an actual investment of his or her Account Balance in any such Measurement Fund.  In the event that the Company, in its own discretion, decides to invest funds in any or all of the Measurement Funds, no Participant shall have any rights in or to such investments themselves.  Without limiting the foregoing, a Participant’s Account Balance shall at all times be a bookkeeping entry only and shall not represent any investment made on his or her behalf by any Employer or the Trust; the Participant shall at all times remain an unsecured creditor of the Employers.  Any liability of an Employer to any Participant, former Participant, or Beneficiary with respect to a right to payment shall be based solely upon contractual obligations created by the Plan.  The Plan Sponsor, the Board, the Plan Administrator, any Employer and any individual or entity shall not be deemed to be a trustee of any amounts to be paid under the Plan.  Nothing contained in the Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship, between the Plan Sponsor and an Employer and a Participant, former Participant, Beneficiary or any other individual or entity.  Neither the Plan Sponsor nor any Employer in any way guarantees any Participant’s Account Balance against loss or depreciation, whether caused by poor investment performance, insolvency of a deemed investment or by any other event or occurrence.  In no event shall any Employee, officer, director or stockholder of the Plan Sponsor or any Employer be liable to any individual or entity on account of any claim arising by reason of the Plan provisions or any instrument or instruments implementing its provisions, or for the failure of any Participant, Beneficiary or other individual or entity to be entitled to any particular tax consequences with respect to the Plan or any credit or payment hereunder.

 

4.2           Distributions .  Any distribution with respect to a Participant’s Account Balance shall be charged to the appropriate account as of the date such payment is made by the Employer or the trustee of any Trust which may be established for the Plan.

 

ARTICLE FIVE

 

ENTITLEMENT TO BENEFITS

 

5.1           Retirement Benefit:

 

(a)           In the event of a Participant’s Retirement, the Plan Administrator shall thereafter cause to be paid to the Participant his or her Accrued Benefit, valued as of the date of such Retirement.  Such benefits shall be payable in the manner and frequency previously elected by the Participant on his or her Election Form(s).  A Participant may select distribution of his or her Retirement benefit in the form of a lump sum payment, or a two, five or ten year Quarterly Installment Method.  The first installment payment shall be due on or about the first day of the first month following the date of Participant’s Retirement.  If such Participant fails to select a form of distribution for purposes of distributions from such Participant’s Accounts for a Plan

 

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Year, such distributions shall be made in a lump sum payment within 90 days following the date of the Participant’s Retirement.

 

(b)           Notwithstanding the foregoing, in accordance with Section 1.409A-3(j)(4)(v) of the Treasury Regulations, a Participant’s Retirement benefit may be distributed in one lump sum not later than 90 days after the date of the Participant’s Retirement rather than in installments if the Participant’s Account Balance as of the date of his or her Retirement is less than the applicable dollar amount under Section 402(g)(1)(B) of the Code.

 

(c)           A Participant may not change his or h