As filed with the Securities
and Exchange Commission on November 2, 2009
No. 333-161850
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF
1933
rue21, inc.
(Exact name of registrant as
specified in its charter)
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Pennsylvania
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5600
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25-1311645
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification No.)
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800 Commonwealth Drive
Suite 100
Warrendale, Pennsylvania
15086
(724) 776-9780
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
Robert N. Fisch
President and Chief Executive
Officer
rue21, inc.
800 Commonwealth Drive
Suite 100
Warrendale, Pennsylvania
15086
(724) 776-9780
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies of all communications,
including communications sent to agent for service, should be
sent to:
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Joshua N. Korff, Esq.
Jason K. Zachary, Esq.
Kirkland & Ellis LLP
601 Lexington Avenue
New York, New York 10022
(212) 446-4800
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William F. Gorin, Esq.
Jeffrey D. Karpf, Esq.
Cleary Gottlieb Steen & Hamilton LLP
One Liberty Plaza
New York, New York 10006
(212) 225-2000
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after this Registration
Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act, check the following
box: o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
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 the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller reporting
company o
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(Do not check if a smaller reporting company)
CALCULATION
OF REGISTRATION FEE
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Proposed Maximum
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Title of Each Class of Securities
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Amount to be
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Offering Price
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Proposed Maximum Aggregate
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Amount of
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to be Registered
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Registered(1)
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Per Share(2)
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Offering Price(1)(2)
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Registration Fee(2)(3)
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Common Stock, $0.004 par value per share
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7,780,252 shares
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$
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18.00
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$
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140,044,536
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$
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7,815
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(1)
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Includes shares of common stock
that the underwriters may purchase, including pursuant to the
option to purchase additional shares, if any, from the selling
stockholders.
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(2)
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Estimated solely for the purpose of
calculating the registration fee pursuant to Rule 457(a)
under the Securities Act of 1933, as amended.
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(3)
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A $6,975 registration fee was paid
pursuant to Rule 457(o) on September 10, 2009 with respect
to a proposed maximum aggregate offering price of $125,000,000.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and
may be changed. We and the selling stockholders may not sell
these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell these securities
and it is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
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6,765,437 Shares
rue21, inc.
Common Stock
This is the initial public offering of shares of common stock of
rue21, inc.
rue21, inc. is offering 1,650,000 shares of common stock.
The selling stockholders identified in this prospectus are
offering an additional 5,115,437 shares of common stock. We
will not receive any proceeds from the sale of shares by the
selling stockholders.
Prior to this offering, there has been no public market for our
common stock. It is currently estimated that the initial public
offering price per share will be between $16.00 and $18.00.
We intend to apply to list our common stock on The NASDAQ Global
Select Market under the symbol rue.
See Risk Factors beginning on page 8 to
read about factors you should consider before buying shares of
our common stock.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
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Per Share
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Total
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Initial public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds, before expenses, to rue21, inc.
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$
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$
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Proceeds, before expenses, to the selling stockholders
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$
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$
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To the extent that the underwriters sell more than
6,765,437 shares of common stock, the underwriters have the
option to purchase up to an additional 1,014,815 shares of
common stock from certain of the selling stockholders at the
initial public offering price less the underwriting discount.
The underwriters expect to deliver the shares against payment in
New York, New York
on ,
2009.
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BofA
Merrill Lynch |
Goldman, Sachs & Co.
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J.P.Morgan
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Piper Jaffray
Prospectus
dated ,
2009.
Subject to Completion, Dated
November 2, 2009
TABLE OF
CONTENTS
You should rely only on the information contained in this
prospectus or in any free-writing prospectus we may specifically
authorize to be delivered or made available to you. We have not,
the selling stockholders have not, and the underwriters have not
authorized anyone to provide you with additional or different
information. We and the selling stockholders are offering to
sell, and seeking offers to buy, shares of our common stock only
in jurisdictions where such offers and sales are permitted. The
information in this prospectus or a free-writing prospectus is
accurate only as of its date, regardless of its time of delivery
or of any sale of shares of our common stock. Our business,
financial condition, results of operations and prospects may
have changed since that date.
Until ,
2009 (25 days after the commencement of the offering), all
dealers that effect transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This delivery requirement is in addition to the
dealers obligation to deliver a prospectus when acting as
an underwriter and with respect to unsold allotments or
subscriptions.
i
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus. This summary does not contain all of the
information that you should consider in making your investment
decision. You should read the following summary together with
the entire prospectus, including the more detailed information
regarding us, the common stock being sold in this offering and
our financial statements and the related notes appearing
elsewhere in this prospectus. You should carefully consider,
among other things, the matters discussed in the sections
entitled Risk Factors and Managements
Discussion and Analysis of Financial Condition and Results of
Operations in this prospectus before deciding to invest in
our common stock. Some of the statements in this prospectus
constitute forward-looking statements. See Forward-Looking
Statements.
Except where the context otherwise requires or where
otherwise indicated, the terms rue21,
we, us, our, our
company and our business refer to rue21, inc.
and its consolidated subsidiary as a combined entity. Certain
differences in the numbers in the tables and text throughout
this prospectus may exist due to rounding.
We operate on a fiscal calendar widely used by the retail
industry that results in a given fiscal year consisting of a 52-
or 53-week period ending on the Saturday closest to January 31
of the following year. For example, references to fiscal
year 2008 refer to the fiscal year ended January 31,
2009. Our fiscal year 2006 consisted of a 53-week period and
ended on February 3, 2007.
Our
Company
rue21 is a fast growing specialty apparel retailer offering the
newest fashion trends for girls and guys at value prices. We
operate over 500 stores in 43 states. Our merchandise is
designed to appeal to 11 to 17 year olds who aspire to be
21 and adults who want to look and feel
21. We react quickly to market trends and our daily
shipments to our stores ensure there is always new merchandise
for our customers to discover. In addition, we offer our own
brands, such as rue21 etc!, Carbon, tarea and rueKicks, to
create merchandise excitement and differentiation in our stores.
The energy in our stores and our focus on customer service,
combined with our great value products, keep our customers
returning to us. Through viral marketing and our interactive
website, we continue to build a rueCommunity with a loyal
customer base that will drive our growth into the future. The
company and customer culture we have created invoke only one
simple thought in the minds of most... Do you rue? I do!
We pursue a three-pronged strategy that focuses on
diversification and growth. The key elements of our strategy are:
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Diversified Product girls, guys, rue21 etc!
We offer a broad range of girls and guys apparel,
accessories, footwear, jewelry and fragrances. Over the last few
years, we have expanded and developed a number of product
categories to complement our extensive apparel offerings,
including rue21 etc!, our girls jewelry and accessories
category; tarea by rue21, our intimate apparel category; Carbon,
our guys apparel and accessories category; rueKicks, one of our
footwear lines; and a full line of fragrances for both girls and
guys.
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Flexible Real Estate strip centers, regional
malls, outlet centers. As of October 3, 2009,
approximately 51% of our stores were located in strip centers,
27% in regional malls and 22% in outlet centers. Our stores are
located primarily in small- and middle-market communities that
we believe have been underserved by traditional specialty
apparel retailers. As a result, we are often the only junior and
young mens specialty apparel retailer in such communities.
In these markets, our limited competition comes from large value
retailers and department stores.
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Balanced Growth new stores, store conversions,
comparable store sales. We drive sales growth through
opening new stores, converting existing stores into our new,
larger rue21 etc! layout and increasing our comparable store
sales. In fiscal year 2009, we plan to open 88 new stores,
including 78 new stores opened as of October 3, 2009. We
also plan to convert 26 stores, including 24 stores converted as
of October 3, 2009, to a larger layout that includes a
separate rue21 etc!
store-in-store.
We
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believe our merchandising initiatives and new category
introductions will further enhance our comparable store sales
growth.
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Under the leadership of Bob Fisch, our President and Chief
Executive Officer, we have experienced consistent growth in net
sales and net income over the seven prior years. We have
continued these strong results in recent quarters despite the
difficult economic environment. Our comparable store sales
increases were 4.1% in the twenty-six weeks ended August 1,
2009 and 3.7% in fiscal year 2008. In the twenty-six weeks ended
August 1, 2009, our net sales were $233.1 million,
which represents a 33.3% increase over the twenty-six weeks
ended August 2, 2008. Our net income was $8.3 million
in the twenty-six weeks ended August 1, 2009, which
represents a 61.4% increase over the twenty-six weeks ended
August 2, 2008. We believe our compelling value proposition
and trend-right merchandise have contributed to our strong
operating results.
Our
Competitive Strengths
We attribute our success as a specialty apparel retailer to the
following competitive strengths:
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Compelling fashion meets value
proposition. We offer the newest fashion for
girls and guys at prices lower than many other similar apparel
retailers. Our broad product assortment, ranging from apparel to
accessories to footwear, enables our customers to create a
complete look. In addition, we provide our customers with a
distinctive shopping experience in a fun-to-shop environment,
further enhancing our branded value proposition.
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Flexible, fast-fashion business model. Our
merchandising model allows us to quickly identify and respond to
trends and bring proven concepts and styles to our stores. Our
sourcing model is designed to achieve lower cost, faster
turnaround and lower inventory levels. Our vendor network
consists of domestic importers and domestic suppliers. Our
collaborative relationship with our vendors allows us to test
small quantities of new products in select stores before broadly
distributing them to our stores which, in turn, reduces markdown
risk. By carrying the newest styles and regularly updating our
floor sets, we provide our customers with a reason to frequently
shop our stores.
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Presence in locations with limited direct
competition. We focus on small- and middle-market
communities, which we define as communities with populations
between 25,000 and 200,000 people, where household incomes
do not typically support higher-priced retailers. As a result,
we often are the only junior and young mens specialty
apparel retailer in a shopping center and face limited direct
competition in these communities.
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Attractive new store economics. We operate a
proven and efficient store model that delivers strong cash flow.
Not only do our stores provide a distinctive shopping experience
and compelling merchandise assortment, but with low store
build-out costs, competitive lease terms and a low-cost
operating model, our stores also generate a strong return on
investment. All of our new stores feature our rue21 etc!
store-in-store
layout, showcasing an expanded accessories offering. Our new
stores average approximately 4,700 square feet, which is
larger than our historical store layout, and pay back our
investment in less than one year.
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Distinct company and customer culture. We have
a strong core culture that emanates from our employees, many of
whom are high school and college students who live in the
community and are rue21 customers. Through our viral marketing
efforts and the support of our online rueCommunity, we bring the
rue21 culture to our customer base. We believe our culture
enables us to connect to our employees and customers,
differentiate our in-store shopping experience and ultimately
strengthen our brand image and drive customer loyalty.
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Strong and experienced management team. Our
senior management team has extensive experience across a broad
range of disciplines in the specialty retail industry, including
merchandising, real estate, supply chain and finance. Bob Fisch,
our President and Chief Executive Officer, has more than
30 years of experience in the apparel industry. Upon
completion of this offering, our executive officers will
own
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8.5% of our common stock and will own options that will enable
them to own, in the aggregate, up to 11.3% of our common stock.
Our
Growth Strategy
We believe we are positioned to take advantage of significant
opportunities to increase net sales and net income. We have
recently invested significant capital to build the
infrastructure necessary to support our growth. This investment
includes an upgrade of our distribution facility and related
systems, which we expect to complete by the end of the first
quarter of fiscal year 2010. Upon completion, the distribution
facility will be able to support approximately 1,300 stores. Key
elements of our growth strategy include the following:
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Increase Square Footage. We intend to drive
our square footage growth by opening new stores and converting
existing stores to our larger rue21 etc! layout. We believe
there is a significant opportunity to expand our store base from
527 locations as of October 3, 2009 to more than 1,000
stores within five years. In fiscal year 2009, we plan to
open 88 new stores, including 78 new stores opened as of
October 3, 2009, and convert 26 stores,
including 24 stores converted as of October 3, 2009.
In fiscal year 2010, we plan to open approximately 100 new
stores.
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Drive Comparable Store Sales. We seek to
maximize our comparable store sales by increasing the
penetration of our diversified product categories, increasing
our rue21 brand awareness, continuing to provide our distinctive
store experience and converting existing stores to our larger
rue21 etc! layout. We believe that our fashionable merchandise
selections and affordable prices create shopping excitement for
our customers, increase our brand loyalty and drive sales.
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Improve Profit Margins. We believe we have the
opportunity to drive margin expansion through scale
efficiencies, continued cost discipline and changes in
merchandise mix. We believe our expected strong store growth
will permit us to take advantage of economies of scale in
sourcing and to leverage our existing infrastructure, corporate
overhead and fixed costs. We believe the expansion of our higher
margin categories, such as accessories and footwear, will
increase our overall margins over time.
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Recent
Developments
For the thirteen weeks ended October 31, 2009, our net
sales increased 40.7%, or $39.6 million, to
$137.1 million from $97.5 million for the thirteen
weeks ended November 1, 2008. Our comparable store sales
increased 13.5% for the thirteen weeks ended October 31,
2009 compared to an increase of 6.6% for the thirteen weeks
ended November 1, 2008.
Risk
Factors
We are subject to a number of risks, including risks that may
prevent us from achieving our business objectives or may
adversely affect our business, financial condition, results of
operations, cash flows and prospects. You should carefully
consider these risks, including the risks discussed in the
section entitled Risk Factors beginning on
page 8 of this prospectus, before investing in our common
stock. Risks relating to our business include:
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we may not be able to effectively identify and respond to
changing fashion trends and customer preferences in a timely
manner or at all;
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we may not be able to execute on our growth strategy because we
are unable to identify suitable locations to open new stores or
convert existing stores into our rue21 etc! layout, obtain
favorable lease terms, attract customers to our stores, hire and
retain personnel and maintain sufficient levels of cash flow and
any necessary financing to support our expansion;
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we may not be able to effectively manage our operations, which
have grown rapidly, or our future growth;
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we may not be able to maintain and enhance our brand image,
which could adversely affect our business;
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we may not be able to maintain or improve levels of comparable
store sales;
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we may lose key personnel, which could adversely impact our
business;
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we may face increased competition, which could adversely affect
our business; and
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we rely on key relationships with numerous vendors and we may
not be able to maintain or add to these relationships by
identifying vendors that appeal to our customer base or obtain
sufficient inventory from these vendors to support our growth.
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Our
Principal Stockholders
Following completion of this offering, funds advised by Apax
Partners, L.P., and BNP Paribas North America, Inc., will own
approximately 57.9% and 4.2%, respectively, of our outstanding
common stock, or 57.9% and 0.0%, respectively, if the
underwriters option to purchase additional shares is fully
exercised. As a result, funds advised by Apax Partners, L.P. and
BNP Paribas North America, Inc. will be able to have a
significant effect relating to votes over fundamental and
significant corporate matters and transactions. See Risk
FactorsRisks Related to this Offering and Ownership of Our
Common Stock.
Apax Partners, L.P. is the United States subsidiary of Apax
Partners LLP. We refer to Apax Partners L.P. and Apax Partners
LLP together as Apax Partners. Apax Partners is an independent
global private equity advisory firm with approximately
$37 billion under management. Funds advised by Apax
Partners invest in five global growth sectors:
Retail & Consumer; Technology &
Telecommunications; Media; Healthcare and Financial &
Business Services. Apax Partners has an established global
platform with nine offices in nine countries across three
continents.
BNP Paribas North America, Inc. is a subsidiary of BNP Paribas,
one of the largest banks in the world. With a presence in 84
countries and more than 205,000 employees, of which 162,500
are in Europe, BNP Paribas is a global-scale European leader in
financial services. It holds key positions in its three
activities: Retail Banking, Investment Solutions and Corporate
and Investment Banking.
Conflicts
of Interest
Bank of America, N.A., an affiliate of Merrill Lynch, Pierce,
Fenner & Smith Incorporated, an underwriter in this
offering, is acting as the administrative agent, collateral
agent, swing line lender, letter of credit issuer and a lender
with respect to our senior secured credit facility. We intend to
obtain a waiver of certain provisions of our senior secured
credit facility in connection with this offering. In addition,
we intend to use the net proceeds from this offering for the
repayment of approximately $22.1 million of our senior
secured credit facility. See Use of Proceeds,
Description of Certain Indebtedness, and
Underwriting.
Corporate
and Other Information
We were incorporated in Pennsylvania in October 1976. We changed
our name to rue21, inc. in May 2003. We intend to reincorporate
in Delaware prior to the completion of this offering. Our
principal executive office is located at 800 Commonwealth Drive,
Suite 100, Warrendale, Pennsylvania 15086 and our telephone
number is
(724) 776-9780.
Our corporate website address is www.rue21.com. We do not
incorporate the information contained on, or accessible through,
our corporate website into this prospectus, and you should not
consider it part of this prospectus.
The trademarks rue21 and rue21 etc!, tarea by rue21, Carbon,
Carbon Black, the CJ logo, CJ Black, rue by rue21, revert eco,
sparkle rue21, Pink Ice rue21 and rueKicks are the property of
rue21, inc. This prospectus contains additional trade names,
trademarks and service marks of ours and of other companies. We
do not intend our use or display of other companies trade
names, trademarks or service marks to imply a relationship with,
or endorsement or sponsorship of us by, any other companies.
4
The
Offering
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Common stock offered by us |
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1,650,000 shares |
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Common stock offered by the selling stockholders |
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5,115,437 shares |
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Common stock to be outstanding immediately after this offering |
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24,160,662 shares |
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Use of proceeds |
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We estimate that the net proceeds to us from this offering,
after deducting underwriting discounts and commissions and
estimated offering expenses, will be approximately
$22.1 million, assuming the shares are offered at $17.00
per share, the midpoint of the price range set forth on the
cover of this prospectus. |
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We will not receive any proceeds from the sale of shares by the
selling stockholders. |
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We intend to use the net proceeds from this offering for the
repayment of approximately $22.1 million of our outstanding
indebtedness. We intend to use any remaining proceeds, if any,
for working capital and other general corporate purposes. See
Use of Proceeds and Description of Certain
Indebtedness. |
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Principal Stockholders |
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Upon completion of this offering, funds advised by Apax
Partners, L.P. will own a controlling interest in us. We
currently intend to avail ourselves of the controlled company
exemption under the corporate governance rules of The NASDAQ
Stock Market. |
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Dividend policy |
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We have not declared or paid any dividends on our common stock.
We currently expect to retain future earnings, if any, for use
in the operation and expansion of our business and do not
anticipate paying any cash dividends in the foreseeable future.
Our ability to pay dividends on our common stock is limited by
the covenants of our senior secured credit facility and may be
further restricted by the terms of any of our future debt or
preferred securities. See Dividend Policy. |
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Risk factors |
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Investing in our common stock involves a high degree of risk.
See Risk Factors beginning on page 8 of this
prospectus for a discussion of factors you should carefully
consider before deciding to invest in our common stock. |
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Proposed symbol for
trading on The NASDAQ Global Select Market |
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rue |
Unless otherwise indicated, all information in this prospectus:
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excludes 3,626,000 shares of common stock reserved for
future grants under our equity compensation plan, which we plan
to adopt in connection with this offering;
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assumes no exercise by the underwriters of their option to
purchase up to an additional 1,014,815 shares from certain
of the selling stockholders to cover their option to purchase
additional shares; and
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assumes that we have reincorporated in Delaware prior to the
completion of this offering.
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5
Summary
Consolidated Financial and Other Data
The following table sets forth our summary consolidated
financial and other data for the periods and at the dates
indicated. The summary consolidated financial data for each of
the years in the three-year period ended January 31, 2009
and as of January 31, 2009 have been derived from our
audited consolidated financial statements included elsewhere in
this prospectus. The historical financial data for the
twenty-six weeks ended August 2, 2008 and the twenty-six
weeks ended August 1, 2009 and as of August 1, 2009
have been derived from our unaudited condensed consolidated
financial statements included elsewhere in this prospectus. The
unaudited condensed consolidated financial statements have been
prepared on the same basis as our audited consolidated financial
statements and, in the opinion of our management, reflect all
adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of this data. The results for
any interim period are not necessarily indicative of the results
that may be expected for a full year. The consolidated financial
statements for each of the fiscal years in the three-year period
ended January 31, 2009 and as of the end of each such year
have been audited.
The historical results presented below are not necessarily
indicative of the results to be expected for any future period.
This information should be read in conjunction with Risk
Factors, Selected Consolidated Financial Data,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, and our consolidated
financial statements and the related notes included elsewhere in
this prospectus.
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Fiscal Year Ended
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Twenty-Six Weeks Ended
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|
|
|
February 3,
|
|
|
February 2,
|
|
|
January 31,
|
|
|
August 2,
|
|
|
August 1,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands, except per share and operating data)
|
|
|
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
225,559
|
|
|
$
|
296,887
|
|
|
$
|
391,414
|
|
|
$
|
174,837
|
|
|
$
|
233,104
|
|
Cost of goods sold(1)
|
|
|
150,163
|
|
|
|
195,034
|
|
|
|
257,853
|
|
|
|
114,904
|
|
|
|
150,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
75,396
|
|
|
|
101,853
|
|
|
|
133,561
|
|
|
|
59,933
|
|
|
|
82,910
|
|
Selling, general and administrative expense
|
|
|
57,575
|
|
|
|
76,039
|
|
|
|
99,886
|
|
|
|
45,280
|
|
|
|
61,082
|
|
Depreciation and amortization expense
|
|
|
5,926
|
|
|
|
8,241
|
|
|
|
11,532
|
|
|
|
5,274
|
|
|
|
7,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
11,895
|
|
|
|
17,573
|
|
|
|
22,143
|
|
|
|
9,379
|
|
|
|
14,054
|
|
Interest expense, net
|
|
|
2,645
|
|
|
|
2,520
|
|
|
|
1,477
|
|
|
|
904
|
|
|
|
297
|
|
Provision for income taxes
|
|
|
1,452
|
|
|
|
5,920
|
|
|
|
8,027
|
|
|
|
3,322
|
|
|
|
5,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,798
|
|
|
$
|
9,133
|
|
|
$
|
12,639
|
|
|
$
|
5,153
|
|
|
$
|
8,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.39
|
|
|
$
|
0.42
|
|
|
$
|
0.58
|
|
|
$
|
0.24
|
|
|
$
|
0.38
|
|
Diluted
|
|
$
|
0.36
|
|
|
$
|
0.40
|
|
|
$
|
0.55
|
|
|
$
|
0.23
|
|
|
$
|
0.36
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
19,782
|
|
|
|
21,705
|
|
|
|
21,914
|
|
|
|
21,880
|
|
|
|
22,090
|
|
Diluted
|
|
|
21,888
|
|
|
|
22,842
|
|
|
|
22,814
|
|
|
|
22,845
|
|
|
|
23,004
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
February 3,
|
|
|
February 2,
|
|
|
January 31,
|
|
|
August 2,
|
|
|
August 1,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
Operating Data (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales per gross square foot
|
|
$
|
234
|
|
|
$
|
236
|
|
|
$
|
235
|
|
|
$
|
238
|
|
|
$
|
233
|
|
Comparable store sales change(2)
|
|
|
(4.7
|
)%
|
|
|
7.8
|
%
|
|
|
3.7
|
%
|
|
|
(2.0
|
)%
|
|
|
4.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stores open at end of period
|
|
|
278
|
|
|
|
352
|
|
|
|
449
|
|
|
|
403
|
|
|
|
505
|
|
Total gross square feet at end of
period (in thousands)
|
|
|
1,095
|
|
|
|
1,448
|
|
|
|
1,949
|
|
|
|
1,729
|
|
|
|
2,229
|
|
Store conversions during period
|
|
|
18
|
|
|
|
20
|
|
|
|
21
|
|
|
|
11
|
|
|
|
18
|
|
Capital expenditures (in thousands)
|
|
$
|
16,586
|
|
|
$
|
20,265
|
|
|
$
|
26,464
|
|
|
$
|
9,526
|
|
|
$
|
16,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1, 2009
|
|
|
|
January 31,
|
|
|
|
|
|
As Adjusted
|
|
|
|
2009
|
|
|
Actual
|
|
|
(3)(4)(5)
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,611
|
|
|
$
|
8,668
|
|
|
$
|
8,668
|
|
Working capital
|
|
|
798
|
|
|
|
14,830
|
|
|
|
14,830
|
|
Total assets
|
|
|
141,200
|
|
|
|
184,275
|
|
|
|
184,275
|
|
Total long-term debt
|
|
|
19,476
|
|
|
|
29,234
|
|
|
|
7,148
|
|
Stockholders equity
|
|
$
|
18,393
|
|
|
$
|
26,930
|
|
|
$
|
49,017
|
|
|
|
|
(1)
|
|
Includes certain buying, freight,
distribution facility and store occupancy expenses.
|
|
(2)
|
|
Comparable store sales in fiscal
years 2006 and 2007 are adjusted for the
53rd week
in fiscal year 2006.
|
|
|
|
(3)
|
|
Reflects the balance sheet data as
further adjusted for (a) our receipt of the estimated net
proceeds from the sale of shares of common stock by us at an
assumed initial public offering price of $17.00 per share, the
midpoint of the price range set forth on the cover of this
prospectus, after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us and
(b) the repayment of outstanding indebtedness as described
in Use of Proceeds. See Capitalization
and Use of Proceeds.
|
|
|
|
(4)
|
|
A $1.00 increase (decrease) in the
assumed initial public offering price of $17.00 per share, the
midpoint of the price range set forth on the cover of this
prospectus, would increase (decrease) each of cash and cash
equivalents, total assets and total stockholders equity by
approximately $1.5 million, assuming that the number of
shares offered by us, as set forth on the cover of this
prospectus, remains the same and after deducting estimated
underwriting discounts and commissions and estimated offering
expenses payable by us. Similarly, if we change the number of
shares offered by us, the net proceeds we receive will increase
or decrease by the increase or decrease in the number of shares
sold, multiplied by the offering price per share, less the
incremental estimated underwriting discounts and commissions and
estimated offering expenses payable by us.
|
|
|
|
(5)
|
|
Reflects 22,510,662 shares of
common stock outstanding as of October 27, 2009, which
includes the exercise of options to purchase an aggregate of
419,620 shares of common stock between August 1, 2009 and
October 27, 2009.
|
7
RISK
FACTORS
This offering and an investment in our common stock involve a
high degree of risk. You should consider carefully the risks
described below, together with the financial and other
information contained in this prospectus, before you decide to
purchase shares of our common stock. If any of the following
risks actually occurs, our business, financial condition,
results of operations, cash flow and prospects could be
materially and adversely affected. As a result, the trading
price of our common stock could decline and you could lose all
or part of your investment in our common stock.
Risks
Related to Our Business
Our
business is highly dependent upon our ability to identify and
respond to new and changing fashion trends, customer preferences
and other related factors.
Fashion trends and customer tastes are volatile and can change
rapidly. Our success depends in large part upon our ability to
effectively identify and respond to changing fashion trends and
consumer demands, and to translate market trends into
appropriate, saleable product offerings in a timely manner. A
small number of our employees, including our divisional
merchandise managers, our Senior Vice President and General
Merchandise Manager and our President and Chief Executive
Officer, are primarily responsible for performing this analysis
and making related product purchase decisions. Failure of these
employees to identify and react appropriately to new and
changing trends or tastes or to accurately forecast demand for
certain product offerings could lead to, among other things,
excess inventories, markdowns and write-offs, which could
materially adversely affect us and our brand image. Because our
success depends significantly on our brand image, damage to our
brand in particular would have a negative impact on us. There
can be no assurance that our new product offerings will be met
with the same level of acceptance as our past product offerings
or that we will be able to adequately and timely respond to the
preferences of our customers. The failure of any new product
offerings could have a material adverse effect on our business
plan, results of operations and financial condition.
Our
growth strategy depends upon our ability to successfully open
and operate a significant number of new stores each year in a
timely and cost-effective manner without affecting the success
of our existing store base.
Our net sales have grown appreciably during the past several
years, primarily as a result of the opening of new stores. We
intend to continue to pursue our growth strategy of opening new
stores for the foreseeable future, and our future operating
results will depend largely upon our ability to successfully
open and operate a significant number of new stores each year in
a timely and cost-effective manner, and to profitably manage a
significantly larger business. We believe there is a significant
opportunity to expand our store base from 527 locations as of
October 3, 2009 to more than 1,000 stores within five
years. In fiscal year 2009, we plan to open 88 new stores,
including 78 new stores opened as of October 3, 2009, and
convert 26 stores, including 24 stores converted as of
October 3, 2009. In fiscal year 2010, we plan to open
approximately 100 new stores.
Our ability to successfully open and operate new stores depends
on many factors including, among others, our ability to:
|
|
|
|
|
identify suitable store locations primarily in strip centers and
regional malls, the availability of which is largely outside of
our control;
|
|
|
|
negotiate acceptable lease terms, desired tenant allowances and
assurances from operators and developers that they can complete
the project, which depend in part on the financial resources of
the operators and developers;
|
|
|
|
obtain or maintain adequate capital resources on acceptable
terms;
|
|
|
|
source sufficient levels of inventory at acceptable costs;
|
|
|
|
hire, train and retain an expanded workforce of store managers
and other personnel;
|
8
|
|
|
|
|
successfully integrate new stores into our existing control
structure and operations, including information system
integration;
|
|
|
|
maintain adequate distribution facility, information system and
other operational system capabilities;
|
|
|
|
identify and satisfy the merchandise and other preferences of
our customers in new geographic areas and markets; and
|
|
|
|
address competitive, merchandising, marketing, distribution and
other challenges encountered in connection with expansion into
new geographic areas and markets.
|
In addition, as the number of our stores increases, we may face
risks associated with market saturation of our product
offerings. To the extent our new store openings are in markets
where we have existing stores, we may experience reduced net
sales in existing stores in those markets. Finally, there can be
no assurance that any newly opened stores will be received as
well as, or achieve net sales or profitability levels comparable
to those of, our existing stores in the time periods estimated
by us, or at all. If our stores fail to achieve, or are unable
to sustain, acceptable net sales and profitability levels, our
business may be materially harmed and we may incur significant
costs associated with closing those stores.
Our failure to effectively address challenges such as these
could adversely affect our ability to successfully open and
operate new stores in a timely and cost-effective manner, and
could have a material adverse effect on our business, results of
operations and financial condition. In addition, our current
expansion plans are only estimates. The actual number of new
stores we open each year and actual number of suitable locations
for our new stores could differ significantly from these
estimates. Any failure to successfully open and operate new
stores in the time frames and at the costs estimated by us could
have a material adverse effect on our business and result in a
decline in the price of our common stock.
Our
growth strategy will require us to expand and improve our
operations and could strain our existing resources and cause the
performance of our existing stores to suffer.
Our operating complexity will increase as our store base grows.
Such increased complexity will require that we continue to
expand and improve our operating capabilities, and grow, train
and manage our employee base. We will need to continually
evaluate the adequacy of our information and distribution
systems and controls and procedures related to financial
reporting. Implementing new systems, controls and procedures and
any changes to existing systems, controls and procedures could
present challenges we do not anticipate and could negatively
impact us.
In addition, we may be unable to hire, train and retain a
sufficient number of personnel or successfully manage our
growth; moreover, our planned expansion will place increased
demands on our existing operational, managerial, administrative
and other resources. These increased demands could cause us to
operate our business less effectively, which in turn could cause
deterioration in the financial performance of our individual
stores or our overall business.
Our rapid growth also makes it difficult for us to adequately
predict the expenditures we will need to make in the future.
This growth may also place increased burdens on our vendors, as
we will likely increase the size of our merchandise orders. In
addition, increased orders may negatively impact our approach of
generally striving to minimize the time from purchase order to
product delivery, and may increase our markdown risk. If we do
not make the necessary capital or other expenditures necessary
to accommodate our future growth, we may not be successful in
our growth strategy. We cannot anticipate all of the demands
that our expanding operations will impose on our business,
personnel, systems and controls and procedures, and our failure
to appropriately address such demands could have a material
adverse effect on us.
9
Our
business depends in part on a strong brand image, and if we are
not able to maintain and enhance our brand, particularly in new
markets where we have limited brand recognition, we may be
unable to attract a sufficient number of customers to our stores
or sell sufficient quantities of our products.
We believe that the brand image we have developed has
contributed significantly to the success of our business. We
also believe that maintaining and enhancing our brand image,
particularly in new markets where we have limited brand
recognition, is important to maintaining and expanding our
customer base. Maintaining and enhancing our brand image may
require us to make substantial investments in areas such as
merchandising, marketing, store operations, community relations,
store promotions and employee training, and these investments
may not be successful. Moreover, we do not utilize some of the
advertising and marketing media used by some of our competitors,
including advertising through the use of newspapers, magazines,
billboards, television and radio. We believe our customers rely
on word-of-mouth and social media marketing. As a result, we
employ a viral approach to marketing that is designed to capture
the interest of our customers and drive them into our stores.
For example, we offer promotions and contests through our
website, we provide product knowledge, trend statements and
fashion blogs through Facebook, MySpace, Twitter and YouTube and
we send regular
e-blasts
to customers to highlight key trends, new products and
promotional events.
Because we do not rely on traditional advertising channels, such
as newspaper or television advertisements, if our viral
marketing efforts are not successful, there may be no
immediately available alternative marketing channel for us to
build awareness of our products in a manner that we think will
be successful. This may impair our ability to successfully
integrate new stores into the surrounding communities, to expand
into new markets or to maintain the strength or distinctiveness
of our brand image in our existing markets. In addition, if our
viral marketing efforts are unsuccessful or we are otherwise
required to use traditional advertising channels in our overall
marketing strategy, then we will incur additional expenses
associated with the transition to and operation of traditional
advertising channels. Failure to successfully market our
products and brand in new and existing markets could harm our
business, results of operations and financial condition.
As of October 3, 2009, our 527 stores are located in
504 cities in 43 states. A primary component of our
strategy involves expanding into new geographic markets. As we
expand into new geographic markets, we may be unable to develop,
and consumers in these markets may not accept, our brand without
significant additional expenditures or at all. Maintaining and
enhancing our brand image will depend largely on our ability to
offer a differentiated in-store experience to our customers and
to continue to provide high quality products, which we may not
continue to do successfully. In addition, our brand image may
also be adversely affected if our public image or reputation is
tarnished by negative publicity. The strength of our brand image
is also dependent on our ability to successfully market our
brand and product offerings to our customer demographic. To the
extent the store and merchandise preferences of these customers
change, the popularity of our brand may decline and our business
may suffer.
Our
inability to maintain or improve levels of comparable store
sales could cause our stock price to decline.
We may not be able to maintain or improve the levels of
comparable store sales that we have experienced in the recent
past. Although we have sustained net sales growth since fiscal
year 2005, our quarter-to-quarter comparable store sales have
ranged from a decrease of 8.1% to an increase of 14.2%. We have
recently experienced strong comparable store sales, which we may
not be able to sustain. If our future comparable store sales
decline or fail to meet market expectations, the price of our
common stock could decline. In addition, the aggregate results
of operations of our stores have fluctuated in the past and will
fluctuate in the future. A variety of factors affect comparable
store sales, including fashion trends, competition, current
national and regional economic conditions, pricing, inflation,
the timing of the release of new merchandise and promotional
events, changes in our merchandise mix, inventory shrinkage, the
success of our multi-channel marketing programs, the timing and
level of markdowns and weather conditions. In addition, many
retailers have been unable to sustain high levels of comparable
store sales growth during and after periods of substantial
expansion. These factors may cause our comparable store sales
results to be materially lower than in recent periods and our
expectations, which could harm our business and result in a
decline in the price of our common stock.
10
Our
business is sensitive to global, national and regional consumer
spending and economic conditions.
Consumer purchases of discretionary retail items and specialty
retail products, including our products, may be affected by
economic conditions such as employment levels, salary and wage
levels, the availability of consumer credit, inflation, high
interest rates, high tax rates, high fuel prices and consumer
confidence in future economic conditions. These consumer
purchases may decline during recessionary periods or at other
times when disposable income is lower. These risks may be
exacerbated for retailers such as us that focus on selling
discretionary fashion merchandise. Consumer sentiment has
recently declined and may decline further due to national and
regional economic conditions, which has resulted in a general
decrease in discretionary purchases. Our financial performance
is particularly susceptible to economic and other conditions in
regions or states where we have a significant number of stores,
such as Texas or Georgia. Current economic conditions and
further slowdown in the economy could further adversely affect
strip center and regional mall traffic and new strip center and
regional mall development and could materially adversely affect
us and our growth plans.
Our
plans to convert our existing stores and expand our product
offerings may not be successful, and implementation of these
plans may divert our operational, managerial and administrative
resources, which could impact our competitive
position.
In addition to our store growth strategy, we plan to convert
many of our existing stores and grow our business by expanding
some of our existing product categories, including our rue21
etc! girls jewelry and accessories category, our footwear
category and our Carbon guys apparel and accessories category.
These plans involve various risks discussed elsewhere in these
risk factors, including:
|
|
|
|
|
implementation of these plans may be delayed or may not be
successful;
|
|
|
|
we may be unable to identify locations for conversion of
existing stores to our larger rue21 etc! layout;
|
|
|
|
if our expanded product offerings fail to maintain and enhance
our distinctive brand identity, our brand image may be
diminished and our sales may decrease;
|
|
|
|
if we fail to expand our infrastructure, including by securing
desirable store locations at reasonable costs and hiring and
training employees, we may be unable to manage our expansion
successfully; and
|
|
|
|
implementation of these plans may divert managements
attention from other aspects of our business and place a strain
on our management, operational and financial resources, as well
as our information systems.
|
In addition, our ability to successfully carry out our plans to
expand our product offerings may be affected by, among other
things, inventory shrinkage that can result from an inventory
that consists of smaller and easily concealable items such as
jewelry, economic and competitive conditions, changes in
consumer spending patterns and changes in consumer preferences
and style trends. Our expansion plans could be delayed or
abandoned, could cost more than anticipated or could divert
resources from other areas of our business, any one of which
could negatively impact our competitive position and reduce our
revenue and profitability.
We
could face increased competition from other retailers that could
adversely affect us and our growth strategy.
We face competition in the specialty retail industry. We compete
on the basis of a combination of factors, including among
others, price, breadth, quality and style of merchandise
offered, in-store experience, level of customer service, ability
to identify and respond to new and emerging fashion trends,
brand image and scalability. We compete with a wide variety of
large and small retailers for customers, vendors, suitable store
locations and personnel. We face competition from major
specialty apparel retailers that offer their own private label
assortment, including Aéropostale, American Eagle
Outfitters, Charlotte Russe, Forever 21, the Gap, J. Crew,
Metropark, Old Navy and Wet Seal, as well as national off-price
apparel chains such as TJX Companies, Burlington Coat Factory,
and Ross Stores. We also face competition from department stores
such as Dillards, and JC Penney, and large value retailers
such as Walmart, Target and Kohls. We also compete against
local off-price and specialty retail stores, regional retail
chains, web-based retail stores and other direct retailers that
engage in the retail sale of junior and young mens
apparel, accessories, footwear and similar merchandise,
11
which offer a variety of products, including apparel, for the
value-conscious consumer. The competitive landscape we face,
particularly among specialty retailers, is subject to rapid
change which can affect customer preferences.
Many of our competitors have substantially greater name
recognition as well as financial, marketing and other resources
and therefore may be able to adapt to changes in customer
preferences more quickly, devote greater resources to marketing
and sale of their products, generate national brand recognition
or adopt more aggressive pricing policies than we can. Many of
our competitors also utilize advertising and marketing media
which we do not, including advertising through use of
newspapers, magazines, billboards, television and radio, which
may provide them with greater brand recognition than we have.
Our competitors may also sell certain products or substantially
similar products through the Internet or through outlet centers
or discount stores, increasing the competitive pricing pressure
for those products. We cannot assure you that we will continue
to be able to compete successfully against existing or future
competitors. Our expansion into markets served by our
competitors and entry of new competitors or expansion of
existing competitors into our markets could have a material
adverse effect on us. Competitive forces and pressures may
intensify as our presence in the retail marketplace grows.
We do not possess exclusive rights to many of the elements that
comprise our in-store experience and product offerings. Some
specialty retailers offer a personalized shopping experience
that in some ways is similar to the one we strive to provide to
our customers. Our competitors may seek to emulate facets of our
business strategy and in-store experience, which could result in
a reduction of any competitive advantage or special appeal that
we might possess. In addition, some of our product offerings are
sold to us on a non-exclusive basis. As a result, our current
and future competitors may be able to duplicate or improve upon
some or all of our in-store experience or product offerings that
we believe are important in differentiating our stores and our
customers shopping experience, especially those
competitors with significantly greater financial, marketing and
other resources than ours. If our competitors were to duplicate
or improve upon some or all of our in-store experience or
product offerings, our competitive position and our business
could suffer.
We
depend on key personnel and may not be able to retain or replace
these individuals or recruit additional personnel, which could
harm our business.
We believe that we have benefited substantially from the
leadership and experience of our key personnel, including our
President and Chief Executive Officer, Robert N. Fisch, and our
Senior Vice President and General Merchandise Manager, Kim A.
Reynolds. The loss of the services of any of our key personnel
could have a material adverse effect on our business and
prospects, as we may not be able to find suitable individuals to
replace such personnel on a timely basis. In addition, any such
departure could be viewed in a negative light by investors and
analysts, which could cause our common stock price to decline.
None of our employees are subject to
non-compete
obligations at the present time. In addition, except for our
President and Chief Executive Officer and employees subject to
stock option award agreements, our employees are not subject to
non-solicitation
obligations. Moreover, we do not have employment agreements with
any of our employees and we do not maintain key man
or key woman insurance policies on the lives of
these individuals, except for our President and Chief Executive
Officer. As a result, their employment may be terminated by us
or them at any time. We do, however, anticipate entering into an
employment agreement with certain members of senior management.
As our business expands, our future success will depend greatly
on our continued ability to attract and retain highly skilled
and qualified personnel. We are also currently in search of
qualified and experienced individuals to fill several open
senior management and finance positions, as we do not currently
have an internal audit department. There is a high level of
competition for experienced, successful personnel in the retail
industry. Our inability to meet our staffing requirements in the
future could impair our growth and harm our business.
12
Our
ability to attract customers to our stores that are located in
strip centers, regional malls and outlet centers depends heavily
on the success of the shopping centers in which our stores are
located, and any decrease in customer traffic in these shopping
centers could cause our net sales to be less than
expected.
Our stores are located in strip centers, regional malls and
outlet centers and our expansion is expected to be predominantly
focused on strip centers and regional malls. Net sales at these
stores are derived, to a significant degree, from the volume of
traffic in those shopping centers and the surrounding area. Our
stores benefit from the ability of shopping centers other
tenants, particularly anchor stores such as Walmart, Target and
Kohls, to generate consumer traffic in the vicinity of our
stores and the continuing popularity of the strip centers,
regional malls and outlet centers as shopping destinations. Our
sales volume and traffic may be adversely affected by, among
other things, economic downturns nationally or regionally, high
fuel prices, increased competition, changes in consumer
demographics, a decrease in popularity of shopping centers or of
stores in the shopping centers in which our stores are located,
the closing of anchor stores important to our business, or a
deterioration in the financial condition of shopping center
operators or developers which could, for example, limit their
ability to finance tenant improvements for us and other
retailers. A reduction in consumer traffic as a result of these
or any other factors, or our inability to obtain or maintain
prominent store locations within shopping centers, could have a
material adverse effect on us. Although we do not have specific
information in respect to the strip centers, regional malls and
outlet centers in which we locate or plan to locate our stores,
we believe strip center, regional mall and outlet center vacancy
rates have been rising and traffic has been decreasing
nationally.
We
plan to use cash from operations to fund our expanding business
and execute on our growth strategy and may require additional
financing, which may not be available to us.
We have grown rapidly, with our net sales increasing from
$146.9 million for fiscal year 2004 to $391.4 million
for fiscal year 2008. During fiscal year 2008, capital
expenditures, net of tenant allowances, were $17.6 million,
of which $8.5 million was related to the 99 new stores we
opened during fiscal year 2008. In addition, we spent
approximately $2.4 million to convert our existing stores
during fiscal year 2008. We plan to continue our growth and
expansion, including opening a significant number of additional
stores, as well as converting existing stores. Our plans to
expand our store base may not be successful and the
implementation of these plans may not result in expected
increases in our net sales even though they increase our costs.
To support our expanding business and execute on our growth
strategy, we will need significant amounts of cash from
operations, including funds to pay our lease obligations, build
out new store space, purchase inventory, pay personnel, further
invest in our infrastructure and facilities, and pay for the
increased costs associated with operating as a public company.
In particular, payments under the operating leases associated
with our stores and our distribution facility account for a
significant portion of our operating expenses.
We primarily depend on cash flow from operations and our senior
secured credit facility to fund our business and growth plans.
If our business does not generate sufficient cash flow from
operations to fund these activities, and sufficient funds are
not otherwise available to us from the net proceeds we receive
from this offering and under our senior secured credit facility,
we may need additional equity or debt financing. If such
financing is not available to us on satisfactory terms, our
ability to run and expand our business or to respond to
competitive pressures would be limited and we could be required
to delay, significantly curtail or eliminate planned store
openings or operations or other elements of our growth strategy.
If we raise additional capital by issuing equity securities or
securities convertible into equity securities, your ownership
may be diluted. Our senior secured credit facility and any
additional debt financing we may incur may impose upon us
covenants that restrict our operations, including limitations on
our ability to incur liens or additional debt, pay dividends,
redeem our common stock, make certain investments and engage in
certain merger, consolidation or asset sale transactions.
Moreover, any borrowings under any future debt financing will
require interest payments and need to be repaid or refinanced,
and would create additional cash demands and financial risk for
us, which could be exacerbated by then-existing business or
prevailing financial market conditions.
13
We
have many important vendor relationships and our ability to
obtain merchandise at competitive prices could suffer as a
result of any deterioration or change in those relationships or
events that adversely affect our vendors or their ability to
obtain financing for their operations.
We have many important vendor relationships that we believe
provide us with a competitive advantage. We do not own or
operate any manufacturing facilities. We instead purchase all of
our merchandise from third-party vendors. Over the last twelve
months, we sourced a majority of our merchandise from our
various merchandise vendors, with no single vendor accounting
for more than 8% of our merchandise. Our financial performance
depends in large part on our ability to purchase desired
merchandise in sufficient quantities at competitive prices from
these and other vendors. In some cases, we obtain exclusive use
of select products from our vendors for a period of time.
Moreover, from time to time, some of our vendors, with their
prior consent, allow us to return certain merchandise purchased
from them. In addition, we are typically able to return
merchandise that does not meet our preset specifications.
However, we generally have no long-term purchase contracts or
other contractual assurances of continued supply, pricing or
access to new products. Any of our vendors could discontinue
supplying us with desired products in sufficient quantities for
a variety of reasons. The benefits we currently experience from
our vendor relationships could be adversely affected if our
vendors:
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choose to discontinue selling non-exclusive or exclusive
products to us;
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refuse to allow us to return merchandise purchased from them;
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raise the prices they charge us;
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sell similar or identical products to certain of our
competitors, many of whom purchase products in significantly
greater volume and, in some cases, at lower prices than we do;
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enter into arrangements with competitors that could impair our
ability to sell their products, including by giving our
competitors exclusive licensing arrangements or exclusive access
to styles, brands and products or limiting our access to such
arrangements or styles, brands or products;
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initiate or expand sales of their products through their own
stores or through the Internet to the retail market and
therefore compete with us directly; or
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sell their products through outlet centers or discount stores,
increasing the competitive pricing pressure we face.
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Some of our vendors are small and specialized with limited
resources, production capacities and operating histories. Events
that adversely affect our vendors could impair our ability to
obtain desired merchandise in sufficient quantities. Such events
include difficulties or problems associated with our
vendors business, finances, labor, importation of
products, costs, production, insurance and reputation. For
example, some of our vendors are extended credit by units of the
CIT Group, or CIT, and if CIT ceases to do business or
materially decreases its level of credit to our vendors, we may
be required to pay for merchandise from our vendors earlier than
our historical practice.
There can be no assurance that we will be able to acquire
desired merchandise in sufficient quantities on acceptable terms
or at all in the future, especially if we need significantly
greater amounts of inventory in connection with the growth of
our business. Any inability to acquire suitable merchandise in
sufficient quantities and at acceptable prices, in particular
exclusive merchandise, due to the loss of or a deterioration or
change in our relationship with one or more key vendors, or
events harmful to our vendors, may materially adversely affect
us.
We are
subject to risks associated with leasing substantial amounts of
space, including future increases in occupancy
costs.
We do not own any real estate. Instead, we lease all of our
store locations, our corporate headquarters in Warrendale,
Pennsylvania and our distribution facility in Weirton, West
Virginia. We lease our distribution facility from the State of
West Virginia under a lease that expires in 2011, with two
five-year renewal options.
14
Although some of our leases are for ten-year periods, we
typically occupy our stores under operating leases with terms of
five years, with additional five-year renewal options. We have
been able to negotiate favorable rental rates over the last year
due in part to the state of the economy and high vacancy rates
within some shopping centers; however, there is no guarantee
that we will be able to continue to negotiate such favorable
terms, and this can cause our occupancy rates to be higher in
future years or may force us to close stores in desirable
locations. Some of our leases have early cancellation clauses,
which permit the lease to be terminated by us or the landlord if
certain sales levels are not met in specific periods or if the
strip center does not meet specified occupancy standards. In
addition to future minimum lease payments, some of our store
leases provide for additional rental payments based on a
percentage of net sales, or percentage rent, if
sales at the respective stores exceed specified levels, as well
as the payment of common area maintenance charges, real property
insurance and real estate taxes. Many of our lease agreements
have defined escalating rent provisions over the initial term
and any extensions. As we expand our store base, our lease
expense and our cash outlays for rent under the lease agreements
will increase. Our substantial operating lease obligations could
have significant negative consequences, including:
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requiring that a substantial portion of our available cash be
applied to pay our rental obligations, thus reducing cash
available for other purposes;
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increasing our vulnerability to general adverse economic and
industry conditions;
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limiting our flexibility in planning for or reacting to changes
in our business or in the industry in which we compete; and
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limiting our ability to obtain additional financing.
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Any of these consequences could place us at a disadvantage with
respect to our competitors. We depend on cash flow from
operations to pay our lease expenses and to fulfill our other
cash needs. If our business does not generate sufficient cash
flow from operating activities to fund these expenses and needs,
and sufficient funds are not otherwise available to us from the
net proceeds we receive from this offering, we may not be able
to service our lease expenses, grow our business, respond to
competitive challenges or to fund our other liquidity and
capital needs, which would harm our business.
Additional sites that we lease may be subject to long-term
non-cancelable leases if we are unable to negotiate our current
standard lease terms. If an existing or future store is not
profitable, and we decide to close it, we may nonetheless be
committed to perform our obligations under the applicable lease
including, among other things, paying the base rent for the
balance of the lease term. Moreover, even if a lease has an
early cancellation clause, we may not satisfy the contractual
requirements for early cancellation under that lease. Our
inability to enter into new leases or renew existing leases on
terms acceptable to us or be released from our obligations under
leases for stores that we close would materially adversely
affect us.
Our
failure to find store employees that reflect our brand image and
embody our culture, especially in light of our growth strategy,
could adversely affect our business.
Our success depends in part upon our ability to attract,
motivate and retain a sufficient number of store employees,
including store managers, who understand and appreciate our
corporate culture and customers, and are able to adequately and
effectively represent our culture and establish credibility with
our customers. The store employee turnover rate in the retail
industry is generally high. If we are unable to hire and retain
store personnel capable of consistently providing a high level
of customer service, as demonstrated by their enthusiasm for our
culture, understanding of our customers and knowledge of the
merchandise we offer, our ability to open new stores may be
impaired, the performance of our existing and new stores could
be materially adversely affected and our brand image may be
negatively impacted. We are also dependent upon temporary
personnel to adequately staff our stores and distribution
facility, with heightened dependence during busy periods such as
the Easter and spring break season, back-to-school season and
the winter holiday season and when multiple new stores are
opening. There can be no assurance that we will receive adequate
assistance from our temporary personnel, or that there will be
sufficient sources of suitable temporary personnel to meet
15
our demand. Any such failure to meet our staffing needs or any
material increases in employee turnover rates could have a
material adverse effect on our business or results of operations.
Our
net sales and inventory levels fluctuate on a seasonal basis or
due to store events or promotions, leaving our operating results
particularly susceptible to changes in seasonal shopping
patterns and related risks.
Our net sales are typically disproportionately higher in the
second and fourth fiscal quarters due to increased net sales
during the summer and winter holiday seasons. Net sales during
these periods cannot be used as an accurate indicator of annual
results. Likewise, as is the case with many retailers of
apparel, accessories and gifts, we typically experience lower
net sales in the first fiscal quarter relative to other
quarters. Any significant decrease in net sales during the
summer or winter holiday seasons would have a material adverse
effect on us. In addition, in order to prepare for these
seasons, we must order and keep in stock significantly more
merchandise than we carry during other parts of the year. This
inventory
build-up may
require us to expend cash faster than is generated by our
operations during this period. Any unanticipated decrease in
demand for our products during these peak shopping seasons could
require us to sell excess inventory at a substantial markdown,
which could have a material adverse effect on our business,
profitability, ability to repay any indebtedness and our brand
image. In addition, we may experience variability in net sales
as a result of a variety of other factors, including the timing
of new store openings, store events, promotions or other
marketing activities, which may cause our results of operations
to fluctuate on a quarterly basis and relative to corresponding
periods in prior years.
We
only have one distribution facility and have not yet implemented
disaster recovery procedures, and if we encounter difficulties
associated with our distribution facility or if it were to shut
down for any reason, we could face shortages of inventory that
would have a material adverse affect on our business operations
and harm our reputation.
Our only distribution facility is located in Weirton, West
Virginia. Our distribution facility supports our entire
business. All of our merchandise is shipped to the distribution
facility from our vendors, and then packaged and shipped from
our distribution facility to our stores. The success of our
stores depends on their timely receipt of merchandise. The
efficient flow of our merchandise requires that we have adequate
capacity in our distribution facility to support our current
level of operations, and the anticipated increased levels that
may follow from our growth plans. If we encounter difficulties
associated with our distribution facility or if it were to shut
down for any reason, including by fire or other natural
disaster, we could face shortages of inventory, resulting in
out-of-stock conditions in our stores, and incur
significantly higher costs and longer lead times associated with
distributing merchandise to our stores. This could have a
material adverse effect on our business and harm our reputation.
We are in the process of developing disaster recovery and
business continuity plans that would allow us to be fully
operational regardless of casualties or unforeseen events that
may affect our corporate headquarters or distribution center.
Without proper disaster recovery and business continuity plans,
if we encounter difficulties with our distribution facility or
other problems or disasters arise, we cannot ensure that
critical systems and operations will be restored in a timely
manner or at all, and this would have a material adverse effect
on our business.
We have identified the need to upgrade our distribution facility
in order to support recent and expected future growth. We are
currently upgrading our distribution facility, which we expect
to complete by the end of the first quarter of fiscal year 2010.
We believe this upgrade will support our growth through
approximately 1,300 stores with little additional capital
investment. If we are unable to successfully implement this
upgrade, the efficient flow of our merchandise could be
disrupted, which could materially hurt our business. We may need
to further increase the capacity of this facility to support our
growth, which may require us to secure additional favorable real
estate or may require us to obtain additional financing.
Appropriate locations or financing for the purchase or lease of
such additional real estate may not be available at reasonable
costs or at all. Our failure to provide adequate order
fulfillment and secure additional distribution capacity when
necessary could impede our growth plans, and the further
increase of this capacity would increase our costs.
16
We
rely upon independent third-party transportation providers for
substantially all of our product shipments.
We currently rely upon independent third-party transportation
providers for substantially all of our product shipments,
including shipments to all of our stores. Our utilization of
their delivery services for shipments, or those of any other
shipping companies we may elect to use, is subject to risks,
including increases in fuel prices, which would increase our
shipping costs, and employee strikes and inclement weather,
which may impact the shipping companys abilities to
provide delivery services that adequately meet our shipping
needs. If we change shipping companies, we could face logistical
difficulties that could adversely affect deliveries and we would
incur costs and expend resources in connection with such change.
Moreover, we may not be able to obtain terms as favorable as
those received from the independent third-party transportation
providers we currently use, which in turn would increase our
costs. We also face shipping and distribution risks and
uncertainties associated with the upgrade of our distribution
facility and related systems.
Our
ability to source our merchandise profitably or at all could be
hurt if new trade restrictions are imposed or existing trade
restrictions become more burdensome.
Trade restrictions, including increased tariffs, safeguards or
quotas, on apparel and accessories could increase the cost or
reduce the supply of merchandise available to us. Under the
World Trade Organization, or WTO, Agreement, effective
January 1, 2005, the United States and other WTO member
countries removed quotas on goods from WTO members, which in
certain instances affords us greater flexibility in importing
textile and apparel products from WTO countries from which we
source our merchandise. However, as the removal of quotas
resulted in an import surge from China, the United States in May
2005 imposed safeguard quotas on seven categories of goods and
apparel imported from China. Effective January 1, 2006, the
United States imposed quotas on approximately twelve categories
of goods and apparel from China, and may impose additional
quotas in the future. These and other trade restrictions could
have a significant impact on our sourcing patterns in the
future. The extent of this impact, if any, and the possible
effect on our purchasing patterns and costs, cannot be
determined at this time. We cannot predict whether any of the
countries in which our merchandise is currently manufactured or
may be manufactured in the future will be subject to additional
trade restrictions imposed by the United States and foreign
governments, nor can we predict the likelihood, type or effect
of any such restrictions. Trade restrictions, including
increased tariffs or quotas, embargoes, safeguards and customs
restrictions against apparel items, as well as United States or
foreign labor strikes, work stoppages or boycotts, could
increase the cost or reduce the supply of apparel available to
us or may require us to modify our current business practices,
any of which could hurt our profitability.
We
rely significantly on information systems and any failure,
inadequacy, interruption or security failure of those systems
could harm our ability to effectively operate our
business.
Our ability to effectively manage and maintain our inventory,
and to ship products to our stores and our customers on a timely
basis, depends significantly on our information systems,
including our Island Pacific Inc., or Island Pacific, enterprise
resource planning system and Epicor Software Corporation, or
Epicor, including its Customer Relationship Management and store
point-of-sale, or POS, system. We believe that utilizing this
suite of products has allowed us to avoid the expense associated
with internally developing and managing our own hardware and
software systems. See BusinessManagement Information
Systems. To manage the growth of our operations, personnel
and real estate portfolio, we will need to continue to improve
and expand our operational and financial systems, real estate
management systems, transaction processing and internal controls
and business processes; in doing so, we could encounter
transitional issues and incur substantial additional expenses.
If we are unable to maintain our current relationships with
Island Pacific or Epicor, there is no assurance that we will be
able to locate replacements on a timely basis or on acceptable
terms. The failure of our information systems to operate
effectively, problems with transitioning to upgraded or
replacement systems or expanding them into new stores, or a
breach in security of these systems, could adversely impact the
promptness and accuracy of our merchandise distribution,
transaction processing, financial accounting and reporting, the
efficiency of our operations and our ability to properly
forecast
17
earnings and cash requirements. We could be required to make
significant additional expenditures to remediate any such
failure, problem or breach. Such events may have a material
adverse effect on us.
In addition, we may now and in the future implement new systems
to increase efficiencies and profitability. To manage growth of
our operations and personnel, we will need to continue to
improve and expand our operational and financial systems,
transaction processing, and internal controls and business
processes. In doing any implementation or change to existing
processes, we may encounter transitional issues and incur
substantial additional expenses.
System
security risk issues could disrupt our internal operations or
information technology services, and any such disruption could
harm our net sales, increase our expenses, and harm our
reputation and stock price.
Experienced computer programmers and hackers, or even internal
users, may be able to penetrate our network security or that of
Island Pacific or Epicor and misappropriate our confidential
information or that of third parties, create system disruptions
or cause shutdowns. As a result, we could incur significant
expenses addressing problems created by security breaches of our
network. This risk is heightened because we collect and store
customer information for marketing purposes. Any compromise of
customer information could subject us to customer or government
litigation and harm our reputation, which could adversely affect
our business and growth. Moreover, we could incur significant
expenses or disruptions of our operations in connection with
system failures or breaches. In addition, sophisticated hardware
and operating system software and applications that we procure
from third parties, including that of Island Pacific or Epicor,
may contain defects in design or manufacture, including
bugs and other problems that could unexpectedly
interfere with the operation of the systems. The costs to us to
eliminate or alleviate security problems, viruses and bugs, or
any problems associated with the outsourced services provided by
Island Pacific or Epicor, could be significant, and such efforts
to address these problems could result in interruptions, delays
or cessation of service that may impede our sales, distribution
or other critical functions.
We may
suffer risks if our vendors fail to follow our vendor
guidelines, including the risk we could acquire merchandise
without full rights to sell it and the risks that a vendor or a
manufacturer may fail to use acceptable labor practices, comply
with other applicable laws or face interruption with its
operations.
We sometimes purchase merchandise from vendors who hold
manufacturing and distribution rights under the terms of certain
licenses or who themselves own intellectual property rights to
the merchandise. In addition, we purchase merchandise that may
be subject to design copyrights, design patents, or otherwise
may incorporate protected intellectual property. We are not
involved in the manufacture of any of the merchandise we
purchase from our vendors for sale to our customers, and we do
not independently investigate whether these vendors legally hold
intellectual property rights to merchandise that they are
manufacturing or distributing. As a result, we rely upon
vendors representations set forth in our purchase orders
and vendor agreements concerning their right to sell us the
products that we purchase from them. If a third party claims to
have licensing rights with respect to merchandise we purchased
from a vendor, or we acquire unlicensed merchandise, we could be
obligated to remove such merchandise from our stores, incur
costs associated with destruction of such merchandise if the
distributor or vendor is unwilling or unable to reimburse us,
and be subject to liability under various civil and criminal
causes of action, including actions to recover unpaid royalties
and other damages and injunctions. Although our purchase orders
and vendor agreement with each vendor require the vendor to
indemnify us against such claims, a vendor may not have the
financial resources to defend itself or us against such claims,
in which case, we may have to pay the costs and expenses
associated with defending such claim. Any of these results could
harm our brand image and have a material adverse effect on our
business and growth.
Many of the products sold in our stores are manufactured outside
of the United States, which may increase the risk that the
labor, manufacturing safety and other practices followed by the
manufacturers of these products may differ from those generally
accepted in the United States. Although we require each of our
vendors to sign a purchase order and vendor agreement that
requires adherence to accepted labor practices and compliance
with labor, manufacturing safety and other laws, we do not
supervise, control or audit our vendors
18
or the manufacturers that produce the merchandise we sell to our
customers, and we have no direct relationship and very limited
contact with any of the manufacturers. We do reserve the right
to conduct random testing of products and we use a third-party
resource to conduct such random testing on designated categories
of items to further address our concern for customer safety.
However, some of our vendors are small and may not have adequate
procedures in place to assure compliance with applicable labor,
manufacturing safety and other laws. The violation of such
labor, manufacturing safety or other laws by any of our vendors
or these manufacturers, or the divergence of the labor practices
followed by any of our vendors or these manufacturers from those
generally accepted in the United States, could interrupt, or
otherwise disrupt, the shipment of finished products to us or
damage our brand image
and/or
subject us to boycotts by our customers or activist groups.
In fiscal year 2008, substantially all of our merchandise was
sourced from foreign factories, many of which were located in
China and India. Any event causing a sudden disruption of
manufacturing or imports from Asia, Central America or
elsewhere, including the imposition of additional import
restrictions, could materially harm our operations. We have no
long-term merchandise supply contracts, and many of our imports
are subject to existing or potential duties, tariffs or quotas
that may limit the quantity of certain types of goods that may
be imported into the United States from countries in Asia,
Central America or elsewhere. We compete with other companies
for production facilities and import quota capacity.
Our vendors sourcing operations may also be hurt by
political and financial instability, strikes, health concerns
regarding infectious diseases in countries in which our
merchandise is produced, adverse weather conditions or natural
disasters that may occur in Asia, Central America or elsewhere
or acts of war or terrorism in the United States or worldwide,
to the extent these acts affect the production, shipment or
receipt of merchandise. Our future operations and performance
will be subject to these factors, which are beyond our control,
and these factors could materially hurt our business, financial
condition and results of operations or may require us to modify
our current business practices or incur increased costs.
There
are claims made against us from time to time that can result in
litigation or regulatory proceedings which could distract
management from our business activities and result in
significant liability or damage to our brand
image.
As a growing company with expanding operations, we increasingly
face the risk of litigation and other claims against us.
Litigation and other claims may arise in the ordinary course of
our business and include employee claims, commercial disputes,
intellectual property issues, product-oriented allegations and
slip and fall claims. Often these cases raise complex factual
and legal issues, which are subject to risks and uncertainties
and which could require significant management time. Litigation
and other claims against us could result in unexpected expenses
and liability, as well as materially adversely affect our
operations and our reputation.
We may
be subject to liability if we infringe upon the trademarks or
other intellectual property rights of third
parties.
We may be subject to liability if we infringe upon the
trademarks or other intellectual property rights of third
parties. If we were to be found liable for any such
infringement, we could be required to pay substantial damages
and could be subject to injunctions preventing further
infringement. Such infringement claims could subject us to
boycotts by our customers or otherwise harm our brand image. In
addition, any payments we are required to make and any
injunctions we are required to comply with as a result of such
infringement actions could adversely affect our financial
results.
Changes
in laws, including employment laws and laws related to our
merchandise, could make conducting our business more expensive
or otherwise change the way we do business.
We are subject to numerous regulations, including labor and
employment, customs,
truth-in-advertising,
consumer protection and zoning and occupancy laws and ordinances
that regulate retailers generally
and/or
govern the importation, promotion and sale of merchandise and
the operation of stores and warehouse
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facilities. If these regulations were to change or were violated
by our management, employees, vendors, buying agents or trading
companies, the costs of certain goods could increase, or we
could experience delays in shipments of our goods, be subject to
fines or penalties, or suffer reputational harm, which could
reduce demand for our merchandise and hurt our business and
results of operations.
In addition to increased regulatory compliance requirements,
changes in laws could make ordinary conduct of our business more
expensive or require us to change the way we do business. For
example, changes in federal and state minimum wage laws could
raise the wage requirements for certain of our employees, which
would likely cause us to reexamine our entire wage structure for
stores. Other laws related to employee benefits and treatment of
employees, including laws related to limitations on employee
hours, supervisory status, leaves of absence, mandated health
benefits or overtime pay, could also negatively impact us, such
as by increasing compensation and benefits costs for overtime
and medical expenses. Moreover, changes in product safety or
other consumer protection laws could lead to increased costs to
us for certain merchandise, or additional labor costs associated
with readying merchandise for sale. For example, in August 2008,
the Consumer Product Safety Improvement Act of 2008, or CPSIA,
was signed into law. The CPSIA imposes new requirements for the
textile and apparel industries. These new requirements relate to
all products marketed to children 12 years of age and
under. Among other requirements, the Consumer Product Safety
Commission requires certification and testing of lead paint
levels as applied to certain products, along with testing of the
lead content of the product as a whole. We have engaged an
accredited third party testing service to ensure our
vendors compliance with consumer safety laws and to meet
further product safety goals. It is often difficult for us to
plan and prepare for potential changes to applicable laws and
future actions or payments related to such changes could be
material to us.
We may
incur indebtedness in the future and that indebtedness could
adversely affect our financial health and harm our ability to
react to changes to our business. Any future indebtedness may
contain covenants that limit our business
activities.
We may incur indebtedness in the future. Any increase in the
amount of our indebtedness could require us to divert funds
identified for other purposes for debt service and impair our
liquidity position. If we cannot generate sufficient cash flow
from operations to service our debt, we may need to refinance
our debt, dispose of assets or issue equity to obtain necessary
funds. We do not know whether we will be able to take any of
such actions on a timely basis, on terms satisfactory to us or
at all.
Our level of indebtedness has important consequences to you and
your investment in our common stock. For example, our level of
indebtedness may:
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require us to use a substantial portion of our cash flow from
operations to pay interest and principal on our debt, which
would reduce the funds available to us for working capital,
capital expenditures and other general corporate purposes;
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limit our ability to pay future dividends;
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limit our ability to obtain additional financing for working
capital, capital expenditures, expansion plans and other
investments, which may limit our ability to implement our
business strategy;
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result in higher interest expense if interest rates increase on
any floating rate borrowings;
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heighten our vulnerability to downturns in our business, the
industry or in the general economy and limit our flexibility in
planning for or reacting to changes in our business and the
retail industry; or
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prevent us from taking advantage of business opportunities as
they arise or successfully carrying out our plans to expand our
store base and product offerings.
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We cannot assure you that our business will generate sufficient
cash flow from operations or that future borrowings will be
available to us in amounts sufficient to enable us to make
payments on our indebtedness or to fund our operations.
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Any indebtedness we incur may contain covenants that restrict
our ability to incur additional debt, pay dividends, make
acquisitions or investments or do certain other things that may
impact the value of our common stock.
The
terms of our senior secured credit facility may restrict our
current and future operations, which would adversely affect our
ability to respond to changes in our business and to manage our
operations.
Our senior secured credit facility contains, and any future
indebtedness of ours would likely contain, a number of
restrictive covenants that impose significant operating and
financial restrictions on us, including restrictions on our
ability to, among other things:
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place liens on our or our direct or indirect subsidiaries
assets;
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make investments other than permitted investments;
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incur additional indebtedness, subject to certain exceptions;
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prepay or redeem certain indebtedness;
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merge, consolidate and dissolve;
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sell assets;
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engage in transactions with affiliates;
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change the nature of our business;
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change our or our direct or indirect subsidiaries fiscal
year or organizational documents; and
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make restricted payments, including certain equity issuances and
payment of dividends in a form other than in common stock.
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A failure by us to comply with the covenants or financial ratios
contained in our senior secured credit facility could result in
an event of default under our credit facility, which could
adversely affect our ability to respond to changes in our
business and manage our operations. A change in control of our
company is also an event of default under our senior secured
credit facility. Under our senior secured credit facility, a
change in control of our company will occur if, among other
things, any person or entity other than the funds advised by
Apax Partners or us or our subsidiaries acquires, directly or
indirectly, more than 35% of the outstanding equity interests of
us or a greater percentage of the equity interest than is
beneficially owned by the funds advised by Apax Partners. Upon
the occurrence of an event of default under our senior secured
credit facility, the lenders could elect to declare all amounts
outstanding to be due and payable, require us to apply all of
our available cash to repay these amounts and exercise other
remedies as set forth in the senior secured credit facility. If
the indebtedness under our senior secured credit facility were
to be accelerated, there can be no assurance that our assets
would be sufficient to repay this indebtedness in full.
We may
be unable to protect our trademarks or other intellectual
property rights.
We are not aware of any claims of infringement upon or
challenges to our right to use any of our brand names or
trademarks in the United States. Nevertheless, there can be no
assurance that the actions we have taken to establish and
protect our trademarks will be adequate to prevent imitation of
our products by others or to prevent others from seeking to
block sales of our products as a violation of the trademarks or
proprietary rights of others. Also, others may assert rights in,
or ownership of, our trademarks and other proprietary rights or
claim that we are infringing on their proprietary rights, and we
may not be able to successfully resolve these types of conflicts
to our satisfaction. In addition, we do not register our marks
internationally, and the laws of certain foreign countries may
not protect proprietary rights to the same extent as do the laws
of the United States.
Because we have not registered our trademarks in any foreign
countries, international protection of our brand image and the
use of these marks could be limited. Other entities may have
rights to trademarks that contain portions of our marks or may
have registered similar or competing marks for apparel and
accessories
21
in foreign countries in which our vendors source our
merchandise. There may also be other prior registrations in
other foreign countries of which we are not aware. Accordingly,
it may be possible for others to enjoin the manufacture, sale or
exportation of our branded goods to the United States. If we
were unable to reach a licensing arrangement with these parties,
our vendors may be unable to manufacture our products in those
countries. Our inability to register our trademarks or purchase
or license the right to use our trademarks or logos in these
jurisdictions could limit our ability to obtain supplies from
less costly markets or penetrate new markets should our business
plan change to include selling our merchandise in those
jurisdictions outside the United States.
We may
be subject to unionization, work stoppages, slowdowns or
increased labor costs, especially if the Employee Free Choice
Act is adopted.
Currently, none of our employees is represented by a union.
However, our employees have the right at any time under the
National Labor Relations Act to form or affiliate with a union.
If some or all of our workforce were to become unionized and the
terms of the collective bargaining agreement were significantly
different from our current compensation arrangements, it could
increase our costs and adversely impact our profitability. The
Employee Free Choice Act of 2007: H.R. 800, or EFCA, was passed
in the United States House of Representatives last year and the
same legislation has been introduced again in 2009 as H.R. 1409
and S. 560. President Obama and leaders of Congress have made
public statements in support of this bill. Accordingly, this
bill or a variation of it could be enacted in the future and the
enactment of this bill could have an adverse impact on our
business, by making it easier for workers to obtain union
representation and increasing the penalties employers may incur
if they engage in labor practices in violation of the National
Labor Relations Act.
Maintaining
and improving our financial controls and the requirements of
being a public company may strain our resources, divert
managements attention and affect our ability to attract
and retain qualified board members.
As a public company, we will be subject to the reporting
requirements of the Securities Exchange Act of 1934, or the
Exchange Act, the Sarbanes-Oxley Act of 2002, or the
Sarbanes-Oxley Act, and The NASDAQ Stock Market rules. The
requirements of these rules and regulations will significantly
increase our legal and financial compliance costs, including
costs associated with the hiring of additional personnel, make
some activities more difficult, time-consuming or costly, and
may also place undue strain on our personnel, systems and
resources. The Exchange Act will require, among other things,
that we file annual, quarterly and current reports with respect
to our business and financial condition.
The Sarbanes-Oxley Act will require, among other things, that we
maintain effective disclosure controls and procedures and
internal control over financial reporting. Ensuring that we have
adequate internal financial and accounting controls and
procedures in place is a costly and time-consuming effort that
needs to be re-evaluated frequently. We have not begun
documenting or testing our internal control procedures in order
to comply with the requirements of Section 404 of the
Sarbanes-Oxley Act, or Section 404. Section 404, which
requires annual management assessments of the effectiveness of
our internal control over financial reporting and a report by
our independent registered public accounting firm auditing our
effectiveness of internal control over financial reporting
beginning with fiscal year 2010. Both we and our independent
registered public accounting firm will be testing our internal
controls in connection with the Section 404 requirements
and could, as part of that documentation and testing, identify
material weaknesses, significant deficiencies or other areas for
further attention or improvement. Implementing any appropriate
changes to our internal controls may require specific compliance
training for our directors, officers and employees, require the
hiring of additional finance, accounting and other personnel,
entail substantial costs to modify our existing accounting
systems, and take a significant period of time to complete. Such
changes may not, however, be effective in maintaining the
adequacy of our internal controls, and any failure to maintain
that adequacy, or consequent inability to produce accurate
financial statements on a timely basis, could increase our
operating costs and could materially impair our ability to
operate our business. Moreover, effective internal controls are
necessary for us to produce reliable financial reports and are
important to help prevent fraud. As a result, our failure to
satisfy the requirements of Section 404 on a timely basis
could result in the loss of investor confidence in the
reliability of our financial statements, which in turn could
cause the market value of our common stock to decline.
22
We expect that various rules and regulations applicable to
public companies will make it more difficult and more expensive
for us to maintain directors and officers liability
insurance, and we may be required to accept reduced coverage or
incur substantially higher costs to maintain coverage. If we are
unable to maintain adequate directors and officers
insurance, our ability to recruit and retain qualified officers
and directors, especially those directors who may be deemed
independent for purposes of The NASDAQ Stock Market rules, will
be significantly curtailed.
Risks
Related to this Offering and Ownership of Our Common
Stock
Concentration
of ownership among our existing executive officers, directors
and principal stockholders may prevent new investors from
influencing significant corporate decisions.
Upon consummation of this offering our executive officers,
directors and principal stockholders will own, in the aggregate,
approximately 71.1% of our outstanding common stock and will own
options that will enable them to own, in the aggregate,
approximately 71.8% of our outstanding common stock. As a
result, these stockholders will be able to exercise control over
all matters requiring stockholder approval, including the
election of directors, amendment of our amended and restated
certificate of incorporation and approval of significant
corporate transactions and will have significant control over
our management and policies. We currently expect that, following
this offering, two of the five members of our board of directors
will be principals of Apax Partners. Funds advised by Apax
Partners can take actions that have the effect of delaying or
preventing a change in control of us or discouraging others from
making tender offers for our shares, which could prevent
stockholders from receiving a premium for their shares. These
actions may be taken even if other stockholders oppose them. The
concentration of voting power among funds advised by Apax
Partners may have an adverse effect on the price of our common
stock. The interests of these stockholders may not be consistent
with your interests as a stockholder.
In addition, our amended and restated certificate of
incorporation will provide that the provisions of
Section 203 of the Delaware General Corporation Law, or the
DGCL, that relate to business combinations with interested
stockholders will apply to us. Section 203 of the DGCL
prohibits a publicly held Delaware corporation from engaging in
a business combination transaction with an interested
stockholder for a period of three years after the interested
stockholder became such unless the transaction fits within an
applicable exemption, such as board approval of the business
combination or the transaction which resulted in such
stockholder becoming an interested stockholder. The provisions
of Section 203 of the DGCL may delay, prevent or deter a merger,
acquisition, tender offer or other transaction that might
otherwise result in our stockholders receiving a premium over
the market price for their common stock.
Our amended and restated certificate of incorporation will
provide that the doctrine of corporate opportunity will not
apply against Apax Partners, funds advised by Apax Partners, or
any of our directors who are employees of or affiliated with
Apax Partners or funds advised by Apax Partners, in a manner
that would prohibit them from investing or participating in
competing businesses. To the extent they invest in such other
businesses, Apax Partners or funds advised by Apax Partners may
have differing interests than our other stockholders.
We
will be a controlled company within the meaning of The NASDAQ
Stock Market rules, and, as a result, we will rely on exemptions
from certain corporate governance requirements that provide
protection to stockholders of other companies.
Upon completion of this offering, funds advised by Apax Partners
will own more than 50% of the total voting power of our common
stock and we will be a controlled company under The NASDAQ Stock
Market corporate governance listing standards. As a controlled
company, certain exemptions under The NASDAQ Stock Market
listing standards will exempt us from the obligation to comply
with certain of the NASDAQ Stock Market corporate governance
requirements, including the requirements:
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that a majority of our board of directors consist of independent
directors, as defined under the rules of The NASDAQ Stock Market;
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that we have a corporate governance and nominating committee
that is composed entirely of independent directors with a
written charter addressing the committees purpose and
responsibilities; and
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that we have a compensation committee that is composed entirely
of independent directors with a written charter addressing the
committees purpose and responsibilities.
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Accordingly, for so long as we are a controlled company, holders
of our common stock will not have the same protections afforded
to stockholders of companies that are subject to all of The
NASDAQ Stock Market corporate governance requirements.
There
may not be a viable public market for our common
stock.
Prior to this offering, there has been no public market for our
common stock. The initial public offering price for our common
stock will be determined through negotiations between us and the
representatives of the underwriters and may not be indicative of
the market price of our common stock after this offering. If you
purchase shares of our common stock, you may not be able to
resell those shares at or above the initial public offering
price. We cannot predict the extent to which investor interest
in our company will lead to the development of an active trading
market on The NASDAQ Global Select Market or otherwise or how
liquid that market might become. An active public market for our
common stock may not develop or be sustained after the offering.
If an active public market does not develop or is not sustained,
it may be difficult for you to sell your shares of common stock
at a price that is attractive to you, or at all.
Our
stock price may be volatile or may decline regardless of our
operating performance, and you may not be able to resell your
shares at or above the initial public offering
price.
After this offering, the market price for our common stock is
likely to be volatile, in part because our shares have not been
traded publicly. In addition, the market price of our common
stock may fluctuate significantly in response to a number of
factors, most of which we cannot control, including:
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fashion trends and changes in consumer preferences;
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market conditions or trends in our industry or the economy as a
whole and, in particular, in the retail sales environment;
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the timing of new store openings and the relative proportion of
our new stores to existing stores;
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the performance and successful integration of any new stores
that we open;
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changes in our merchandise mix;
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timing of promotional events;
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changes in key personnel;
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entry into new markets;
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our levels of comparable store sales;
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announcements by us or our competitors of new product offerings
or significant acquisitions;
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actions by competitors or other strip center, regional mall and
outlet center tenants;
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weather conditions, particularly during the holiday shopping
period;
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the level of pre-opening expenses associated with our new stores;
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the level of expenses associated with our store conversions;
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inventory shrinkage beyond our historical average rates;
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changes in operating performance and stock market valuations of
other retail companies;
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the publics response to press releases or other public
announcements by us or third parties, including our filings with
the Securities and Exchange Commission, or SEC, and
announcements relating to litigation;
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the financial projections we may provide to the public, any
changes in these projections or our failure to meet these
projections;
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changes in financial estimates by any securities analysts who
follow our common stock, our failure to meet these estimates or
failure of those analysts to initiate or maintain coverage of
our common stock;
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ratings downgrades by any securities analysts who follow our
common stock;
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the development and sustainability of an active trading market
for our common stock;
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future sales of our common stock by our officers, directors and
significant stockholders;
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other events or factors, including those resulting from war,
acts of terrorism, natural disasters or responses to these
events; and
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changes in accounting principles.
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In addition, the stock markets, and in particular The NASDAQ
Global Select Market, have experienced extreme price and volume
fluctuations that have affected and continue to affect the
market prices of equity securities of many retail companies. In
the past, stockholders have instituted securities class action
litigation following periods of market volatility. If we were
involved in securities litigation, we could incur substantial
costs and our resources and the attention of management could be
diverted from our business.
Future
sales of our common stock, or the perception in the public
markets that these sales may occur, may depress our stock
price.
Sales of substantial amounts of our common stock in the public
market after this offering, or the perception that these sales
could occur, could adversely affect the price of our common
stock and could impair our ability to raise capital through the
sale of additional shares. Upon completion of this offering, we
will have 24,160,662 shares of common stock outstanding.
The shares of common stock offered in this offering will be
freely tradable without restriction under the Securities Act of
1933, as amended, or the Securities Act, except for any shares
of our common stock that may be held or acquired by our
directors, executive officers and other affiliates, as that term
is defined in the Securities Act, which will be restricted
securities under the Securities Act. Restricted securities may
not be sold in the public market unless the sale is registered
under the Securities Act or an exemption from registration is
available.
We, each of our officers, directors and the selling stockholders
have agreed, subject to certain exceptions, with the
underwriters not to dispose of or hedge any of the shares of
common stock or securities convertible into or exchangeable for
shares of common stock during the period from the date of this
prospectus continuing through the date 180 days after the
date of this prospectus, except, in our case, for the issuance
of common stock upon exercise of options under existing option
plans. Merrill Lynch, Pierce, Fenner & Smith Incorporated
and Goldman, Sachs & Co. may, in their sole
discretion, release any of these shares from these restrictions
at any time without notice. See Underwriting.
All of our shares of common stock outstanding as of the date of
this prospectus may be sold in the public market by existing
stockholders 180 days after the date of this prospectus,
subject to applicable volume and other limitations imposed under
federal securities laws. See Shares Eligible for Future
Sale for a more detailed description of the restrictions
on selling shares of our common stock after this offering.
In the future, we may also issue our securities in connection
with investments or acquisitions. The amount of shares of our
common stock issued in connection with an investment or
acquisition could constitute a material portion of our
then-outstanding shares of our common stock.
25
Anti-takeover
provisions in our charter documents and Delaware law might
discourage or delay acquisition attempts for us that you might
consider favorable.
Our amended and restated certificate of incorporation and
amended and restated bylaws will contain provisions that may
make the acquisition of our company more difficult without the
approval of our board of directors. These provisions:
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establish a classified board of directors so that not all
members of our board of directors are elected at one time;
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authorize the issuance of undesignated preferred stock, the
terms of which may be established and the shares of which may be
issued without stockholder approval, and which may include super
voting, special approval, dividend, or other rights or
preferences superior to the rights of the holders of common
stock;
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prohibit stockholder action by written consent, which requires
all stockholder actions to be taken at a meeting of our
stockholders;
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provide that the board of directors is expressly authorized to
make, alter, or repeal our amended and restated bylaws; and
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establish advance notice requirements for nominations for
elections to our board of directors or for proposing matters
that can be acted upon by stockholders at stockholder meetings.
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These anti-takeover provisions and other provisions under
Delaware law could discourage, delay or prevent a transaction
involving a change in control of our company, even if doing so
would benefit our stockholders. These provisions could also
discourage proxy contests and make it more difficult for you and
other stockholders to elect directors of your choosing and to
cause us to take other corporate actions you desire.
If you
purchase shares of common stock sold in this offering, you will
incur immediate and substantial dilution.
If you purchase shares of common stock in this offering, you
will incur immediate and substantial dilution in the amount of
$14.97 per share because the initial public offering price of
$17.00 is substantially higher than the pro forma net tangible
book value per share of our outstanding common stock. This
dilution is due in large part to the fact that our earlier
investors paid substantially less than the initial public
offering price when they purchased their shares. In addition,
you may also experience additional dilution upon future equity
issuances or the exercise of stock options to purchase common
stock granted to our employees, consultants and directors under
our stock option and equity incentive plans. See
Dilution.
If
securities or industry analysts do not publish research or
publish inaccurate or unfavorable research about our business,
our stock price and trading volume could decline.
The trading market for our common stock will depend in part on
the research and reports that securities or industry analysts
publish about us or our business. We do not currently have and
may never obtain research coverage by securities and industry
analysts. If no securities or industry analysts commence
coverage of our company, the trading price for our common stock
would be negatively impacted. If we obtain securities or
industry analyst coverage and if one or more of the analysts who
covers us downgrades our common stock or publishes inaccurate or
unfavorable research about our business, our stock price would
likely decline. If one or more of these analysts ceases coverage
of us or fails to publish reports on us regularly, demand for
our common stock could decrease, which could cause our stock
price and trading volume to decline.
We do
not expect to pay any cash dividends for the foreseeable
future.
The continued operation and expansion of our business will
require substantial funding. Accordingly, we do not anticipate
that we will pay any cash dividends on shares of our common
stock for the foreseeable future. Any determination to pay
dividends in the future will be at the discretion of our board
of directors and
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will depend upon results of operations, financial condition,
contractual restrictions, including our senior secured credit
facility and other indebtedness we may incur, restrictions
imposed by applicable law and other factors our board of
directors deems relevant. Accordingly, if you purchase shares in
this offering, realization of a gain on your investment will
depend on the appreciation of the price of our common stock,
which may never occur. Investors seeking cash dividends in the
foreseeable future should not purchase our common stock.
27
FORWARD-LOOKING
STATEMENTS
This prospectus contains forward-looking statements that are
subject to risks and uncertainties. All statements other than
statements of historical fact included in this prospectus are
forward-looking statements. Forward-looking statements give our
current expectations and projections relating to our financial
condition, results of operations, plans, objectives, future
performance and business. You can identify forward-looking
statements by the fact that they do not relate strictly to
historical or current facts. These statements may include words
such as anticipate, estimate,
expect, project, plan,
intend, believe, may,
will, should, can have,
likely and other words and terms of similar meaning
in connection with any discussion of the timing or nature of
future operating or financial performance or other events. For
example, all statements we make relating to our estimated and
projected earnings, revenues, costs, expenditures, cash flows,
growth rates and financial results, our plans and objectives for
future operations, growth or initiatives, strategies, or the
expected outcome or impact of pending or threatened litigation
are forward-looking statements. All forward-looking statements
are subject to risks and uncertainties that may cause actual
results to differ materially from those that we expected,
including:
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failure to successfully execute our growth strategy, including
delays in store growth and store conversions, difficulties
executing sales and operating profit margin initiatives and
inventory shrinkage prevention;
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the failure of our new stores or the conversion of our existing
stores to achieve sales and operating levels consistent with our
expectations;
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risks and challenges in connection with sourcing merchandise
from domestic and foreign vendors;
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our level of success in gaining and maintaining broad market
acceptance of our exclusive brands;
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our failure to protect our brand image;
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our debt levels and restrictions in our senior secured credit
facility and in agreements for other indebtedness we may incur;
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economic conditions, including their effect on the financial and
capital markets, our vendors and business partners, employment
levels, consumer demand, spending patterns, inflation and the
cost of goods;
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our loss of key personnel or our inability to hire additional
personnel;
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seasonality of our business;
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increases in costs of fuel, or other energy, transportation or
utilities costs and in the costs of labor and employment;
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the impact of governmental laws and regulations and the outcomes
of legal proceedings;
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disruptions in our supply chain and distribution facility;
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damage or interruption to our information systems;
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changes in the competitive environment in our industry and the
markets in which we operate;
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natural disasters, unusually adverse weather conditions,
pandemic outbreaks, boycotts and geo-political events;
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the incurrence of material uninsured losses or excessive
insurance costs; and
|
|
|
|
our failure to maintain effective internal controls.
|
We derive many of our forward-looking statements from our
operating budgets and forecasts, which are based upon many
detailed assumptions. While we believe that our assumptions are
reasonable, we caution that it is very difficult to predict the
impact of known factors, and, it is impossible for us to
anticipate all factors that could affect our actual results.
Important factors that could cause actual results to differ
materially from
28
our expectations, or cautionary statements, are disclosed under
Risk Factors and Managements Discussion
and Analysis of Financial Condition and Results of
Operations in this prospectus. All written and oral
forward-looking statements attributable to us, or persons acting
on our behalf, are expressly qualified in their entirety by the
cautionary statements as well as other cautionary statements
that are made from time to time in our other SEC filings and
public communications. You should evaluate all forward-looking
statements made in this prospectus in the context of these risks
and uncertainties.
We caution you that the important factors referenced above may
not contain all of the factors that are important to you. In
addition, we cannot assure you that we will realize the results
or developments we expect or anticipate or, even if
substantially realized, that they will result in the
consequences we anticipate or affect us or our operations in the
way we expect. The forward-looking statements included in this
prospectus are made only as of the date hereof. We undertake no
obligation to publicly update or revise any forward-looking
statement as a result of new information, future events or
otherwise, except as otherwise required by law.
29
USE OF
PROCEEDS
We estimate that the net proceeds to us from the sale of the
shares of common stock offered by us will be approximately
$22.1 million based upon an assumed initial public offering
price of $17.00 per share, the midpoint of the range set forth
on the cover of this prospectus, and after deducting estimated
underwriting discounts and commissions and estimated offering
expenses payable by us. We will not receive any proceeds from
the sale of shares of our common stock by the selling
stockholders, including any shares sold by certain of the
selling stockholders in connection with the exercise of the
underwriters option to purchase additional shares.
A $1.00 increase or decrease in the assumed initial public
offering price of $17.00 per share would increase or decrease
the net proceeds we receive from this offering by approximately
$1.5 million, assuming the number of shares offered by us,
as set forth on the cover of this prospectus, remains the same
and after deducting the estimated underwriter discounts and
commissions and estimated offering expenses payable by us.
We currently intend to use the net proceeds we receive from this
offering for the repayment of approximately $22.l million
of our outstanding indebtedness. We currently intend to use the
remaining net proceeds, if any, for working capital and other
general corporate purposes. As of August 1, 2009 and
October 3, 2009, we had $29.2 million and
$17.2 million, respectively, of borrowings outstanding
under our senior secured credit facility with Bank of America,
N.A., an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated, an underwriter in this offering. Immediately prior
to the completion of this offering, we anticipate the
outstanding borrowings under our senior secured credit facility
will be greater than the net proceeds we receive from this
offering. In April 2008, we used borrowings under our senior
secured credit facility to discharge all of our long-term debt,
accrued monitoring fees payable to Apax Partners and a
commitment fee payable to Bank of America, N.A. Our revolving
credit facility has a maturity date of April 10, 2013 and
is expandable at our option in increments of $5.0 million
up to a limit of $85.0 million under certain defined
conditions. Availability under our senior secured credit
facility is collateralized by a first priority interest in all
of our assets. The revolving credit facility accrues interest at
the Bank of America base rate, defined at our option as the
prime rate or the Eurodollar rate plus applicable margin, which
ranges from 1.25% to 2.00% set quarterly dependent upon average
net availability under the senior secured credit facility during
the previous quarter. The weighted-average interest rate under
the revolving credit facility was 1.32% for the twenty-six weeks
ended August 1, 2009. See Description of Certain
Indebtedness Senior Secured Credit Facility.
Pending use of the net proceeds from this offering described
above, we intend to invest the net proceeds in short- and
intermediate-term interest-bearing obligations, investment-grade
instruments, certificates of deposit or direct or guaranteed
obligations of the United States government.
By establishing a public market for our common stock, this
offering is also intended to facilitate our future access to
public markets.
30
DIVIDEND
POLICY
We have never declared or paid cash dividends on our common
stock. We do not expect to pay dividends on our common stock for
the foreseeable future. Instead, we anticipate that all of our
earnings in the foreseeable future will be used in the operation
and growth of our business. Any future determination to pay
dividends will be at the discretion of our board of directors,
subject to compliance with certain contractual restrictions,
including under our senior secured credit facility and
agreements for other indebtedness we may incur, which restricts
or limits our ability to pay dividends, and will depend upon,
among other factors, our results of operations, financial
condition, capital requirements, restrictions contained in
current and future financing instruments and other factors that
our board of directors deems relevant. See Description of
Certain Indebtedness.
31
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
our capitalization as of August 1, 2009 on:
|
|
|
|
|
an actual basis; and
|
|
|
|
on an as adjusted basis to give effect to the following:
|
|
|
|
|
|
the exercise by employees of options to purchase an aggregate of
419,620 shares of common stock between August 1, 2009 and
October 27, 2009;
|
|
|
|
|
|
the sale of 1,650,000 shares of our common stock in this
offering by us at an assumed initial public offering price of
$17.00 per share, the midpoint of the price range set forth on
the cover of this prospectus, after deducting underwriting
discounts and commissions and estimated offering expenses
payable by us; and
|
|
|
|
|
|
the application of the net proceeds from this offering to us as
described under Use of Proceeds.
|
You should read the following table in conjunction with the
sections titled Use of Proceeds, Selected
Consolidated Financial Data, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our financial statements and related notes
included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
As of August 1, 2009
|
|
|
|
Actual
|
|
|
As Adjusted(1)
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
8,668
|
|
|
$
|
8,668
|
|
|
|
|
|
|
|
|
|
|
Long-term debt(2):
|
|
$
|
29,234
|
|
|
|
7,148
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.004 par value per share, 50,000,000
authorized; 22,091,042 shares issued and outstanding, actual;
$0.001 par value per share, 200,000,000 authorized;
24,160,662 shares issued and outstanding, on a pro forma as
adjusted basis
|
|
|
88
|
|
|
|
24
|
|
Additional paid-in capital
|
|
|
37
|
|
|
|
22,188
|
|
Retained earnings
|
|
|
26,805
|
|
|
|
26,805
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
26,930
|
|
|
|
49,017
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
56,164
|
|
|
|
56,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
A $1.00 increase or decrease in the
assumed initial public offering price of $17.00 per share, the
midpoint of the range set forth on the cover of this prospectus,
would increase or decrease the amount of additional paid-in
capital, total stockholders equity and total
capitalization by approximately $1.5 million, assuming the
number of shares offered by us, as set forth on the cover of
this prospectus, remains the same and after deducting
underwriting discounts and commissions and estimated offering
expenses payable by us.
|
|
|
|
(2)
|
|
As of August 1, 2009 and
October 3, 2009, we had $30.8 million and
$42.8 million, respectively, of availability under the
revolving portion of our senior secured credit facility,
excluding the accordion option.
|
The outstanding share information set forth above is as of
August 1, 2009, and excludes:
|
|
|
|
|
1,582,520 shares of common stock issuable upon exercise of
stock options outstanding as of August 1, 2009 at a
weighted average exercise price of $4.88 per share on an actual
basis and 1,205,380 shares of common stock issuable upon
exercise of stock options outstanding as of October 27,
2009 at a weighted average exercise price of $6.82 per share on
an as adjusted basis, of which 288,300 will vest upon completion
of this offering;
|
|
|
|
|
|
an aggregate of 3,626,000 shares of common stock reserved
for issuance under our equity compensation plan, which we plan
to adopt in connection with this offering; and
|
|
|
|
|
|
assumes no exercise by the underwriters of their option to
purchase up to an additional 1,014,815 shares from certain
of the selling stockholders to cover their option to purchase
additional shares.
|
32
DILUTION
If you invest in our common stock, your ownership interest will
be diluted to the extent of the difference between the initial
public offering price per share of our common stock in this
offering and the pro forma net tangible book value per share of
common stock upon completion of this offering.
Historical net tangible book value per share represents the
amount of our total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding. The
historical net tangible book value of our common stock as of
August 1, 2009 was approximately $26.9 million, or
approximately $1.22 per share of common stock, based upon
the number of shares of common stock outstanding as of
August 1, 2009.
Investors participating in this offering will incur immediate,
substantial dilution. After giving effect to (1) the sale
of 1,650,000 shares of our common stock by us at an assumed
initial public offering price of $17.00 per share, the midpoint
of the price range set forth on the cover of this prospectus,
and after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us,
(2) the exercise by employees of options to purchase an
aggregate of 419,620 shares of common stock between
August 1, 2009 and October 27, 2009, and (3) the
application of the net proceeds to us from this offering as
described in Use of Proceeds, our pro forma net
tangible book value as of August 1, 2009 would have been
approximately $49.0 million, or approximately $2.03 per
share of common stock. This represents an immediate increase in
pro forma net tangible book value of $0.81 per share to existing
common stockholders, and an immediate dilution of $14.97 per
share to investors participating in this offering. If the
initial public offering price is higher or lower, the dilution
to new stockholders will be greater or less.
The following table illustrates this dilution on a per share
basis:
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share of common stock
|
|
|
|
|
|
$
|
17.00
|
|
Historical net tangible book value per share as of
August 1, 2009
|
|
$
|
1.22
|
|
|
|
|
|
Increase per share attributable to this offering
|
|
|
0.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value per share after this offering
|
|
|
|
|
|
|
2.03
|
|
|
|
|
|
|
|
|
|
|
Dilution in pro forma net tangible book value per share to new
investors(1)
|
|
|
|
|
|
$
|
14.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Dilution is determined by
subtracting pro forma net tangible book value per share after
giving effect to the offering from the initial public offering
price paid by a new investor.
|
Each $1.00 increase (decrease) in the assumed initial public
offering price of $17.00 per share would increase (decrease) our
pro forma net tangible book value by approximately
$1.5 million, or $0.06 per share, and the dilution in net
tangible book value per share to investors in this offering by
$15.91 per share, assuming that the number of shares offered by
us, as set forth on the cover of this prospectus, remains the
same. This pro forma information is illustrative only, and
following the completion of this offering, will be adjusted
based on the actual initial public offering price and other
terms of this offering determined at pricing.
The following table summarizes as of August 1, 2009 the
differences between our existing stockholders and new investors
with respect to the number of shares of our common stock sold in
this offering, the total consideration paid and the average
price per share paid. The calculations with respect to shares
purchased by new investors in this offering reflect an assumed
initial public offering price of $17.00 per share, the midpoint
of the range set forth on the cover of this prospectus, before
deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Average Price
|
|
|
|
Number
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
|
Per Share
|
|
|
Existing stockholders
|
|
|
22,091,042
|
|
|
|
93.1
|
|
|
$
|
126,000
|
|
|
|
0.4
|
|
|
$
|
0.01
|
|
New investors
|
|
|
1,650,000
|
|
|
|
6.9
|
|
|
|
28,050,000
|
|
|
|
99.6
|
|
|
|
17.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
23,741,042
|
|
|
|
100
|
%
|
|
$
|
28,176,000
|
|
|
|
100
|
%
|
|
|
1.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
A $1.00 increase (decrease) in the assumed initial public
offering price of $17.00 per share, the midpoint of the price
range set forth on the cover of this prospectus, would increase
(decrease) the total consideration paid by investors
participating in this offering by $6.8 million, or increase
(decrease) the percent of total consideration paid by investors
participating in this offering by 5.9%, assuming that the number
of shares offered by us and the selling stockholders, as set
forth on the cover of this prospectus, remains the same and
after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us.
Except as otherwise indicated, the discussion and tables above
assume no exercise of the underwriters option to purchase
additional shares, no exercise of any outstanding options and no
sale of common stock by the selling stockholders. The sale of
5,115,437 shares of common stock to be sold by the selling
stockholders in this offering will reduce the number of shares
held by existing stockholders to 16,975,605, or 71.5% of the
total shares outstanding, and will increase the number of shares
held by investors participating in this offering to 6,765,437,
or 28.5% of the total shares outstanding. In addition, if the
underwriters option to purchase additional shares is
exercised in full, the number of shares of common stock held by
existing stockholders will be further reduced to 67.2% of the
total number of shares of common stock to be outstanding upon
the closing of this offering, and the number of shares of common
stock held by investors participating in this offering will be
further increased to 7,780,252 shares or 32.8% of the total
number of shares of common stock to be outstanding upon the
closing of this offering.
Except where specifically indicated, the tables and calculations
above are based on 22,091,042 shares of common stock issued
and outstanding as of August 1, 2009, and exclude:
|
|
|
|
|
1,582,520 shares of common stock issuable upon exercise of
stock options outstanding as of August 1, 2009 at a
weighted average exercise price of $4.88 per share, on an actual
basis and 1,205,380 shares of common stock issuable upon
exercise of stock options outstanding as of October 27,
2009 at a weighted average exercise price of $6.82 per share on
an adjusted basis, of which 288,300 will vest upon completion of
this offering;
|
|
|
|
|
|
an aggregate of 3,626,000 shares of common stock reserved
for issuance under our equity compensation plan, which we plan
to adopt in connection with this offering; and
|
|
|
|
|
|
the exercise by employees of options to purchase an aggregate of
419,620 shares of common stock between August 1, 2009 and
October 27, 2009.
|
To the extent that any outstanding options are exercised, new
investors will experience further dilution.
34
SELECTED
CONSOLIDATED FINANCIAL DATA
The following tables set forth selected consolidated financial
and other data for the periods and at the dates indicated. The
selected income statement data for the fiscal years ended
January 29, 2005, January 28, 2006, February 3,
2007, February 2, 2008 and January 31, 2009 and
selected consolidated balance sheet data as of January 29,
2005, January 28, 2006, February 3, 2007,
February 2, 2008 and January 31, 2009 are derived from
our audited consolidated financial statements. Our audited
statements of income for the fiscal years ended February 3,
2007, February 2, 2008 and January 31, 2009 and our
audited consolidated balance sheets as of February 2, 2008
and January 31, 2009 are included elsewhere in this
prospectus. Our audited consolidated statements of income for
the fiscal years ended January 29, 2005 and
January 28, 2006 and our audited consolidated balance
sheets as of January 29, 2005, January 28, 2006 and
February 3, 2007 have not been included in this prospectus.
The selected income statement data for the twenty-six weeks
ended August 2, 2008 and the twenty-six weeks ended
August 1, 2009 and the selected balance sheet data as of
August 2, 2008 and August 1, 2009 are derived from our
unaudited condensed consolidated financial statements included
elsewhere in this prospectus. The historical results presented
below are not necessarily indicative of the results to be
expected for any future period. You should read this selected
consolidated financial data in conjunction with the consolidated
financial statements and related notes and the information under
Managements Discussion and Analysis of Financial
Condition and Results of Operations appearing elsewhere in
this prospectus. The historical results set forth below are not
necessarily indicative of results of operations to be expected
in any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
January 29,
|
|
|
January 28,
|
|
|
February 3,
|
|
|
February 2,
|
|
|
January 31,
|
|
|
August 2,
|
|
|
August 1,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands, except per share and operating data)
|
|
|
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
146,918
|
|
|
$
|
192,818
|
|
|
$
|
225,559
|
|
|
$
|
296,887
|
|
|
$
|
391,414
|
|
|
$
|
174,837
|
|
|
$
|
233,104
|
|
Cost of goods sold(1)
|
|
|
100,216
|
|
|
|
129,214
|
|
|
|
150,163
|
|
|
|
195,034
|
|
|
|
257,853
|
|
|
|
114,904
|
|
|
|
150,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
46,702
|
|
|
|
63,604
|
|
|
|
75,396
|
|
|
|
101,853
|
|
|
|
133,561
|
|
|
|
59,933
|
|
|
|
82,910
|
|
Selling, general and administrative expense
|
|
|
38,136
|
|
|
|
48,703
|
|
|
|
57,575
|
|
|
|
76,039
|
|
|
|
99,886
|
|
|
|
45,280
|
|
|
|
61,082
|
|
Depreciation and amortization expense
|
|
|
2,782
|
|
|
|
3,945
|
|
|
|
5,926
|
|
|
|
8,241
|
|
|
|
11,532
|
|
|
|
5,274
|
|
|
|
7,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
5,784
|
|
|
|
10,956
|
|
|
|
11,895
|
|
|
|
17,573
|
|
|
|
22,143
|
|
|
|
9,379
|
|
|
|
14,054
|
|
Interest expense, net
|
|
|
1,685
|
|
|
|
1,959
|
|
|
|
2,645
|
|
|
|
2,520
|
|
|
|
1,477
|
|
|
|
904
|
|
|
|
297
|
|
Provision for income taxes
|
|
|
190
|
|
|
|
1,638
|
|
|
|
1,452
|
|
|
|
5,920
|
|
|
|
8,027
|
|
|
|
3,322
|
|
|
|
5,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,909
|
|
|
$
|
7,359
|
|
|
$
|
7,798
|
|
|
$
|
9,133
|
|
|
$
|
12,639
|
|
|
$
|
5,153
|
|
|
$
|
8,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.20
|
|
|
$
|
0.38
|
|
|
$
|
0.39
|
|
|
$
|
0.42
|
|
|
$
|
0.58
|
|
|
$
|
0.24
|
|
|
$
|
0.38
|
|
Diluted
|
|
$
|
0.17
|
|
|
$
|
0.33
|
|
|
$
|
0.36
|
|
|
$
|
0.40
|
|
|
$
|
0.55
|
|
|
$
|
0.23
|
|
|
$
|
0.36
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
19,217
|
|
|
|
19,217
|
|
|
|
19,782
|
|
|
|
21,705
|
|
|
|
21,914
|
|
|
|
21,880
|
|
|
|
22,090
|
|
Diluted
|
|
|
21,978
|
|
|
|
22,184
|
|
|
|
21,888
|
|
|
|
22,842
|
|
|
|
22,814
|
|
|
|
22,845
|
|
|
|
23,004
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
January 29,
|
|
|
January 28,
|
|
|
February 3,
|
|
|
February 2,
|
|
|
January 31,
|
|
|
August 2,
|
|
|
August 1,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
Operating Data (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales per gross square foot
|
|
$
|
217
|
|
|
$
|
245
|
|
|
$
|
234
|
|
|
$
|
236
|
|
|
$
|
235
|
|
|
$
|
238
|
|
|
$
|
233
|
|
Comparable store sales change(2)
|
|
|
10.8
|
%
|
|
|
10.9
|
%
|
|
|
(4.7
|
)%
|
|
|
7.8
|
%
|
|
|
3.7
|
%
|
|
|
(2.0
|
)%
|
|
|
4.1
|
%
|
Number of stores open at end of period
|
|
|
193
|
|
|
|
229
|
|
|
|
278
|
|
|
|
352
|
|
|
|
449
|
|
|
|
403
|
|
|
|
505
|
|
Total gross square feet at end of period (in thousands)
|
|
|
750
|
|
|
|
896
|
|
|
|
1,095
|
|
|
|
1,448
|
|
|
|
1,949
|
|
|
|
1,729
|
|
|
|
2,229
|
|
Store conversions during period
|
|
|
10
|
|
|
|
6
|
|
|
|
18
|
|
|
|
20
|
|
|
|
21
|
|
|
|
11
|
|
|
|
18
|
|
Capital expenditures (in thousands)
|
|
$
|
7,174
|
|
|
$
|
12,098
|
|
|
$
|
16,586
|
|
|
$
|
20,265
|
|
|
$
|
26,464
|
|
|
$
|
9,526
|
|
|
$
|
16,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
January 29,
|
|
|
January 28,
|
|
|
February 3,
|
|
|
February 2,
|
|
|
January 31,
|
|
|
August 2,
|
|
|
August 1,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
3,977
|
|
|
|
4,075
|
|
|
|
2,525
|
|
|
|
3,343
|
|
|
|
4,611
|
|
|
|
7,385
|
|
|
|
8,668
|
|
Working capital
|
|
|
3,231
|
|
|
|
37
|
|
|
|
(622
|
)
|
|
|
3,946
|
|
|
|
798
|
|
|
|
7,171
|
|
|
|
14,830
|
|
Total assets
|
|
|
38,227
|
|
|
|
52,716
|
|
|
|
79,092
|
|
|
|
102,285
|
|
|
|
141,200
|
|
|
|
138,767
|
|
|
|
184,275
|
|
Total long-term debt
|
|
|
30,930
|
|
|
|
25,279
|
|
|
|
23,317
|
|
|
|
27,968
|
|
|
|
19,476
|
|
|
|
27,567
|
|
|
|
29,234
|
|
Stockholders (deficit) equity
|
|
|
(18,535
|
)
|
|
|
(11,174
|
)
|
|
|
(3,537
|
)
|
|
|
5,753
|
|
|
|
18,393
|
|
|
|
10,956
|
|
|
|
26,930
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
11,283
|
|
|
$
|
16,195
|
|
|
$
|
17,480
|
|
|
$
|
21,512
|
|
|
$
|
36,859
|
|
|
$
|
13,969
|
|
|
$
|
10,955
|
|
|
|
|
(1)
|
|
Includes certain buying, freight,
distribution facility and store occupancy expenses.
|
|
(2)
|
|
Comparable store sales in fiscal
years 2006 and 2007 are adjusted for the
53rd week
in fiscal year 2006.
|
36
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with
Selected Consolidated Financial Data, and the
historical financial statements and related notes included
elsewhere in this prospectus. The statements in this discussion
regarding industry outlook, our expectations regarding our
future performance, liquidity and capital resources and other
non-historical statements in this discussion are forward-looking
statements. These forward-looking statements are subject to
numerous risks and uncertainties, including, but not limited to,
the risks and uncertainties described in Risk
Factors and Forward-Looking Statements. Our
actual results may differ materially from those contained in or
implied by any forward-looking statements.
We operate on a fiscal calendar widely used by the retail
industry that results in a given fiscal year consisting of a 52-
or 53-week period ending on the Saturday closest to January 31
of the following year. For example, references to fiscal
year 2008 refer to the fiscal year ended January 31,
2009. Our fiscal year 2006 consisted of a 53-week period and
ended on February 3, 2007.
Overview
rue21 is a fast growing specialty apparel retailer offering the
newest fashion trends for girls and guys at value prices. We
were originally founded in 1976 as a value-focused specialty
apparel retailer. In 1998, we were acquired by certain funds now
advised by Apax Partners, through SKM Equity Fund II, L.P. and
SKM Investment Fund II. In 2001, our current President and Chief
Executive Officer, Bob Fisch, joined us. Upon his hiring, Bob
Fisch began repositioning our company by aligning our stores
under one brand name, strengthening our management team, honing
our fashion value merchandise approach and refocusing our store
growth strategy. As part of our turnaround, we sought bankruptcy
protection in February 2002 and emerged within fifteen months as
a stronger company with a rationalized store base of 168 stores.
We have been growing consistently since that time. In late 2006,
we introduced our larger rue21 etc! store layout, which averages
approximately 4,700 square feet and features a separate
store-in-store
for our rue21 etc! girls jewelry and accessories category. As of
October 3, 2009, we operated 527 stores in 43 states,
302 of which featured the larger rue21 etc! store layout.
Our strong growth and operating results reflect the initiatives
taken by our management team, as well as the increasing
acceptance of our brand and merchandise. Our net sales increased
from $146.9 million in fiscal year 2004 to
$391.4 million in fiscal year 2008, a compound annual
growth rate of 27.8%. Over the same period, we grew income from
operations from $5.8 million to $22.1 million, a
compound annual growth rate of 39.9%. Since the beginning of
fiscal year 2004, we have increased our store base from 175
stores to 527 stores as of October 3, 2009. Our total
square footage growth has outpaced our total store growth over
this same period, reflecting the increasing size of our average
store.
We expect to continue our strong growth in the future. We
believe there is a significant opportunity to grow our store
base to more than 1,000 stores within five years. We plan to
open 88 stores in fiscal year 2009, including 78 new stores
opened as of October 3, 2009, and 100 stores in fiscal year
2010. We also plan to continue to convert our existing stores
into the larger rue21 etc! layout, which allows us to offer an
increased proportion of higher margin categories, such as
accessories, intimate apparel, footwear and fragrances. We
converted 21 stores to the rue21 etc! layout in fiscal year 2008
and plan to convert 26 stores in fiscal year 2009, including
24 stores converted as of October 3, 2009. We expect
to continue to drive our comparable store sales by increasing
the penetration of our newer product categories, increasing our
brand awareness, continuing to provide our distinctive in-store
experience and converting stores to the rue21 etc! layout.
Our growth in total square footage is supported by our store
economics, which we believe to be very attractive. As a result
of our low store build-out costs, favorable lease terms and
low-cost operating model, our stores generate strong returns on
investment. We focus our real estate strategy on strip centers,
regional malls and outlet centers, primarily in small- and
middle-market communities, which we believe are underserved by
traditional junior and young mens specialty apparel
retailers. Our typical new store investment is approximately
$160,000, which includes build-out costs, net of landlord tenant
allowances and initial inventory, net of payables. New stores
generate on average between $900,000 and $1.1 million in
net sales per store in the first twelve
37
months and pay back our investment in less than one year.
However, new stores opened in the future may not generate
similar net sales in the first twelve months or pay back our
investment in a similar time period.
We have recently invested significant capital to build the
infrastructure necessary to support our future growth. This
investment includes an upgrade of our distribution facility and
related systems, which we expect to complete by the end of the
first quarter of fiscal year 2010. Upon completion, our
distribution facility will be able to support approximately
1,300 stores. Additionally, we continue to invest in our systems
infrastructure, including implementation of the latest store
merchandising, distribution, financial and real estate
applications. Furthermore, in fiscal year 2008, we invested in
an expansion of our corporate headquarters, which increased the
square footage by 50%.
We believe our business strategy will continue to offer
significant opportunity, but it also presents risks and
challenges. These risks and challenges include that we may not
be able to effectively identify and respond to changing fashion
trends and customer preferences, that we may not be able to find
desirable locations in strip centers and regional malls or that
we may not be able to effectively manage our operations which
have grown rapidly, or our future growth. We seek to ensure that
addressing these risks does not divert our managements
attention from continuing to build on the strengths that we
believe have driven the growth of our business. We believe our
focus on maintaining the desirability of our products to our
customers, maintaining and scaling our supply chain resources
and improving our in-store shopping experience and our customer
service will contribute to our ongoing success.
How We
Assess the Performance of Our Business
In assessing the performance of our business, we consider a
variety of performance and financial measures. The key measures
for determining how our business is performing are net sales,
comparable store and non-comparable store sales, gross profit
margin and selling, general and administrative expense.
Net
Sales
Net sales constitute gross sales net of any returns and
merchandise discounts. Net sales consist of sales from
comparable stores and non-comparable stores.
Comparable
Store Sales
A store is included in comparable store sales on the first day
of the sixteenth month as new stores generally open with above
run-rate sales volumes, which usually extend for a period of at
least three months, and comparability is achieved twelve months
after the initial three-month period after store opening.
Comparable store sales include existing stores that have been
converted to our rue21 etc! layout. When a store that is
included in comparable store sales is in process of being
converted to our rue21 etc! layout, net sales from that store
remain in comparable store sales. There may be variations in the
way in which some of our competitors and other apparel retailers
calculate comparable or same store sales. As a
result, data in this prospectus regarding our comparable store
sales may not be comparable to similar data made available by
other retailers. Non-comparable store sales include sales not
included in comparable store sales and sales from closed stores.
Measuring the change in
year-over-year
comparable store sales allows us to evaluate how our store base
is performing. Various factors affect comparable store sales,
including:
|
|
|
|
|
consumer preferences, buying trends and overall economic trends;
|
|
|
|
our ability to identify and respond effectively to fashion
trends and customer preferences;
|
|
|
|
competition;
|
|
|
|
changes in our merchandise mix;
|
|
|
|
pricing;
|
|
|
|
the timing of our releases of new merchandise and promotional
events;
|
|
|
|
the level of customer service that we provide in our stores;
|
38
|
|
|
|
|
our ability to source and distribute products
efficiently; and
|
|
|
|
the number of stores we open, close and convert in any period.
|
As we continue to pursue our store growth strategy, we expect
that a significant percentage of our net sales increase will
continue to come from non-comparable store sales. Opening new
stores is an important part of our growth strategy. Accordingly,
comparable store sales is only one element we use to assess the
success of our growth strategy.
The retail apparel industry is cyclical, and consequently our
net sales are affected by general economic conditions. Purchases
of apparel and accessories are sensitive to a number of factors
that influence the levels of consumer spending, including
economic conditions and the level of disposable consumer income,
consumer debt, interest rates and consumer confidence.
Our business is seasonal and as a result, our net sales
fluctuate from quarter to quarter. Net sales are usually higher
in the second and fourth fiscal quarters, and particularly in
the months of August and December, as customers make
back-to-school and holiday purchases.
Gross
Profit
Gross profit is equal to our net sales minus our cost of goods
sold. Gross margin measures gross profit as a percentage of our
net sales. Cost of goods sold includes the direct cost of
purchased merchandise, distribution center costs, all freight
costs incurred to get merchandise to our stores, store occupancy
costs and buying costs. The components of our cost of goods sold
may not be comparable to those of other retailers.
Our cost of goods sold is substantially higher in higher volume
quarters because cost of goods sold generally increases as net
sales increase. Changes in the mix of our products, such as
changes in the proportion of accessories, may also impact our
overall cost of goods sold. We review our inventory levels on an
ongoing basis in order to identify slow-moving merchandise, and
generally use markdowns to clear that merchandise. The timing
and level of markdowns are not seasonal in nature but are driven
by customer acceptance of our merchandise. If we misjudge the
market for our products, we may be faced with significant excess
inventories for some products and be required to mark down those
products in order to sell them. Significant markdowns have
reduced our gross profit in some prior periods and may have a
material adverse impact on our earnings for future periods
depending on the amount of the markdowns and the amount of
merchandise affected.
Selling,
General and Administrative Expense
Selling, general and administrative expense includes
administration, share-based compensation and store expenses but
excludes store occupancy costs and freight to stores. These
expenses do not generally vary proportionally with net sales. As
a result, selling, general and administrative expense as a
percentage of net sales is usually higher in lower volume
quarters and lower in higher volume quarters. The components of
our selling, general and administrative expense may not be
comparable to those of other retailers. We expect that our
selling, general and administrative expense will increase in
future periods due to our continuing store growth and in part to
additional legal, accounting, insurance and other expenses we
expect to incur as a result of being a public company. Among
other things, we expect that compliance with the Sarbanes-Oxley
Act and related rules and regulations will result in significant
legal and accounting costs.
Share-based compensation expense related to stock options was
$34,000, $34,000 and $0 for fiscal years 2006, 2007 and 2008,
respectively. We granted options to purchase an aggregate of
397,000 shares and 126,500 shares of common stock in
fiscal years 2007 and 2008, respectively. These and any future
stock option grants will increase our share-based compensation
expense in fiscal year 2009 and in future fiscal years compared
to fiscal year 2008. See Critical Accounting
Policies.
39
Results
of Operations
The following tables summarize key components of our results of
operations for the periods indicated, both in dollars and as a
percentage of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
February 3,
|
|
|
February 2,
|
|
|
January 31,
|
|
|
August 2,
|
|
|
August 1,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands, except operating data)
|
|
|
Net sales
|
|
$
|
225,559
|
|
|
$
|
296,887
|
|
|
$
|
391,414
|
|
|
$
|
174,837
|
|
|
$
|
233,104
|
|
Cost of goods sold(l)
|
|
|
150,163
|
|
|
|
195,034
|
|
|
|
257,853
|
|
|
|
114,904
|
|
|
|
150,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
75,396
|
|
|
|
101,853
|
|
|
|
133,561
|
|
|
|
59,933
|
|
|
|
82,910
|
|
Selling, general and administrative expense
|
|
|
57,575
|
|
|
|
76,039
|
|
|
|
99,886
|
|
|
|
45,280
|
|
|
|
61,082
|
|
Depreciation and amortization expense
|
|
|
5,926
|
|
|
|
8,241
|
|
|
|
11,532
|
|
|
|
5,274
|
|
|
|
7,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
11,895
|
|
|
|
17,573
|
|
|
|
22,143
|
|
|
|
9,379
|
|
|
|
14,054
|
|
Interest expense, net
|
|
|
2,645
|
|
|
|
2,520
|
|
|
|
1,477
|
|
|
|
904
|
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
9,250
|
|
|
|
15,053
|
|
|
|
20,666
|
|
|
|
8,475
|
|
|
|
13,757
|
|
Provision for income taxes
|
|
|
1,452
|
|
|
|
5,920
|
|
|
|
8,027
|
|
|
|
3,322
|
|
|
|
5,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,798
|
|
|
$
|
9,133
|
|
|
$
|
12,639
|
|
|
$
|
5,153
|
|
|
$
|
8,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating data (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stores open at end of period
|
|
|
278
|
|
|
|
352
|
|
|
|
449
|
|
|
|
403
|
|
|
|
505
|
|
Total gross square feet at end of the period (in thousands)
|
|
|
1,095
|
|
|
|
1,448
|
|
|
|
1,949
|
|
|
|
1,729
|
|
|
|
2,229
|
|
Sales per gross square foot
|
|
$
|
234
|
|
|
$
|
236
|
|
|
$
|
235
|
|
|
$
|
238
|
|
|
$
|
233
|
|
Comparable store sales change(2)
|
|
|
(4.7
|
)%
|
|
|
7.8
|
%
|
|
|
3.7
|
%
|
|
|
(2.0
|
)%
|
|
|
4.1
|
%
|
|
|
|
(1)
|
|
Includes certain buying, freight,
distribution facility and store occupancy expenses.
|
|
(2)
|
|
Comparable store sales in fiscal
years 2006 and 2007 are adjusted for the
53rd week
in fiscal year 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
February 3,
|
|
|
February 2,
|
|
|
January 31,
|
|
|
August 2,
|
|
|
August 1,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of goods sold(l)
|
|
|
66.6
|
|
|
|
65.7
|
|
|
|
65.9
|
|
|
|
65.7
|
|
|
|
64.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
33.4
|
|
|
|
34.3
|
|
|
|
34.1
|
|
|
|
34.3
|
|
|
|
35.6
|
|
Selling, general and administrative expense
|
|
|
25.5
|
|
|
|
25.6
|
|
|
|
25.5
|
|
|
|
25.9
|
|
|
|
26.2
|
|
Depreciation and amortization expense
|
|
|
2.6
|
|
|
|
2.8
|
|
|
|
2.9
|
|
|
|
3.0
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
5.3
|
|
|
|
5.9
|
|
|
|
5.7
|
|
|
|
5.4
|
|
|
|
6.0
|
|
Interest expense, net
|
|
|
1.2
|
|
|
|
0.8
|
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
4.1
|
|
|
|
5.1
|
|
|
|
5.3
|
|
|
|
4.9
|
|
|
|
5.9
|
|
Provision for income taxes
|
|
|
0.6
|
|
|
|
2.0
|
|
|
|
2.1
|
|
|
|
1.9
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
3.5
|
%
|
|
|
3.1
|
%
|
|
|
3.2
|
%
|
|
|
3.0
|
%
|
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes certain buying, freight,
distribution facility and store occupancy expenses.
|
40
The approximate percentage of our net sales derived from our
product categories, based on our internal merchandising system,
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
February 3,
|
|
|
February 2,
|
|
|
January 31,
|
|
|
August 2,
|
|
|
August 1,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Merchandise categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Girls apparel
|
|
|
60.9
|
%
|
|
|
61.6
|
%
|
|
|
58.3
|
%
|
|
|
60.1
|
%
|
|
|
58.0
|
%
|
Girls accessories
|
|
|
21.4
|
%
|
|
|
21.9
|
%
|
|
|
23.5
|
%
|
|
|
22.8
|
%
|
|
|
24.6
|
%
|
Guys apparel and accessories
|
|
|
17.7
|
%
|
|
|
16.5
|
%
|
|
|
18.2
|
%
|
|
|
17.1
|
%
|
|
|
17.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
The increase in girls accessories net sales as a percentage of
total net sales is due to management efforts to expand the
number of items in the girls accessories category.
The following table summarizes the number of stores open at the
beginning of the period and at the end of the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
February 3,
|
|
|
February 2,
|
|
|
January 31,
|
|
|
August 2,
|
|
|
August 1,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
Number of stores open at beginning of period
|
|
|
229
|
|
|
|
278
|
|
|
|
352
|
|
|
|
352
|
|
|
|
449
|
|
New stores
|
|
|
56
|
|
|
|
74
|
|
|
|
99
|
|
|
|
51
|
|
|
|
56
|
|
Store closings
|
|
|
(7
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stores open at end of period
|
|
|
278
|
|
|
|
352
|
|
|
|
449
|
|
|
|
403
|
|
|
|
505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store conversions during period
|
|
|
18
|
|
|
|
20
|
|
|
|
21
|
|
|
|
11
|
|
|
|
18
|
|
Twenty-Six
Weeks Ended August 1, 2009 Compared to Twenty-Six Weeks
Ended August 2, 2008
Net
Sales
Net sales increased 33.3%, or $58.3 million, to
$233.1 million for the twenty-six weeks ended
August 1, 2009 from $174.8 million for the twenty-six
weeks ended August 2, 2008. The increase in net sales was
due to an increase of approximately 35% in the number of
transactions, primarily driven by new store openings, partially
offset by a decrease of approximately 1% in the average dollar
value of transactions per store.
Comparable store sales increased 4.1% for the twenty-six weeks
ended August 1, 2009 compared to a decrease of 2.0% for the
twenty-six weeks ended August 2, 2008. Comparable store
sales increased by $38.2 million and non-comparable store
sales increased by $20.1 million. There were 362 comparable
stores and 143 non-comparable stores open at August 1, 2009
compared to 286 and 117, respectively, at August 2, 2008.
The increase in the girls accessories category as a percentage
of net sales and the approximate corresponding decrease in the
girls apparel category as a percentage of net sales was
reflective of varying category sales growth rates. The girls
accessories category grew by approximately 44% and the girls
apparel category grew by approximately 29%. The guys apparel and
accessories category sales as a percentage of net sales change
was minimal as category growth was closer to total net sales
growth. The increase in girls accessories as a percentage of
total net sales was due to management efforts to expand the
number of items in the girls accessories category.
Gross
Profit
Gross profit increased 38.3%, or $23.0 million, in the
twenty-six weeks ended August 1, 2009 to $82.9 million
from $59.9 million in the twenty-six weeks ended
August 2, 2008. Gross margin increased
41
130 basis points to 35.6% for the twenty-six weeks ended
August 1, 2009 from 34.3% for the twenty-six weeks ended
August 2, 2008. This increase was primarily attributable to
a 110 basis point increase in merchandise margin, due
primarily to lower merchandise costs. The remainder of the gross
margin increase was due to a 20 basis point decrease in
store occupancy, distribution and buying costs as these costs
increased at a lower rate than net sales.
Selling,
General and Administrative Expense
Selling, general and administrative expense increased 34.9%, or
$15.8 million, to $61.1 million in the twenty-six
weeks ended August 1, 2009 from $45.3 million for the
twenty-six weeks ended August 2, 2008. As a percentage of
net sales, selling, general and administrative expense increased
to 26.2% in the twenty-six weeks ended August 1, 2009 from
25.9% in the twenty-six weeks ended August 2, 2008.
Store operating expenses increased by $12.2 million
primarily resulting from the operation of 505 stores as of
August 1, 2009 compared to the operation of 403 stores as
of August 2, 2008. As a percentage of net sales, store
operating expenses increased to 19.4% for the twenty-six weeks
ended August 1, 2009 from 18.8% for the twenty-six weeks
ended August 2, 2008, due primarily to increased store
salaries as a percentage of net sales.
Due in part to insurance settlement proceeds received of
$223,000, administrative and general expenses decreased as a
percentage of net sales to 6.8% for the twenty-six weeks ended
August 1, 2009 from 7.1% for the twenty-six weeks ended
August 2, 2008 as these costs increased at a lower rate
than net sales.
Depreciation
and Amortization Expense
Depreciation and amortization expense increased as a percentage
of net sales to 3.3% for the twenty-six weeks ended
August 1, 2009 from 3.0% for the twenty-six weeks ended
August 2, 2008, or $2.5 million. The increase was due
to growth in capital expenditures to $16.7 million for the
twenty-six weeks ended August 1, 2009 from
$9.5 million for the twenty-six weeks ended August 2,
2008. This increase follows annual increases in capital
expenditures of $3.7 million in fiscal year 2007 and
$6.2 million in fiscal year 2008.
Interest
Expense, Net
Interest expense, net decreased by $607,000 to $297,000 for the
twenty-six weeks ended August 1, 2009 due primarily to
reduced weighted average borrowings and a reduced average
interest rate under our senior secured credit facility.
Provision
for Income Taxes
The increase in provision for income taxes of $2.1 million
in the twenty-six weeks ended August 1, 2009 from the
twenty-six weeks ended August 2, 2008 was due primarily to
the $5.3 million increase in pre-tax income. The effective
tax rates were 39.5% and 39.2% for the twenty-six weeks ended
August 1, 2009 and the twenty-six weeks ended
August 2, 2008, respectively.
Net
Income
Net income increased 61.4%, or $3.2 million, to
$8.3 million for the twenty-six weeks ended August 1,
2009 from $5.2 million for the twenty-six weeks ended
August 2, 2008. This increase was due primarily to the
$23.0 million increase in gross profit and lower interest
expense, partially offset by increases in selling, general and
administrative expense of $15.8 million, higher
depreciation and amortization expense of $2.5 million and
higher provision for income taxes of $2.1 million.
42
Fiscal
Year 2008 Compared to Fiscal Year 2007
Net
Sales
Net sales increased 31.8%, or $94.5 million, to
$391.4 million in fiscal year 2008 from $296.9 million
in fiscal year 2007. The increase in net sales was due to an
increase of approximately 23% in the number of transactions,
driven by new store openings and an increase of approximately 2%
in the average dollar value of transactions per store.
Comparable store sales increased 3.7% for fiscal year 2008
compared to an increase of 7.8% for fiscal year 2007. Comparable
store sales increased by $66.7 million and non-comparable
store sales increased by $27.8 million. There were 330
comparable stores and 119 non-comparable stores open at
January 31, 2009 compared to 260 and 92, respectively, at
February 2, 2008.
The increase in the girls accessories and guys apparel and
accessories categories as a percentage of net sales and the
approximate corresponding decrease in the girls apparel category
as a percentage of net sales was reflective of varying category
sales growth rates. The girls accessories and guys apparel and
accessories categories grew by approximately 42% and 45%,
respectively. Girls apparel category growth was approximately
25%. The increase in girls accessories as a percentage of net
sales was due to management efforts to expand the number of
items in the girls accessories category.
Gross
Profit
Gross profit increased 31.1%, or $31.7 million, in fiscal
year 2008 to $133.6 million from $101.9 million in
fiscal year 2007. Gross margin decreased 20 basis points to
34.1% for fiscal year 2008 from 34.3% for fiscal year 2007. This
decrease was primarily attributable to a 30 basis point
decrease in merchandise margin, due primarily to increased
markdowns. Gross margin was positively impacted by a
10 basis point increase in store occupancy, distribution
and buying costs, as these costs increased at a rate lower than
net sales.
Selling,
General and Administrative Expense
Selling, general and administrative expense increased 31.4%, or
$23.8 million to $99.9 million in fiscal year 2008
from $76.0 million in fiscal year 2007. As a percentage of
net sales, selling, general and administrative expense remained
constant at 25.5% and 25.6% in fiscal year 2008 and fiscal year
2007, respectively.
Store operating expenses increased by $18.6 million
primarily resulting from the operation of 449 stores as of
January 31, 2009 compared to the operation of 352 stores as
of February 2, 2008. As a percentage of net sales, store
operating expenses increased to 18.6% in fiscal year 2008 from
18.3% in fiscal year 2007, due primarily to increased store
salaries as a percentage of net sales.
Administrative and general expenses decreased as a percentage of
net sales to 6.9% in fiscal year 2008 from 7.4% in fiscal year
2007 as these costs increased at a lower rate than net sales.
Offsetting the decrease in administrative expense margin was a
$434,000 asset write-off related to store conversions.
Depreciation
and Amortization Expense
Depreciation and amortization expense increased as a percentage
of net sales to 2.9% in fiscal year 2008 from 2.8% in fiscal
year 2007, or $3.3 million. The increase was due to growth
in capital expenditures of $6.2 million and $3.7 in fiscal
year 2008 and fiscal year 2007, respectively.
Interest
Expense, Net
Interest expense, net decreased by $1.0 million to
$1.5 million in fiscal year 2008 due to both reduced
weighted average borrowings and a reduced average interest rate
under our senior secured credit facility.
43
Provision
for Income Taxes
The increase in provision for income taxes of $2.1 million
in fiscal year 2008 from fiscal year 2007 was due primarily to a
$5.6 million increase in pre-tax income. The effective tax
rate declined to 38.8% in fiscal year 2008 from 39.3% in fiscal
year 2007.
Net
Income
Net income increased 38.4%, or $3.5 million, to
$12.6 million in fiscal year 2008 from $9.1 million in
fiscal year 2007. This increase was due primarily to a
$31.7 million increase in gross profit and lower interest
expense, partially offset by increases in selling, general and
administrative expense of $23.8 million, higher
depreciation and amortization expense of $3.3 million and a
higher provision for income taxes of $2.1 million.
Fiscal
Year 2007 Compared to Fiscal Year 2006
Net
Sales
Net sales increased 31.6%, or $71.3 million, to
$296.9 million in fiscal year 2007 from $225.6 million
in fiscal year 2006. The increase in net sales was due primarily
to the increase of approximately 19% in the number of
transactions coupled with an increase of approximately 6% in the
average dollar value of transactions per store.
Comparable store sales increased 7.8% for fiscal year 2007
compared to a decrease of 4.7% for fiscal year 2006. Comparable
store sales increased by $46.4 million and non-comparable
stores increased by $24.9 million. There were 260
comparable stores and 92 non-comparable stores open at
February 2, 2008 compared to 208 and 69, respectively, at
February 3, 2007.
The increases in the girls apparel and girls accessories
categories as a percentage of net sales and the approximate
corresponding decrease in the guys apparel and accessories
category as a percentage of net sales was reflective of varying
category sales growth rates. The girls apparel and girls
accessories categories grew by approximately 35% and 37%,
respectively. The guys apparel and accessories category growth
was approximately 25%. The increase in girls accessories as a
percentage of net sales was due to management efforts to expand
the number of items in the girls accessories category.
Gross
Profit
Gross profit increased 35.1%, or $26.5 million, in fiscal
year 2007 to $101.9 million from $75.4 million in
fiscal year 2006. Gross margin increased 90 basis points to
34.3% for fiscal year 2007 from 33.4% for fiscal year 2006. This
increase was primarily attributable to a 50 basis point
increase in merchandise margin, due primarily to lower
merchandise costs. In addition, store occupancy, distribution
and buying costs decreased 40 basis points as these costs
increased at a lower rate than net sales.
Selling,
General and Administrative Expense
Selling, general and administrative expense increased 32.1%, or
$18.5 million, to $76.0 million in fiscal year 2007
from $57.6 million in fiscal year 2006. As a percentage of
net sales, selling, general and administrative expense remained
constant at 25.6% and 25.5% in fiscal year 2007 and fiscal year
2006, respectively.
Store operating expenses increased by $11.9 million
primarily resulting from the operation of 352 stores as of
February 2, 2008 compared to the operation of 278 stores as
of February 3, 2007. However, these costs declined from
18.8% of net sales in fiscal year 2006 to 18.3% of net sales in
fiscal year 2007.
Administrative and general expenses increased as a percentage of
net sales to 7.4% in fiscal year 2007 from 6.8% in fiscal year
2006 as these costs increased at a rate greater than net sales,
due primarily to increased administrative salaries.
44
Depreciation
and Amortization Expense
Depreciation and amortization expense increased as a percentage
of net sales to 2.8% in fiscal year 2007 from 2.6% in fiscal
year 2006, or $2.3 million. This increase was due to growth in
capital expenditures of $3.7 million in fiscal year 2007.
Interest
Expense, Net
Interest expense, net decreased by $125,000 to $2.5 million
in fiscal year 2007 from $2.6 million in fiscal year 2006
due to relatively constant levels of weighted average borrowings
and average interest rate under our senior secured credit
facility.
Provision
for Income Taxes
The increase in provision for income taxes of $4.5 million
in fiscal year 2007 from fiscal year 2006 was due primarily to
the increase in the effective tax rate and to a lesser extent
pre-tax income being $5.8 million higher. The effective tax
rates were 39.3% and 15.7% for fiscal year 2007 and fiscal year
2006, respectively. The fiscal year 2006 effective tax rate was
significantly less than the fiscal year 2007 effective tax rate
as a result of the reversal of income tax reserves due to
settlement of a 2004 Internal Revenue Service audit as well as
the reversal of the valuation allowance as we determined as of
February 3, 2007 that it was more likely than not that the
deferred tax assets would be fully realized.
Net
Income
Net income increased 17.1%, or $1.3 million, to
$9.1 million in fiscal year 2007 from $7.8 million in
fiscal year 2006. This increase was due primarily to a
$26.5 million increase in gross profit, partially offset by
increases in selling, general and administrative expense of
$18.5 million, higher depreciation and amortization expense
of $2.3 million and a higher provision for income taxes of
$4.5 million.
Quarterly
Results and Seasonality
The following table sets forth our historical unaudited
quarterly consolidated statements of income data for each of the
ten fiscal quarters ended August 1, 2009 and expressed as a
percentage of our net sales. This unaudited quarterly
information has been prepared on the same basis as our annual
audited financial statements appearing elsewhere in this
prospectus, and includes all adjustments, consisting only of
normal recurring adjustments, that we consider necessary to
present fairly the financial information for the fiscal quarters
presented.
The quarterly data should be read in conjunction with our
audited and unaudited consolidated financial statements and the
related notes appearing elsewhere in this prospectus.
45
Quarterly
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2007
|
|
|
Fiscal Year 2008
|
|
|
Fiscal Year 2009
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
First
|
|
|
Second
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(unaudited)
|
|
|
|
(in thousands, except percentages)
|
|
|
Net sales
|
|
$
|
63,745
|
|
|
$
|
77,282
|
|
|
$
|
72,929
|
|
|
$
|
82,931
|
|
|
$
|
76,779
|
|
|
$
|
98,058
|
|
|
$
|
97,464
|
|
|
$
|
119,113
|
|
|
$
|
107,998
|
|
|
$
|
125,106
|
|
Gross profit
|
|
|
21,097
|
|
|
|
26,902
|
|
|
|
25,558
|
|
|
|
28,296
|
|
|
|
25,218
|
|
|
|
34,714
|
|
|
|
35,149
|
|
|
|
38,480
|
|
|
|
37,918
|
|
|
|
44,992
|
|
Income from operations
|
|
|
1,537
|
|
|
|
6,113
|
|
|
|
3,633
|
|
|
|
6,290
|
|
|
|
1,873
|
|
|
|
7,505
|
|
|
|
5,107
|
|
|
|
7,658
|
|
|
|
5,116
|
|
|
|
8,938
|
|
Net income
|
|
|
535
|
|
|
|
3,288
|
|
|
|
1,855
|
|
|
|
3,455
|
|
|
|
836
|
|
|
|
4,315
|
|
|
|
2,890
|
|
|
|
4,598
|
|
|
|
2,989
|
|
|
|
5,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-Over-Year-Increase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
40.1
|
%
|
|
|
42.0
|
%
|
|
|
27.9
|
%
|
|
|
20.9
|
%
|
|
|
20.4
|
%
|
|
|
26.9
|
%
|
|
|
33.6
|
%
|
|
|
43.6
|
%
|
|
|
40.7
|
%
|
|
|
27.6
|
%
|
Gross profit
|
|
|
46.1
|
|
|
|
45.3
|
|
|
|
31.8
|
|
|
|
22.8
|
|
|
|
19.5
|
|
|
|
29.0
|
|
|
|
37.5
|
|
|
|
36.0
|
|
|
|
50.4
|
|
|
|
29.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Annual Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
21.5
|
%
|
|
|
26.0
|
%
|
|
|
24.6
|
%
|
|
|
27.9
|
%
|
|
|
19.6
|
%
|
|
|
25.1
|
%
|
|
|
24.9
|
%
|
|
|
30.4
|
%
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
20.7
|
|
|
|
26.4
|
|
|
|
25.1
|
|
|
|
27.8
|
|
|
|
18.9
|
|
|
|
26.0
|
|
|
|
26.3
|
|
|
|
28.8
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
8.7
|
|
|
|
34.8
|
|
|
|
20.7
|
|
|
|
35.8
|
|
|
|
8.4
|
|
|
|
33.9
|
|
|
|
23.1
|
|
|
|
34.6
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
5.9
|
|
|
|
36.0
|
|
|
|
20.3
|
|
|
|
37.8
|
|
|
|
6.6
|
|
|
|
34.1
|
|
|
|
22.9
|
|
|
|
36.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable store sales change(1)
|
|
|
12.7
|
%
|
|
|
8.9
|
%
|
|
|
9.8
|
%
|
|
|
1.8
|
%
|
|
|
(5.2
|
)%
|
|
|
0.7
|
%
|
|
|
6.6
|
%
|
|
|
11.2
|
%
|
|
|
8.3
|
%
|
|
|
0.6
|
%
|
|
|
|
(1)
|
|
Comparable store sales in fiscal
year 2007 is adjusted for the
53rd week
in fiscal year 2006.
|
Liquidity
and Capital Resources
Our primary sources of liquidity are cash flows from operations
and borrowings under our senior secured credit facility. Our
primary cash needs are for capital expenditures in connection
with opening new stores and converting existing stores, and the
additional working capital required for the related increase in
merchandise inventories. Cash is also required for investment in
information technology and distribution facility enhancements
and funding normal working capital requirements. The most
significant components of our working capital are cash and cash
equivalents, merchandise inventories, accounts payable and other
current liabilities. Our working capital position benefits from
the fact that we generally collect cash from sales to customers
the same day or, in the case of credit or debit card
transactions, within several days of the related sale, and we
typically have up to 75 days to pay our vendors.
Cash
Flow
A summary of operating, investing and financing activities are
shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
February 3,
|
|
|
February 2,
|
|
|
January 31,
|
|
|
August 2,
|
|
|
August 1,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
|
Provided by operating activities
|
|
$
|
17,480
|
|
|
$
|
21,512
|
|
|
$
|
36,859
|
|
|
$
|
13,969
|
|
|
$
|
10,955
|
|
Used for investing activities
|
|
|
(16,586
|
)
|
|
|
(20,265
|
)
|
|
|
(26,464
|
)
|
|
|
(9,526
|
)
|
|
|
(16,656
|
)
|
Provided (used) for financing activities
|
|
|
(2,444
|
)
|
|
|
(429
|
)
|
|
|
(9,127
|
)
|
|
|
(401
|
)
|
|
|
9,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
$
|
(1,550
|
)
|
|
$
|
818
|
|
|
$
|
1,268
|
|
|
$
|
4,042
|
|
|
$
|
4,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
Operating
Activities
Operating activities consist primarily of net income adjusted
for non-cash items, including depreciation and amortization,
deferred taxes, the effect of working capital changes and tenant
allowances received from landlords.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
February 3,
|
|
|
February 2,
|
|
|
January 31,
|
|
|
August 2,
|
|
|
August 1,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
|
Net income
|
|
$
|
7,798
|
|
|
$
|
9,133
|
|
|
$
|
12,639
|
|
|
$
|
5,153
|
|
|
$
|
8,317
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
5,926
|
|
|
|
8,241
|
|
|
|
11,532
|
|
|
|
5,274
|
|
|
|
7,774
|
|
Deferred taxes
|
|
|
(2,573
|
)
|
|
|
(522
|
)
|
|
|
1,900
|
|
|
|
(369
|
)
|
|
|
(419
|
)
|
Changes in working capital(1)
|
|
|
1,823
|
|
|
|
1,639
|
|
|
|
5,144
|
|
|
|
999
|
|
|
|
(9,636
|
)
|
Other
|
|
|
4,506
|
|
|
|
3,021
|
|
|
|
5,644
|
|
|
|
2,912
|
|
|
|
4,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
17,480
|
|
|
$
|
21,512
|
|
|
$
|
36,859
|
|
|
$
|
13,969
|
|
|
$
|
10,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes the following
change in merchandise inventory:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise inventory, net
|
|
$
|
(11,184
|
)
|
|
$
|
(8,977
|
)
|
|
$
|
(19,685
|
)
|
|
$
|
(24,561
|
)
|
|
$
|
(26,149
|
)
|
Net cash provided by operating activities was $14.0 million
and $11.0 million for the twenty-six weeks ended
August 2, 2008 and August 1, 2009,
respectively. The $3.0 million decline in the twenty-six
weeks ended August 1, 2009 when compared to August 2,
2008 was due to a $10.6 million increase in the changes in
working capital partially offset by Other, which includes tenant
allowances received, additionally offset by increased net income
and depreciation and amortization. The increase in the changes
in working capital was due to accounts payable increasing at a
faster rate than inventory in fiscal year 2008, attributable in
part to better terms received from our vendors. In the
twenty-six weeks ended August 1, 2009, the rate of accounts
payable increase was more consistent with the rate of inventory
increase.
Merchandise inventory increased $26.1 million in the
twenty-six weeks ended August 1, 2009 compared to an
increase of $24.6 million in the twenty-six weeks ended
August 2, 2008. Merchandise inventory was planned to, and
did, increase during the twenty-six week period in preparation
for the
back-to-school
selling season, which typically peaks in the beginning of the
third fiscal quarter. Increases to merchandise inventory also
related to new store openings, both those previously opened and
those planned for the subsequent quarter. We estimate inventory
levels and capital requirements based on historical store sales
performance, as well as planned merchandise assortments. To the
extent that inventory levels substantially increase, we may rely
upon various promotional events or pricing strategies to sell
through the inventory levels. Management believes that at
August 1, 2009 merchandise inventory is at an appropriate
level, from both a business and capital structure perspective,
and properly planned for the prospective selling season. While
management is particularly cautious in the current economic
environment, we do not believe it will have a negative effect on
our present business strategy.
The $15.3 million improvement in net cash provided by
operating activities in fiscal year 2008 compared to fiscal year
2007 is due to the growth in net income of $3.5 million,
the increase in depreciation and amortization expense of
$3.3 million, an increase in changes in working capital of
$3.5 million, and an increase in the changes in Other,
primarily tenant allowances received from landlords due to
additional new store openings. The increase in the changes in
working capital was primarily related to an increase in trade
payables as we sought and secured longer payment terms from our
vendors which were partially offset by an increase in
merchandise inventory.
Merchandise inventory increased $19.7 million in fiscal
year 2008 compared to an increase of $9.0 million in fiscal
year 2007. Increases to merchandise inventory were due to actual
and anticipated sales increases
47
related to comparable store sales and non-comparable store count
increases as well as new store openings planned for the
subsequent quarter.
The $4.0 million improvement in net cash provided by
operating activities in fiscal year 2007 compared to fiscal year
2006 was due to the growth in net income of $1.3 million,
the increase in depreciation and amortization expense of
$2.3 million and the decrease in deferred taxes assets of
$2.0 million. The increases were partially offset by a
decrease in Other of $1.5 million and a decrease in the
changes in working capital of $184,000.
Merchandise inventory increased $9.0 million in fiscal year
2007 compared to an increase of $11.2 million in fiscal
year 2006. Increases to merchandise inventory were due to actual
and anticipated sales increases related to comparable store
sales and non-comparable store count increases as well as new
store openings planned for the subsequent quarter.
Investing
Activities
Investing activities consist entirely of capital expenditures
for new and converted stores, as well as investment in
information technology and our distribution facility
enhancements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
February 3,
|
|
|
February 2,
|
|
|
January 31,
|
|
|
August 2,
|
|
|
August 1,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
|
Capital expenditures, net of tenant allowances
|
|
$
|
(11,331
|
)
|
|
$
|
(14,304
|
)
|
|
$
|
(17,555
|
)
|
|
$
|
(5,725
|
)
|
|
$
|
(11,576
|
)
|
Tenant allowances
|
|
|
(5,255
|
)
|
|
|
(5,961
|
)
|
|
|
(8,909
|
)
|
|
|
(3,801
|
)
|
|
|
(5,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
(16,586
|
)
|
|
$
|
(20,265
|
)
|
|
$
|
(26,464
|
)
|
|
$
|
(9,526
|
)
|
|
$
|
(16,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the twenty-six weeks ended August 1, 2009, capital
expenditures, net of tenant allowances were $11.6 million.
Capital expenditures, net of tenant allowances, for the opening
of 51 new stores and 11 store conversions were $4.5 million
in the twenty-six weeks ended August 2, 2008 and
$7.3 million for 56 new stores and 18 conversions in the
twenty-six weeks ended August 1, 2009. The remaining
capital expenditures in each period were primarily for
investment in information technology and distribution facility
enhancements.
Capital expenditures, net of tenant allowances, for the opening
of new stores and conversions were $5.7 million,
$7.8 million and $10.9 million in fiscal years 2006,
2007 and 2008, respectively. The remaining capital expenditures
in each period were primarily for investment in the headquarters
facility expansion, information technology and distribution
facility enhancements.
Management anticipates that capital expenditures, net of tenant
allowances in fiscal year 2009 will be approximately
$27.8 million, including $13.6 million for 88 new
stores and 26 store conversions and $9.5 million for
investment in information technology and distribution facility
enhancements. Management anticipates that capital expenditures
net of tenant allowances in fiscal year 2010 will be
approximately $32.0 million.
48
Financing
Activities
Financing activities consist principally of borrowings and
payments on our outstanding credit facilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
February 3,
|
|
|
February 2,
|
|
|
January 31,
|
|
|
August 2,
|
|
|
August 1,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
|
Net borrowings under revolver
|
|
$
|
3,257
|
|
|
$
|
1,573
|
|
|
$
|
14,645
|
|
|
$
|
22,751
|
|
|
$
|
9,758
|
|
Payments on long-term debt
|
|
|
(5,716
|
)
|
|
|
(2,002
|
)
|
|
|
(23,326
|
)
|
|
|
(23,152
|
)
|
|
|
|
|
Proceeds from stock options exercised
|
|
|
15
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Debt financing costs
|
|
|
|
|
|
|
|
|
|
|
(447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided for financing activities
|
|
$
|
(2,444
|
)
|
|
$
|
(429
|
)
|
|
$
|
(9,127
|
)
|
|
$
|
(401
|
)
|
|
$
|
9,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash of $9.8 million was provided by financing
activities in the twenty-six weeks ended August 1, 2009 to fund
higher capital expenditures.
$23.3 million of the proceeds from our senior secured
credit facility in fiscal year 2008 were used to repay the
senior secured credit facility established on May 15, 2003,
or the Senior Revolver, and all term note loan facility
financing arrangements with BNP Paribas, or the Term Notes. The
outstanding borrowings under our senior secured credit facility
were then reduced to $19.5 million by the end of fiscal
year 2008, resulting in the $9.1 million use of cash.
The $2.4 million use of cash in fiscal year 2006 resulted
primarily from the scheduled payments for the Term Notes of
$5.7 million.
Senior
Secured Credit Facility
Effective April 10, 2008, we established a five-year
$60.0 million senior secured credit facility with Bank of
America, N.A., or the senior secured credit facility. The
accordion feature allows us to increase the limit of the senior
secured credit facility in increments of $5.0 million up to
$85.0 million under certain defined conditions.
Availability under our senior secured credit facility is
collateralized by a first priority interest in all of our assets.
Our senior secured credit facility accrues interest at the Bank
of America base rate, defined at our option as the prime rate or
the Eurodollar rate plus applicable margin, which ranges from
1.25% to 2.0% set quarterly dependent upon average net
availability under our senior secured credit facility during the
previous quarter. The weighted-average interest rate under our
senior secured credit facility for the year ended
January 31, 2009 and for the twenty-six weeks ended
August 1, 2009 was 3.22% and 1.32%, respectively. We had
$40.5 million and $30.8 million availability under our
senior secured credit facility on January 31, 2009 and
August 1, 2009, respectively, excluding the accordion
option.
Our senior secured credit facility includes a fixed charge
covenant applicable only if net availability falls below
thresholds of 15% in calendar year 2009 and 10% thereafter. We
are in compliance with all covenants under our senior secured
credit facility as of August 1, 2009.
We believe that our cash position, net cash provided by
operating activities and availability under our senior secured
credit facility will be adequate to finance working capital
needs and planned capital expenditures for at least the next
twelve months.
Off
Balance Sheet Arrangements
We are not a party to any off balance sheet arrangements.
49
Contractual
Obligations
The following table summarizes our contractual obligations as of
August 1, 2009 and the effect such obligations are expected
to have on our liquidity and cash flows in future periods.
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
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|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 year
|
|
|
1 - 3 years
|
|
|
3 - 5 years
|
|
|
5 years
|
|
|
|
(in thousands)
|
|
|
Long-term debt obligations
|
|
$
|
29,234
|
|
|
|
|
|
|
|
|
|
|
$
|
29,234
|
|
|
|
|
|
Operating lease obligations(1)
|
|
|
196,480
|
|
|
|
37,250
|
|
|
|
90,407
|
|
|
|
19,645
|
|
|
|
49,178
|
|
Merchandise inventory purchase commitments
|
|
|
59,844
|
|
|
|
59,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract for upgrade of distribution facility
|
|
|
4,187
|
|
|
|
4,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
289,745
|
|
|
$
|
101,281
|
|
|
$
|
90,407
|
|
|
$
|
48,879
|
|
|
$
|
49,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Excludes common area maintenance
charges, real estate taxes and certain other expenses which
amounted to approximately 22% of minimum lease obligations in
fiscal year 2008. We expect this percentage to be relatively
consistent for the next three years.
|
Impact of
Inflation
Our results of operations and financial condition are presented
based on historical cost. While it is difficult to accurately
measure the impact of inflation due to the imprecise nature of
the estimates required, we believe the effects of inflation, if
any, on our results of operations and financial condition have
been immaterial.
Recent
Accounting Pronouncements
In May 2009, the FASB issued Statement of Financial Accounting
Standards (SFAS) 165, Subsequent
Events (SFAS 165), which establishes
guidance regarding the Companys accounting for and
disclosure of subsequent events. SFAS 165 requires
management to evaluate, as of each reporting period: events or
transactions that occur after the balance sheet date through the
date that the financial statements are issued or are available
to be issued. The Company adopted SFAS 165 as of
August 1, 2009 and the adoption did not have a material
impact on the Companys Consolidated Financial Statements.
In July 2009, the FASB issued SFAS 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles, a replacement of FASB Statement
No. 162 (SFAS 168). SFAS 168
establishes the FASB Accounting Standard Codification as the
single source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the
preparation of financial statements in conformity with GAAP. The
Company will adopt SFAS 168 beginning in the third quarter
of fiscal year 2009. The Company does not expect the adoption of
SFAS 168 to have a material impact on its Consolidated
Financial Statements.
Effective February 1, 2009, we adopted
SFAS No. 157, Fair Value Measurements,
or SFAS No. 157, for non-financial assets and
non-financial liabilities, and it did not have a material impact
on our consolidated financial statements. In October 2008, the
FASB issued Staff Position
No. FAS 157-3,
Determining the Fair Value of a Financial Asset When
the Market for That Asset is Not Active, or FSP
FAS 157-3,
which clarified the application of SFAS No. 157 in
cases where a market is not active. We have considered the
guidance provided by FSP
FAS 157-3
in our determination of fair values as of January 31, 2009,
and the impact was not material.
In December 2007, the SEC issued Staff Accounting Bulletin, or
SAB, 110, Share-Based Payments, or
SAB 110. SAB 110 allows for continued use of the
simplified method for estimating the expected term of
plain vanilla share option grants under specified
conditions. The expected term used to value a share option grant
under the simplified method is the midpoint between the vesting
date and the contractual term of the share option. SAB 110
eliminates the December 31, 2007 sunset provision
previously specified in SAB No. 107, Share-Based
Payments, or SAB 107. SAB 110 is effective for
share option grants made on or after January 1, 2008. We
have utilized the simplified method for estimating the expected
term of its stock option
50
grants under SAB 107 and SAB 110 and will continue to
utilize this simplified method until we have sufficient
historical exercise data to provide a reasonable basis to
estimate the expected term.
Critical
Accounting Policies
Managements discussion and analysis of financial condition
and results of operations is based upon our consolidated
financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United
States. The preparation of these financial statements requires
estimates and judgments that affect the reported amounts of our
assets, liabilities, net sales and expenses. Management bases
estimates on historical experience and other assumptions it
believes to be reasonable given the circumstances and evaluates
these estimates on an ongoing basis. Actual results may differ
from these estimates under different assumptions or conditions.
We believe that the following critical accounting policies
involve a higher degree of judgment and complexity. See
Note 1 to our consolidated financial statements for the
fiscal year ended January 31, 2009 for a complete
discussion of our significant accounting policies. The following
reflect the significant estimates and judgments used in the
preparation of our consolidated financial statements.
Revenue
Recognition
Revenue is recognized upon purchase of merchandise by customers.
Allowances for sales returns are recorded as a reduction of
sales in the periods in which the sales are recognized. Deferred
revenue is established upon the purchase of gift cards by
customers, and revenue is recognized upon redemption of gift
cards for merchandise.
Inventory
Valuation
We value merchandise inventory at the lower of cost
(first-in,
first-out basis) or market using the retail inventory method. We
record merchandise receipts at the time they are delivered to
our consolidator, as we do not directly import any merchandise.
This is the point at which title and risk of loss transfer to us.
We review our inventory levels to identify slow-moving
merchandise and generally use markdowns to clear slow-moving
merchandise. We record a markdown reserve based on estimated
future markdowns related to current inventory to clear
slow-moving inventory. Each period we evaluate the selling
trends experienced and the related promotional events or pricing
strategies in place to sell through the current inventory
levels. Markdowns may occur when inventory exceeds customer
demand for reasons of style, seasonal adaptation, changes in
customer preference, lack of consumer acceptance of fashion
items, competition, or if it is determined that the inventory in
stock will not sell at its currently ticketed price. Such
markdowns may have an adverse impact on earnings, depending on
the extent and amount of inventory affected. The anticipated
deployment of new seasonal merchandise is reflected within the
estimated future markdowns reserve used in valuing current
inventory, as such new inventory in certain circumstances will
displace merchandise units currently on-hand. The markdown
reserve is recorded as an increase to cost of goods sold in the
accompanying consolidated statements of income.
We also estimate a shrinkage reserve for the period of time
between the last physical count and the balance sheet date. The
estimate for shrinkage reserve can be affected by changes in
merchandise mix and changes in actual shrinkage trends.
Asset
Impairment
We are exposed to potential impairment if the book value of our
assets exceeds their expected future cash flows. The major
components of our long-lived assets are store fixtures,
equipment and leasehold improvements. We have recognized
impairment charges related to store conversions and may
recognize impairment charges in the future. The impairment of
unamortized costs is measured at the store level and the
unamortized cost is reduced to fair value if it is determined
that the sum of expected discounted future net cash flows is
less than net book value.
51
Income
Taxes
Effective February 4, 2007, we adopted FASB Interpretation
Number, or FIN, 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement
No. 109, or FIN 48. FIN 48 prescribes a
comprehensive model for recognizing, measuring, presenting and
disclosing in the financial statements tax positions taken or
expected to be taken on a tax return, including a decision
whether to file or not to file in a particular jurisdiction.
Under FIN 48, a tax benefit from an uncertain position may
be recognized only if it is more likely than not
that the position is sustainable based on its technical merits.
See Note 9 to our consolidated financial statements for
further discussion of the adoption of FIN 48.
We calculate income taxes in accordance with
SFAS No. 109 Accounting For Income
Taxes, or SFAS No. 109, which requires the use of the
asset and liability method. Under this method, deferred tax
assets and liabilities are recognized based on the difference
between our consolidated financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
as computed pursuant to FIN 48. Deferred tax assets and
liabilities are measured using the tax rates, based on certain
judgments regarding enacted tax laws and published guidance, in
effect in the years when those temporary differences are
expected to reverse. A valuation allowance is established
against the deferred tax assets when it is more likely than not
that some portion or all of the deferred taxes may not be
realized. Changes in the level and composition of earnings, tax
laws or the deferred tax valuation allowance, as well as the
results of tax audits may materially impact our effective tax
rate.
The calculation of the deferred tax assets and liabilities, as
well as the decision to recognize a tax benefit from an
uncertain position and to establish a valuation allowance
require management to make estimates and assumptions. We believe
that our assumptions and estimates are reasonable, although
actual results may have a positive or negative material impact
on the balances of deferred tax assets and liabilities,
valuation allowances, or net income.
Share-Based
Compensation
We estimate the grant date fair value of stock option awards
under the provisions of SFAS No. 123(R) Share-Based
Payments, or SFAS No. 123(R), using the Black-Scholes
option pricing model. For fiscal year 2008, the twenty-six weeks
ended August 2, 2008 and the twenty-six weeks ended
August 1, 2009, the fair value of stock options was
estimated at the grant date using the following assumptions:
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|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
|
|
|
Fiscal Year
|
|
August 2,
|
|
August 1,
|
|
|
|
|
|
|
2008
|
|
2008
|
|
2009
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Expected volatility
|
|
55%
|
|
55%
|
|
60%
|
|
|
|
|
Risk-free interest rate
|
|
4.7%
|
|
4.7%
|
|
2.6%
|
|
|
|
|
Weighted average expected term
|
|
6.3 years
|
|
6.3 years
|
|
6.3 years
|
|
|
|
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
The expected option life reflects the application of the
simplified method set out in SAB 107. The simplified method
defines the life as the average of the contractual term of the
options and the weighted-average vesting period for all option
tranches. The risk-free interest rate is based on 5-year
U.S. Treasury instruments whose maturities are similar to
those of the expected term of the award being valued. The
expected volatility reflects the application of
SAB 110s interpretive guidance and, accordingly,
incorporates historical volatility of similar entities whose
share prices are publicly available. The expected dividend yield
was based on our expectation of not paying dividends on our
common stock for the foreseeable future. The weighted-average
grant date fair value per share of stock options granted to
employees during fiscal year 2008, the twenty-six weeks ended
August 2, 2008 and the twenty-six weeks ended
August 1, 2009 was $0.43, $0.40 and $6.19, respectively.
We have granted to our employees and non employees options to
purchase our common stock at exercise prices greater than or
equal to the fair value of the underlying stock at the time of
each grant based upon the most recent valuation.
52
The following table sets forth all stock option grants since the
beginning of fiscal year 2006:
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|
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|
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|
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|
Common
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|
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|
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|
|
Stock Fair
|
|
|
|
|
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|
|
Number of
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|
|
Exercise
|
|
|
Value per
|
|
|
Effective
|
|
|
|
|
|
Options
|
|
|
Price per
|
|
|
Share at
|
|
|
Valuation
|
|
Vesting Period
|
|
Grant Date
|
|
Granted
|
|
|
Share
|
|
|
Grant Date
|
|
|
Date
|
|
(Years)
|
|
|
August 1, 2006
|
|
|
120,000
|
|
|
$
|
0.006
|
|
|
$
|
0.005
|
|
|
August 1, 2006
|
|
|
5
|
|
August 1, 2006
|
|
|
344,500
|
|
|
$
|
0.005
|
|
|
$
|
0.005
|
|
|
August 1, 2006
|
|
|
5
|
|
January 27, 2007
|
|
|
80,000
|
|
|
$
|
0.310
|
|
|
$
|
0.310
|
|
|
January 27, 2007
|
|
|
5
|
|
May 8, 2007
|
|
|
12,500
|
|
|
$
|
0.310
|
|
|
$
|
0.310
|
|
|
January 27, 2007
|
|
|
5
|
|
June 11, 2007
|
|
|
5,000
|
|
|
$
|
0.310
|
|
|
$
|
0.310
|
|
|
January 27, 2007
|
|
|
5
|
|
August 1, 2007
|
|
|
5,000
|
|
|
$
|
1.79
|
|
|
$
|
1.79
|
|
|
August 4, 2007
|
|
|
5
|
|
January 4, 2008
|
|
|
374,500
|
|
|
$
|
8.00
|
|
|
$
|
1.79
|
|
|
August 4, 2007
|
|
|
3.5
|
|
February 4, 2008
|
|
|
4,000
|
|
|
$
|
8.00
|
|
|
$
|
1.79
|
|
|
August 4, 2007
|
|
|
4
|
|
June 16, 2008
|
|
|
115,000
|
|
|
$
|
8.00
|
|
|
$
|
1.79
|
|
|
August 4, 2007
|
|
|
4
|
|
October 1, 2008
|
|
|
7,500
|
|
|
$
|
8.00
|
|
|
$
|
2.80
|
|
|
August 2, 2008
|
|
|
4
|
|
February 2, 2009
|
|
|
36,000
|
|
|
$
|
8.00
|
|
|
$
|
2.80
|
|
|
August 2, 2008
|
|
|
4
|
|
March 10, 2009
|
|
|
7,500
|
|
|
$
|
8.00
|
|
|
$
|
2.80
|
|
|
August 2, 2008
|
|
|
4
|
|
July 24, 2009
|
|
|
326,500
|
|
|
$
|
11.80
|
|
|
$
|
11.80
|
|
|
August 1, 2009
|
|
|
4
|
|
August 21, 2009
|
|
|
42,480
|
|
|
$
|
11.80
|
|
|
$
|
11.80
|
|
|
August 1, 2009
|
|
|
4
|
|
Given the absence of an active market we perform a valuation of
our common stock at least annually. We set the exercise price of
all stock options granted at or above the result of the most
recent valuation. The valuation is dependent upon objective and
subjective factors, including:
|
|
|
|
|
impact from, and stage or recovery from, our 2001 bankruptcy;
|
|
|
|
negative equity from the time of our 2003 emergence from
bankruptcy until July 2007;
|
|
|
|
the February 2006 buyback of debt and approximately 5% of our
equity at a price of 96% of the face value of the debt;
|
|
|
|
stage of development and growth of our net sales, both
enterprise and same store, and number of stores;
|
|
|
|
budgets and forecasts of our financial performance, including
our historical success in meeting those budgets;
|
|
|
|
comparative benchmarking of our financial results with those of
our industry peer group;
|
|
|
|
the continued expansion of the depth and quality of management
team;
|
|
|
|
material events that could result in increased valuation of our
common stock;
|
|
|
|
material risks affecting our business; and
|
|
|
|
the lack of marketability of our common stock.
|
Our common stock valuations utilized methodologies consistent
with the recommendations of the American Institute of Certified
Public Accountants, or AICPA, Audit and Accounting Practice Aid
Series, Valuation of Privately-Held Company Equity Securities
Issued as Compensation. In light of advancements in our stage of
development and growth, we determined it was appropriate for the
cash flow estimates used to value our common stock be based on
the relative likelihood of occurrence that we would follow one
of four possible future scenarios:
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|
|
continue to operate as a private company;
|
|
|
|
complete a strategic merger or sale;
|
53
|
|
|
|
|
complete an initial public offering; or
|
|
|
|
liquidate our assets upon failure and dissolve.
|
The estimated fair value of our common stock under each scenario
was in turn affected by the use of certain assumptions and
valuation methodologies. We assessed the relative likelihood and
occurrence of the future scenarios as of the dates options were
granted.
For the options granted subsequent to August 1, 2006, we
determined that the undertaking of an initial public offering
was the most likely event, the likelihood of a strategic merger
or sale being a less likely event, the likelihood of continuing
to operate as a private company even less likely and the
likelihood of liquidating our assets upon failure and
dissolution having no likelihood. For all options granted
subsequent to August 1, 2007, we assessed the relative
likelihood of a strategic merger or sale, or of continuing to
operate as a private company as being a less likely event, and
the likelihood of liquidating our assets upon failure and
dissolution as having no likelihood.
The first step in the valuation process involved estimating the
enterprise value of our firm. Based on our stage of development,
our operating history and the reliability with which we can
forecast future performance at the dates options were granted.
We used a market approach and an income approach, as detailed in
the AICPA guidelines.
In the market approach, we developed a list of comparable
companies and valuation multiples based on those comparable
companies historical and pro forma financial statements
and stock prices, including multiples and ratios such as
revenue, earnings before interest and taxes, or EBIT, earnings
before interest, taxes, depreciation and amortization, or
EBITDA, net income
and/or
tangible book value. We then applied these multiples to our
financial performance to determine our estimated enterprise
value. A second technique considered under the market approach
involved developing a list of comparable merger and acquisition
transactions and applying the observed exit multiples to our
financial performance to determine our enterprise value.
The comparable companies considered in the market valuation
multiples have historically included retail apparel and
accessory companies that focus on teen and young adults, with
lower price points, comparable distribution methods and other
characteristics that make those companies alternative investment
opportunities. Based on the significant historical growth we
have experienced and the forecasted growth we are expecting, the
list of comparable companies considered in our valuation as of
August 1, 2009 was expanded to include other high growth
apparel retailers with higher price points, and some with
different distribution and supply chain systems that focus on a
broader demographic group, because we now consider ourselves a
reasonable investment alternative to those companies.
Similarly, the degree of growth that we have achieved and are
forecasting to achieve impacts the decision regarding whether to
rely on comparable historical or forecasted earnings multiples.
For our August 2, 2008 and earlier valuations, based on our
operating history, proximity to having emerged from bankruptcy
in 2003, and our stage of growth, only historical earnings
multiples were used in our valuations. Based on a consideration
of the following factors, both historical and forecasted EBITDA
multiples were used to value our common stock as of
August 1, 2009:
|
|
|
|
|
our discernible, demonstrated history of successfully meeting or
exceeding the results we forecast;
|
|
|
|
the importance that investors are placing on forecasted
future earnings;
|
|
|
|
our belief that we were closer to an initial public offering as
of the date options were granted on July 24, 2009; and
|
|
|
|
the expectation that a significant portion of the shares issued
in our initial public offering would be purchased by
institutional investors, that are expected to place weight on
forecasted multiples of earnings.
|
54
The inclusion of a broader range of high growth apparel
retailers in our peer group of comparable companies, and the
recent relevance of using forecasted earnings multiples to value
us, are key factors that have resulted in a significant increase
in our value from August 2008 to August 2009.
In the income approach, we performed discounted cash flow
analyses. For options granted subsequent to August 1, 2006,
valuations of our total equity were performed by first
estimating the value of total invested capital based on debt
free cash flow, discounted to present value using estimates of a
weighted average cost of capital estimate reflective of the
degree of risk associated with our forecasted financial
information. The value of total invested capital was then
reduced by the market value of debt to estimate the value of our
equity.
For options granted subsequent to August 1, 2007, the total
equity was valued based on the cash flows that would be
available to equity owners after anticipated borrowing and debt
service was considered. This method was considered appropriate
because our capital structure was expected to fluctuate from
year to year.
Consistent with Concept Statement 7, CON 7: Using Cash
Flow Information and Present Value in Accounting
Measurements, issued by the FASB, we utilized the
expected cash flow approach to estimate our future cash flows
using forecasts of net sales and expenses, inclusive of
anticipated borrowing and debt service activity as appropriate.
The probability-weighted expected cash flows were estimated
based on assessments of the probabilities of various cash flow
scenarios that focused on the amounts and timing that cash flows
were expected to be received.
The probability-weighted expected cash flows were estimated and
then discounted to a present value at rates of return that
reflected the degree of risk associated with our enterprise,
including but not limited to, our improving demonstrated success
in achieving or surpassing forecasted financial results, risks
related to our target customers, competition, and ability to
timely anticipate, identify and respond to changing fashion
trends, customer preferences, depth of management, and both
liquidity and leverage risks associated with the availability of
capital for future expansion. The following estimated discount
rates used on our valuations were based on the preceding market
participant considerations:
|
|
|
|
|
|
|
Equity Rate
|
|
Valuation Date
|
|
of Return
|
|
|
August 1, 2006
|
|
|
25.1
|
%
|
August 4, 2007
|
|
|
27.8
|
%
|
August 2, 2008
|
|
|
26.0
|
%
|
August 1, 2009
|
|
|
18.1
|
%
|
The downward trend in the estimated rates of return used in our
August 2009 valuation reflects our success in exceeding the
results we forecasted, our ability to obtain and repay the debt
necessary to achieve significant growth, our continued
improvement in the quality and depth of our management team, and
other meaningful reductions in the risks associated with
investing in us. These demonstrated improvements have resulted
in a significant increase in our value over the past year.
The second step in the valuation process involved applying
discounts to reflect the impairment to value resulting from the
lack of marketability inherent in the ownership of our common
stock, where we believed it was appropriate to do so. The level
of discounts were impacted by numerous factors, including
historical and forecasted profitability, growth expectations,
restrictions on the transferability of the shares and the
estimated term before those restrictions would lapse, and the
estimated holding period of the stock, which is impacted by the
time period(s) from the measurement date to when an initial
public offering might take place:
|
|
|
|
|
|
|
Discount for Lack
|
|
Valuation Date
|
|
of Marketability
|
|
|
August 1, 2006
|
|
|
10
|
%
|
August 4, 2007
|
|
|
15
|
%
|
August 2, 2008
|
|
|
15
|
%
|
August 1, 2009
|
|
|
10
|
%
|
55
Based on such valuations and other information considered by our
board of directors, we determined the fair value per share of
our common stock. We then recorded share-based compensation for
stock option grants based on the Black-Scholes option pricing
model and the adjusted fair values of our common stock.
There are significant judgments and estimates inherent in the
determination of the fair values. These judgments and estimates
include determinations of the appropriate valuation methods and,
when utilizing a market-based approach, the selection and
weighting of appropriate market comparables and valuation
multiples. For these and other reasons, the assessed fair values
used to compute share-based compensation expense for financial
reporting purposes may not reflect the fair values that would
result from the application of other valuation methods,
including accepted valuation methods, assumptions and inputs for
tax purposes.
We recorded share-based compensation expense for fiscal years
ended February 3, 2007, February 2, 2008,
January 31, 2009, the twenty-six weeks ended August 2,
2008 and the twenty-six weeks ended August 1, 2009 of
$34,000, $34,000, $0, $0 and $24,000, respectively.
The total intrinsic value of outstanding options as of
February 3, 2007, February 2, 2008, January 31, 2009
and August 1, 2009 was $16,000, $360,000, $2.1 million and $10.9
million, respectively. Based on the assumed initial public
offering price of $17.00 per share, the midpoint of the price
range set forth on the cover page of this prospectus, the total
intrinsic value of outstanding options as of January 31,
2009 was $17.1 million and as of August 1, 2009 was
$19.4 million. As of January 31, 2009 and
August 1, 2009, total unrecognized compensation expense
related to non-vested stock options was approximately $153,000
and $2.4 million, respectively. This expense is expected to
be recognized over a weighted-average period of 2.8 years
and 3.8 years, respectively.
Quantitative
and Qualitative Disclosures about Market Risk
Our principal market risk relates to interest rate sensitivity,
which is the risk that future changes in interest rates will
reduce our net income or net assets. Our senior secured credit
facility accrues interest at the Bank of America base rate,
defined at our option as the prime rate or the Eurodollar rate
plus applicable margin, which ranges from 1.25% to 2.00% set
quarterly dependent upon average net availability under our
senior secured credit facility during the previous quarter. At
August 1, 2009 the weighted-average interest rate on our
borrowings was 1.32%. Based upon a sensitivity analysis at
August 1, 2009, assuming average outstanding borrowings
during fiscal year 2009 of $21.0 million, a 50 basis
point increase in interest rates would result in an increase in
interest expense of $105,000.
56
BUSINESS
Our
Company
rue21 is a fast growing specialty apparel retailer offering the
newest fashion trends to girls and guys at value prices. We
operate over 500 stores in 43 states. Our merchandise is
designed to appeal to 11 to 17 year olds who aspire to be
21 and adults who want to look and feel
21. We react quickly to market trends and our daily
shipments ensure there is always new merchandise for our
customers to discover. In addition, we offer our own brands,
such as rue21 etc!, Carbon, tarea and rueKicks, to create
merchandise excitement and differentiation in our stores. The
energy in our stores and our focus on customer service, combined
with our great value products, keep our customers returning to
us. Through viral marketing and our interactive website, we
continue to build a rueCommunity with a loyal customer base that
will drive our growth into the future. The company and customer
culture we have created invokes only one simple thought in the
minds of most... Do you rue? I do!
We pursue a three-pronged strategy that focuses on
diversification and growth. The key elements of our strategy are:
|
|
|
|
|
Diversified Product girls, guys, rue21
etc! We offer a broad range of girls and guys
apparel, accessories, footwear, jewelry and fragrances. Over the
last few years, we have expanded and developed a number of
product categories to complement our extensive apparel
offerings, including rue21 etc!, our girls jewelry and
accessories category; tarea by rue21, our intimate apparel
category; Carbon, our guys apparel and accessories category;
rueKicks, one of our footwear lines and a full line of
fragrances for both girls and guys. While our girls apparel
category currently represents the majority of our net sales, we
believe the expansion of our guys apparel and accessories
category presents a significant opportunity for us.
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|
|
|
|
|
Flexible Real Estate strip centers, regional
malls, outlet centers. As of October 3, 2009
approximately 51% of our stores were located in strip centers,
27% in regional malls and 22% in outlet centers. Our stores are
located primarily in small- and middle-market communities that
we believe have been underserved by traditional specialty
apparel retailers. As a result, we are often the only junior and
young mens specialty apparel retailer in such communities
and face limited direct competition. In these markets, our
limited competition comes from large value retailers and
department stores.
|
|
|
|
|
|
Balanced Growth new stores, store conversions,
comparable store sales. We drive sales growth
through opening new stores, converting existing stores into our
new, larger rue21 etc! layout, and increasing our comparable
store sales. In fiscal year 2009, we plan to open 88 new stores,
including 78 new stores opened as of October 3, 2009. We
also plan to convert 26 stores, including 24 stores converted as
of October 3, 2009, to a larger layout that includes a
separate rue21 etc!
store-in-store.
We believe our merchandising initiatives and new category
introductions will further enhance our comparable store sales
growth.
|
In 2001, our President and Chief Executive Officer, Bob Fisch,
joined our company and began repositioning our business by
aligning our stores under one brand name, structuring our
management team, honing our fashion value merchandise and
refocusing our store growth strategy. At that time, we had over
$60.0 million in liabilities, including $38.0 million
in senior debt, coupled with a shareholder deficit of
$18.5 million and a net loss for the preceding twelve
months of $13.0 million. As part of our turnaround, we
sought bankruptcy protection in February 2002 due to the poor
financial condition of our business. We used bankruptcy
protection to reorganize our operations and restructure our debt
and emerged within fifteen months as a stronger company
with a rationalized store base of 168 stores. Since emerging
from bankruptcy, we have experienced rapid and consistent growth
in net sales and net income.
We have continued to deliver strong results in recent quarters
despite the difficult economic environment. Our comparable store
sales increases were 4.1% in the twenty-six weeks ended
August 1, 2009 and 3.7% in fiscal year 2008. In the
twenty-six weeks ended August 1, 2009, our net sales were
$233.1 million, which represents a 33.3% increase over the
twenty-six weeks ended August 2, 2008. Our net income was
$8.3 million in the twenty-six weeks ended August 1,
2009, which represents a 61.4% increase over the twenty-six
weeks
57
ended August 2, 2008. We believe our compelling value
proposition and trend-right merchandise have contributed to our
strong operating results.
Our
Competitive Strengths
We attribute our success as a specialty apparel retailer to the
following competitive strengths:
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|
|
|
|
Compelling fashion meets value
proposition. We offer the newest fashion to girls
and guys at prices lower than many other similar apparel
retailers. Our broad product assortment, ranging from apparel to
accessories to footwear, enables our customers to create a
complete look. In addition, we provide our customers with a
distinctive shopping experience in a fun-to-shop environment,
further enhancing our branded value proposition.
|
|
|
|
Flexible, fast-fashion business model. Our
merchandising model allows us to quickly identify and respond to
trends and bring proven concepts and styles to our stores. Our
sourcing model is designed to achieve lower cost, faster
turnaround and lower inventory levels. Our vendor network
consists of domestic importers and domestic suppliers. Our
collaborative relationship with our vendors allows us to test
small quantities of new products in select stores before broadly
distributing them to our stores which, in turn, reduces markdown
risk. By carrying the newest styles and regularly updating our
floor sets, we provide our customers with a reason to frequently
shop our stores.
|
|
|
|
Presence in locations with limited direct
competition. We focus on small- and middle-market
communities, which we define as communities with populations
between 25,000 and 200,000 people, where household incomes
do not typically support higher-priced retailers. As a result,
we often are the only junior and young mens specialty
apparel retailer in a shopping center and face limited direct
competition in these communities. We have a prominent, central
location in many of our strip centers and regional malls to
further drive traffic to our stores. We believe we are a highly
attractive tenant and, as such, we are able to negotiate
competitive and favorable lease terms and low construction costs.
|
|
|
|
Attractive new store economics. We operate a
proven and efficient store model that delivers strong cash flow.
Not only do our stores provide a distinctive shopping experience
and compelling merchandise assortment, but with low store
build-out costs, competitive lease terms and a low-cost
operating model, our stores also generate a strong return on
store investment. All of our new stores feature our rue21 etc!
store-in-store
layout, showcasing an expanded accessories offering. Our new
stores average approximately 4,700 square feet, which is
larger than our historical store layout, and pay back our
investment in less than one year.
|
|
|
|
|
|
Distinct company and customer culture. We have
a strong core culture that emanates from our employees, many of
whom are high school and college students who live in the
community and are rue21 customers. Through our viral marketing
efforts and the support of our online rueCommunity, we bring the
rue21 culture to our customer base. We believe our culture
enables us to connect to our employees and customers,
differentiate our in-store shopping experience and ultimately
strengthen our brand image and drive customer loyalty.
|
|
|
|
|
|
Strong and experienced management team. Our
senior management team has extensive experience across a broad
range of disciplines in the specialty retail industry, including
merchandising, real estate, supply chain and finance. Bob Fisch,
our President and Chief Executive Officer, has more than
30 years of experience in the apparel industry. Since being
named President and Chief Executive Officer, he has helped turn
around our company and has overseen consistent growth in net
sales and income from operations. Upon completion of this
offering, our executive officers will own 8.5% of our common
stock and will have options that will enable them to own, in the
aggregate, up to 11.3% of our common stock.
|
Our
Growth Strategy
We believe we are positioned to take advantage of significant
opportunities to increase net sales and net income. We have
recently invested significant capital to build the
infrastructure necessary to support our
58
growth. This investment includes an upgrade of our distribution
facility and related systems, which we expect to complete by the
end of the first quarter of fiscal year 2010. Upon completion,
the distribution facility will be able to support approximately
1,300 stores. Key elements of our growth strategy include:
|
|
|
|
|
Increase Square Footage. We intend to drive
our square footage growth by opening new stores and converting
existing stores to our larger rue21 etc! layout.
|
Open new stores. We believe there is a
significant opportunity to expand our store base from 527
locations as of October 3, 2009 to over 1,000 stores within
the next five years. We expect to open 88 stores in fiscal
year 2009, including 78 new stores opened as of October 3,
2009, and 100 stores in fiscal year 2010. Most of our new
stores will be opened in strip centers and regional malls in
small- and middle-market communities. We will focus our store
expansion in the south, southwest and western United States.
Convert existing stores to rue21 etc!
layout. We plan to continue to convert our
existing stores into our larger rue21 etc! layout, which
averages approximately 4,700 square feet. This store layout
allows us to offer an increased proportion of higher margin
categories, such as accessories, intimate apparel, footwear and
fragrances. As of October 3, 2009, more than 50% of our
store base was in the rue21 etc! layout. We converted 21 stores
to the rue21 etc! layout in fiscal year 2008 and plan to convert
26 stores in fiscal year 2009, including 24 stores converted as
of October 3, 2009. These conversions result in increased
store profitability and generate return on investment in excess
of 30% over a twelve-month period.
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|
|
|
|
Drive Comparable Store Sales. We seek to
maximize our comparable store sales by increasing the
penetration of our diversified product categories, increasing
our rue21 brand awareness, continuing to provide our distinctive
store experience and converting existing stores to our larger
rue21 etc! layout. We believe that our fashionable merchandise
selections and affordable prices create more shopping excitement
for our customers, increase our brand loyalty and drive sales.
We believe significant opportunities exist to grow our guys
apparel and accessories category, as there is limited specialty
competition in guys at value prices, and our highly attractive
footwear category, both of which have been recent drivers of
comparable store sales. We also believe that our ability to
quickly and consistently introduce the newest fashions into our
stores keeps our shopping experience fresh and exciting and
drives repeat customer visits.
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|
|
|
Improve profit margins. We believe we have the
opportunity to drive margin expansion through scale
efficiencies, continued cost discipline and changes in
merchandise mix. We believe our strong expected store growth
will permit us to take advantage of economies of scale in
sourcing and to leverage our existing infrastructure, corporate
overhead and fixed costs. We are focused on reducing costs
throughout our organization and believe further cost reduction
opportunities exist in inventory and supply chain management. We
believe the expansion of our higher margin categories, such as
accessories and footwear, will increase our overall margins over
time.
|
Our
Market
According to The NPD Group Inc., a nationally recognized firm
that specializes in apparel market research based upon consumer
panel tracking data, retail sales of domestic apparel totaled
$199.4 billion in the United States in 2008. The specialty
retail distribution channel represented 30.8% of the total
market, or $61.5 billion in retail sales, in 2008. Teen
specialty apparel retail sales totaled $12.9 billion in
2008. The value apparel market, as defined by us, totaled
$100.7 billion in 2008.
Our customers, who include both 11 to 17 year olds who
aspire to be 21 and adults who want to look and feel
21, live in small- or middle-market communities,
which we define as communities with populations between 25,000
and 200,000 people. Based upon Nielsen Claritas
SiteReports, an online source for United States demographics,
our customers typically live in households with a median annual
income of less than $50,000. We believe we appeal to our
customers by providing the newest fashions at value prices and
locating our stores in strip centers and regional malls in their
communities.
59
Our
Stores
As of October 3, 2009, we operated 527 stores in
504 cities in 43 states throughout the United States.
Our stores are located in strip centers, regional malls and
outlet centers in small- and middle-market communities. Our
stores averaged net sales of approximately $946,000 and net
sales per gross square foot of $235 for fiscal year 2008.
The table below indicates certain historical information
regarding our stores by type of shopping center as of the fiscal
year end for each of the years indicated below and as of
October 3, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Strip centers
|
|
|
13
|
|
|
|
47
|
|
|
|
93
|
|
|
|
148
|
|
|
|
215
|
|
|
|
270
|
|
Regional malls
|
|
|
66
|
|
|
|
72
|
|
|
|
74
|
|
|
|
90
|
|
|
|
118
|
|
|
|
143
|
|
Outlet centers
|
|
|
114
|
|
|
|
110
|
|
|
|
111
|
|
|
|
114
|
|
|
|
116
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stores
|
|
|
193
|
|
|
|
229
|
|
|
|
278
|
|
|
|
352
|
|
|
|
449
|
|
|
|
527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross square feet at end of period (in thousands)
|
|
|
750
|
|
|
|
896
|
|
|
|
1,095
|
|
|
|
1,448
|
|
|
|
1,949
|
|
|
|
2,229
|
|
Average gross square feet per store
|
|
|
3,884
|
|
|
|
3,906
|
|
|
|
3,937
|
|
|
|
4,113
|
|
|
|
4,341
|
|
|
|
4,413
|
|
The gross square footage of new stores opened in fiscal years
2008 and 2009 averaged approximately 4,700 square feet,
which is larger than our historical store base and features a
separate
store-in-store
for our rue21 etc! girls jewelry and accessories category. We
have an ongoing strategy to convert our existing store base into
the larger rue21 etc! layout which frequently involves
relocating our stores. As a result, we have worked with our
landlords to either convert or relocate our existing stores to
attractively priced new locations, either in the same shopping
center or in shopping centers in close proximity to the existing
store, that would allow us to prominently showcase all of our
product lines in a compelling store layout. In fiscal year 2008,
we converted 21 stores to our rue21 etc! layout.
Store
Locations
The following store list shows the number of stores operated in
each state as of October 3, 2009:
|
|
|
|
|
|
|
Total
|
|
|
|
Number of
|
|
State
|
|
Stores
|
|
|
Alabama
|
|
|
27
|
|
Arizona
|
|
|
13
|
|
Arkansas
|
|
|
8
|
|
California
|
|
|
16
|
|
Colorado
|
|
|
7
|
|
Connecticut
|
|
|
1
|
|
Delaware
|
|
|
1
|
|
Florida
|
|
|
20
|
|
Georgia
|
|
|
37
|
|
Illinois
|
|
|
16
|
|
Indiana
|
|
|
14
|
|
Iowa
|
|
|
7
|
|
Kansas
|
|
|
4
|
|
Kentucky
|
|
|
8
|
|
Louisiana
|
|
|
21
|
|
Maine
|
|
|
1
|
|
Maryland
|
|
|
6
|
|
Massachusetts
|
|
|
3
|
|
Michigan
|
|
|
14
|
|
Minnesota
|
|
|
4
|
|
Mississippi
|
|
|
17
|
|
Missouri
|
|
|
14
|
|
Nebraska
|
|
|
2
|
|
Nevada
|
|
|
4
|
|
New Hampshire
|
|
|
2
|
|
New Jersey
|
|
|
2
|
|
New Mexico
|
|
|
7
|
|
New York
|
|
|
13
|
|
North Carolina
|
|
|
33
|
|
Ohio
|
|
|
14
|
|
Oklahoma
|
|
|
14
|
|
Oregon
|
|
|
4
|
|
Pennsylvania
|
|
|
24
|
|
South Carolina
|
|
|
17
|
|
Tennessee
|
|
|
23
|
|
Texas
|
|
|
68
|
|
Utah
|
|
|
9
|
|
Vermont
|
|
|
1
|
|
Virginia
|
|
|
11
|
|
Washington
|
|
|
4
|
|
West Virginia
|
|
|
7
|
|
Wisconsin
|
|
|
8
|
|
Wyoming
|
|
|
1
|
|
|
|
|
|
|
Total
|
|
|
527
|
|
|
|
|
|
|
60
Distinctive
Store Experience
Our stores are designed by our in-house team in partnership with
architectural consultants with the goal of creating an exciting
and inviting atmosphere for girls and guys to shop and
socialize. Our stores feature colorful displays showcasing the
latest styles and trends, themed dressing rooms and top-40
music. Girls and guys apparel is located in separate areas with
trend walls displaying the newest fashions. In our larger rue21
etc! layout stores, we feature our rue21 etc! accessories in the
center of our stores, along with denim and fragrance bars and
rueKicks displays. We believe that the fun and playful
atmosphere in our stores contributes to the overall shopping
experience.
Each of our stores is typically led by a manager, a full-time
assistant manager and two part-time assistant managers. In
addition, each store has eight to ten part-time sales
associates, depending on store volume, many of whom are young
members of the community who represent the rue21 demographic and
carry the rueCulture not only inside the store, but also in
their schools and communities.
Store
Growth and Store Conversions
Our in-house real estate team works along with our brokerage
network to negotiate the leases, lease renewals, and
construction costs of every site. We lease all of our stores and
determine store locations based on several factors, including
geographic location, demographic information and proximity to
other value retailers including Walmart, Target and Kohls.
Additionally, we analyze factors such as performance of a
particular shopping center, the quality and nature of existing
shopping center tenants and the configuration of the space and
the lease terms being offered. We have prominent positioning in
many of our strip center and regional mall locations as well as
a highly visible façade.
In fiscal year 2008, we opened 99 new stores. We plan to open a
total of 88 stores in fiscal year 2009, including 78 new stores
opened as of October 3, 2009, and 100 stores in fiscal
year 2010. We expect our store base to grow from 527 stores
today to more than 1,000 stores within the next five years. Our
new store operating model assumes an average store size of
4,700 square feet that has historically achieved sales per
store of $900,000 to $1.1 million in the first twelve
months. Our average net investment to open a new store is
approximately $160,000, which includes $120,000 of average
build-out costs, net of landlord contributions, and $40,000 of
initial inventory, net of payables. This operating model results
in an average pretax cash return on investment in excess of
100%. As a result, our stores pay back our investment in less
than one year.
Our new store strategy is primarily focused on expanding our
strip center presence, particularly in single anchor centers. We
also see an opportunity to increase our footprint within
regional malls, particularly in the small- and middle-markets
communities, and to a more limited extent in outlet centers.
Converting existing stores to our larger rue21 etc! layout
remains central to our growth strategy. As of October 3,
2009, 302 of our 527 stores were in the rue21 etc! layout. We
have plans to continue to convert additional stores within the
next five years to the larger rue 21 etc! layout as
opportunities to do so become available. We have plans to
convert 26 stores to the rue21 etc! layout in fiscal year 2009,
including 24 stores converted as of October 3, 2009, and
plan to convert approximately 30 stores in fiscal year 2010.
The table below highlights certain information regarding our new
stores opened and existing stores converted to the rue21 etc!
layout as of the fiscal year end for each of the years indicated
below and as of October 3, 2009:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Stores at beginning of period
|
|
|
175
|
|
|
|
193
|
|
|
|
229
|
|
|
|
278
|
|
|
|
352
|
|
|
|
449
|
|
Stores opened during period(1)
|
|
|
21
|
|
|
|
42
|
|
|
|
56
|
|
|
|
74
|
|
|
|
99
|
|
|
|
78
|
|
Stores closed during period
|
|
|
3
|
|
|
|
6
|
|
|
|
7
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores at end of period
|
|
|
193
|
|
|
|
229
|
|
|
|
278
|
|
|
|
352
|
|
|
|
449
|
|
|
|
527
|
|
Store conversions during period
|
|
|
10
|
|
|
|
6
|
|
|
|
18
|
|
|
|
20
|
|
|
|
21
|
|
|
|
24
|
|
|
|
|
(1)
|
|
Stores opened during period does
not include existing stores that have been converted.
|
61
rueCulture
and rueCommunity
A key component to our ongoing success has been our ability to
preserve and continue to build our deep-rooted corporate and
customer culture. The passion and commitment fostered by
rueCulture enables us to connect with our employees and
customers, to differentiate our customers shopping
experience and to ultimately drive our growth and profitability.
Customer
Connection
We create a fun and exciting fashion destination for our
customers both in the store, through our themed dressing rooms
and our top-40 music selection, and on the internet via our
website, the rueCommunity blog and other social networking sites
such as Facebook, MySpace, Twitter and YouTube. We consult a
panel of teen advisors who regularly provide us with feedback on
products and trends. By carrying the newest styles and regularly
updating floor sets, we encourage our customers to shop our
stores frequently. Our store associates share the rue21
excitement and deliver a memorable, high energy in-store
experience to our customers. Our stores have become a community
destination of choice where customers can meet and socialize
with friends.
Associate
Development
rueCulture emphasizes exceptional people, and we believe that
the passion and commitment of our managers, assistant managers
and sales associates are key to our past and future success. We
are intensely focused on fostering the talents of our employees,
and are committed to providing sales associates and managers
with career advancement opportunities. We endeavor to promote a
large portion of store managers and district managers from
within our company. We emphasize clear communication throughout
the company, and routinely hold store manager conference calls
and store level, district, and regional management meetings to
keep our employees focused, informed and involved. In addition,
we provide continuing education and training through our
Management Advancement Development training program and our
rueniversity assistant manager training program,
which promote building effective management skills and reinforce
the rueCulture.
Our
Products and Brands
We offer a complete assortment of fashion apparel and
accessories for girls and guys, including graphic
t-shirts,
denim, dresses, shirts, hoodies, belts, jewelry, handbags,
footwear, intimate apparel and other accessories. We seek to
identify the most current fashion trends in the market and
utilize our product and sourcing teams to quickly introduce
these fashions to our stores. Our strategy is to price our
fashion merchandise lower than most other similar apparel
retailers, with most of our products priced below $35. The
prices for each of our products typically range from $7.99 to
$39.99 for our girls and guys apparel, $1.99 to $19.99 for our
accessories, $14.99 to $29.99 for our footwear and $9.99 for our
fragrances.
The table below indicates our product mix as a percentage of our
net sales derived from our product categories, based on our
internal merchandising system, as of the fiscal year end for
each of the years indicated below and as of August 1, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Girls apparel
|
|
|
60.9
|
%
|
|
|
61.6
|
%
|
|
|
58.3
|
%
|
|
|
58.0
|
%
|
Girls accessories
|
|
|
21.4
|
|
|
|
21.9
|
|
|
|
23.5
|
|
|
|
24.6
|
|
Guys apparel and accessories
|
|
|
17.7
|
|
|
|
16.5
|
|
|
|
18.2
|
|
|
|
17.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We believe that we have an opportunity to increase sales in our
guys apparel and accessories category because there are few
value retailers who offer similarly priced fashion apparel for
young men. Currently, we offer more girls apparel and girls
accessories than guys apparel and accessories. Our product mix
may change based on the growth rate of each product category,
although an increase in net sales in one of our product
62
categories may not necessarily decrease net sales in our other
product categories. Our diversified product assortment allows us
to benefit from increased sales in all categories.
All our brands are sold exclusively through our own stores. An
overview of our key brands is as follows:
|
|
|
|
|
Brand
|
|
Year Introduced
|
|
Category
|
|
|
|
1999
|
|
Girls apparel, including graphic t-shirts, fashion tops,
dresses, denim and outerwear
|
|
|
|
|
|
|
|
2006
|
|
Girls accessories, including jewelry, handbags, wallets, belts,
sunglasses and scarves
|
|
|
|
|
|
|
|
2005
|
|
Guys apparel and accessories, including graphic t-shirts, denim,
shirts, outerwear and accessories
|
|
|
|
|
|
|
|
2007
|
|
Girls intimate apparel, including lingerie sets, bras,
underwear, sleepwear and loungewear
|
|
|
|
|
|
|
|
2009
|
|
Girls and guys footwear
|
|
|
|
|
|
|
|
2004 - 2009
|
|
Girls fragrances and guys colognes
|
Merchandising
and Sourcing
Our flexible, fast fashion model allows us to quickly identify
and respond to trends and bring the newest, tested concepts and
styles to our stores. We strive to offer a compelling product
selection for our customers by regularly editing our merchandise
assortment to reflect key fashion trends and by shipping daily
deliveries of new merchandise to our stores.
Merchandising
We maintain a separate merchandising team for each of the three
principal categories of our business girls apparel,
girls accessories and guys apparel and accessories. Our
merchandise directors, with the support of our product
development and visual teams, coordinate color and trends across
the product categories to ensure brand consistency. We utilize
fashion and color services, trade shows, vendors, retail
shopping and social networking to identify the merchandise that
meets the demands of our customers. Our merchandising team
schedules weekly trend meetings to review the information
gathered and determine the trends to incorporate into our
product offerings. We order our product assortments after
careful review and consideration of the volumes required by each
of our stores. We frequently test our new products in a limited
number of our stores before broadly distributing to the rest of
our stores.
Sourcing
We do not own or operate any manufacturing facilities. We
purchase all of our merchandise from a network of third-party
vendors. Our vendor network currently consists of approximately
330 domestic importers and domestic suppliers. During the last
twelve months, we sourced approximately 70% of our merchandise
from our top thirty vendors, with no single vendor accounting
for more than 8% of our merchandise. We believe our lack of
dependence on any one vendor enhances our flexibility and
minimizes product risk. In addition, we believe our long-term
relationships with many of our vendors enable us to benefit from
quick deliveries as well as very competitive pricing.
A majority of our products are manufactured in China and India
at lead times of less than 90 days. Our vendors are
responsible for importing products. We do not directly import
any of our products. A small portion
63
of our merchandise is manufactured domestically, with lead times
as short as seven days to eight weeks. This maximizes our speed
to market on key fashion items.
Although we typically transact business on an
order-by-order
basis, all of our vendors are required to sign our vendor
agreement that incorporates a comprehensive vendor compliance
manual. The vendor compliance manual details our packing,
shipping and production requirements, as well as our legal
requirements, professional and ethical standards and payment
terms. Each purchase order also incorporates and references
these requirements, standards and terms. The purchase orders,
vendor agreement and vendor compliance manual all are designed
to ensure that our vendors operate in compliance with all
applicable rules and regulations, including labor, customs and
consumer protection laws. We do not control or audit the vendors
that produce the merchandise we sell. We do reserve the right to
conduct random testing of products and use a third party
resource to conduct such random testing on designated categories
of items to further address our concern for customer safety.
Our national freight consolidator ships to our distribution
facility from both the west coast and east coast and ships to
our distribution facility in Weirton, West Virginia.
Marketing
and Advertising
We believe that girls and guys rely heavily on the opinions of
their peers, often expressed through social media, websites and
blogs, to determine whether a retailer is relevant to them. As a
result, we do not depend on conventional advertising, but
instead employ a viral approach to marketing that is designed to
capture the interest of our customers and drive them into our
stores. For example, product knowledge, trend statements and
fashion blogs are posted daily through Facebook, MySpace,
Twitter and YouTube. Our rue21.com website reinforces our brand
image and allows us to reach our customers in a fun and
interactive environment. Website promotions and contests are an
added incentive to motivate teens to share their voice. In
addition, email campaigning is used to send
e-blasts
on a regular basis to customers who have provided their email
addresses to us though our website or in-store collection
processes. The
e-blasts
highlight key trends, new products and promotional events to
drive our customer back to our stores.
In addition to using our website and social networking to
promote our brand image, we employ a community-based marketing
approach to building brand awareness and customer loyalty. We
often initiate marketing efforts in concert with the local
shopping center management in advance of opening our stores. At
a store level, we reinforce our brands through in-store signage,
events, and product labeling.
Our coupon programs encourage repeat business from our
customers. We have built an extensive coupon program, which is
strategically planned during select time periods during the year
to maximize sales, traffic and customer loyalty. During an
event, coupons are distributed in stores to our customers to
generate repeat traffic as well as provide us with information
as to customer spending, shopping patterns and habits.
Hiring the right people is a brand building tool in and of
itself. We seek to hire a diverse, energetic, enthusiastic,
trendy, passionate and knowledgeable group of individuals to be
a part of our team. We promote individuality by welcoming
diversity, keeping an open mind, and valuing different points of
view.
Distribution
We distribute all of our merchandise from an 189,600 square
foot distribution and office facility located in Weirton, West
Virginia. Substantially all merchandise arrives at our
distribution facility pre-ticketed by our vendors, which allows
for a quick turn around time and reduced internal labor. In
general, the merchandise is received, sorted by stock keeping
unit, or SKU, based upon class, vendor and style, and packed in
to shipments for each store based on a predetermined allocation
plan. The distribution facility then uses an automated sorting
system for separating shipments by store. Merchandise is shipped
to our stores daily via a third-party delivery service to ensure
a steady flow of new products to our stores. We are in the
process of upgrading our distribution facility and related
systems, which we expect to complete the end of the first
quarter of fiscal year 2010. Upon completion, the distribution
facility will be able to support approximately 1,300 stores.
64
Management
Information Systems
Our management information systems provide a full range of
business process support and information to our store,
merchandising, financial and real estate business teams. We
believe the combination of our business processes and systems
provide us with improved operational efficiencies, scalability,
increased management control and timely reporting that allow us
to identify and respond to trends in our business. These
applications operate on vendor supported NCR registers, IBM and
Dell servers, and operate on Epicor/CRS software for store point
of sale and loss prevention, Island Pacific software for
merchandising, allocation, inventory and warehouse management,
and Lawson software for accounting and financial reporting.
Using a high-speed, broadband network, which we anticipate will
be operational in all of our stores by the end of fiscal year
2009, we will have the ability to communicate to our stores
continuously, change POS promotional pricing daily and update
each stores SKU level inventory that is updated daily in
our inventory management system.
Competition
We believe rue21 is specialized in its ability to operate
successfully in many different types of markets, including small
or middle markets where there is limited direct competition.
Small markets, which we define as communities with populations
of less than 50,000 people, provide us with the ability to
have a prominent location within the community. Typically, no
other junior and young mens specialty apparel retailer
operates in these markets and our principal competitors are
large value retailers. Even in middle markets, which we define
as communities with populations between 50,000 and
200,000 people, we typically face limited direct
competition from other junior and young mens specialty
apparel retailers. Although large value retailers, including
Walmart, Target and Kohls, sell merchandise at comparable
price points, our store format and
in-store
shopping experience is distinctive, with an exciting and
inviting atmosphere offering trend-right fashions and our
exclusive brands. Large value retailers may only have a small
part of their store and total product selection dedicated to
apparel and accessories. Department stores, including
Dillards and JC Penney, or other junior retailers may be
located in regional malls or outlet centers in small to middle
markets; however we believe that we have been successful
competing in these markets against all types of competition
based on our product assortment, exclusive brands, ability to
respond to changing trends, and our distinctive combination of
fashion and value. Although we feel we have many competitive
strengths, we recognize that we face some competitive challenges
in small to middle markets, including the fact that large value
retailers, department stores and some junior retail stores have
substantially greater name recognition, as well as financial,
marketing, and other resources, and devote greater resources to
the marketing and sale of their products than we do. We believe
that we benefit from the traffic that large value retailers
generate in a shopping center, and often seek to place ourselves
in close proximity to large value retailers.
The junior and young mens specialty apparel landscape is
highly competitive in large markets, which we define as
communities with populations in excess of 200,000 people.
We believe we are able to operate successfully in these markets
given our distinctive combination of fashion and value. In large
markets, we tend to position ourselves adjacent to other value
retailers in strip centers or outlet centers. This provides the
possibility of significant customer traffic and increased
potential for sales, as most junior and young mens
specialty apparel retailers, including Aéropostale,
American Eagle Outfitters, Charlotte Russe, Forever 21, the
Gap, J. Crew, Metropark, Old Navy and Wet Seal, choose to
position themselves in the more dominant regional malls. We
recognize that some of the specialty apparel retailers with whom
we compete also successfully offer a personalized shopping
experience that could appeal to our target customers and that
existing and new competitors may seek to emulate facets of our
business strategy and in-store experience. Further, we may face
new competitors and increased competition from existing
competitors as we expand into new markets and increase our
presence in existing markets. Competitive forces and pressures
may intensify as our presence in the retail marketplace grows.
65
Intellectual
Property
We have registered numerous trademarks, trade names and logos
with the United States Patent and Trademark Office, including
rue21 and rue21 etc!, Carbon, Carbon Black, the CJ logo design,
and tarea by rue21. We also own trademark registrations for the
names of our fragrances, including rue by rue21, revert eco, CJ
Black, sparkle rue21 and Pink Ice rue21. In addition we own
domain names, including www.rue21.com, for our primary
trademarks and own unregistered copyright rights in our website
content. We also rely on a variety of intellectual property
rights that we license from third parties. We expect to
continually grow our merchandise assortment and strengthen our
brands, and we will continue to file new applications as
appropriate to protect our intellectual property rights.
Regulation
and Legislation
We are subject to labor and employment laws, laws governing
advertising and promotions, privacy laws, safety regulations and
other laws, including consumer protection regulations that
regulate retailers and or govern the promotion and sale of
merchandise and the operation of stores and warehouse
facilities. We monitor changes in these laws and believe that we
are in material compliance with applicable laws.
Insurance
We use a combination of insurance and self-insurance for a
number of risk management activities including workers
compensation, general liability, automobile liability, and
employee-related health care benefits, a portion of which is
paid by the employees. We believe that we have adequately
reserved for our self-insurance liability. We evaluate our
insurance requirements on an ongoing basis to ensure we maintain
adequate levels of coverage.
Employees
As of October 3, 2009, we had 5,833 employees of which
4,205 were part-time employees. Of this total number,
199 employees were based at our corporate headquarters,
135 employees were employed at our distribution facility,
73 managers were employed in the field, 1,952 managers and
assistant managers and 3,474 sales associates were located in
our stores. None of our employees is represented by a union and
we have had no labor-related work stoppages. Our rueCulture
emphasizes teamwork and the belief that everyone can make a
difference. The value we place on our employees is one of the
keys to our success, and as a result we believe our relationship
with our employees is strong.
Seasonality
Our business is seasonal and, historically, we have realized a
higher portion of our net sales, net income and operating cash
flows in the second and fourth fiscal quarters, attributable to
the impact of the summer selling season and the holiday selling
season. As a result, our working capital requirements fluctuate
during the year, increasing in mid-summer in anticipation of the
fourth fiscal quarter. Our business is also subject, at certain
times, to calendar shifts, which may occur during key selling
times such as school holidays, Easter and regional fluctuations
in the calendar during the back-to-school selling season.
Legal
Proceedings
We are subject to various legal proceedings and claims which
arise in the ordinary course of our business. Although the
outcome of these and other claims cannot be predicted with
certainty, management does not believe that the ultimate
resolution of these matters will have a material adverse effect
on our financial condition or on our operations.
Properties
We do not own any real property. Our principal executive office
is located in Warrendale, Pennsylvania and is leased under a
lease agreement expiring in 2017, with an option to renew for an
additional five-year term. The 53,035 square foot space
includes two state-of-the-art simulated stores that provide a
forum for planning, visual and marketing concepts prior to their
execution in our stores. We also lease office space in New York
City at 1071 Sixth Avenue under a lease agreement that expires
at the end of 2013.
66
Our 189,600 square foot distribution facility is located in
Weirton, West Virginia. Our distribution facility is leased
under a lease agreement expiring in 2011, with options to renew
for two additional five-year terms. We are currently upgrading
our distribution facility and related systems, which we expect
to complete by the end of the first quarter of fiscal year 2010.
Upon completion, the distribution facility will be able to
support approximately 1,300 stores.
As of October 3, 2009, we operated 527 stores in
504 cities in 43 states. All of our stores are leased
from third parties and the leases typically have terms of five
years with options to renew for additional five-year periods
thereafter. Some of our leases have early cancellation clauses,
which permit the lease to be terminated by us or the landlord if
certain sales levels are not met in specific periods or if a
shopping center does not meet specified occupancy standards. In
addition to future minimum lease payments, some of our store
leases provide for additional rental payments based on a
percentage of net sales if sales at the respective stores exceed
specified levels, as well as the payment of common area
maintenance charges, real property insurance and real estate
taxes. Many of our lease agreements have defined escalating rent
provisions over the initial term and any extensions.
We believe that our facilities are generally adequate for
current and anticipated future use, although we may from time to
time lease new facilities or vacate existing facilities as our
operations require.
67
MANAGEMENT
Directors
and Executive Officers
Set forth below are the name, age, position and a description of
the business experience of each of our executive officers,
directors and other key employees as of November 2, 2009.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Robert N. Fisch
|
|
|
59
|
|
|
President, Chief Executive Officer and Chairman
|
Kim A. Reynolds
|
|
|
52
|
|
|
Senior Vice President and General Merchandise Manager
|
Keith A. McDonough
|
|
|
50
|
|
|
Senior Vice President and Chief Financial Officer
|
John P. Bugnar
|
|
|
60
|
|
|
Senior Vice President and Director of Stores
|
Michael A. Holland
|
|
|
45
|
|
|
Senior Vice President of Information Technology
|
Mark K.J. Chrystal
|
|
|
36
|
|
|
Senior Vice President of Planning and Allocation
|
Robert R. Thomson
|
|
|
50
|
|
|
Senior Vice President of Real Estate
|
Mark F. Darrel
|
|
|
52
|
|
|
Director
|
John F. Megrue Jr.
|
|
|
51
|
|
|
Director
|
Alex S. Pellegrini
|
|
|
34
|
|
|
Director
|
Douglas E. Coltharp
|
|
|
48
|
|
|
Director Nominee
|
Executive
Officers
Robert N. Fisch has served as our President and Chief
Executive Officer and Chairman of our board of directors since
June 2001. From February 1987 to December 1999, he served
as president of Casual Corner Group, Inc. Since June 2004,
Mr. Fisch has served as director at The Childrens
Place Retail Stores, Inc. and currently serves on its audit
committee and compensation committee.
Kim A. Reynolds has served as our Senior Vice President
and General Merchandise Manager since July 2001. From March
1987 to November 1999, she served as general merchandising
manager of Casual Corner Group, Inc.
Keith A. McDonough has served as our Chief Financial
Officer since May 2003. From February 1990 to March 2001,
Mr. McDonough served as senior vice president of finance
and chief operating officer at Iron Age Corp. From March
2001 to December 2002, he served as chief operating officer at
Iron Age Corp.
John P. Bugnar has served as our Senior Vice President
and Director of Stores since September 2001. From December 1997
to September 2001, he served as vice president at Jones Apparel
Group, Inc./Jones Retail Corporation.
Michael A. Holland has served as our Senior Vice
President of Information Technology since April 2004. From
January 1995 to March 2004, he served as senior director of
information technology at the Timberland Company.
Mark K.J. Chrystal has served as our Senior Vice
President of Planning and Allocation since June 2008. From April
2007 to June 2008, Mr. Chrystal served as vice president of
allocation, replenishment and planning for American Eagle
Outfitters. From September 2004 to April 2007, he served as vice
president of planning and allocation at The Disney Store, Inc.
Robert R. Thomson has served as our Senior Vice President
of Real Estate since January 2007. From June 2000 to January
2007, Mr. Thomson served as vice president of real estate
and construction at Brookstone Corporation. From April 1995 to
June 2000, he served as the director of real estate at The
Stride Rite Corporation.
Our executive officers are appointed by our board of directors
and serve until their successors have been duly elected and
qualified or their earlier resignation or removal. There are no
family relationships among any of our directors or executive
officers.
68
Directors
Mark F. Darrel has served as a member of our board of
directors since June 2008. Since February 2009, Mr. Darrel
has been the Head of Private Equity Portfolio Management at BNP
Paribas. Since February 2004, Mr. Darrel has served as a
director of the Structured Finance Group of BNP Paribas, the
parent company of one of our significant stockholders. Mr.
Darrel has advised us that he will resign as a member of our
board of directors shortly after completion of this offering.
John F. Megrue Jr. has served as a member of our board of
directors since July 1998. Since November 2006, Mr. Megrue
has served as chief executive officer of Apax Partners in the
United States. From April 2005 to November 2006, he served as
co-chief executive officer of Apax Partners, L.P. From May 1992
to April 2005, he served as a partner of Saunders
Karp & Megrue, LLC. Mr. Megrue also serves as a
member of the board of directors of Bobs Discount
Furniture, L.L.C., Tommy Hilfiger Corporation and MagnaCare
Holdings, Inc. and has previously served as a member of the
board of directors of Dollar Tree, Inc., The Childrens
Place Retail Stores, Inc. and Hibbett Sports, Inc.
Alex Pellegrini has served as a member of our board of
director since September 2009. Since January 2009,
Mr. Pellegrini has served as a partner of Apax Partners,
L.P. From April 2005 to December 2008, he served as a principal
at Apax Partners, L.P. From August 2000 to April 2005, he served
as an investment professional of Saunders Karp & Megrue,
LLC. Mr. Pellegrini also serves as a member of the board of
directors of MagnaCare Holdings, Inc. and Spectrum Laboratory
Holdings.
Douglas E. Coltharp has been nominated, and has agreed to
serve, as a member of our board of directors upon completion of
this offering. Since May 2007, Mr. Coltharp has served as a
partner at Arlington Capital Advisors, LLC and Arlington
Investment Partners. From November 1996 to May 2007,
Mr. Coltharp served as executive vice president and chief
financial officer of Saks Incorporated and its predecessor
organization. Mr. Coltharp also serves as a member of the
board of directors of Under Armour, Inc. and Ares Capital
Corporation.
Corporate
Governance
Controlled
Company
We intend to avail ourselves of the controlled company exemption
under the corporate governance rules of The NASDAQ Stock Market.
Although we will have a majority of independent directors on our
board of directors, we will not have a compensation committee
and a nominating and corporate governance committee composed
entirely of independent directors as defined under the rules of
The NASDAQ Stock Market. The controlled company exemption does
not modify the independence requirements for the audit
committee, and we intend to comply with the requirements of
Sarbanes-Oxley and The NASDAQ Stock Market, which require that
our audit committee be composed of at least three members, one
of whom will be independent upon the listing of our common stock
on The NASDAQ Global Select Market, a majority of whom will be
independent within 90 days of the date of this prospectus,
and each of whom will be independent within one year of the date
of this prospectus.
Board
Composition
Our business and affairs will be managed under the direction of
our board of directors. Our amended and restated bylaws will
provide that our board of directors will be fixed from time to
time by resolution adopted by the affirmative vote of a majority
of the total directors then in office. Within 90 days of the
completion of this offering, our board of directors will be
comprised of five directors. Currently, all of our directors are
either employed by us or affiliated with Apax Partners or BNP
Paribas North America, Inc. Within 90 days of the completion of
this offering, we expect that at least two additional members of
our board of directors will be independent under the corporate
governance rules of The NASDAQ Stock Market. Our board of
directors has determined that Messrs. Megrue, Pellegrini
and Darrel are independent as defined under the corporate
governance rules of The NASDAQ Stock Market. The directors will
have discretion to increase or decrease the size of the board of
directors.
69
Our board of directors will be divided into three classes, with
each director serving a three-year term and one class being
elected at each years annual meeting of stockholders.
Mr. Darrel and Mr. Fisch will serve as Class I
directors with an initial term expiring in 2010. Mr. Darrel
has advised us that he will resign as a member of our board of
directors shortly after completion of this offering. If
Mr. Darrel resigns, our board of directors may keep his
directorship vacant, fill the vacancy by vote of a majority of
the remaining members of our board of directors at any meeting
of our board of directors or apportion our existing board of
directors among each class to make all classes as nearly equal
in number as practicable. Mr. Pellegrini and Mr. Coltharp
will serve as Class II directors, with an initial term
expiring in 2011. Mr. Megrue will serve as a Class III
director with an initial term expiring in 2012.
Board
Committees
Our board of directors plans to establish the following
committees: an audit committee, a compensation committee and a
corporate governance and nominating committee. The composition
and responsibilities of each committee are described below.
Members will serve on these committees until their resignation
or until otherwise determined by our board of directors.
Audit
Committee
We do not currently have an audit committee; however, we plan to
establish an audit committee prior to completion of this
offering. Upon completion of this offering, our audit committee
will consist of Messrs. Coltharp, Megrue, and Pellegrini, with
Mr. Coltharp serving as chair of the audit committee. Our
audit committee will have responsibility for, among other things:
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selecting and hiring our independent registered public
accounting firm, and approving the audit and non-audit services
to be performed by our independent registered public accounting
firm;
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evaluating the qualifications, performance and independence of
our independent;
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monitoring the integrity of our financial statements and our
compliance with legal and regulatory requirements as they relate
to financial statements or accounting matters;
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reviewing the adequacy and effectiveness of our internal control
policies and procedures;
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discussing the scope and results of the audit with the
independent registered public accounting firm and reviewing with
management and the independent registered public accounting firm
our interim and year-end operating results; and
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preparing the audit committee report required by the SEC to be
included in our annual proxy statement.
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The SEC and NASDAQ Stock Market rules require us to have one
independent audit committee member upon the listing of our
common stock on The NASDAQ Global Select Market, a majority of
independent directors within 90 days of the date of such
listing and all independent audit committee members within one
year of the date of such listing. Our board of directors has
affirmatively determined that Mr. Coltharp meets the definition
of independent directors for purposes of serving on
an audit committee under applicable SEC and The NASDAQ Stock
Market rules, and we intend to comply with these independence
requirements within the time periods specified. In addition, Mr.
Coltharp qualifies as our audit committee financial
expert.
Our board of directors will adopt a written charter for our
audit committee, which will be available on our corporate
website at
www.rue21.com
upon completion of this offering.
Compensation
Committee
Upon completion of this offering, our compensation committee
will consist of Messrs. Megrue, Fisch and Pellegrini.
Mr. Megrue will be the chairperson of our compensation
committee. The compensation committee will be responsible for,
among other things:
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reviewing and approving compensation of our executive officers
including annual base salary, annual incentive bonuses, specific
goals, equity compensation, employment agreements, severance and
change in control arrangements, and any other benefits,
compensation or arrangements;
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reviewing succession planning for our executive officers;
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reviewing and recommending compensation goals, bonus and stock
compensation criteria for our employees;
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determining the compensation of our directors;
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reviewing and discussing annually with management our
Compensation Discussion and Analysis disclosure
required by SEC rules;
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preparing the compensation committee report required by the SEC
to be included in our annual proxy statement; and
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administrating, reviewing and making recommendations with
respect to our equity compensation plans.
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We expect to have one independent compensation committee member
upon the listing of our common stock on The NASDAQ Global Select
Market and a majority of independent directors within
90 days of such listing. However, as a controlled company,
we will rely upon the exemption from the requirement that we
have a compensation committee that is composed entirely of
independent directors within one year from the date of such
listing. Our board of directors has affirmatively determined
that Messrs. Megrue and Pellegrini meet the definition of
independent directors for purposes of serving on a
compensation committee under applicable SEC and The NASDAQ Stock
Market rules.
Our board of directors will adopt a written charter for our
compensation committee, which will be available on our corporate
website at
www.rue21.com
upon completion of this offering.
Corporate
Governance and Nominating Committee
Upon completion of this offering, our corporate governance and
nominating committee will consist of Messrs. Coltharp,
Pellegrini and Fisch and Mr. Coltharp will be the chairperson of
this committee.
The corporate governance and nominating committee will be
responsible for, among other things:
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assisting our board of directors in identifying prospective
director nominees and recommending nominees for each annual
meeting of stockholders to the board of directors;
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reviewing developments in corporate governance practices and
developing and recommending governance principles applicable to
our board of directors;
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overseeing the evaluation of our board of directors and
management; and
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recommending members for each board committee of our board of
directors.
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We expect to have one independent corporate governance and
nominating committee member upon the listing of our common stock
on The NASDAQ Global Select Market and a majority of independent
directors within 90 days of such listing. However, as a
controlled company, we will rely upon the exemption from the
requirement that we have a corporate governance and nominating
committee that is composed entirely of independent directors
within one year from the date of such listing. Our board of
directors has affirmatively determined that Messrs. Coltharp and
Pellegrini meet the definition of independent
directors for purposes of serving on a corporate
governance and nominating committee under applicable SEC and The
NASDAQ Stock Market rules, and we intend to comply with these
independence requirements within the time periods specified.
Our board of directors will adopt a written charter for our
corporate governance and nominating committee, which will be
available on our corporate website at
www.rue21.com
upon completion of this offering.
71
Compensation
Committee Interlocks and Insider Participation
None of our executive officers currently serves, or in the past
year has served, as a member of the board of directors or
compensation committee of any entity that has one or more
executive officers serving on our board of directors or
compensation committee.
Code of
Business Conduct and Ethics
We will adopt a code of business conduct and ethics applicable
to our principal executive, financial and accounting officers
and all persons performing similar functions. A copy of that
code will be available on our corporate website at www.rue21.com
upon completion of this offering. We expect that any amendments
to such code, or any waivers of its requirements, will be
disclosed on our website.
Director
Compensation
Prior to this offering, members of our board of directors did
not receive compensation for their services as directors, except
for the reimbursement of reasonable and documented costs and
expenses incurred by directors in connection with attending any
meetings of the board of directors or any committee thereof.
Apax Partners L.P., of which Mr. Megrue is chief executive
officer and Mr. Pellegrini is a partner, has received fees
from us pursuant to a letter agreement for financial advisory
services performed by Apax Partners. See Certain
Relationships and Related Party Transactions
Agreement with Apax Partners.
We did not pay any compensation to members of our board of
directors during 2008 because all of our directors were either
employees of our company or affiliated with Apax Partners, our
largest stockholder, or BNP Paribas North America, Inc., a
principal stockholder.
Upon completion of this offering, our executive officers who are
members of our board of directors and the directors who continue
to provide services to, or are affiliated with, Apax Partners or
funds advised by Apax Partners or BNP Paribas North America,
Inc. will not receive compensation from us for their service on
our board of directors. Accordingly, Messrs. Fisch, Darrel,
Megrue and Pellegrini will not receive compensation from us for
their service on our board of directors. Only those directors
who are considered independent directors under the corporate
governance rules of The NASDAQ Stock Market and are not
affiliated with Apax Partners or funds advised by Apax Partners
or BNP Paribas North America, Inc. are eligible to receive
compensation from us for their service on our board of
directors. Mr. Coltharp and all other non-employee directors not
affiliated with Apax Partners or funds affiliated with Apax
Partners or BNP Paribas North America, Inc. will be paid
quarterly in arrears:
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a base annual retainer of $50,000 in cash;
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an additional annual retainer of $20,000 in cash to the chair of
the audit committee; and
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an additional annual retainer of $10,000 in cash to each of the
chairs of the compensation committee and the corporate
governance and nominating committee.
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In addition, upon initial election to our board of directors,
each non-employee director not affiliated with Apax Partners,
funds advised by Apax Partners or BNP Paribas North America,
Inc. will receive an option grant of 12,500 shares of our
common stock. For each year of continued service thereafter,
each non-employee director not affiliated with Apax Partners,
funds advised by Apax Partners or BNP Paribas North America,
Inc. will receive an annual option grant of 5,000 shares.
Each grant will be subject to the same terms as those of our
employees as described in the 2009 Omnibus Incentive Plan
narrative. See Executive Compensation 2009
Omnibus Incentive Plan. We will also reimburse directors
for reasonable expenses incurred to attend meetings of our board
of directors or committees.
72
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
The purpose of this compensation discussion and analysis section
is to provide information about the material elements of
compensation that are paid, awarded to, or earned by, our
named executive officers, who consist of our
principal executive officer, principal financial officer, and
the three other most highly compensated executive officers. For
fiscal year 2008, our named executive officers, were:
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Robert N. Fisch, President and Chief Executive Officer;
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Kim A. Reynolds, Senior Vice President and General Merchandise
Manager;
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Keith A. McDonough, Senior Vice President and Chief Financial
Officer;
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John P. Bugnar, Senior Vice President and Director of Stores; and
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Michael A. Holland, Senior Vice President of Information
Technology.
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Historical
Compensation Decisions
Our compensation approach is necessarily tied to our stage of
development. Prior to this offering, we were a privately-held
company with a relatively small number of stockholders,
including our principal investors, funds advised by Apax
Partners and BNP Paribas North America, Inc. As a result, we
have not been subject to any stock exchange listing or SEC rules
requiring a majority of our board of directors to be independent
or relating to the formation and functioning of board
committees, including audit, compensation and nominating
committees. Most, if not all, of our prior compensation policies
and determinations, including those made for fiscal year 2008,
have been the product of informal discussions between our
President and Chief Executive Officer and our board of directors.
Compensation
Philosophy and Objectives
Upon completion of this offering, our compensation committee
will review and approve the compensation of our named executive
officers and oversee and administer our executive compensation
programs and initiatives. As we gain experience as a public
company, we expect that the specific direction, emphasis and
components of our executive compensation program will continue
to evolve. For example, over time we may reduce our reliance
upon determinations made by our President and Chief Executive
Officer
and/or board
of directors in favor of a more empirically-based approach that
involves benchmarking against peer companies. Accordingly, the
compensation paid to our named executive officers for fiscal
year 2008 is not necessarily indicative of how we will
compensate our named executive officers following this offering.
We have strived to create an executive compensation program that
balances short-term versus long-term payments and awards, cash
payments versus equity awards and fixed versus contingent
payments and awards in ways that we believe are most appropriate
to motivate our executive officers. Our executive compensation
program is designed to:
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attract and retain talented and experienced executives in our
industry;
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reward executives whose knowledge, skills and performance are
critical to our success;
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align the interests of our executive officers and stockholders
by motivating executive officers to increase stockholder value
and rewarding executive officers when stockholder value
increases;
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ensure fairness among the executive management team by
recognizing the contributions each executive officer makes to
our success;
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foster a shared commitment among executives by aligning their
individual goals with the goals of the executive management team
and our company; and
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compensate our executives in a manner that incentivizes them to
manage our business to meet our long-range objectives.
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73
The compensation committee will meet outside the presence of all
of our executive officers, including our named executive
officers, to consider appropriate compensation for our President
and Chief Executive Officer. For all other named executive
officers, the compensation committee will meet outside the
presence of all executive officers except our President and
Chief Executive Officer. Going forward, our President and Chief
Executive Officer will review annually each other named
executive officers performance with the compensation
committee and recommend appropriate base salary, cash
performance awards and grants of long-term equity incentive
awards for all other executive officers. Based upon the
recommendations from our President and Chief Executive Officer
and in consideration of the objectives described above and the
principles described below, the compensation committee will
approve the annual compensation packages of our executive
officers other than our President and Chief Executive Officer.
The compensation committee also will annually analyze our
President and Chief Executive Officers performance and
determine his base salary, cash performance awards and grants of
long-term equity incentive awards based on its assessment of his
performance with input from any consultants engaged by the
compensation committee.
Compensation amounts historically have been highly
individualized, resulted from arms length negotiations and
have been based on a variety of informal factors including, in
addition to the factors listed above, our financial condition
and available resources, our need for that particular position
to be filled and the compensation levels of our other executive
officers, each as of the time of the applicable compensation
decision. In addition, we informally considered the competitive
market for corresponding positions within comparable geographic
areas and companies of similar size and stage of development
operating in the retail apparel industry. This informal
consideration was based on the general knowledge possessed by
our President and Chief Executive Officer regarding the
compensation given to some of the executive officers of other
companies in our industry through informal discussions with
recruiting firms, research and informal benchmarking against
their personal knowledge of the competitive market. As a result,
our President and Chief Executive Officer historically has
typically applied his discretion to make compensation decisions
and did not formally benchmark executive compensation against a
particular set of comparable companies or use a formula to set
the compensation for our executives in relation to survey data.
Our President and Chief Executive Officer, in consultation with
members of our board of directors, made compensation decisions
for our executive officers and after thorough discussion of
various factors, including any informal knowledge or data he may
have had, set the compensation for each executive officer on an
individual basis. We anticipate that our compensation committee
will more formally benchmark executive compensation against a
peer group of comparable companies in the future. We also
anticipate that our compensation committee may make adjustments
in executive compensation levels in the future as a result of
this more formal benchmarking process.
In April 2008, management engaged Ernst & Young LLP to
advise management with their efforts to construct, from publicly
available data, a peer group of companies to be used for
compensation purposes in preparation for an initial public
offering, provide market compensation data on the peer group
companies, supplemented by survey data, as appropriate, and
general market trends and developments. Management intends to
use the information provided by Ernst & Young LLP and
other resources and tools to develop recommendations to be
presented and approved by our board of directors.
Ernst & Young LLP has not recommended specific
compensation amounts or the form of payment for any of our named
executive officers. Managements review and analysis of its
executive compensation program is ongoing and has not been
completed. Ernst & Young LLP is also our independent
registered public accounting firm.
Elements
of Compensation
Our current executive compensation program, which was set by our
President and Chief Executive Officer in consultation with our
board of directors prior to the establishment of our
compensation committee, consists of the following components:
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base salary;
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annual cash incentive awards linked to corporate and business
segment performance;
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periodic grants of long-term equity-based compensation, such as
restricted stock or options;
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other executive benefits and perquisites; and
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employment agreements, which contain termination and change in
control benefits.
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Executive compensation includes both fixed components (base
salary, benefits and executive perquisites) and variable
components (annual bonus/incentive, stock option and/or
restricted stock unit grants) with the heaviest weight generally
placed on the variable components. Each component is linked to
one or more of the strategic objectives listed above. The fixed
components of compensation are designed to be competitive in
order to induce talented executives to join our company.
Revisions to the fixed components of compensation occur
infrequently aside from our annual salary review, which
generally results in salary increases that range from 4% to 7%.
Salary increases are, in part, designed to reward executives for
their management activities during the year and to maintain
their level of income with respect to cost of living increases.
The variable components are tied specifically to the achievement
of our annual financial objectives and are designed so that
above average performance is rewarded with above average
rewards. Bonus levels, as a percentage of base salary, are set
once the executive is hired and generally relate to his or her
scope of responsibility, with revisions typically occurring upon
promotions or substantial increases to the executives
scope of responsibility. Although bonus levels, as a percentage
of base salary, generally do not change, the opportunity to
accelerate bonus payments to twice the target amount for any one
year does exist for an executive based upon our overall
financial performance. Our bonus policy is designed to align
each executives annual goals for their respective area of
responsibility with the financial goals of the entire business
as set by our board of directors. The other material element to
variable compensation is stock option awards. Our Amended and
Restated 2003 Ownership Incentive Plan was adopted by our board
of directors to award grants, usually on an annual basis, to
executive officers, general management and select associates.
The grants awarded over the last six years have had no public
market and no certain opportunity for liquidity, making them
inherently long-term compensation. The awards have been used to
motivate executives and employees to individually and
collectively build long-term shareholder value that might in the
future create a liquid market opportunity.
Base
Salary
The primary component of compensation of our executive officers
has historically been base salary. The base salary established
for each of our executive officers is intended to reflect each
individuals professional responsibilities, the skills and
experience required for the job, their individual performance,
business performance, labor market conditions and competitive
market salary levels. Base salary is also designed to provide
our executive officers with steady cash flow during the course
of the fiscal year that is not contingent on short-term
variations in our corporate performance. Our President and Chief
Executive Officer
and/or board
of directors determine market level compensation for base
salaries based on our executives experience in the
industry with reference to the base salaries of similarly
situated executives in other companies of similar size and stage
of development operating in the retail apparel industry. This
determination is informal and based primarily on the general
knowledge of our President and Chief Executive Officer of the
compensation practices within our industry.
Mr. Fischs employment agreement sets forth his annual
salary. Effective February 1, 2008, his base salary was
increased to $735,000 and, effective February 1, 2009, his
base salary was increased to $800,000.
Base salaries are reviewed during the fiscal year by our
President and Chief Executive Officer, and salary increases
typically take effect in June of each year, unless business
circumstances require otherwise. In past years, our President
and Chief Executive Officer
and/or board
of directors reviewed the performance of all executive officers,
and based on this review and any relevant informal competitive
market data made available to him or them during the preceding
year, through informal discussions with recruiting firms,
research and informal benchmarking against our President and
Chief Executive Officer
and/or
directors personal knowledge of the competitive market,
set the salary level for each executive officer for the coming
year. Upon completion of this offering, the compensation
committee will take a more significant role in this annual
review and decision-making process.
75
As part of our annual review process, in June 2008, our
President and Chief Executive Officer approved annual merit
salary increases for each of our named executive officers,
except for himself. These merit increases for our named
executive officers for fiscal year 2008 ranged from 4% to 7% and
took into account accomplishments of each individual; for
example, Mr. McDonoughs contributions to expense
control and supply chain efficiencies, Ms. Reynolds
contributions to merchandise mix and increasing gross margins;
Mr. Hollands success in significant technology
implementations; Mr. Bugnars management of the
operational aspects of our store growth and developing our
management training programs. Ms. Reynoldss salary
increased from $308,000 to $330,000; Mr. McDonoughs
salary increased from $212,000 to $227,000;
Mr. Bugnars salary increased from $243,000 to
$253,000; and Mr. Hollands salary increased from
$210,000 to $222,500.
Bonus
Our President and Chief Executive Officer
and/or board
of directors have authority to award annual cash bonuses to our
executive officers. The annual cash bonuses are intended to
offer incentive compensation by rewarding the achievement of
corporate objectives linked to seasonal financial results of the
Company.
On an annual basis, or at the commencement of an executive
officers employment with us, our President and Chief
Executive Officer
and/or board
of directors typically sets a target level of bonus compensation
that is structured as a percentage of such executive
officers annual base salary. Depending upon corporate
performance, an executive officer may receive from 0% to 60% of
his or her base salary or in the case of our President and Chief
Executive Officer from 0% to 110%. In setting the percentage of
base salary level, our President and Chief Executive Officer
and/or board
of directors set the target bonus levels (as a percentage of
base salary) based upon each executives scope of
responsibility and impact on the performance of the Company.
The actual bonuses awarded in any year, if any, may be more or
less than the target, depending on the achievement of corporate
objectives, as discussed below. In addition, our President and
Chief Executive Officer
and/or board
of directors may adjust bonuses due to extraordinary or
nonrecurring events, such as significant financings, equity
offerings or acquisitions. We believe that establishing cash
bonus opportunities helps us attract and retain qualified and
highly skilled executives. These annual bonuses are intended to
reward executive officers who have a positive impact on
corporate results. Upon completion of this offering, the
compensation committee will take a more significant role in this
annual review and decision-making process.
Each year we establish our corporate financial performance
objective and target amounts with reference to achieving pre-set
levels of desired financial performance, and with consideration
given to our annual and long-term financial plan, as well as to
macroeconomic conditions. For fiscal year 2008, the annual cash
bonus was linked to achievement of Adjusted EBITDA within a
range of $28.9 million to $34.5 million. We believe
this corporate performance objective and the proportionate
weighting assigned, as discussed below, reflected our overall
company goals for fiscal year 2008, which balanced the
achievement of revenue growth and improving our operating
efficiency. For purposes of our cash bonus program in fiscal
year 2008, Adjusted EBITDA was defined as earnings before
interest, taxes, depreciation and amortization, excluding
approximately $800,000 in operating expense associated with the
annual fee payable to Apax Partners, L.P. and a loss on the
disposal of fixed assets in fiscal year 2008, which were not
taken into account when setting fiscal year 2008 financial
targets. Our President and Chief Executive Officer
and/or board
of directors determined that these unplanned costs were outside
managements control and excluded them when measuring
Adjusted EBITDA achievement under the cash bonus program. For
the Spring and Fall selling seasons, our actual
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Adjusted EBITDA, as calculated for the purpose of the annual
cash bonus, was $14.7 million and $19.0 million,
respectively. For the year ended January 31, 2009, our
actual Adjusted EBITDA, as calculated for the purpose of the
annual cash bonus, was $34.2 million.
The corporate performance objective is based upon the
achievement of Adjusted EBITDA targets that are set at a
threshold amount, a target amount and a maximum amount for each
of our Spring and Fall selling seasons and for the fiscal year
by our President and Chief Executive Officer
and/or board
of directors. For fiscal year 2008, we defined our Spring
selling season as the performance period from February 2008
through July 2008 and our Fall selling season as the performance
period from July 2008 through January 2009. For fiscal year
2008, each of our Spring and Fall selling seasons carried a
weight of 25% of the total bonus target amount while our annual
Adjusted EBITDA target carried a weight of 50% of the total
bonus target amount. The corporate performance during each of
the three performance periods is compared separately to the
different target amounts.
The following table sets forth the Adjusted EBITDA targets for
the Spring and Fall selling seasons and the fiscal year.
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Fiscal Year
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Spring Season
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Fall Season
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Adjusted EBITDA Amounts:
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Targets
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Targets
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Targets
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Threshold
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$
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28.9 million
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$
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13.1 million
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$
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15.8 million
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Target
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$
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31.1 million
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$
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14.1 million
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$
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17.0 million
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Maximum
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$
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34.5 million
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$
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15.6 million
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$
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18.9 million
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In November 2007, our President and Chief Executive Officer, in
consultation with members of our board of directors, established
a target bonus, expressed as a percentage of base salary, for
each of our named executive officers, other than himself, with a
minimum, threshold and maximum target bonus based upon the
achievement of the Adjusted EBITDA target. For fiscal year 2008,
Mr. Fischs target bonus amount was set in accordance
with his employment agreement at 50%. Going forward, our board
of directors will determine the actual cash bonus awarded to our
President and Chief Executive Officer. The following table shows
the target bonus pool amounts for each of our named executive
officers for different levels of achievement of the Adjusted
EBITDA target amounts, as shown in the table above, for each of
the Spring and Fall selling seasons and the fiscal year:
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111%
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93%
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100%
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of Adjusted
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of Adjusted
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of Adjusted
|
|
EBITDA
|
|
|
Below
|
|
|
EBITDA
|
|
EBITDA
|
|
Target or
|
|
|
Threshold
|
|
|
Target
|
|
Target
|
|
Above
|
|
Robert N. Fisch
|
|
|
|
|
|
25% salary
|
|
50% salary
|
|
110% salary
|
Kim A. Reynolds
|
|
|
|
|
|
15% salary
|
|
30% salary
|
|
60% salary
|
Keith A. McDonough
|
|
|
|
|
|
12.5% salary
|
|
25% salary
|
|
50% salary
|
John P. Bugnar
|
|
|
|
|
|
12.5% salary
|
|
25% salary
|
|
50% salary
|
Michael A. Holland(1)
|
|
|
|
|
|
12.5% salary
|
|
25% salary
|
|
50% salary
|
|
|
|
(1)
|
|
Mr. Hollands target bonus was
increased from 20% to 25% in June 2008 as part of his promotion
from Vice President to Senior Vice President.
|
Based upon our achievement of Adjusted EBITDA as calculated
under our cash bonus program, each of our named executive
officers received a bonus in the amount set forth in the Summary
Compensation Table below.
Long-Term
Equity-Based Compensation
Our President and Chief Executive Officer
and/or board
of directors believe that equity-based compensation is an
important component of our executive compensation program and
that providing a significant portion of our executive
officers total compensation package in equity-based
compensation aligns the incentives of our executives with the
interests of our stockholders and with our long-term corporate
success. Additionally, our President and Chief Executive Officer
and/or board
of directors believe that equity-based compensation
77
awards enable us to attract, motivate, retain and adequately
compensate executive talent. To that end, we have awarded
equity-based compensation in the form of options to purchase
shares of our common stock. Our President and Chief Executive
Officer
and/or board
of directors believe stock options provide executives with a
significant long-term interest in our success by rewarding the
creation of stockholder value over time.
Generally, each executive officer is provided with a stock
option grant when he or she joins our company based upon his or
her position with us and his or her relevant prior experience.
Prior to fiscal year 2008, these inducement grants generally
vested over the course of five years with 20% of the shares
vesting on the first anniversary of the applicable grant date
and the remainder of the shares vesting annually in equal
installments over the next four years, to encourage executive
longevity and to compensate our executive officers for their
contribution to our success over a period of time. Beginning in
fiscal year 2008, each of our stock option grants generally vest
over the course of four years with 25% of the shares vesting on
the first anniversary of the applicable grant date and the
remainder of the shares vesting annually in equal installments
over the next three years. In addition to stock options granted
upon commencement of employment with us, our compensation
committee may grant additional stock options to retain our
executives and to recognize the achievement of corporate and
individual goals
and/or
strong individual performance.
Stock options are granted with an exercise price equal to or
greater than the fair value of our stock on the applicable date
of grant. Upon completion of this offering, we expect to
determine fair value for purposes of stock option pricing based
on the closing price of our common stock on The NASDAQ Global
Select Market on the date of grant.
In general, stock option grants to our executive officers are
determined at the discretion of our President and Chief
Executive Officer in consultation with our board of directors.
In addition, our President and Chief Executive Officer and/or
board of directors also consider the executive officers
current position with our company, the size of his or her total
compensation package and the amount of existing vested and
unvested stock options, if any, then held by the executive
officer. No formal benchmarking efforts are made by our
President and Chief Executive Officer
and/or board
of directors with respect to the size of option grants made to
executive officers and, in general, the determination process is
very informal. Historically, our President and Chief Executive
Officer
and/or board
of directors has made all stock option grant decisions with
respect to our executive officers, and we anticipate that, upon
completion of this offering, our compensation committee will,
subject to approval by our board of directors as deemed
necessary by the compensation committee, determine the size and
terms and conditions of option grants to our executive officers
in accordance with the terms of the applicable plan and will
approve them on an individual basis.
We did not grant any stock options during fiscal year 2008 to
our named executive officers.
On July 24, 2009, we approved a grant of incentive stock
options to each of our named executive officers, as well as
certain other executive officers. The stock options were granted
in accordance with our Amended and Restated 2003 Ownership
Incentive Plan, or the 2003 Plan, as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of Stock
|
|
|
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Robert N. Fisch
|
|
|
73,702
|
|
|
$
|
11.80
|
|
Kim A. Reynolds
|
|
|
58,962
|
|
|
$
|
11.80
|
|
Keith A. McDonough
|
|
|
29,481
|
|
|
$
|
11.80
|
|
John P. Bugnar
|
|
|
14,740
|
|
|
$
|
11.80
|
|
Michael A. Holland
|
|
|
14,740
|
|
|
$
|
11.80
|
|
The number of shares of common stock underlying each stock
option grant was determined by our President and Chief Executive
Officer based upon the outstanding equity grants held both by
the individual and by our executives as a group, total
compensation, performance, the vesting dates of outstanding
grants, tax and accounting costs, potential dilution and other
factors. The exercise price of the stock options equals 100% of
the fair value in accordance with the terms of the 2003 Plan.
Each grant of stock options vest in four equal annual
installments beginning on the first anniversary of the date of
grant. The term of the options is ten years.
78
2009
Omnibus Incentive Plan
Effective upon completion of this offering, we will implement
the rue21, inc. 2009 Omnibus Incentive Plan, or the 2009 Plan.
For more information relating to our 2009 Plan, see
2009 Omnibus Incentive Plan.
Our 2009 Plan will allow for the grant of other forms of equity
incentives in addition to stock options, such as grants of
restricted stock, restricted stock units and stock appreciation
rights. In the future, our compensation committee may consider
awarding such additional or alternative forms of awards to our
executive officers, although no decision to use such other forms
of award has yet been made.
Other
Executive Benefits and Perquisites
We provide the following benefits to our executive officers on
the same basis as other eligible employees:
|
|
|
|
|
health insurance;
|
|
|
|
vacation, personal holidays and sick days;
|
|
|
|
life insurance and supplemental life insurance;
|
|
|
|
short-term and long-term disability; and
|
|
|
|
a 401(k) profit-sharing plan with matching contributions.
|
We believe these benefits are generally consistent with those
offered by other companies and specifically with those companies
with which we compete for employees.
We also provide an automobile allowance to our executive
officers and a housing allowance and the reimbursement of
certain travel expenses of our President and Chief Executive
Officer and his spouse.
Employment
Agreements and Severance and Change in Control
Benefits
We have entered into an employment agreement that contains
severance benefits and change in control provisions with
Mr. Fisch, our President and Chief Executive Officer, the
terms of which are described under the heading
Potential Payments Upon Termination or Change in
Control. We believe these severance and change in control
benefits are essential elements of our executive compensation
package and assist us in recruiting and retaining talented
individuals. In addition, we may enter into an employment
agreement with certain other executive officers.
Section 162(m)
Compliance
Section 162(m) of the Code limits us to a deduction for
federal income tax purposes of no more than $1 million of
compensation paid to certain executive officers in a taxable
year. Compensation above $1 million may be deducted if it
is performance-based compensation within the meaning
of the Code.
Our board of directors has determined that stock options granted
under our Amended and Restated 2003 Ownership Incentive Plan, or
2003 Plan, with an exercise price at least equal to the fair
value of our common stock on the date of grant should be treated
as performance-based compensation. Our board of
directors believes that we should be able to continue to manage
our executive compensation program for our named executive
officers so as to preserve the related federal income tax
deductions, although individual exceptions may occur.
79
2008
Summary Compensation Table
The following table sets forth certain information with respect
to compensation for the year ended January 31, 2009 earned
by, awarded to or paid to our named executive officers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
Option
|
|
Incentive Plan
|
|
All Other
|
|
|
|
|
|
|
Salary
|
|
Bonus
|
|
Awards
|
|
Awards
|
|
Compensation
|
|
Compensation
|
|
Total
|
Name and Principal Position
|
|
Year
|
|
($)
|
|
($)
|
|
($)
|
|
($)(1)
|
|
($)(2)
|
|
($)(3)
|
|
($)
|
|
Robert N. Fisch
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President and Chief Executive Officer
|
|
|
2008
|
|
|
|
735,000
|
|
|
|
|
|
|
|
|
|
|
|
7,708
|
|
|
|
736,497
|
|
|
|
79,220
|
|
|
|
1,558,425
|
|
Kim A. Reynolds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Vice President and General Merchandise Manager
|
|
|
2008
|
|
|
|
321,116
|
(4)
|
|
|
|
|
|
|
|
|
|
|
8,115
|
|
|
|
184,106
|
|
|
|
1,506
|
|
|
|
514,843
|
|
Keith A. McDonough
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Vice President and Chief Financial Officer
|
|
|
2008
|
|
|
|
220,942
|
(5)
|
|
|
|
|
|
|
|
|
|
|
4,063
|
|
|
|
105,562
|
|
|
|
2,223
|
|
|
|
332,790
|
|
John P. Bugnar
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Vice President and Director of Stores
|
|
|
2008
|
|
|
|
248,962
|
(6)
|
|
|
|
|
|
|
|
|
|
|
3,051
|
|
|
|
118,992
|
|
|
|
11,533
|
|
|
|
382,538
|
|
Michael A. Holland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Vice President of Information Technology
|
|
|
2008
|
|
|
|
217,452
|
(7)
|
|
|
|
|
|
|
|
|
|
|
2,562
|
|
|
|
95,250
|
|
|
|
1,122
|
|
|
|
316,386
|
|
|
|
|
(1)
|
|
Reflects the aggregate dollar
amounts recognized for incentive shares for financial statement
reporting purposes for fiscal year 2008, disregarding any
estimate of forfeitures related to service-based vesting
conditions, in accordance with SFAS No. 123(R). See
note 5 to our audited consolidated financial statements
included elsewhere in this prospectus.
|
|
(2)
|
|
Represents amounts earned for
fiscal year 2008 under our annual cash incentive program, which
were paid in August 2008 and March 2009.
|
|
(3)
|
|
Includes 401(k) profit-sharing plan
contributions for eligible employees, term life insurance,
disability insurance, long-term care insurance and other
personal benefits. The amounts included in that column include
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401(k)
|
|
Term Life
|
|
Life
|
|
Automobile
|
|
Personal
|
|
Housing
|
Name
|
|
Match(a)
|
|
Insurance(b)
|
|
Insurance(b)
|
|
Allowance
|
|
Travel(c)
|
|
Allowance(d)
|
|
Robert N. Fisch
|
|
|
|
|
|
|
628
|
|
|
|
3,074
|
|
|
|
3,548
|
|
|
|
44,082
|
|
|
|
27,888
|
|
Kim A. Reynolds
|
|
|
1,108
|
|
|
|
398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Keith A. McDonough
|
|
|
1,805
|
|
|
|
418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John P. Bugnar
|
|
|
1,260
|
|
|
|
747
|
|
|
|
|
|
|
|
9,526
|
|
|
|
|
|
|
|
|
|
Michael A. Holland
|
|
|
945
|
|
|
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Reflects amounts of contributions
to the 401(k) profit-sharing plan for eligible employees.
|
|
(b)
|
|
Represents premiums paid by us for
applicable insurance policies.
|
|
(c)
|
|
Includes commercial airfare and
other travel-related expenses of our President and Chief
Executive Officer and his spouse to and from our corporate
headquarters.
|
|
(d)
|
|
Represents the dollar value of rent
and utilities paid by us for an apartment used by Mr. Fisch
when he is in Pennsylvania.
|
|
|
|
(4)
|
|
Ms. Reynoldss salary was
increased from $308,000 to $330,000 in June 2008.
|
|
(5)
|
|
Mr. McDonoughs salary
was increased from $212,000 to $227,000 in June 2008.
|
|
(6)
|
|
Mr. Bugnars salary was
increased from $243,000 to $253,000 in June 2008.
|
|
(7)
|
|
Mr. Hollands salary was
increased from $210,000 to $222,500 in June 2008.
|
80
2008
Grants of Plan-Based Awards
The following table sets forth certain information with respect
to grants of plan-based awards for the year ended
January 31, 2009 with respect to our named executive
officers. We did not grant any stock options to our named
executive officers in fiscal year 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
of
|
|
|
Exercise or
|
|
|
Grant Date
|
|
|
|
Estimated Future Payouts Under
|
|
|
Estimated Future Payouts Under
|
|
|
of Shares
|
|
|
Securities
|
|
|
Base Price
|
|
|
Fair Value
|
|
|
|
Non-Equity Incentive Plan Awards
|
|
|
Equity Incentive Plan Awards(1)
|
|
|
of Stock
|
|
|
Underlying
|
|
|
of Option
|
|
|
of Stock
|
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
or Units
|
|
|
Options
|
|
|
Awards
|
|
|
and Option
|
|
Name
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
(#)
|
|
|
(#)
|
|
|
($/sh)
|
|
|
Awards
|
|
|
Robert N. Fisch
|
|
|
183,750
|
|
|
|
367,506
|
|
|
|
808,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kim A. Reynolds
|
|
|
48,125
|
|
|
|
96,250
|
|
|
|
192,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Keith A. McDonough
|
|
|
27,594
|
|
|
|
55,188
|
|
|
|
110,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John P. Bugnar
|
|
|
31,104
|
|
|
|
62,208
|
|
|
|
124,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael A. Holland(1)
|
|
|
24,880
|
|
|
|
49,760
|
|
|
|
99,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Mr. Hollands target bonus was
increased from 20% to 25% in June 2008.
|
Outstanding
Equity Awards at Fiscal Year End 2008
The following table sets forth certain information with respect
to outstanding equity awards of each of our named executive
officers as of January 31, 2009. The market value of the
shares in the following table is the fair value of such shares
as of January 31, 2009. There were no unvested stock awards
outstanding at the end of fiscal year 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
Underlying
|
|
|
Option
|
|
|
|
|
|
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Exercise
|
|
|
Option
|
|
|
|
|
|
|
Options (#)
|
|
|
Options (#)
|
|
|
Unearned
|
|
|
Price
|
|
|
Expiration
|
|
Name
|
|
Grant Date
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Options(#)
|
|
|
($)
|
|
|
Date
|
|
|
Robert N. Fisch
|
|
|
8/01/2005
|
(1)
|
|
|
40,000
|
|
|
|
80,000
|
|
|
|
|
|
|
$
|
0.006
|
|
|
|
8/01/2015
|
|
|
|
|
8/01/2006
|
(1)
|
|
|
24,000
|
|
|
|
72,000
|
|
|
|
|
|
|
$
|
0.006
|
|
|
|
8/01/2016
|
|
|
|
|
1/04/2008
|
(2)
|
|
|
18,750
|
|
|
|
56,250
|
|
|
|
|
|
|
$
|
8.00
|
|
|
|
1/04/2018
|
|
Kim A. Reynolds
|
|
|
8/01/2005
|
(1)
|
|
|
|
|
|
|
8,000
|
|
|
|
|
|
|
$
|
0.005
|
|
|
|
8/01/2015
|
|
|
|
|
8/01/2006
|
(1)
|
|
|
|
|
|
|
60,000
|
|
|
|
|
|
|
$
|
0.005
|
|
|
|
8/01/2016
|
|
|
|
|
1/04/2008
|
(2)
|
|
|
20,000
|
|
|
|
60,000
|
|
|
|
|
|
|
$
|
8.00
|
|
|
|
1/04/2018
|
|
Keith A. McDonough
|
|
|
8/01/2005
|
(1)
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
$
|
0.005
|
|
|
|
8/01/2015
|
|
|
|
|
8/01/2006
|
(1)
|
|
|
|
|
|
|
36,000
|
|
|
|
|
|
|
$
|
0.005
|
|
|
|
8/01/2016
|
|
|
|
|
1/04/2008
|
(2)
|
|
|
10,000
|
|
|
|
30,000
|
|
|
|
|
|
|
$
|
8.00
|
|
|
|
1/04/2018
|
|
John P. Bugnar
|
|
|
8/03/2003
|
(1)
|
|
|
80,000
|
|
|
|
|
|
|
|
|
|
|
$
|
0.005
|
|
|
|
8/03/2013
|
|
|
|
|
8/01/2005
|
(1)
|
|
|
4,000
|
|
|
|
4,000
|
|
|
|
|
|
|
$
|
0.005
|
|
|
|
8/01/2015
|
|
|
|
|
8/01/2006
|
(1)
|
|
|
20,000
|
|
|
|
30,000
|
|
|
|
|
|
|
$
|
0.005
|
|
|
|
8/01/2016
|
|
|
|
|
1/04/2008
|
(2)
|
|
|
7,500
|
|
|
|
22,500
|
|
|
|
|
|
|
$
|
8.00
|
|
|
|
1/04/2018
|
|
Michael A. Holland
|
|
|
8/04/2004
|
(1)
|
|
|
|
|
|
|
10,000
|
|
|
|
|
|
|
$
|
0.005
|
|
|
|
8/04/2014
|
|
|
|
|
8/01/2005
|
(1)
|
|
|
|
|
|
|
2,000
|
|
|
|
|
|
|
$
|
0.005
|
|
|
|
8/01/2015
|
|
|
|
|
8/01/2006
|
(1)
|
|
|
|
|
|
|
18,000
|
|
|
|
|
|
|
$
|
0.005
|
|
|
|
8/01/2016
|
|
|
|
|
1/04/2008
|
(2)
|
|
|
6,250
|
|
|
|
18,750
|
|
|
|
|
|
|
$
|
8.00
|
|
|
|
1/04/2018
|
|
|
|
|
(1)
|
|
Options vest at a rate of 20% per
year over five years on each anniversary date of the grant date,
subject to continued employment with us.
|
|
(2)
|
|
Options vest at a rate of 25% per
year over four years on each anniversary date of the grant date,
subject to continued employment with us.
|
81
Options
Exercised and Stock Vested
The following table sets forth certain information with respect
to the vesting or exercise of stock options during the fiscal
year ended January 31, 2009 with respect to our named
executive officers.
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
|
Number of Shares
|
|
|
|
|
|
|
Acquired on
|
|
|
Value Realized
|
|
|
|
Exercise
|
|
|
on Exercise
|
|
Name
|
|
(#)
|
|
|
($)(1)
|
|
|
Robert N. Fisch
|
|
|
|
|
|
|
|
|
Kim A. Reynolds
|
|
|
64,000
|
|
|
|
178,880
|
|
Keith A. McDonough
|
|
|
34,000
|
|
|
|
95,030
|
|
John P. Bugnar
|
|
|
|
|
|
|
|
|
Michael A. Holland
|
|
|
34,000
|
|
|
|
95,030
|
|
|
|
|
(1)
|
|
Based upon a share value of $2.80
per share.
|
Pension
Benefits
Our named executive officers did not participate in or have
account balances in qualified or nonqualified defined benefit
plans sponsored by us. Our board of directors or compensation
committee may elect to adopt qualified or nonqualified benefit
plans in the future if it determines that doing so is in our
best interest.
Nonqualified
Deferred Compensation
Our named executive officers did not participate in or have
account balances in nonqualified defined contribution plans or
other nonqualified deferred compensation plans maintained by us.
Our board of directors or compensation committee may elect to
provide our executive officers and other employees with
nonqualified defined contribution or other nonqualified deferred
compensation benefits in the future if it determines that doing
so is in our best interest.
Potential
Payments Upon Termination or Change in Control
The information below describes and quantifies certain
compensation that would become payable under
Mr. Fischs employment agreement if, as of
January 31, 2009, his employment with us had been
terminated. Due to the number of factors that affect the nature
and amount of any benefits provided upon the events discussed
below, any actual amounts paid or distributed may be different.
Factors that could affect these amounts include the timing
during the year of any such event.
On January 1, 2008, we entered into an employment agreement
with Mr. Fisch. Under the terms of his employment
agreement, Mr. Fisch is entitled to the following:
|
|
|
|
|
annual base salary of $735,000 effective February 1, 2008,
which increased to $800,000 effective February 1, 2009,
$875,000 effective February 1, 2010 and annually reviewed
thereafter by the board of directors;
|
|
|
|
annual target bonus ranging from 0% of base salary with a
maximum equal to 110% of base salary;
|
|
|
|
a stock option grant of 75,000 shares, which vests 25%
annually over four years with the first vesting date occurring
on August 1, 2008;
|
|
|
|
participation in our employee benefit programs and perquisites,
including lease of an automobile, a housing allowance for an
apartment near our corporate headquarters and the reimbursement
of certain of his and his spouses travel expenses;
|
|
|
|
severance if his employment were terminated by us for cause or
by him without good reason, equal to:
|
|
|
|
|
|
accrued but unpaid base salary; and
|
82
|
|
|
|
|
reimbursement of expenses and benefits to which he is
entitled; and
|
|
|
|
|
|
severance if his employment were terminated by us without cause
or by him for good reason, equal to:
|
|
|
|
|
|
two times his base salary in effect at termination;
|
|
|
|
two times his target annual cash incentive for the year of
termination;
|
|
|
|
continuation of employee benefits for twenty-four months
following termination to the extent permitted or, if not
permitted, then a lump sum payment of reasonably equivalent
value of the discontinued benefit;
|
|
|
|
full vesting of all accrued benefits under all retirement plans,
excluding any stock option plans, for which he has participated
and all such benefits shall be calculated as if he was credited
with two additional years of age
and/or
service to us.
|
Mr. Fischs right to severance if his employment were
terminated by us without cause or by him for good reason is
conditioned upon execution of a general release of claims. In
the event we choose not to renew his employment agreement and he
executes a general release of claims, he is eligible to receive
an amount equal to twenty-four months of his base salary in
effect at the end of the term in which we chose not to renew his
employment agreement and the continuation of employee benefits
for twenty-four months following the end of the term, to the
extent permitted.
For this purpose cause is defined as:
|
|
|
|
|
acts or omissions which constitute intentional misconduct or a
knowing violation of a material written company policy;
|
|
|
|
personal receipt of money, property or services by any person in
knowing violation of applicable law or a violation of a material
written company policy;
|
|
|
|
act of fraud, conversion, misappropriation or embezzlement or
his conviction of, or entry of a guilty plea or plea of no
contest, with respect to a felony or any other crime in which
imprisonment is possible;
|
|
|
|
act of moral turpitude adversely affecting his ability to
perform his duties;
|
|
|
|
alcohol or controlled substance abuse;
|
|
|
|
reckless disregard in the performance of his duties;
|
|
|
|
commission in bad faith of any act which injures or could
reasonably be expected to injure the reputation, business or
business relationships of our company;
|
|
|
|
material breach of his registration rights set forth in his
employment agreement; or
|
|
|
|
any other breach of his employment agreement in any material
respect which continues uncured for thirty days.
|
For this purpose good reason is defined as, other
than with Mr. Fischs consent:
|
|
|
|
|
removal or failure to reappoint him as President and Chief
Executive Officer or as a member of the board of directors;
|
|
|
|
material decrease or other material adverse change in the nature
or status of his duties, authority or responsibilities;
|
|
|
|
any other material breach by us of his employment agreement and
which, in respect of any material decrease or other material
adverse change in the nature or status of his duties, authority
or responsibilities or any other material breach of his
employment agreement, continues uncured for thirty days; or
|
|
|
|
a change in control and he remains employed by us for a period
of six months following the change in control.
|
83
The table below provides an estimate of the value of the
compensation and benefits due to our President and Chief
Executive Officer in the event of: (i) a termination for
cause or without good reason; (ii) death or disability;
(iii) a change in control; or (iv) a termination
without cause or for good reason. The amounts shown assume that
specified event was effective as of January 31, 2009. The
actual amounts to be paid can only be determined at the time of
the termination of employment or change in control, as
applicable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
|
|
|
|
|
|
Termination
|
|
|
|
for Cause or
|
|
|
|
|
|
|
|
|
Without
|
|
|
|
Without
|
|
|
Death or
|
|
|
Change in
|
|
|
Cause or for
|
|
|
|
Good Reason
|
|
|
Disability
|
|
|
Control
|
|
|
Good Reason
|
|
|
Cash severance base salary
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,470,000
|
|
|
$
|
1,470,000
|
|
Cash severance bonus
|
|
|
367,500
|
|
|
|
367,500
|
|
|
|
735,000
|
|
|
|
735,000
|
|
Health benefits continuation
|
|
|
|
|
|
|
|
|
|
|
7,200
|
|
|
|
7,200
|
|
Housing and car allowance
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
|
|
30,000
|
|
Life insurance premiums
|
|
|
|
|
|
|
|
|
|
|
3,600
|
|
|
|
3,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
367,500
|
|
|
$
|
367,500
|
|
|
$
|
2,245,800
|
|
|
$
|
2,245,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Solicitation
Pursuant to his employment agreement, Mr. Fisch may not solicit
any of our employees during the term of his respective
employment for two years following his date of termination.
Under our 2003 Plan, each stock option grant agreement contains
a non-solicitation provision, which provides that each recipient
may not solicit any of our employees during the term of his
respective employment for two years following his date of
termination.
Amended
and Restated 2003 Ownership Incentive Plan
Our board of directors adopted our 2003 Plan effective May 2003,
which was amended in June 2006 to increase the aggregate number
of shares available under the plan from 3,500,000 shares to
4,743,340 shares, or 19.8% of the outstanding shares of our
common stock.
As of August 1, 2009, 2,874,380 shares of common stock
had been issued upon the exercise of options granted under the
2003 Plan and 1,582,520 shares were subject to options
granted and unexercised under the 2003 Plan. Prior to completion
of this offering, the 2003 Plan will be terminated and no
further option grants will be made under the 2003 Plan and any
shares then remaining available for future grant, plus any
shares underlying outstanding options that expire or are
forfeited, will be allocated to our 2009 Plan.
Administration
The 2003 Plan is administered by our board of directors. Our
board of directors has the authority to determine the exercise
price of the awards, the recipients of awards granted under the
2003 Plan and the terms, conditions and restrictions applicable
to all awards granted under the 2003 Plan. Our board of
directors approves the form of award agreement and has authority
to accelerate, continue, extend or defer the exercisability of
any award issued under the 2003 Plan. Our board of directors may
amend, alter or discontinue the 2003 Plan at any time, provided
that, subject to certain exceptions, no such amendment may
adversely affect any then outstanding award without the consent
of the applicable recipient.
Eligibility
The 2003 Plan permits us to grant awards to our officers,
employees, non-employee directors and consultants or advisors.
Awards
The 2003 Plan provides for the grant of incentive stock options,
nonstatutory stock options, stock appreciation rights, share
awards or a combination of the foregoing. A stock option may be
an incentive stock
84
option within the meaning of Section 422 of the U.S.
Internal Revenue Service Code of 1986, or the Code, or a
nonstatutory stock option. The maximum number of shares with
respect to awards may be granted to any person during any
calendar year is 2,000,000 shares.
The 2003 Plan also provides that the ownership of shares by a
recipient is subject to the terms of the shareholders
agreement, as amended and in effect from time to time. See
Certain Relationships and Related Party
TransactionsShareholders Agreement.
Stock
Options
Incentive and nonstatutory stock options may be granted pursuant
to incentive and nonstatutory stock option agreements adopted by
our board of directors. Our board of directors determines the
exercise price for a stock option, within the terms and
conditions of the 2003 Plan, provided that the exercise price of
a stock option cannot be less than 100% of the fair value of our
common stock on the date of grant. An incentive stock option
granted to a person who at the time of grant owns or is deemed
to own more than 10% of the total combined voting power of all
classes of our outstanding stock or any of our affiliates must
have a term of no more than five years and an exercise price
that is at least 110% of the fair value at the time of grant.
Options granted under the 2003 Plan vest at the rate specified
in the optionholders option agreement.
Our board of directors determines the term of stock options
granted under the 2003 Plan, up to a maximum of ten years,
except in certain cases of termination, as described below.
Unless the terms of an optionholders stock option
agreement provide otherwise, if an optionholders
relationship with us, or our subsidiary, ceases for any reason
other than for cause, resignation with the consent of the board
of directors or disability, death or retirement, the
optionholder may exercise any vested options for a period of
thirty days following the cessation of service. If an
optionholders service relationship is terminated for
cause, then the option terminates immediately. If an
optionholder ceases service with us by reason of resignation
with the consent of the board of directors, the option shall
terminate three months after the optionholder ceases services
with us or our subsidiary. Unless the terms of an
optionholders stock option agreement provide otherwise, if
an optionholders service relationship ceases due to
disability, death or retirement, or an optionholder dies within
a certain period following cessation of service, the
optionholder or a beneficiary may exercise any vested options
for a period of 15 months following the date of termination
due to disability, death or retirement.
No option may be assigned or transferred by the optionholder
except, in the event of the death of the optionholder, by will
or the laws of descent and distribution. In addition, our board
of directors may amend, modify, extend, cancel or renew any
outstanding option or may waive any restrictions or conditions
applicable to any outstanding option. Each option is evidenced
by a written agreement, which contains such terms and
conditions, including any performance objectives as may be
determined at the discretion of the board of directors.
Stock
Appreciation Rights
Stock appreciation rights may be granted pursuant to stock
appreciation rights agreements adopted by our board of
directors. Our board of directors determines the strike price
for a stock appreciation right, which cannot be less than 100%
of the fair value of our common stock on the date of grant. Upon
the exercise of a stock appreciation right, we will pay the
participant an amount not greater than the product of
(a) the excess of the per share fair value of our common
stock on the date of exercise over the strike price, multiplied
by (b) the number of shares of common stock with respect to
which the stock appreciation right is exercised. The
appreciation distribution may be paid in cash or in any other
form of consideration acceptable to our board of directors and
set forth in the stock appreciation right agreement. A stock
appreciation right granted under the 2003 Plan vests at the rate
specified in the stock appreciation right agreement and may be
restricted by our board of directors at the time of grant.
Our board of directors determines the term of stock appreciation
rights granted under the 2003 Plan, up to a maximum of ten
years. Unless the terms of a recipients stock appreciation
right agreement provide otherwise, if a participants
relationship with us, or our subsidiary, ceases for any reason
other than for cause,
85
resignation with the consent of our board of directors or
disability, death or retirement, the participant may exercise
any vested stock appreciation right for a period of thirty days
following the cessation of service. If a participants
service relationship is terminated for cause, then the stock
appreciation right terminates immediately. If a participant
ceases service with us by reason of resignation with the consent
of our board of directors, the stock appreciation right shall
terminate three months after the participant ceases services
with us or our subsidiary. Unless the terms of a
participants stock appreciation right agreement provide
otherwise, if a participants service relationship ceases
due to disability, death or retirement, or a participant dies
within a certain period following cessation of service, the
participant or a beneficiary may exercise any vested stock
appreciation right for a period of 15 months following the
date of termination due to disability, death or retirement.
Share
Awards
Shares subject to a share award may be issued or transferred to
a recipient at the time the share award is granted, or at any
time thereafter, or in installments from time to time, as our
board of directors shall determine. In the event that any such
issuance or transfer shall not be made to the recipient at the
time the share award is granted, our board of directors may
provide for payment to such recipient, either in cash or in
shares from time to time or at the time or times such shares
shall be issued or transferred to such recipient, of amounts not
exceeding the income distributions which would have been payable
to such recipient in respect of such shares if they had been
issued or transferred to such recipient at the time such share
award was granted. Any amount payable in shares under the terms
of a share award may, at the discretion of our board of
directors, be paid in cash, on each date on which delivery of
shares would otherwise have been made, in an amount equal to the
fair value on such date of the shares which would otherwise have
been delivered.
Upon the issuance or transfer of shares pursuant to a share
award, the recipient shall, with respect to such shares, become
a stockholder of our company except to the extent otherwise
provided in the share award agreement.
Effect on
Awards of Certain Corporate Transactions
If we experience a change in control, all awards that have been
outstanding for at least six months shall immediately vest or
become exercisable. The acquiring or surviving corporation may
either assume or continue outstanding awards, or substitute
equivalent awards for such awards. Alternatively, the acquiring
or surviving corporation may instead terminate and cancel
outstanding awards in exchange for a payment equal to the excess
of the value of the shares that the recipient would have
received upon the exercise of the awards over the exercise price
or amount otherwise payable.
Other
Provisions
If there is a transaction or event which changes our stock that
does not involve our receipt of consideration, such as a merger,
consolidation, reorganization, stock dividend or stock split,
our board of directors will appropriately adjust the class and
the maximum number of shares subject to the 2003 Plan.
2009
Omnibus Incentive Plan
We intend to adopt the rue21, inc. 2009 Omnibus Incentive Plan,
or the 2009 Plan, in connection with our initial public
offering. The 2009 Plan provides for grants of stock options,
stock appreciation rights, restricted stock, restricted stock
units, dividend equivalents, other stock-based awards and other
cash-based awards. Directors, officers and other employees of us
and our subsidiaries, as well as others performing consulting or
advisory services for us, will be eligible for grants under the
2009 Plan. The purpose of the 2009 Plan is to provide incentives
that will attract, retain and motivate highly competent
officers, directors, employees and consultants by providing them
with appropriate incentives and rewards either through a
proprietary interest in our long-term success or compensation
based on their performance in fulfilling their personal
responsibilities. The following is a summary of the material
terms of the 2009 Plan, but does not include all of the
provisions of the 2009 Plan. For further information about the
86
2009 Plan, we refer you to the complete copy of the 2009 Plan,
which we have filed as an exhibit to the registration statement,
of which this prospectus is a part.
Administration
The 2009 Plan provides for its administration by the
compensation committee of our board of directors, any committee
designated by our board of directors to administer the 2009 Plan
or our board of directors. Among the committees powers are
to determine the form, amount and other terms and conditions of
awards, clarify, construe or resolve any ambiguity in any
provision of the 2009 Plan or any award agreement, amend the
terms of outstanding awards and adopt such rules, forms,
instruments and guidelines for administering the 2009 Plan as it
deems necessary or proper. All actions, interpretations and
determinations by the committee or by our board of directors are
final and binding.
Shares
Available
The 2009 Plan makes available an aggregate of
3,626,000 shares of our common stock, subject to
adjustments. In the event that any outstanding award expires, is
forfeited, cancelled or otherwise terminated without
consideration, shares of our common stock allocable to such
award, including the unexercised portion of such award, shall
again be available for purposes of the 2009 Plan. If any award
is exercised by tendering shares of our common stock to us,
either as full or partial payment, in connection with the
exercise of such award under the 2009 Plan or to satisfy our
withholding obligation with respect to an award, only the number
of shares of our common stock issued net of such shares tendered
will be deemed delivered for purposes of determining the maximum
number of shares of our common stock then available for delivery
under the 2009 Plan.
Eligibility
for Participation
Members of our board of directors, as well as employees of, and
consultants to, us or any of our subsidiaries and affiliates are
eligible to receive awards under the 2009 Plan. The selection of
participants is within the sole discretion of the committee.
Types of
Awards
The 2009 Plan provides for the grant of stock options, including
incentive stock options and nonqualified stock options,
collectively, the options, stock appreciation rights, shares of
restricted stock, or the restricted stock, restricted stock
units, rights to dividend equivalents, other stock-based awards
and other cash-based awards, collectively, the awards. The
committee will, with regard to each award, determine the terms
and conditions of the award, including the number of shares
subject to the award, the vesting terms of the award, and the
purchase price for the award. Awards may be made in assumption
of or in substitution for outstanding awards previously granted
by us or our affiliates, or a company acquired by us or with
which we combine.
Award
Agreement
Awards granted under the 2009 Plan shall be evidenced by award
agreements, which need not be identical, that provide additional
terms, conditions, restrictions
and/or
limitations covering the grant of the award, including, without
limitation, terms providing for the acceleration of
exercisability or vesting of awards in the event of a change in
control or conditions regarding the participants
employment, as determined by the committee in its sole
discretion; provided, however, that in the event of any conflict
between the provisions of the 2009 Plan and any such award
agreement, the provisions of the 2009 Plan shall prevail.
Options
An option granted under the 2009 Plan will enable the holder to
purchase a number of shares of our common stock on set terms.
Options shall be designated as either a nonqualified stock
option or an incentive stock option. An option granted as an
incentive stock option shall, to the extent it fails to qualify
as an incentive stock option, be treated as a nonqualified
option. None of us, including any of our affiliates or the
87
committee, shall be liable to any participant or to any other
person if it is determined that an option intended to be an
incentive stock option does not qualify as an incentive stock
option. Each option shall be subject to terms and conditions,
including exercise price, vesting and conditions and timing of
exercise, consistent with the 2009 Plan and as the committee may
impose from time to time.
The exercise price of an option granted under the 2009 Plan will
be determined by the committee and it is expected that the
exercise price will not be less than 100% of the fair value of a
share of our common stock on the date of grant, provided the
exercise price of an incentive stock option granted to a person
holding greater than 10% of our voting power may not be less
than 110% of such fair value on such date. The committee will
determine the term of each option at the time of grant in its
discretion; however, the term may not exceed ten years or, in
the case of an incentive stock option granted to a ten percent
stockholder, five years.
Stock
Appreciation Rights
A stock appreciation right entitles the holder to receive, upon
its exercise, the excess of the fair value of a specified number
of shares of our common stock on the date of exercise over the
grant price of the stock appreciation right. The payment of the
value may be in the form of cash, shares of our common stock,
other property or any combination thereof, as the committee
determines in its sole discretion. Stock appreciation rights may
be granted alone or in tandem with any option at the same time
such option is granted, or a tandem SAR. A tandem SAR is only
exercisable to the extent that the related option is exercisable
and expires no later than the expiration of the related option.
Upon the exercise of all or a portion of a tandem SAR, a
participant is required to forfeit the right to purchase an
equivalent portion of the related option, and vice versa.
Subject to the terms of the 2009 Plan and any applicable award
agreement, the grant price, which is not expected to be less
than 100% of the fair value of a share of our common stock on
the date of grant, term, methods of exercise, methods of
settlement, and any other terms and conditions of any stock
appreciation right shall be determined by the committee. The
committee may impose such other conditions or restrictions on
the exercise of any stock appreciation right as it may deem
appropriate.
Restricted
Stock
The committee may, in its discretion, grant awards of restricted
stock. Restricted stock may be subject to such terms and
conditions, including vesting, as the committee determines
appropriate, including, without limitation, restrictions on the
sale or other disposition of such shares of our common stock.
The committee may require the participant to deliver a duly
signed stock power, endorsed in blank, relating to shares of our
common stock covered by such an award. The committee may also
require that the stock certificates evidencing such shares be
held in custody or bear restrictive legends until the
restrictions thereon shall have lapsed. Unless otherwise
determined by the committee and set forth in the award
agreement, a participant holding restricted stock will have the
right to vote and receive dividends with respect to such
restricted stock.
Restricted
Stock Units
The committee may, in its discretion, grant awards of restricted
stock units, or RSUs. RSUs are awards that provide for the
deferred delivery of a specified number of shares of our common
stock. RSUs may be subject to such terms and conditions,
including vesting, as the committee determines appropriate.
Dividend
Equivalents
The committee may, in its discretion, grant dividend equivalents
based on the dividends declared on shares that are subject to
any award. The grant of dividend equivalents shall be treated as
a separate award. Such dividend equivalents shall be converted
to cash or shares by such formula and at such time and subject
to such limitations as may be determined by the committee. As
determined by the committee, dividend equivalents granted with
respect to any option or stock appreciation right may be payable
regardless of whether such option or stock appreciation right is
subsequently exercised.
88
Other
Share-Based Awards
The committee, in its discretion, may grant awards of shares of
our common stock and awards that are valued, in whole or in
part, by reference to, or are otherwise based on the fair market
value of such shares the other share-based awards. Such
other share-based awards shall be in such form, and dependent on
such conditions, as the committee shall determine, including,
without limitation, the right to receive one or more shares of
our common stock, or the equivalent cash value of such stock,
upon completion of a specified period of service, the occurrence
of an event
and/or the
attainment of performance objectives. Subject to the provisions
of the 2009 Plan, the committee shall determine to whom and when
other share-based awards will be made, the number of shares of
our common stock to be awarded under, or otherwise related to,
such other share-based awards, whether such other share-based
awards shall be settled in cash, shares of our common stock or a
combination of cash and such shares, and all other terms and
conditions of such awards.
Other
Cash-Based Awards
The committee, in its discretion, may grant awards payable in
cash. Cash-based awards shall be in such form, and dependent on
such conditions, as the committee shall determine, including,
without limitation, being subject to the satisfaction of vesting
conditions or awarded purely as bonus and not subject to
restrictions or conditions. If a cash-based award is subject to
vesting conditions, the committee may accelerate the vesting of
such award in its discretion.
Transferability
Except as otherwise determined by the committee, an award shall
not be transferable or assignable by a participant except in the
event of his death, subject to the applicable laws of descent
and distribution, and any such purported assignment, alienation,
pledge, attachment, sale, transfer or encumbrance shall be void
and unenforceable against us or any of our subsidiaries or
affiliates. Any permitted transfer of the awards to heirs or
legatees of a participant shall not be effective to bind us
unless the committee has been furnished with written notice
thereof and a copy of such evidence as the committee may deem
necessary to establish the validity of the transfer and the
acceptance by the transferee or transferees of the terms and
conditions of the 2009 Plan and any award agreement.
Stockholder
Rights
Except as otherwise provided in the applicable award agreement,
a participant has no rights as a stockholder with respect to
shares of our common stock covered by any award until the
participant becomes the record holder of such shares.
Adjustment
of Awards
Notwithstanding any other provision of the 2009 Plan, in the
event of any corporate event or transaction such as a merger,
consolidation, reorganization, recapitalization, separation,
stock dividend, stock split, reverse stock split, split up,
spin-off, combination of shares of our common stock, exchange of
shares of our common stock, dividend in kind, extraordinary cash
dividend, or other like change in capital structure, other than
normal cash dividends, to our stockholders, or any similar
corporate event or transaction, the committee, to prevent
dilution or enlargement of participants rights under the
2009 Plan, shall, in its sole discretion, as applicable,
(a) adjust the number and kind of shares of stock or other
securities that may be issued under the 2009 Plan, the number
and kind of shares of our common stock or other securities
subject to outstanding awards,
and/or where
applicable, the exercise price, base value or purchase price
applicable to such awards; (b) grant a right to receive one
or more payments of securities, cash
and/or
property, which right may be evidenced as an additional award
under the 2009 Plan, in respect of any outstanding award; or
(c) provide for the settlement of any outstanding award,
other than a stock option or stock appreciation right, in such
securities, cash
and/or other
property as would have been received had the award been settled
in full immediately prior to such corporate event or
transaction; provided, however, that in the case of an
adjustment made in accordance with (b) or (c) above,
the right to any securities, cash
and/or
property may be issued subject to the same vesting schedule as
the outstanding award being adjusted; and provided, further,
that any
89
adjustment shall comply with Section 409A of the Code to
the extent applicable. Should the vesting of any award be
conditioned upon our attainment of performance conditions, our
board of directors may make such adjustments to the terms and
conditions of such awards and the criteria therein to recognize
unusual and nonrecurring events affecting us or in response to
changes in applicable laws, regulations or accounting principles.
In the event we are a party to a merger or consolidation or
similar transaction, including a change in control, unless
otherwise prohibited under applicable law or by the applicable
rules and regulations of national securities exchanges or unless
the committee determines otherwise in an award agreement, the
committee is authorized, but not obligated, to make adjustments
in the terms and conditions of outstanding awards, including,
without limitation, the continuation or assumption of such
outstanding awards under the 2009 Plan by us, if we are the
surviving company or corporation, or by the surviving company or
corporation or its parent; substitution by the surviving company
or corporation or its parent of awards with substantially the
same terms for such outstanding awards; accelerated
exercisability, vesting
and/or lapse
of restrictions under all then outstanding awards immediately
prior to the occurrence of such event; upon written notice,
provided that any outstanding awards must be exercised, to the
extent then exercisable, within fifteen days immediately prior
to the scheduled consummation of the event, or such other period
as determined by the committee, in either case contingent upon
the consummation of the event, at the end of which period such
awards shall terminate to the extent not so exercised within
such period; and cancellation of all or any portion of
outstanding awards for fair value, as determined in the sole
discretion of the committee, which, in the case of options and
stock appreciation rights, may equal the excess, if any, of the
value of the consideration to be paid in the change in control
transaction to holders of the same number of shares subject to
such awards or, if no such consideration is paid, fair value of
our shares of common stock subject to such outstanding awards or
portion thereof being canceled, over the aggregate option price
or grant price, as applicable, with respect to such awards or
portion thereof being canceled.
Amendment
and Termination
Our board of directors may amend, alter, suspend, discontinue,
or terminate the 2009 Plan or any portion thereof or any award,
or award agreement, thereunder at any time; provided that no
such amendment, alteration, suspension, discontinuation or
termination shall be made (i) without stockholder approval
if such approval is necessary to comply with any tax or
regulatory requirement applicable to the 2009 Plan and
(ii) without the consent of the participant, if such action
would materially diminish any of the rights of any participant
under any award granted to such participant under the 2009 Plan;
provided, however, the committee may amend the 2009 Plan, any
award or any award agreement in such manner as it deems
necessary to permit the granting of awards meeting the
requirements of applicable laws.
Compliance
with Section 409A of the Code
To the extent that the 2009 Plan
and/or
awards are subject to Section 409A of the Code, the
committee may, in its sole discretion and without a
participants prior consent, amend the 2009 Plan
and/or
awards, adopt policies and procedures, or take any other
actions, including amendments, policies, procedures and actions
with retroactive effect, as are necessary or appropriate to
(a) exempt any award from the application of
Section 409A, (b) preserve the intended tax treatment
of any such award, or (c) comply with the requirements of
Section 409A, United States Treasury regulations and other
interpretive guidance issued thereunder, including without
limitation any such regulations or other guidance that may be
issued after the date of the grant. The 2009 Plan shall be
interpreted at all times in such a manner that the terms and
provisions of the 2009 Plan and awards comply with
Section 409A and any guidance issued thereunder. Neither we
nor the committee has any obligation to take any action to
prevent the assessment of any excise tax on any person with
respect to any award under Section 409A, and none of us or
any of our subsidiaries or affiliates, or any of our employees
or representatives, has any liability to a participant with
respect thereto.
Effective
Date
The 2009 Plan will become effective prior to the completion of
this offering.
90
Indemnification
of Officers and Directors
Our amended and restated certificate of incorporation and
amended and restated bylaws will provide that we will indemnify
our directors and officers to the fullest extent permitted by
the DGCL. Upon completion of this offering, we intend to have in
place directors and officers liability insurance
that insures such persons against the costs of defense,
settlement or payment of a judgment under certain circumstances.
In addition, our amended and restated certificate of
incorporation will provide that our directors will not be liable
for monetary damages for breach of fiduciary duty.
In addition, prior to the completion of this offering, we will
enter into indemnification agreements with each of our executive
officers and directors. The indemnification agreements will
provide the executive officers and directors with contractual
rights to indemnification, expense advancement and
reimbursement, to the fullest extent permitted under the DGCL.
There is no pending litigation or proceeding naming any of our
directors or officers to which indemnification is being sought,
and we are not aware of any pending or threatened litigation
that may result in claims for indemnification by any director or
officer.
91
PRINCIPAL
AND SELLING STOCKHOLDERS
The following table sets forth information as of
October 27, 2009 regarding the beneficial ownership of our
common stock (1) immediately prior to and (2) as
adjusted to give effect to this offering by:
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each person or group who is known by us to own beneficially more
than 5% of our outstanding shares of common stock;
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each of our named executive officers;
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each of our directors and each director nominee;
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all of the executive officers, directors and director nominees
as a group; and
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each selling stockholder.
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For further information regarding material transactions between
us and certain of our stockholders, see Certain
Relationships and Related Party Transactions.
Beneficial ownership for the purposes of the following table is
determined in accordance with the rules and regulations of the
SEC. These rules generally provide that a person is the
beneficial owner of securities if such person has or shares the
power to vote or direct the voting thereof, or to dispose or
direct the disposition thereof or has the right to acquire such
powers within 60 days. Common stock subject to options that
are currently exercisable or exercisable within 60 days of
October 27, 2009 are deemed to be outstanding and
beneficially owned by the person holding the options. These
shares, however, are not deemed outstanding for the purposes of
computing the percentage ownership of any other person.
Percentage of beneficial ownership is based on
22,510,662 shares of common stock outstanding after giving
effect to our corporate reorganization, and
24,160,662 shares of common stock to be outstanding after
the completion of this offering, including common stock
outstanding due to the exercise of options to purchase
419,620 shares of common stock between August 1, 2009
and October 27, 2009 and assuming no exercise of the option
to purchase additional shares. Except as disclosed in the
footnotes to this table and subject to applicable community
property laws, we believe that each stockholder identified in
the table possesses sole voting and investment power over all
shares of common stock shown as beneficially owned by the
stockholder. Unless otherwise indicated in the table or
footnotes below, the address for each beneficial owner is
c/o rue21,
inc., 800 Commonwealth Drive, Suite 100, Warrendale,
Pennsylvania 15086.
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Shares Beneficially Owned
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Shares Beneficially Owned
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Prior to This Offering(1)
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Number of
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After This Offering
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Name
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Number
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Percent
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Shares Offered
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Number
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Percent
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5% Stockholders:
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Funds advised by Apax Partners(2)
601 Lexington Avenue, 53rd Floor
New York, New York 10022
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14,000,000
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62.2
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%
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14,000,000
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57.9
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%
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BNP Paribas North America, Inc.(3)
787 Seventh Avenue
New York, New York 10019
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5,216,662
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23.2
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4,201,847
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1,014,815
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4.2
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Executive Officers and Directors:
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Robert N. Fisch(4)
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2,357,500
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10.4
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617,176
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1,740,324
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7.2
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Kim A. Reynolds(5)
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360,000
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1.6
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114,741
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245,259
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1.0
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Keith A. McDonough(6)
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190,000
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*
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59,870
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130,130
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*
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John P. Bugnar(7)
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275,000
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1.2
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76,185
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198,815
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*
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Michael A. Holland(8)
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97,500
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*
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97,500
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*
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Robert R. Thomson(9)
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47,500
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*
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47,500
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*
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Mark K.J. Chrystal(10)
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12,500
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*
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3,250
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9,250
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*
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Mark F. Darrel(11)
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5,216,662
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23.2
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4,201,847
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1,014,815
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4.2
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John F. Megrue Jr.(2)
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14,000,000
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62.2
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14,000,000
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57.9
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Alex S. Pellegrini(2)
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14,000,000
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62.2
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14,000,000
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57.9
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Douglas E. Coltharp(12)
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*
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12,500
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*
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92
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Shares Beneficially Owned
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Shares Beneficially Owned
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Prior to This Offering(1)
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Number of
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After This Offering
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Name
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Number
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Percent
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Shares Offered
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Number
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Percent
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All executive officers and directors
as a group (11 persons)(13)
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22,556,662
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99.9
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5,073,069
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17,496,093
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72.3
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Selling Stockholders:
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Judy Kucinski(14)
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92,500
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*
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25,000
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67,500
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*
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Lynne M. Lindley(15)
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26,000
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*
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5,900
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20,100
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*
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Elaine Gaydosh(16)
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20,500
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*
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7,593
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12,907
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*
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Sarah J. Hatfield(17)
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6,250
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*
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3,875
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2,375
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*
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*
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Represents beneficial ownership of
less than one percent (1%) of our outstanding common stock.
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(1)
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Shares shown in the table above
include shares held in the beneficial owners name or
jointly with others, or in the name of a bank, nominee or
trustee for the beneficial owners account.
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(2)
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Includes 13,725,490.2 shares
of common stock held by SKM Equity Fund II, L.P. and
274,509.8 shares of common stock held by SKM Investment
Fund II. SKM Equity Fund II, L.P. and SKM Investment
Fund II are funds advised by Apax Partners. Apax Partners
may be deemed to be the beneficial owner of shares beneficially
owned by SKM Equity Fund II, L.P. and SKM Investment
Fund II, but disclaims such beneficial ownership pursuant
to rules under the Securities Exchange Act of 1934, as amended.
Mr. Megrue is the chief executive officer and
Mr. Pellegrini is a partner of Apax Partners, and each may
be deemed to be the beneficial owners of shares owned by SKM
Equity Fund II, L.P. and SKM Investment Fund II. Both
Messrs. Megrue and Pellegrini disclaim beneficial ownership
of any securities owned by SKM Equity Fund II, L.P. or SKM
Investment Fund II.
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(3)
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BNP Paribas North America, Inc.
will sell its remaining shares if the underwriters exercise
their option to purchase additional shares.
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(4)
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Includes 125,500 shares of our
common stock issuable pursuant to the exercise of stock options,
of which 88,000 vest upon completion of the initial public
offering.
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(5)
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Includes 84,000 shares of our
common stock issuable pursuant to the exercise of stock options,
of which 44,000 vest upon completion of this offering.
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(6)
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Includes 46,000 shares of our
common stock issuable pursuant to the exercise of stock options,
of which 26,000 vest upon completion of this offering.
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(7)
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Includes 37,000 shares of our
common stock issuable pursuant to the exercise of stock options,
of which 22,000 vest upon completion of this offering.
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(8)
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Includes 42,500 shares of our
common stock issuable pursuant to the exercise of stock options,
of which 13,000 vest upon completion of this offering.
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(9)
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Includes 47,500 shares of our
common stock issuable pursuant to the exercise of stock options,
of which 24,000 vest upon completion of this offering.
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(10)
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Includes 12,500 shares of our
common stock issuable pursuant to the exercise of stock options,
none of which vest upon completion of this offering.
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(11)
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Mr. Darrel is employed by BNP
Paribas. BNP Paribas North America, Inc., a subsidiary of BNP
Paribas, beneficially owns 5,216,662 shares of our common
stock. Mr. Darrel may be deemed to be the beneficial owner
of shares owned by BNP Paribas North America, Inc.
Mr. Darrel disclaims beneficial ownership of any securities
beneficially owned by BNP Paribas North America, Inc.
Mr. Darrel has advised us that he will resign as a member
of our board of directors shortly after completion of this
offering.
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(12)
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Includes 12,500 shares of our
common stock issuable pursuant to the exercise of stock options,
of which 12,500 vest upon the completion of the initial public
offering.
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(13)
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Includes shares of our common stock
issuable pursuant to the exercise of stock options and the
shares of our common stock beneficially owned described in
footnotes (2), (3), (4), (5), (6), (7), (8), (9), (10), (11) and
(12).
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(14)
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Includes 33,500 shares of our
common stock issuable pursuant to the exercise of stock options,
of which 13,000 vest upon completion of this offering.
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(15)
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|
Includes 20,100 shares of our
common stock issuable pursuant to the exercise of stock options,
of which 6,800 vest upon completion of this offering.
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(16)
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Includes 10,100 shares of our
common stock issuable pursuant to the exercise of stock options,
of which 4,800 vest upon completion of this offering.
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(17)
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Includes 6,250 shares of our
common stock issuable pursuant to the exercise of stock options,
of which 3,000 vest upon completion of this offering.
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CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Shareholders
Agreement
In May 2003, we entered into a shareholders agreement with
SKM Equity Fund II, L.P. and SKM Investment Fund II as
funds advised by Apax Partners, BNP Paribas of North America,
Inc., UnionBalCal Equities, Inc., National City Bank of
Pennsylvania and persons who become shareholders of our company
from time to time. Under this agreement, holders of our common
stock are subject to contractual restrictions relating to their
proposed transfer of our capital stock. This agreement also
provides for certain rights of first refusal and co-sale
relating to the shares of our common stock held by the parties
thereto. Upon completion of this offering, the right of first
refusal and co-sale provisions of the shareholders agreement
will terminate pursuant to the terms of the shareholders
agreement. In addition, the agreement provides for certain
rights relating to the sale of our company and certain
preemptive rights, which, immediately prior to completion of
this offering, will terminate pursuant to the terms of the
shareholders agreement.
The election of the members of our board of directors by funds
advised by Apax Partners is also governed by the
shareholders agreement and related provisions of our
amended and restated articles of incorporation. Upon completion
of this offering, the provisions of the shareholders
agreement related to the election of the members of our board of
directors by funds advised by Apax Partners will terminate in
its entirety pursuant to the terms of the shareholders
agreement and our amended and restated articles of incorporation
will be further amended and restated such that none of our
stockholders will have any special rights regarding the election
or designation of members of our board of directors.
Agreements
with Apax Partners
In May 2003, we entered into a letter agreement with Apax
Partners, L.P. as successor to Saunders Karp & Megrue,
LLC, relating to financial advisory services to be provided to
us from time to time. Under the letter agreement, we have agreed
to pay an annual fee of $250,000 to Apax Partners and to
reimburse Apax Partners for all reasonable out-of-pocket
expenses incurred in connection with the letter agreement. In
addition, the letter agreement provides for customary
indemnification provisions and terminates once Apax Partners and
its affiliates beneficially own, collectively, less than 25% our
voting common stock. The letter agreement will be terminated in
connection with this offering and Apax Partners will be paid a
termination fee of $1.5 million. Our indemnification
obligations contained in the letter agreement will survive the
termination of the letter agreement.
Board
Compensation
Upon completion of this offering, directors who are our
employees or employees of our subsidiaries or affiliated with
Apax Partners or BNP Paribas North America, Inc. will not
receive any compensation for their service as members of either
our board of directors or board committees. All non-employee
members of our board of directors not affiliated with Apax
Partners or BNP Paribas North America, Inc. will be compensated
as set forth under ManagementCorporate
GovernanceDirector Compensation.
Employment
Agreements
We have entered into an employment agreement with
Mr. Fisch, our President and Chief Executive Officer. For
more information regarding this agreement, see Executive
CompensationPotential Payments Upon Termination or Change
in Control. In addition, we currently intend to enter into
an employment agreement with certain of our executive officers.
Indemnification
Agreements
We intend to enter into indemnification agreements with each of
our current directors and executive officers. These agreements
will require us to indemnify these individuals to the fullest
extent permitted under Delaware law against liabilities that may
arise by reason of their service to us, and to advance expenses
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incurred as a result of any proceeding against them as to which
they could be indemnified. We also intend to enter into
indemnification agreements with our future directors and
executive officers.
Procedures
for Related Party Transactions
Our board of directors will adopt a written code of conduct and
ethics for our company, which will be available on our corporate
website at www.rue21.com upon completion of this offering. The
code of conduct and ethics were not in effect when we entered
into the related party transactions discussed above. Under our
code of business conduct and ethics, our employees, officers and
directors will be discouraged from entering into any transaction
that may cause a conflict of interest for us. In addition, they
must report any potential conflict of interest, including
related party transactions, to their managers or our corporate
counsel who then reviews and summarizes the proposed transaction
for our audit committee. Pursuant to its charter, our audit
committee will be required to then approve any related-party
transactions, including those transactions involving our
directors. In approving or rejecting such proposed transactions,
the audit committee will be required to consider the relevant
facts and circumstances available and deemed relevant to the
audit committee, including the material terms of the
transactions, risks, benefits, costs, availability of other
comparable services or products and, if applicable, the impact
on a directors independence. Our audit committee will
approve only those transactions that, in light of known
circumstances, are in, or are not inconsistent with, our best
interests, as our audit committee determines in the good faith
exercise of its discretion. A copy of our code of business
conduct and ethics and audit committee charter will be available
on our corporate website at www.rue21.com upon completion of
this offering.
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DESCRIPTION
OF CAPITAL STOCK
We intend to reincorporate in Delaware prior to the
completion of this offering. Unless otherwise indicated, all
information in this prospectus assumes that we have
reincorporated in Delaware prior to the completion of this
offering. The following is a description of the material terms
of our amended and restated certificate of incorporation and
amended and restated bylaws as they will be in effect upon
completion of this offering. They may not contain all of the
information that is important to you. To understand them fully,
you should read our amended and restated certificate of
incorporation and amended and restated bylaws, copies of which
are filed with the SEC as exhibits to the registration
statement, of which this prospectus is a part.
Authorized
Capitalization
Our authorized capital stock consists of 50,000,000 shares
of common stock, par value $0.004 per share. On October 27,
2009, there were 22,510,662 shares of our common stock
outstanding, held of record by approximately
30 stockholders.
Upon our reincorporation in Delaware, our authorized capital
stock will consist of 200,000,000 of shares of common stock, par
value $0.001 per share, and 10,000,000 shares of preferred
stock, par value $0.001 per share. Following completion of this
offering, there will be 24,160,662 shares of our common stock
outstanding. As of October 27, 2009, there were outstanding
options to purchase 1,205,380 shares of our common stock,
of which 935,905 were non-vested and 269,475 were vested. Upon
completion of this offering, options to purchase
288,300 shares of our common stock will vest.
Common
Stock
Voting
Rights
Each share of common stock entitles the holder to one vote with
respect to each matter presented to our stockholders on which
the holders of common stock are entitled to vote. Our common
stock votes as a single class on all matters relating to the
election and removal of directors on our board of directors and
as provided by law. Holders of our common stock will not have
cumulative voting rights. Except in respect to matters relating
to the election and removal of directors on our board of
directors and as otherwise provided in our amended and restated
certificate of incorporation or required by law, all matters to
be voted on by our stockholders must be approved by a majority
of the shares present in person or by proxy at the meeting and
entitled to vote on the subject matter. In the case of election
of directors, all matters to be voted on by our stockholders
must be approved by a plurality of the votes entitled to be cast
by all shares of common stock.
Dividend
Rights
Subject to preferences that may be applicable to any then
outstanding preferred stock, the holders of our outstanding
shares of common stock are entitled to receive dividends, if
any, as may be declared from time to time by our board of
directors out of legally available funds. In addition, we also
may not pay dividends on our capital stock if we are in default
or have elected to defer payments of interest under our senior
secured credit facility and agreements for other indebtedness we
may incur. See Dividend Policy.
Liquidation
Rights
In the event of any voluntary or involuntary liquidation,
dissolution or winding up of our affairs, holders of our common
stock would be entitled to share ratably in our assets that are
legally available for distribution to stockholders after payment
of our debts and other liabilities. If we have any preferred
stock outstanding at such time, holders of the preferred stock
may be entitled to distribution
and/or
liquidation preferences. In either such case, we must pay the
applicable distribution to the holders of our preferred stock
before we may pay distributions to the holders of our common
stock.
Other
Rights
Our stockholders have no preemptive, conversion or other rights
to subscribe for additional shares. The rights, preferences and
privileges of the holders of our common stock are subject to,
and may be adversely
96
affected by, the rights of the holders of shares of any series
of our preferred stock that we may designate and issue in the
future.
Listing
We intend to apply to have our common stock approved for listing
on The NASDAQ Global Select Market under the symbol
rue.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock will be
Mellon Investor Services LLC.
Preferred
Stock
Our board of directors is authorized to provide for the issuance
of 10,000,000 shares of preferred stock in one or more
series and to fix the preferences, powers and relative,
participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, including
the dividend rate, conversion rights, voting rights, redemption
rights and liquidation preference and to fix the number of
shares to be included in any such series without any further
vote or action by our stockholders. Any preferred stock so
issued may rank senior to our common stock with respect to the
payment of dividends or amounts upon liquidation, dissolution or
winding up, or both. The issuance of preferred stock may have
the effect of delaying, deferring or preventing a change in
control of our company without further action by the
stockholders and may adversely affect the voting and other
rights of the holders of common stock. The issuance of preferred
stock with voting and conversion rights may adversely affect the
voting power of the holders of common stock, including the loss
of voting control to others. At present, we have no plans to
issue any of the preferred stock.
Corporate
Opportunity
Our amended and restated certificate of incorporation will
provide that the doctrine of corporate opportunity
will not apply against Apax Partners, the funds advised by Apax
Partners, or any of our directors who are employees of, or
affiliated with, Apax Partners, or funds advised by Apax
Partners, in a manner that would prohibit them from advising the
investing in or investing in competing businesses or doing
business with our clients or customers. See Risk
FactorsRisks Related to this Offering and Ownership of Our
Common StockConcentration of ownership among our existing
executive officers, directors and principal stockholders may
prevent new investors from influencing significant corporate
decisions.
Antitakeover
Effects of Delaware Law and Our Amended and Restated Certificate
of Incorporation and Amended and Restated Bylaws
Our amended and restated certificate of incorporation and our
amended and restated bylaws will contain provisions that may
delay, defer or discourage another party from acquiring control
of us. We expect that these provisions, which are summarized
below, will discourage coercive takeover practices or inadequate
takeover bids. These provisions are also designed to encourage
persons seeking to acquire control of us to first negotiate with
our board of directors, which we believe may result in an
improvement of the terms of any such acquisition in favor of our
stockholders. However, they also give our board of directors the
power to discourage acquisitions that some stockholders may
favor.
Undesignated
Preferred Stock
The ability to authorize undesignated preferred stock will make
it possible for our board of directors to issue preferred stock
with super voting, special approval, dividend or other rights or
preferences on a discriminatory basis that could impede the
success of any attempt to acquire us. These and other provisions
may have the effect of deferring, delaying or discouraging
hostile takeovers, or changes in control or management of our
company.
Classified
Board of Directors
Our amended and restated certificate of incorporation provides
that our board of directors will be divided into three classes.
Each class of directors will serve three-year terms.
97
Requirements
for Advance Notification of Stockholder Meetings, Nominations
and Proposals
Our amended and restated bylaws will provide that special
meetings of the stockholders may be called only upon the request
of not less than a majority of the combined voting power of the
voting stock, upon the request of a majority of the board of
directors, or upon the request of the chief executive officer.
Our amended and restated bylaws will prohibit the conduct of any
business at a special meeting other than as specified in the
notice for such meeting. These provisions may have the effect of
deferring, delaying or discouraging hostile takeovers, or
changes in control or management of our company.
Our amended and restated bylaws will establish advance notice
procedures with respect to stockholder proposals and the
nomination of candidates for election as directors, other than
nominations made by or at the direction of the board of
directors or a committee of the board of directors. In order for
any matter to be properly brought before a meeting,
a stockholder will have to comply with advance notice
requirements and provide us with certain information.
Additionally, vacancies and newly created directorships may be
filled only by a vote of a majority of the directors then in
office, even though less than a quorum, and not by the
stockholders. Our amended and restated bylaws will allow the
presiding officer at a meeting of the stockholders to adopt
rules and regulations for the conduct of meetings which may have
the effect of precluding the conduct of certain business at a
meeting if the rules and regulations are not followed. These
provisions may also defer, delay or discourage a potential
acquiror from conducting a solicitation of proxies to elect the
acquirors own slate of directors or otherwise attempting
to obtain control of our company.
Stockholder
Action by Written Consent
Pursuant to Section 228 of the DGCL, any action required to
be taken at any annual or special meeting of the stockholders
may be taken without a meeting, without prior notice and without
a vote if a consent or consents in writing, setting forth the
action so taken, is signed by the holders of outstanding stock
having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which
all shares of our stock entitled to vote thereon were present
and voted, unless the companys amended and restated
certificate of incorporation provides otherwise. Our amended and
restated certificate of incorporation will provide that any
action required or permitted to be taken by our stockholders may
be effected at a duly called annual or special meeting of our
stockholders and may not be effected by consent in writing by
such stockholders, unless such action is recommended by all
directors then in office.
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DESCRIPTION
OF CERTAIN INDEBTEDNESS
Senior
Secured Credit Facility
In April 2008, we entered into a five-year $60.0 million
senior secured credit facility with Bank of America, N.A., as
administrative agent, collateral agent, swing line lender,
letter of credit issuer and a lender, and various other lenders.
The revolving credit facility matures on April 10, 2013 and
is expandable at our option in increments of $5.0 million
up to a limit of $85.0 million under certain defined
conditions. The senior secured credit facility is intended to
provide financing for working capital and general corporate
purposes, including permitted investments and acquisitions and
the repayment of our prior debt. The senior secured credit
facility also contains (i) a $10.0 million sublimit
for swingline loans and (ii) a $25.0 million sublimit
for letters of credit. Availability under the senior secured
credit facility is collateralized by a first priority interest
in all of our assets.
As of August 1, 2009 and October 3, 2009, we had
$29.2 million and $17.2 million, respectively, of
outstanding borrowings under our senior secured credit facility.
Immediately prior to the completion of this offering, we
anticipate the outstanding borrowings under our senior secured
credit facility will be greater than the net proceeds we receive
from this offering.
Interest
Rate, Facility Fee and Other Fees
Borrowings under our revolving credit facility bear interest, at
our option, at either the base rate (defined as the greater of
(a) the federal funds rate plus 0.5% and (b) the prime
rate) or adjusted LIBOR (defined as an interest rate equal to
either the one-, two-, three- or six-month LIBOR, as applicable,
multiplied by the statutory reserve rate) plus a margin ranging
from 1.25% to 2.00% set quarterly depending upon the average net
availability under the senior secured credit facility during the
previous quarter. The statutory reserve rate is defined as a
fraction, expressed as a decimal, the numerator of which is one
and the denominator of which is one minus the aggregate of the
maximum reserve percentages expressed as a decimal established
by the Federal Reserve Board with respect to adjusted LIBOR, for
Eurocurrency funding. Borrowings under our swingline subfacility
will bear interest at a rate equal to the base rate referenced
above. We are also required to pay letter of credit fees with
respect to each letter of credit equal to 50% of the applicable
margin for adjusted LIBOR multiplied by the face amount of each
letter of credit.
The revolving credit facility also provides for a commitment fee
equal to 0.25% times the actual daily amount by the aggregate
commitments exceed the sum of the outstanding amount of loans
and the outstanding amount of letter of credit obligations. In
addition, if we terminate the senior secured credit facility on
or prior to April 10, 2010, we are required to pay a fee
equal to 1.0% of the revolving credit facility ceiling in effect
at the date of termination.
Guarantees
All of our borrowings under our senior secured credit facility
are guaranteed by substantially all of our material domestic
subsidiaries, as defined in the revolving credit facility. All
guarantees are guarantees of payment and performance and not of
collection.
Covenants
Our senior secured credit facility contains a number of
affirmative and restrictive covenants including limitations on
the ability to place liens on our or our direct or indirect
subsidiaries assets; make investments other than permitted
investments; incur additional indebtedness, subject to certain
exceptions; prepay or redeem certain indebtedness; merge,
consolidate and dissolve; sell assets; engage in transactions
with affiliates; change the nature of our business; change our
or our direct or indirect subsidiaries fiscal year or
organizational documents; and make restricted payments
(including certain equity issuances and payment of dividends in
a form other than in common stock). In connection with this
offering, we will seek a waiver of certain provisions of the
senior secured credit facility, including the restricted
payments covenant and the
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notice provision of the covenant restricting our ability to
merge with another entity in connection with a public offering.
Following this offering, we intend to amend the senior secured
credit facility.
During the continuance of a covenant compliance event (as
defined below), our senior secured credit facility also requires
us to meet a consolidated fixed charge covenant ratio, measured
monthly, not to be less than 1.0 to 1.0. A covenant compliance
event is defined as either (i) an event of default has
occurred and continuing or (ii) excess availability is less
than or equal to (a) 15% of the borrowing base at any time
between January 1, 2009 through December 31, 2009 or
(b) 10% of the borrowing base at any time thereafter.
Events of
Default
Our senior secured credit facility contains events of default
that are usual and customary in credit facilities of this type,
including:
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non-payment of principal, interest, fees or other amounts (with
cure periods applicable to non-payment of interest, fees or
other amounts);
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violation of covenants (with cure periods, as applicable);
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material inaccuracy of representations and warranties;
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cross default to other indebtedness in an outstanding aggregate
principal amount of at least $1.0 million;
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bankruptcy and other insolvency events;
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judgments involving an aggregate liability of at least
$2.5 million or that have, or could reasonably be expected
to have, individually or in the aggregate, a material adverse
effect;
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certain ERISA matters;
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failure of any loan documentation (including any guarantee) to
be in full force and effect;
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change in control;
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cessation of business;
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loss to a material portion of the collateral;
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failure to make payments when due in respect of any material
contract;
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legal proceedings against us or any subsidiary in respect of a
felony; and
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the termination of the subordination provisions of the governing
documents of any subordinated indebtedness.
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100
SHARES
ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our
common stock. Future sales of substantial amounts of our common
stock in the public market, or the perception that such sales
may occur, could adversely affect the prevailing market price of
our common stock. No prediction can be made as to the effect, if
any, future sales of shares, or the availability of shares for
future sales, will have on the market price of our common stock
prevailing from time to time. The sale of substantial amounts of
our common stock in the public market, or the perception that
such sales could occur, could harm the prevailing market price
of our common stock.
Sale of
Restricted Shares
Upon completion of this offering, we will have
24,160,662 shares of common stock outstanding. Of these
shares of common stock, the 6,765,437 shares of common
stock being sold in this offering will be freely tradable
without restriction under the Securities Act, except for any
such shares which may be held or acquired by an
affiliate of ours, as that term is defined in
Rule 144 promulgated under the Securities Act, which shares
will be subject to the volume limitations and other restrictions
of Rule 144 described below. The remaining
17,395,225 shares of common stock held by our existing
stockholders upon completion of this offering will be
restricted securities, as that phrase is defined in
Rule 144, and may be resold only after registration under
the Securities Act or pursuant to an exemption from such
registration, including, among others, the exemptions provided
by Rules 144 and 701 under the Securities Act, which rules
are summarized below. These remaining shares of common stock
held by our existing stockholders upon completion of this
offering will be available for sale in the public market after
the expiration of the
lock-up
agreements described in Underwriting, taking into
account the provisions of Rules 144 and 701 under the
Securities Act.
Rule 144
The SEC adopted amendments to Rule 144 which became
effective on February 15, 2008. Under these amendments,
persons who became the beneficial owner of shares of our common
stock prior to the completion of this offering may not sell
their shares until the earlier of (i) the expiration of a
six-month holding period, if we have been subject to the
reporting requirements of the Exchange Act and have filed all
required reports for at least 90 days prior to the date of
the sale, or (ii) a one-year holding period.
At the expiration of the six-month holding period, a person who
was not one of our affiliates at any time during the three
months preceding a sale would be entitled to sell an unlimited
number of shares of our common stock provided current public
information about us is available, and a person who was one of
our affiliates at any time during the three months preceding a
sale would be entitled to sell within any three-month period
only a number of shares of common stock that does not exceed the
greater of either of the following:
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1% of the number of shares of our common stock then outstanding,
which will equal approximately 241,607 shares immediately
after this offering; or
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the average weekly trading volume of our common stock on The
NASDAQ Global Select Market during the four calendar weeks
preceding the filing of a notice on Form 144 with respect
to the sale.
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At the expiration of the one-year holding period, a person who
was not one of our affiliates at any time during the three
months preceding a sale would be entitled to sell an unlimited
number of shares of our common stock without restriction. A
person who was one of our affiliates at any time during the
three months preceding a sale would remain subject to the volume
restrictions described above.
Sales under Rule 144 by our affiliates are also subject to
manner of sale provisions and notice requirements and to the
availability of current public information about us.
Rule 701
In general, under Rule 701, any of our employees,
directors, officers, consultants or advisors who purchased
shares from us in connection with a compensatory stock or option
plan or other written agreement
101
before the effective date of this offering, or who purchased
shares from us after that date upon the exercise of options
granted before that date, are eligible to resell such shares in
reliance upon Rule 144 beginning 90 days after the
date of this prospectus. If such person is not an affiliate, the
sale may be made subject only to the manner-of-sale restrictions
of Rule 144. If such a person is an affiliate, the sale may
be made under Rule 144 without compliance with its one-year
minimum holding period, but subject to the other Rule 144
restrictions.
Stock
Plans
We intend to file one or more registration statements on
Form S-8
under the Securities Act to register shares of our common stock
issued or reserved for issuance under our 2009 Plan. The first
such registration statement is expected to be filed soon after
the date of this prospectus and will automatically become
effective upon filing with the SEC. Accordingly, shares
registered under such registration statement will be available
for sale in the open market following the effective date, unless
such shares are subject to vesting restrictions with us,
Rule 144 restrictions applicable to our affiliates or the
lock-up
restrictions described below.
Lock-Up
Agreements
We, each of our officers, directors and the selling stockholders
have agreed, subject to certain exceptions, with the
underwriters not to dispose of or hedge any of the shares of
common stock or securities convertible into or exchangeable for
shares of common stock during the period from the date of this
prospectus continuing through the date 180 days after the
date of this prospectus, except, in our case, for the issuance
of common stock upon exercise of options under existing option
plans. Merrill Lynch, Pierce, Fenner & Smith Incorporated
and Goldman, Sachs & Co. may, in their sole
discretion, release any of these shares from these restrictions
at any time without notice. See Underwriting.
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MATERIAL
U.S. FEDERAL INCOME TAX CONSIDERATIONS TO
NON-U.S.
HOLDERS
The following is a summary of material U.S. federal income
tax consequences of the purchase, ownership and disposition of
our common stock to a
non-U.S. holder
that purchases shares of our common stock in this offering. For
purposes of this summary, a
non-U.S. holder
means a beneficial owner of our common stock that is, for
U.S. federal income tax purposes:
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a nonresident alien individual;
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a foreign corporation (or an entity treated as a foreign
corporation for U.S. federal income tax purposes); or
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a foreign estate or foreign trust.
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In the case of a holder that is classified as a partnership for
U.S. federal income tax purposes, the tax treatment of a
partner in such partnership generally will depend upon the
status of the partner and the activities of the partner and the
partnership. If you are a partner in a partnership holding our
common stock, then you should consult your own tax advisor.
This summary is based upon the provisions of the
U.S. Internal Revenue Code of 1986, as amended, which we
refer to as the Code, the Treasury regulations promulgated
thereunder and administrative and judicial interpretations
thereof, all as of the date hereof. Those authorities may be
changed, perhaps retroactively, so as to result in
U.S. federal income tax consequences different from those
summarized below. We cannot assure you that a change in law will
not alter significantly the tax considerations that we describe
in this summary. We have not sought and do not plan to seek any
ruling from the U.S. Internal Revenue Service, which we
refer to as the IRS, with respect to statements made and the
conclusions reached in the following summary, and there can be
no assurance that the IRS or a court will agree with our
statements and conclusions.
This summary does not address all aspects of U.S. federal
income taxes that may be relevant to
non-U.S. holders
in light of their personal circumstances, and does not deal with
federal taxes other than the U.S. federal income tax or
with
non-U.S.,
state or local tax considerations. Special rules, not discussed
here, may apply to certain
non-U.S. holders,
including:
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U.S. expatriates;
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controlled foreign corporations;
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passive foreign investment companies;
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corporations that accumulate earnings to avoid U.S. federal
income tax; and
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investors in pass-through entities that are subject to special
treatment under the Code.
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Such
non-U.S. holders
should consult their own tax advisors to determine the
U.S. federal, state, local and other tax consequences that
may be relevant to them.
This summary applies only to a
non-U.S. holder
that holds our common stock as a capital asset (within the
meaning of Section 1221 of the Code), and assumes that no
item of income or gain in respect of the common stock at any
time will be effectively connected with a U.S. trade or
business conducted by the
non-U.S. holder.
If you are considering the purchase of our common stock, you
should consult your own tax advisor concerning the particular
U.S. federal income tax consequences to you of the
purchase, ownership and disposition of our common stock, as well
as the consequences to you arising under U.S. tax laws
other than the federal income tax law or under the laws of any
other taxing jurisdiction.
Dividends
As discussed under the section entitled Dividend
Policy above, we do not currently anticipate paying
dividends. In the event that we do make a distribution of cash
or property with respect to our common stock,
103
any such distributions will be treated as a dividend for
U.S. federal income tax purposes to the extent paid from
our current or accumulated earnings and profits (as determined
under U.S. federal income tax principles). Dividends paid
to you generally will be subject to withholding of
U.S. federal income tax at a 30% rate or such lower rate as
may be specified by an applicable income tax treaty.
If the amount of a distribution paid on our common stock exceeds
our current and accumulated earnings and profits, such excess
will be allocated ratably among each share of common stock with
respect to which the distribution is paid and treated first as a
tax-free return of capital to the extent of your adjusted tax
basis in each such share, and thereafter as capital gain from a
sale or other disposition of such share of common stock that is
taxed to you as described below under the heading
Gain on Disposition of Common Stock.
If you wish to claim the benefit of an applicable treaty rate to
avoid or reduce withholding of U.S. federal income tax for
dividends, then you must (a) provide the withholding agent
with a properly completed IRS
Form W-8BEN
(or other applicable form) and certify under penalties of
perjury that you are not a U.S. person and are eligible for
treaty benefits, or (b) if our common stock is held through
certain foreign intermediaries, satisfy the relevant
certification requirements of applicable U.S. Treasury
regulations. Special certification and other requirements apply
to certain
non-U.S. holders
that act as intermediaries (including partnerships).
If you are eligible for a reduced rate of U.S. federal
income tax pursuant to an income tax treaty, then you may obtain
a refund of any excess amounts withheld by filing timely an
appropriate claim for refund with the IRS.
Gain on
Disposition of Common Stock
You generally will not be subject to U.S. federal income
tax with respect to gain realized on the sale or other taxable
disposition of our common stock, unless:
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if you are an individual, you are present in the United States
for 183 days or more in the taxable year of the sale or
other taxable disposition, and you have a tax home
(as defined in the Code) in the United States; or
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we are or have been during a specified testing period a
U.S. real property holding corporation for
U.S. federal income tax purposes, and certain other
conditions are met.
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We believe that we have not been and are not, and we do not
anticipate becoming, a U.S. real property holding
corporation for U.S. federal income tax purposes.
Recent
Developments Potentially Impacting Taxation of
Non-U.S.
Holders
As part of its 2010 Fiscal year Revenue Proposals, the Obama
Administration included descriptions of legislative proposals
that would, among other things, limit certain benefits currently
available to certain
non-U.S.
holders that hold our common stock through a
non-United
States intermediary that is not a qualified
intermediary. The full details of these proposals have not
yet been made public, although the Administrations
description of these proposals generally indicates that they are
not intended to disrupt ordinary and customary market
transactions. It is unclear whether, or in what form, these
proposals may be enacted.
Non-U.S.
holders should consult their tax advisors regarding the possible
implications of the Administrations proposals on their
investment in our common stock.
Information
Reporting and Backup Withholding Tax
We must report annually to the IRS and to you the amount of
dividends paid to you and the amount of tax, if any, withheld
with respect to such dividends. The IRS may make this
information available to the tax authorities in the country in
which you are resident.
In addition, you may be subject to information reporting
requirements and backup withholding tax (currently at a rate of
28%) with respect to dividends paid on, and the proceeds of
disposition of, shares of our common stock, unless, generally,
you certify under penalties of perjury (usually on IRS
Form W-8BEN)
that you are not a U.S. person or you otherwise establish
an exemption. Additional rules relating to information
104
reporting requirements and backup withholding tax with respect
to payments of the proceeds from the disposition of shares of
our common stock are as follows:
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If the proceeds are paid to or through the U.S. office of a
broker, the proceeds generally will be subject to backup
withholding tax and information reporting, unless you certify
under penalties of perjury (usually on IRS
Form W-8BEN)
that you are not a U.S. person or you otherwise establish
an exemption.
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If the proceeds are paid to or through a
non-U.S. office
of a broker that is not a U.S. person and is not a foreign
person with certain specified U.S. connections (a
U.S.-related
person), information reporting and backup withholding tax
generally will not apply.
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If the proceeds are paid to or through a
non-U.S. office
of a broker that is a U.S. person or a
U.S.-related
person, the proceeds generally will be subject to information
reporting (but not to backup withholding tax), unless you
certify under penalties of perjury (usually on IRS
Form W-8BEN)
that you are not a U.S. person or you otherwise establish
an exemption.
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Any amounts withheld under the backup withholding tax rules may
be allowed as a refund or a credit against your
U.S. federal income tax liability, provided the required
information is timely furnished by you to the IRS.
THE SUMMARY OF MATERIAL U.S. FEDERAL INCOME TAX
CONSEQUENCES ABOVE IS INCLUDED FOR GENERAL INFORMATION PURPOSES
ONLY. POTENTIAL PURCHASERS OF OUR COMMON STOCK ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE
U.S. FEDERAL, STATE, LOCAL AND
NON-U.S. TAX
CONSIDERATIONS OF PURCHASING, OWNING AND DISPOSING OF OUR COMMON
STOCK.
105
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Goldman, Sachs & Co. and J.P. Morgan Securities Inc.
are acting as representatives of each of the underwriters named
below. We, the selling stockholders and the underwriters named
below have entered into a purchase agreement with respect to the
shares of common stock being offered. Subject to certain
conditions, each underwriter has severally agreed to purchase
the number of shares of common stock indicated in the following
table.
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Number
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Underwriters
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of Shares
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Merrill Lynch, Pierce, Fenner & Smith
Incorporated
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Goldman, Sachs & Co.
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J.P. Morgan Securities Inc.
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Piper Jaffray & Co.
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Total
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6,765,437
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The expenses of the offering, not including the underwriting
discount, are estimated at $4.0 million and are payable by
us.
The purchase agreement provides that the obligations of the
underwriters to purchase the shares of common stock offered by
this prospectus are subject to certain conditions precedent and
that the underwriters will purchase all of the shares of common
stock offered by this prospectus, other than those covered by
the option to purchase additional shares described below, if any
of these shares are purchased.
If the underwriters sell more shares of common stock than the
total number set forth in the table above, the underwriters have
an option to buy up to an additional 1,014,815 shares of
common stock from certain of the selling stockholders. They may
exercise that option for 30 days. If any shares of common
stock are purchased pursuant to this option, the underwriters
will severally purchase shares of common stock in approximately
the same proportion as set forth in the table above.
The following table shows the per share and total underwriting
discounts and commissions to be paid to the underwriters by us
and the selling stockholders. Such amounts are shown assuming
both no exercise and full exercise of the underwriters
option to purchase 1,014,815 additional shares of common
stock.
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Per Share
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Without Option
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With Option
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Public offering price
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$
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$
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$
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Underwriting discount
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$
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$
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$
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Proceeds, before expenses, to rue21, inc.
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$
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$
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$
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Proceeds, before expenses, to the selling stockholders
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$
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$
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$
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Shares of common stock sold by the underwriters to the public
will initially be offered at the initial public offering price
set forth on the cover of this prospectus. Any shares of common
stock sold by the underwriters to securities dealers may be sold
at a discount of up to $ per share
of common stock from the initial public offering price. If all
the shares of common stock are not sold at the initial public
offering price, the representatives may change the offering
price and the other selling terms. The offering of the shares by
the underwriters is subject to receipt and acceptance and
subject to the underwriters right to reject any order in
whole or in part.
We, each of our officers, directors and the selling stockholders
have agreed with the underwriters not to dispose of or hedge any
of the shares of common stock or securities convertible into or
exchangeable for shares of common stock without the prior
written consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Goldman, Sachs & Co. during the period
from the date of this prospectus continuing through the date
that is 180 days after the date of this prospectus.
Specifically, we and these other persons have agreed, with
certain limited exceptions, not to directly or indirectly:
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offer, pledge, sell or contract to sell any common stock;
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106
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sell any option or contract to purchase any common stock;
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purchase any option or contract to sell any common stock;
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grant any option, right or warrant for the sale of any common
stock;
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lend or otherwise dispose of or transfer any common stock;
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request or demand that we file a registration statement related
to the common stock; or
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enter into any swap or other agreement that transfers, in whole
or in part, the economic consequence of ownership of any common
stock whether any such swap or transaction is to be settled by
delivery of shares or other securities, in cash or otherwise.
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The 180-day
restricted period described in the preceding paragraph will be
automatically extended if: (1) during the last 17 days
of the initial
180-day
restricted period we issue an earnings release or announce
material news or a material event; or (2) prior to the
expiration of the initial
180-day
restricted period, we announce that we will release earnings
results during the
15-day
period following the last day of the initial
180-day
period, then in each case the initial
180-day
restricted period will be automatically extended until the
expiration of the
18-day
period beginning on the date of the earnings release or the
announcement of the material news or material event, as
applicable, unless Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Goldman, Sachs & Co. waive, in
writing, such extension.
We expect the shares of common stock to be approved for listing
on The NASDAQ Global Select Market, subject to notice of
issuance, under the symbol rue.
Prior to this offering, there has been no public market for the
shares of common stock. The initial public offering price will
be negotiated among us, the selling stockholders and the
representatives. Among the factors to be considered in
determining the initial public offering price of the shares of
common stock, in addition to prevailing market conditions, will
be our companys historical performance, estimates of the
business potential and earnings prospects of our company, an
assessment of our companys management and the
consideration of the above factors in relation to market
valuation of companies in related businesses. An active trading
market for the shares may not develop. It is also possible that
after the offering the shares will not trade in the public
market at or above the initial offering price.
The underwriters do not expect to sell more than 5% of the
shares of common stock in the aggregate to accounts over which
they exercise discretionary authority. In addition, Merrill
Lynch, Pierce, Fenner & Smith Incorporated will not
confirm initial sales to any accounts over which it exercises
discretionary authority without the prior written approval of
the customer.
We and the selling stockholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the Securities Act, and to contribute to payments that the
underwriters may be required to make for these liabilities.
In connection with this offering, the underwriters may purchase
and sell our shares of common stock in the open market. These
transactions may include short sales, stabilizing transactions
and purchases to cover positions created by short sales. Short
sales involve the sale by the underwriters of a greater number
of shares of common stock than they are required to purchase in
this offering. Covered short sales are sales made in
an amount not greater than the underwriters option to
purchase additional shares of common stock in this offering. The
underwriters may close out any covered short position by either
exercising their option to purchase additional shares of common
stock or purchasing shares of common stock in the open market.
In determining the source of shares of common stock to close out
the covered short position, the underwriters will consider,
among other things, the price of shares of common stock
available for purchase in the open market as compared to the
price at which they may purchase additional shares of common
stock pursuant to the option granted to them. Naked
short sales are any sales in excess of that option. The
underwriters must close out any naked short position by
purchasing shares of common stock in the open market. A naked
short position is more likely to be created if the underwriters
are concerned that there may be downward pressure on the price
of the shares of common stock in the open market after pricing
that could adversely affect investors who purchase in this
offering. Stabilizing transactions consist of various bids for
or purchases of shares of common stock made by the underwriters
in the open market prior to the completion of this offering.
107
The underwriters may also impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representatives have repurchased shares of common stock sold by
or for the account of such underwriter in stabilizing or short
covering transactions.
Purchases to cover a short position and stabilizing
transactions, as well as other purchases by the underwriters for
their own accounts, may have the effect of preventing or
retarding a decline in the market price of the companys
stock, and together with the imposition of the penalty bid, may
stabilize, maintain or otherwise affect the market price of the
common stock. As a result, the price of the common stock may be
higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be
discontinued at any time. These transactions may be effected on
The NASDAQ Global Select Market, in the over-the-counter market
or otherwise.
Conflicts
of Interest
Bank of America, N.A., an affiliate of Merrill Lynch, Pierce,
Fenner & Smith Incorporated, an underwriter in this
offering, is acting as the administrative agent, collateral
agent, swing line lender, letter of credit issuer and a lender
with respect to our senior secured credit facility. We intend to
obtain a waiver of certain provisions of our senior secured
credit facility in connection with this offering. In addition,
we intend to use the net proceeds from this offering for the
repayment of approximately $22.1 million of our senior
secured credit facility. See Use of Proceeds and
Description of Certain Indebtedness. Because of this
relationship, the offering will be conducted in accordance with
the applicable provisions of NASD Rule 2720, as adopted by
the Financial Industry Regulatory Authority, Inc., or FINRA.
This rule requires, among other things, that the initial public
offering price can be no higher than that recommended by a
qualified independent underwriter, as defined by
FINRA. Goldman, Sachs & Co. has served in that
capacity and performed due diligence investigations and reviewed
and participated in the preparation of the registration
statement of which this prospectus forms a part. Goldman,
Sachs & Co. has received $10,000 from us as
compensation for such role.
Certain of the underwriters and their respective affiliates may
in the future perform various financial advisory and investment
banking services for us, for which they will receive customary
fees and expenses.
Foreign
Selling Restrictions
In relation to each Member State of the European Economic Area,
or EEA, which has implemented the Prospectus Directive, each a
Relevant Member State, an offer to the public of any shares
which are the subject of the offering contemplated by this
prospectus may not be made in that Relevant Member State except
that an offer to the public in that Relevant Member State of any
shares may be made at any time under the following exemptions
under the Prospectus Directive, if they have been implemented in
that Relevant Member State:
(a) to legal entities which are authorized or regulated to
operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in
securities;
(b) to any legal entity which has two or more of
(1) an average of at least 250 employees during the
last financial year; (2) a total balance sheet of more than
43,000,000 and (3) an annual net turnover of more
than 50,000,000, as shown in its last annual or
consolidated accounts;
(c) by the underwriters to fewer than 100 natural or legal
persons (other than qualified investors as defined in the
Prospectus Directive) subject to obtaining the prior consent of
representatives for any such offer; or
(d) in any other circumstances falling within
Article 3(2) of the Prospectus Directive,
provided that no such offer of shares shall result in a
requirement for the publication by us or any of the underwriters
of a prospectus pursuant to Article 3 of the Prospectus
Directive.
Any person making or intending to make any offer within the EEA
of shares which are the subject of the offering contemplated in
this prospectus should only do so in circumstances in which no
obligation arises for us or any of the underwriters to produce a
prospectus for such offer. Neither we nor the underwriters have
authorized, nor do they authorize, the making of any offer of
shares through any financial intermediary, other
108
than offers made by the underwriters which constitute the final
offering of shares contemplated in this prospectus.
For the purposes of this provision, and your representation
below, the expression an offer to the public in
relation to any shares in any Relevant Member State means the
communication in any form and by any means of sufficient
information on the terms of the offer and any shares to be
offered so as to enable an investor to decide to purchase any
shares, as the same may be varied in that Relevant Member State
by any measure implementing the Prospectus Directive in that
Relevant Member State and the expression Prospectus
Directive means Directive 2003/71/EC and includes any
relevant implementing measure in each Relevant Member State.
Each person in a Relevant Member State who receives any
communication in respect of, or who acquires any shares which
are the subject of the offering contemplated by this prospectus
under, the offers contemplated in this prospectus will be deemed
to have represented, warranted and agreed to and with us and
each underwriter that:
(a) it is a qualified investor within the meaning of the
law in that Relevant Member State implementing
Article 2(1)(e) of the Prospectus Directive; and
(b) in the case of any shares acquired by it as a financial
intermediary, as that term is used in Article 3(2) of the
Prospectus Directive, (i) the shares acquired by it in the
offering have not been acquired on behalf of, nor have they been
acquired with a view to their offer or resale to, persons in any
Relevant Member State other than qualified investors
as defined in the Prospectus Directive, or in circumstances in
which the prior consent of the representatives has been given to
the offer or resale; or (ii) where shares have been
acquired by it on behalf of persons in any Relevant Member State
other than qualified investors, the offer of those shares to it
is not treated under the Prospectus Directive as having been
made to such persons.
The shares may not be offered or sold by means of any document
other than (i) in circumstances which do not constitute an
offer to the public within the meaning of the Companies
Ordinance (Cap.32, Laws of Hong Kong), or (ii) to
professional investors within the meaning of the Securities and
Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules
made thereunder, or (iii) in other circumstances which do
not result in the document being a prospectus within
the meaning of the Companies Ordinance (Cap.32, Laws of Hong
Kong), and no advertisement, invitation or document relating to
the shares may be issued or may be in the possession of any
person for the purpose of issue, in each case whether in Hong
Kong or elsewhere, which is directed at, or the contents of
which are likely to be accessed or read by, the public in Hong
Kong, except if permitted to do so under the laws of Hong Kong,
other than with respect to shares which are or are intended to
be disposed of only to persons outside Hong Kong or only to
professional investors within the meaning of the Securities and
Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules
made thereunder.
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the offer
or sale, or invitation for subscription or purchase, of the
shares may not be circulated or distributed, nor may the shares
be offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or indirectly, to
persons in Singapore other than (i) to an institutional
investor under Section 274 of the Securities and Futures
Act, Chapter 289 of Singapore, or the SFA, (ii) to a
relevant person, or any person pursuant to Section 275(1A),
and in accordance with the conditions, specified in
Section 275 of the SFA or (iii) otherwise pursuant to,
and in accordance with the conditions of, any other applicable
provision of the SFA.
Where the shares are subscribed or purchased under
Section 275 by a relevant person which is: (a) a
corporation (which is not an accredited investor) the sole
business of which is to hold investments and the entire share
capital of which is owned by one or more individuals, each of
whom is an accredited investor; or (b) a trust (where the
trustee is not an accredited investor) whose sole purpose is to
hold investments and each beneficiary is an accredited investor,
shares, debentures and units of shares and debentures of that
corporation or the beneficiaries rights and interest in
that trust shall not be transferable for six months after that
109
corporation or that trust has acquired the shares under
Section 275 except: (1) to an institutional investor
under Section 274 of the SFA or to a relevant person, or
any person pursuant to Section 275(1A), and in accordance
with the conditions, specified in Section 275 of the SFA;
(2) where no consideration is given for the transfer; or
(3) by operation of law.
The securities have not been and will not be registered under
the Securities and Exchange Law of Japan, or the Securities and
Exchange Law, and each underwriter has agreed that it will not
offer or sell any securities, directly or indirectly, in Japan
or to, or for the benefit of, any resident of Japan (which term
as used herein means any person resident in Japan, including any
corporation or other entity organized under the laws of Japan),
or to others for re-offering or resale, directly or indirectly,
in Japan or to a resident of Japan, except pursuant to an
exemption from the registration requirements of, and otherwise
in compliance with, the Securities and Exchange Law and any
other applicable laws, regulations and ministerial guidelines of
Japan.
This document, as well as any other material relating to the
shares which are the subject of the offering contemplated by
this prospectus, do not constitute an issue prospectus pursuant
to Article 652a of the Swiss Code of Obligations. The
shares will not be listed on the SIX Swiss Exchange and,
therefore, the documents relating to the shares, including, but
not limited to, this document, do not claim to comply with the
disclosure standards of the listing rules of the SIX Swiss
Exchange and corresponding prospectus schemes annexed to the
listing rules of the SIX Swiss Exchange. The shares are being
offered in Switzerland by way of a private placement, i.e., to a
small number of selected investors only, without any public
offer and only to investors who do not purchase the shares with
the intention to distribute them to the public. The investors
will be individually approached by us from time to time. This
document, as well as any other material relating to the shares,
is personal and confidential and does not constitute an offer to
any other person. This document may only be used by those
investors to whom it has been handed out in connection with the
offering described herein and may neither directly nor
indirectly be distributed or made available to other persons
without our express consent. It may not be used in connection
with any other offer and shall in particular not be copied
and/or
distributed to the public in (or from) Switzerland.
NOTICE TO
PROSPECTIVE INVESTORS IN THE DUBAI INTERNATIONAL FINANCIAL CENTRE
This document relates to an exempt offer in accordance with the
Offered Securities Rules of the Dubai Financial Services
Authority. This document is intended for distribution only to
persons of a type specified in those rules. It must not be
delivered to, or relied on by, any other person. The Dubai
Financial Services Authority has no responsibility for reviewing
or verifying any documents in connection with exempt offers. The
Dubai Financial Services Authority has not approved this
document nor taken steps to verify the information set out in
it, and has no responsibility for it. The shares which are the
subject of the offering contemplated by this prospectus may be
illiquid
and/or
subject to restrictions on their resale. Prospective purchasers
of the shares offered pursuant to this prospectus should conduct
their own due diligence on such shares. If you do not understand
the contents of this document you should consult an authorized
financial adviser.
110
INDUSTRY
AND MARKET DATA
We obtained the industry, market and competitive position data
throughout this prospectus from our own internal estimates and
research as well as from industry and general publications and
research, surveys and studies conducted by third parties,
including Nielsen Claritas Site Reports and The NPD Group, Inc.
Industry publications, studies and surveys generally state that
they have been obtained from sources believed to be reliable,
although they do not guarantee the accuracy or completeness of
such information. While we believe that each of these studies
and publications is reliable, we have not independently verified
market and industry data from third-party sources. While we
believe our internal company research is reliable and the market
definitions are appropriate, neither such research nor these
definitions have been verified by any independent source.
LEGAL
MATTERS
The validity of the common stock offered hereby will be passed
upon for us by Kirkland & Ellis LLP, New York, New
York. Certain partners of Kirkland & Ellis LLP are
members of a limited partnership that is an investor in one or
more investment funds advised by Apax Partners.
Kirkland & Ellis LLP represents entities affiliated
with Apax Partners and its affiliates in connection with legal
matters. Cleary Gottlieb Steen & Hamilton LLP, New
York, New York will act as counsel to the underwriters.
EXPERTS
The consolidated financial statements of rue21, inc. and
subsidiary at February 2, 2008 and January 31, 2009,
and for each of the three fiscal years in the period ended
January 31, 2009, appearing in this prospectus and
registration statement have been audited by Ernst &
Young LLP, independent registered public accounting firm, as set
forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given on the authority
of such firm as experts in accounting and auditing.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act that registers the shares of our common
stock to be sold in this offering. The registration statement,
including the attached exhibits, contains additional relevant
information about us and our common stock. The rules and
regulations of the SEC allow us to omit from this document
certain information included in the registration statement.
You may read and copy the reports and other information we file
with the SEC at the SECs Public Reference Room at
100 F Street, N.E., Room 1580,
Washington, D.C. 20549. You may also obtain copies of this
information by mail from the public reference room of the SEC,
100 F Street, N.E., Washington, D.C. 20549, at
prescribed rates. You may obtain information regarding the
operation of the public reference room by calling
1-800-SEC-0330.
The SEC also maintains a website that contains reports, proxy
statements and other information about issuers, like us, who
file electronically with the SEC. The address of that website is
http://www.sec.gov.
This reference to the SECs website is an inactive textual
reference only and is not a hyperlink.
Upon completion of this offering, we will become subject to the
reporting, proxy and information requirements of the Exchange
Act and, as a result, will be required to file periodic reports,
proxy statements and other information with the SEC. These
periodic reports, proxy statements and other information will be
available for inspection and copying at the SECs public
reference room and the website of the SEC referred to above, as
well as on our website, www.rue21.com. This reference to our
website is an inactive textual reference only and is not a
hyperlink. The contents of our website are not part of this
prospectus, and you should not consider the contents of our
website in making an investment decision with respect to our
common stock.
We intend to furnish our stockholders with annual reports
containing audited financial statements and make available to
our stockholders quarterly reports for the first three quarters
of each fiscal year containing unaudited interim financial
information.
111
Report of
Independent Registered Public Accounting Firm
The Board of
Directors and Shareholders of rue21, inc.
We have audited the accompanying consolidated balance sheets of
rue21, inc. and subsidiary as of February 2, 2008 and
January 31, 2009, and the related consolidated statements
of income, shareholders equity, and cash flows for each of
the three years in the period ended January 31, 2009. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of rue21, inc. and subsidiary at
February 2, 2008 and January 31, 2009, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended January 31,
2009, in conformity with U.S. generally accepted accounting
principles.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
September 10, 2009
F-2
rue21,
inc. and subsidiary
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
February 2,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands, except
|
|
|
|
per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,343
|
|
|
$
|
4,611
|
|
Accounts receivable
|
|
|
2,649
|
|
|
|
2,527
|
|
Merchandise inventory, net
|
|
|
47,153
|
|
|
|
66,838
|
|
Prepaid expenses and other current assets
|
|
|
3,457
|
|
|
|
6,637
|
|
Deferred tax assets
|
|
|
2,595
|
|
|
|
3,135
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
59,197
|
|
|
|
83,748
|
|
Property and equipment, at cost
|
|
|
72,405
|
|
|
|
96,889
|
|
Less accumulated depreciation and amortization
|
|
|
30,083
|
|
|
|
40,202
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
|
42,322
|
|
|
|
56,687
|
|
Other assets
|
|
|
267
|
|
|
|
765
|
|
Deferred tax assets
|
|
|
499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
102,285
|
|
|
$
|
141,200
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
188
|
|
|
$
|
|
|
Accounts payable
|
|
|
36,315
|
|
|
|
60,449
|
|
Accrued expenses and other current liabilities
|
|
|
12,530
|
|
|
|
14,969
|
|
Accrued payroll and related taxes
|
|
|
6,099
|
|
|
|
7,532
|
|
Accrued income and franchise taxes
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
55,251
|
|
|
|
82,950
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
27,968
|
|
|
|
19,476
|
|
Deferred rent, tenant allowances and other long-term liabilities
|
|
|
13,313
|
|
|
|
18,440
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
1,941
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
41,281
|
|
|
|
39,857
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
96,532
|
|
|
|
122,807
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock $0.004 par value;
50,000 shares authorized, 21,869 and 22,090 shares
issued and outstanding
|
|
|
87
|
|
|
|
88
|
|
Additional paid-in capital
|
|
|
13
|
|
|
|
13
|
|
Retained earnings
|
|
|
5,653
|
|
|
|
18,292
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
5,753
|
|
|
|
18,393
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
102,285
|
|
|
$
|
141,200
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-3
rue2l,
inc. and subsidiary
Consolidated
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 3,
|
|
|
February 2,
|
|
|
January 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands, except per share data)
|
|
|
Net sales
|
|
$
|
225,559
|
|
|
$
|
296,887
|
|
|
$
|
391,414
|
|
Cost of goods sold (includes certain buying, occupancy and
distribution center expenses)
|
|
|
150,163
|
|
|
|
195,034
|
|
|
|
257,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
75,396
|
|
|
|
101,853
|
|
|
|
133,561
|
|
Selling, general, and administrative expense
|
|
|
57,575
|
|
|
|
76,039
|
|
|
|
99,886
|
|
Depreciation and amortization expense
|
|
|
5,926
|
|
|
|
8,241
|
|
|
|
11,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
11,895
|
|
|
|
17,573
|
|
|
|
22,143
|
|
Interest expense, net
|
|
|
2,645
|
|
|
|
2,520
|
|
|
|
1,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
9,250
|
|
|
|
15,053
|
|
|
|
20,666
|
|
Provision for income taxes
|
|
|
1,452
|
|
|
|
5,920
|
|
|
|
8,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,798
|
|
|
$
|
9,133
|
|
|
$
|
12,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share
|
|
$
|
0.39
|
|
|
$
|
0.42
|
|
|
$
|
0.58
|
|
Diluted income per common share
|
|
$
|
0.36
|
|
|
$
|
0.40
|
|
|
$
|
0.55
|
|
Weighted average basic common shares outstanding
|
|
|
19,782
|
|
|
|
21,705
|
|
|
|
21,914
|
|
Weighted average diluted common shares outstanding
|
|
|
21,888
|
|
|
|
22,842
|
|
|
|
22,814
|
|
See accompanying notes.
F-4
rue2l,
inc. and subsidiary
Consolidated
Statements of Stockholders Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Retained
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Earnings
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance January 28, 2006
|
|
|
19,216
|
|
|
$
|
80
|
|
|
$
|
24
|
|
|
$
|
(11,278
|
)
|
|
$
|
(11,174
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,798
|
|
|
|
7,798
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
34
|
|
Exercise of stock options
|
|
|
2,479
|
|
|
|
10
|
|
|
|
5
|
|
|
|
|
|
|
|
15
|
|
Treasury shares repurchased
|
|
|
|
|
|
|
(3
|
)
|
|
|
(207
|
)
|
|
|
|
|
|
|
(210
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance February 3, 2007
|
|
|
21,695
|
|
|
|
87
|
|
|
|
(144
|
)
|
|
|
(3,480
|
)
|
|
|
(3,537
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,133
|
|
|
|
9,133
|
|
Share-based compensation and other
|
|
|
|
|
|
|
|
|
|
|
157
|
|
|
|
|
|
|
|
157
|
|
Exercise of stock options
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance February 2, 2008
|
|
|
21,869
|
|
|
|
87
|
|
|
|
13
|
|
|
|
5,653
|
|
|
|
5,753
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,639
|
|
|
|
12,639
|
|
Exercise of stock options
|
|
|
221
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 31, 2009
|
|
|
22,090
|
|
|
$
|
88
|
|
|
$
|
13
|
|
|
$
|
18,292
|
|
|
$
|
18,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-5
rue21,
inc. and subsidiary
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 3,
|
|
|
February 2,
|
|
|
January 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,798
|
|
|
$
|
9,133
|
|
|
$
|
12,639
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
5,926
|
|
|
|
8,241
|
|
|
|
11,532
|
|
Loss on fixed assets disposals
|
|
|
139
|
|
|
|
44
|
|
|
|
349
|
|
Deferred taxes
|
|
|
(2,573
|
)
|
|
|
(522
|
)
|
|
|
1,900
|
|
Impairment of long-lived assets
|
|
|
29
|
|
|
|
13
|
|
|
|
219
|
|
Share based compensation
|
|
|
34
|
|
|
|
34
|
|
|
|
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,259
|
)
|
|
|
(36
|
)
|
|
|
122
|
|
Merchandise inventory, net
|
|
|
(11,184
|
)
|
|
|
(8,977
|
)
|
|
|
(19,685
|
)
|
Prepaid expenses and other current assets
|
|
|
(2,143
|
)
|
|
|
(1,041
|
)
|
|
|
(3,180
|
)
|
Accounts payable
|
|
|
15,479
|
|
|
|
5,141
|
|
|
|
24,134
|
|
Accrued payroll and related taxes
|
|
|
(430
|
)
|
|
|
1,966
|
|
|
|
1,433
|
|
Accrued expenses and other current liabilities
|
|
|
1,361
|
|
|
|
4,586
|
|
|
|
2,320
|
|
Deferred rent and tenant allowances
|
|
|
4,788
|
|
|
|
2,301
|
|
|
|
4,926
|
|
Other
|
|
|
(485
|
)
|
|
|
629
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
17,480
|
|
|
|
21,512
|
|
|
|
36,859
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(16,586
|
)
|
|
|
(20,265
|
)
|
|
|
(26,464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(16,586
|
)
|
|
|
(20,265
|
)
|
|
|
(26,464
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under revolver
|
|
|
54,505
|
|
|
|
66,799
|
|
|
|
125,371
|
|
Payments under revolver
|
|
|
(51,248
|
)
|
|
|
(65,226
|
)
|
|
|
(110,726
|
)
|
Payments on long-term debt
|
|
|
(5,716
|
)
|
|
|
(2,002
|
)
|
|
|
(23,326
|
)
|
Proceeds from stock options exercised
|
|
|
15
|
|
|
|
|
|
|
|
1
|
|
Debt financing costs
|
|
|
|
|
|
|
|
|
|
|
(447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for financing activities
|
|
|
(2,444
|
)
|
|
|
(429
|
)
|
|
|
(9,127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) Increase in cash and cash equivalents
|
|
|
(1,550
|
)
|
|
|
818
|
|
|
|
1,268
|
|
Cash and cash equivalents, beginning of period
|
|
|
4,075
|
|
|
|
2,525
|
|
|
|
3,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
2,525
|
|
|
$
|
3,343
|
|
|
$
|
4,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
2,244
|
|
|
$
|
1,907
|
|
|
$
|
2,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
3,238
|
|
|
$
|
7,053
|
|
|
$
|
7,935
|
|
|
|
|
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See accompanying notes.
F-6
rue2l,
inc. and subsidiary
Notes to Consolidated Financial Statements
Years Ended February 3, 2007; February 2, 2008 and
January 31, 2009
(Dollars in thousands, unless otherwise indicated)
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1.
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Business
and Summary of Significant Accounting Policies
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Nature of
Business
rue21, inc. (the Company or rue21) is a
specialty retailer of junior and young mens apparel and
accessories with 277, 352 and 449 stores as of February 3,
2007, February 2, 2008, and January 31, 2009
respectively, in various strip centers, regional malls and
outlet centers throughout the United States. Sales are generally
transacted for cash or checks and through the acceptance of
third-party credit and debit cards.
Segment
Reporting
Statement of Financial Accounting Standards (SFAS)
No. 131, Disclosures about Segments of an
Enterprise and Related Information
(SFAS No. 131) establishes standards
for reporting information about a companys operating
segments. It also establishes standards about products and
services, geographic areas and major customers. The Company
operates in and reports as a single operating segment which is
the operation of its retail stores which are only located in the
United States. The Company has no international sales. Net sales
are generated through the retail store sale of merchandise to
consumers only. All of the Companys identifiable assets
are located in the United States.
Principles
of Consolidation
The consolidated financial statements include all the accounts
of the Company and its wholly owned subsidiary r services,
llc. All intercompany transactions and balances have been
eliminated in consolidation.
Fiscal
Year
The Companys fiscal year is 52 or 53 weeks ending on
the Saturday nearest to January 31 of the following year. These
consolidated financial statements were prepared for the
53 weeks ended February 3, 2007, the 52 weeks
ended February 2, 2008 and the 52 weeks ended January
31, 2009.
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions. These
estimates and assumptions affect the reported amounts of assets
and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of net sales and expenses during the reporting
period. Actual results could differ from those estimates. On an
ongoing basis, management reviews its estimates based on
currently available information. Changes in facts and
circumstances may result in revised estimates.
Seasonality
Our business is seasonal and historically we have realized a
higher portion of our net sales, net income and operating cash
flows in the second and fourth fiscal quarters, attributable to
the impact of the summer selling season in the second quarter,
and the holiday selling season in the fourth quarter. As a
result, our working capital requirements fluctuate during the
year, increasing in mid-summer in anticipation of the fourth
fiscal quarter. Our business is also subject, at certain times,
to calendar shifts which may occur during key selling times such
as school holidays, Easter and regional fluctuations in the
calendar during the back-to-school selling season.
F-7
rue2l,
inc. and subsidiary
Notes to
Consolidated Financial
Statements (Continued)
Fair
Value of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of
Financial Instruments
(SFAS No. 107), requires management to
disclose estimated fair value of certain assets and liabilities
defined by SFAS No. 107 as financial instruments. As
of February 2, 2008 and January 31, 2009, management
believes that the carrying amounts of cash and cash equivalents,
receivables, and payables approximate fair value because of the
short maturity of these financial instruments. Additionally,
management believes the fair value of the long-term debt
approximates carrying value as of February 2, 2008 and
January 31, 2009, as the debt instrument has a variable
interest rate that resets quarterly.
Cash and
Cash Equivalents
Cash includes cash equivalents, which includes credit and debit
card transactions. Credit and debit card transactions are
typically paid to the Company on the next business day. Amounts
due from credit and debit card transactions totaled $1,982 and
$1,332 on January 31, 2009 and February 2, 2008. The
Company considers all highly liquid investments purchased with
an initial maturity of three months or less to be cash
equivalents.
Accounts
Receivable
Accounts receivable generally represent tenant allowances due
from lessors. The Company evaluates collectability and has
determined that no allowance is necessary.
Merchandise
Inventory
Merchandise inventory is valued at the lower of cost (first-in,
first-out basis) or market using the retail inventory method.
The Company records merchandise receipts at the time they are
delivered to our consolidator, as we are not directly importing
any merchandise. This is the point at which title and risk of
loss transfer to the Company.
The Company reviews its inventory levels to identify slow-moving
merchandise and generally uses markdowns to clear slow-moving
merchandise. The Company records a markdown reserve based on
estimated future markdowns related to current inventory to clear
slow-moving inventory. Each period the Company evaluates the
selling trends experienced and the related promotional events or
pricing strategies in place to sell through the current
inventory levels. Markdowns may occur when inventory exceeds
customer demand for reasons of style, seasonal adaptation,
changes in customer preference, lack of consumer acceptance of
fashion items, competition, or if it is determined that the
inventory in stock will not sell at its currently ticketed
price. Such markdowns may have an adverse impact on earnings,
depending on the extent and amount of inventory affected. The
anticipated deployment of new seasonal merchandise is reflected
within the estimated future markdowns reserve utilized in
valuing current inventory, as such new inventory in certain
circumstances will displace merchandise units currently on-hand.
The markdown reserve is recorded as an increase to cost of goods
sold in the accompanying Consolidated Statements of Income.
The Company also estimates a shrinkage reserve for the period of
time between the last physical count and the balance sheet date.
The estimate for shrinkage reserve can be affected by changes in
merchandise mix and changes in actual shrinkage trends.
F-8
rue2l,
inc. and subsidiary
Notes to
Consolidated Financial
Statements (Continued)
Property
and Equipment
Property and equipment are recorded on the basis of cost with
depreciation and amortization computed utilizing the
straight-line method over the estimated useful lives as follows:
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Furniture and fixtures
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7 years
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Leasehold improvements
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Lesser of 5 to 10 years or lease term
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Automobiles
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5 years
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Computer equipment and software
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3 to 5 years
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In accordance with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets,
impairment losses may be recorded on long-lived assets used in
operations when events and circumstances indicate that the
assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the
carrying amounts of those assets. If such a condition occurs,
the assets are adjusted to their estimated fair value, which is
determined based upon prices for similar assets. Impairment
charges of $29, $13 and $219 were recognized for the years ended
February 3, 2007, February 2, 2008, and
January 31, 2009, respectively, for assets related to
stores to be converted and are recorded in selling, general, and
administrative expense in the accompanying Consolidated
Statements of Income.
Deferred
Rent and Tenant Allowances
Deferred rent is recognized when a lease contains a
predetermined fixed escalation of minimum rent. The Company
recognizes the related rent expense on a straight-line basis
from possession date and records the difference between the
recognized rental expense and the amounts payable under the
lease as deferred rent liability. Also included in deferred rent
are tenant allowances received from landlords in accordance with
negotiated lease terms. The tenant allowances are amortized as a
reduction to rent expense on a straight-line basis over the term
of the lease (including the pre-opening build-out period). The
short-term portion of deferred rent is recorded in accrued
expenses and other current liabilities and the long-term portion
is included in deferred rent, tenant allowances and other
long-term liabilities in the accompanying Consolidated Balance
Sheets.
Insurance
and Self-Insurance
The Company uses a combination of insurance and self-insurance
for a number of risk management activities including
workers compensation, general liability, automobile
liability, and employee-related health care benefits, a portion
of which is paid by the employees. Costs related to claims are
accrued based on known claims and historical experiences of
incurred but not reported claims received from our insurers. The
Company believes that it has adequately reserved for its
self-insurance liability, which is capped through the use of
stop-loss contracts and specified retentions with insurance
companies. However, any significant variation of future claims
from historical trends could cause actual results to differ from
the accrued liability.
Revenue
Recognition
Revenue is recognized upon purchase of merchandise by customers.
Allowances for sales returns are recorded as a reduction of net
sales in the periods in which the sales are recognized.
Consistent with our merchandise return policy of 30 days,
the allowance for sales returns at each period end is calculated
and recorded based on actual returns made during the subsequent
30-day period. The allowance for sales returns was $204 and $229
for the years ended February 2, 2008 and January 31,
2009, respectively. Sales tax collected from customers is
excluded from revenue and is included as part of accrued
expenses and other current liabilities on the Companys
consolidated balance sheets.
Deferred revenue is established upon the purchase of gift cards
by customers, and revenue is recognized upon redemption of gift
cards for merchandise. The Company evaluated unredeemed gift
cards and determined
F-9
rue2l,
inc. and subsidiary
Notes to
Consolidated Financial
Statements (Continued)
that the likelihood of certain gift cards being redeemed by the
customer after 18 months was remote, based upon historical
redemption patterns of gift cards. We have established a
wholly-owned subsidiary to administer the gift card program
within a state jurisdiction that does not require remittance of
unclaimed property. For those gift cards that were determined
redemption would be remote, the Company reversed the liability,
and recorded gift card breakage income. Gift card breakage
income of $535 was recognized for the year ended
January 31, 2009 which represented the initial recognition
and includes income related to gift cards sold since the
inception of the gift card program. Gift card breakage income is
recorded as reduction to cost of goods sold.
Cost of
Goods Sold
Cost of goods sold includes costs related to merchandise sold,
distribution and warehousing, freight from the distribution
center to the stores, store occupancy, and buying and
merchandising department expenses. Cost of goods sold is reduced
by certain vendor allowances received, primarily for markdowns,
merchandise marked out of stock and vendor non-compliance
charges.
Selling,
General and Administrative Expense
Selling, general and administrative expense includes
administration, share-based compensation and store expenses but
excludes store occupancy costs and freight to stores.
Income
Taxes
Effective February 4, 2007, the Company adopted Financial
Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109
(FIN 48). FIN 48 prescribes a
comprehensive model for recognizing, measuring, presenting and
disclosing in the financial statements tax positions taken or
expected to be taken on a tax return, including a decision
whether to file or not to file in a particular jurisdiction.
Under FIN 48, a tax benefit from an uncertain position may
be recognized only if it is more likely than not
that the position is sustainable based on its technical merits.
Refer to Note 8 to the Consolidated Financial Statements
for further discussion of the adoption of FIN 48.
The Company calculates income taxes in accordance with SFAS
No. 109, Accounting for Income Taxes
(SFAS No. 109), which requires the use of
the asset and liability method. Under this method, deferred tax
assets and liabilities are recognized based on the difference
between the Consolidated Financial Statement carrying amounts of
existing assets and liabilities and their respective tax bases
as computed pursuant to FIN 48. Deferred tax assets and
liabilities are measured using the tax rates, based on certain
judgments regarding enacted tax laws and published guidance, in
effect in the years when those temporary differences are
expected to reverse. A valuation allowance is established
against the deferred tax assets when it is more likely than not
that some portion or all of the deferred taxes may not be
realized. Changes in the level and composition of earnings, tax
laws or the deferred tax valuation allowance, as well as the
results of tax audits may materially impact the Companys
effective tax rate.
The calculation of the deferred tax assets and liabilities, as
well as the decision to recognize a tax benefit from an
uncertain position and to establish a valuation allowance
require management to make estimates and assumptions. The
Company believes that its assumptions and estimates are
reasonable, although actual results may have a positive or
negative material impact on the balances of deferred tax assets
and liabilities, valuation allowances, or net income.
Share
Based Compensation
The Company accounts for share based compensation awards in
accordance with SFAS No. 123(R), Share Based
Payments (SFAS No. 123(R)).
SFAS No. 123(R) requires that companies recognize all
share-
F-10
rue2l,
inc. and subsidiary
Notes to
Consolidated Financial
Statements (Continued)
based payments to employees, including grants of employee stock
options, in the consolidated financial statements based on the
grant date fair value of the equity or liability instruments
issued. The Company recognizes compensation expense for stock
option awards on a straight-line basis over the requisite
service period of the award. All share-based awards to date have
been incentive stock options.
Store
Preopening Costs
Store preopening costs, which consist primarily of occupancy
costs and payroll, are expensed as incurred and are included in
selling, general and administrative expense in the accompanying
Consolidated Statements of Income.
Advertising
Costs
The Company expenses advertising costs when incurred.
Advertising expense, which is classified in selling, general,
and administrative expense in the accompanying Consolidated
Statements of Income, was $1,405, $1,795 and $2,381 for the
years ended February 3, 2007, February 2, 2008 and
January 31, 2009, respectively.
Repairs
and Maintenance
The Company capitalizes costs that extend the life of an asset
and that meet certain minimal dollar thresholds depending on
asset category. All other costs including maintenance agreements
are charged to selling, general and administrative expense in
the accompanying Consolidated Statements of Income. Repairs and
maintenance expense was $662, $850 and $1,204 for the years
ended February 3, 2007, February 2, 2008 and
January 31, 2009, respectively. Repairs and maintenance
expense does not include any costs for store conversions.
Legal
Proceedings and Claims
The Company is subject to certain legal proceedings and claims
arising out of the conduct of its business. In accordance with
SFAS No. 5, Accounting for
Contingencies, management records a reserve for
estimated losses when the loss is probable and the amount can be
reasonably estimated. If a range of possible loss exists and no
anticipated loss within the range is more likely than any other
anticipated loss, the Company records the accrual at the low end
of the range, in accordance with FASB Interpretation
No. 14, Reasonable Estimation of the Amount of a
Loss an interpretation of FASB Statement
No. 5. As the Company believes that it has
provided adequate reserves, it anticipates that the ultimate
outcome of any matter currently pending against the Company will
not materially affect the consolidated financial position or
results of operations of the Company.
Earnings
per Share
Basic earnings per common share amounts are calculated using the
weighted average number of common shares outstanding for the
period. Diluted earnings per common share amounts are calculated
using the weighted average number of common shares outstanding
plus the additional dilution for all potentially dilutive stock
options utilizing the treasury stock method.
F-11
rue2l,
inc. and subsidiary
Notes to
Consolidated Financial
Statements (Continued)
The following table shows the amounts used in computing earnings
per share and the effect on net income and the weighted average
number of shares of potential dilutive common stock (stock
options):
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Fiscal Year Ended
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February 3,
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February 2,
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January 31,
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2007
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2008
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2009
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Net income
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$
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7,798
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$
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9,133
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$
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12,639
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Weighted average basic shares
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19,782
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21,705
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21,914
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Impact of dilutive securities
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2,106
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1,137
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900
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Weighted average dilutive shares
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21,888
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22,842
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22,814
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Per common share:
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Basic earnings per share
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$
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0.39
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$
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0.42
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$
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0.58
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Diluted earnings per share
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$
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0.36
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$
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0.40
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$
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0.55
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Equity awards to purchase 23, 236 and 314 shares of common stock
for the years ended February 3, 2007, February 2, 2008
and January 31, 2009, respectively, were outstanding, but
were not included in the computation of weighted average diluted
common share amounts as the effect of doing so would have been
anti-dilutive.
Reclassifications
Certain reclassifications have been made to the Consolidated
Financial Statements for prior periods in order to conform to
the fiscal year 2008 presentation, including unaudited quarterly
financial information.
Recent
Accounting Pronouncements
In May 2009, the FASB issued SFAS 165, Subsequent
Events (SFAS 165), which establishes
guidance regarding the Companys accounting for and
disclosure of subsequent events. SFAS 165 requires
management to evaluate, as of each reporting period, events or
transactions that occur after the balance sheet date through the
date that the financial statements are issued or are available
to be issued. The Company adopted SFAS 165 as of
August 1, 2009 and the adoption did not have a material
impact on the Companys Consolidated Financial Statements.
In July 2009, the FASB issued SFAS 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles, a replacement of FASB Statement
No. 162 (SFAS 168).
SFAS 168 establishes the FASB Accounting Standard
Codification as the single source of authoritative accounting
principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial
statements in conformity with GAAP. The Company will adopt
SFAS 168 beginning in the third quarter of fiscal year
2009. The Company does not expect the adoption of SFAS 168
to have a material impact on its Consolidated Financial
Statements.
Effective February 1, 2009, the Company adopted
SFAS No. 157, Fair Value Measurements
(SFAS No. 157), for non-financial
assets and non-financial liabilities, and it did not have a
material impact on the Companys Consolidated Financial
Statements. In October 2008, the FASB issued Staff Position
No. FAS 157-3,
Determining the Fair Value of a Financial Asset When
the Market for That Asset is Not Active (FSP
FAS 157-3),
which clarified the application of SFAS No. 157 in
cases where a market is not active. The Company has considered
the guidance provided by FSP
FAS 157-3
in its determination of fair values as of January 31, 2009,
and the impact on its Consolidated Financial Statements was not
material.
In December 2007, the SEC issued Staff Accounting
Bulletin 110, Share-Based Payment
(SAB 110). SAB 110 allows for
continued use of the simplified method for estimating the
expected term of plain vanilla share option grants
under specified conditions. The expected term used to value a
share option grant under the
F-12
rue2l,
inc. and subsidiary
Notes to
Consolidated Financial
Statements (Continued)
simplified method is the midpoint between the vesting date and
the contractual term of the share option. SAB 110
eliminates the December 31, 2007 sunset provision
previously specified in Staff Accounting Bulletin No. 107
(SAB 107). SAB 110 is effective for share
option grants made on or after January 1, 2008. The Company
has utilized the simplified method for estimating the expected
term of its stock option grants under SAB 107 and
SAB 110 and will continue to utilize this simplified method
until the Company has sufficient historical exercise data to
provide a reasonable basis to estimate the expected term.
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2.
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Fair
Value of Financial Measurements
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SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in accordance with accounting
principles generally accepted in the United States, and expands
disclosures about fair value measurements. Fair value is defined
under SFAS No. 157 as the exit price associated with
the sale of an asset or transfer of a liability in an orderly
transaction between market participants at the measurement date.
The Company has adopted the provisions of SFAS No. 157
as of February 3, 2008, for its financial instruments.
Valuation techniques used to measure fair value under
SFAS No. 157 must maximize the use of observable
inputs and minimize the use of unobservable inputs. In addition,
SFAS No. 157 establishes a three-tier fair value
hierarchy, which prioritizes the inputs used in measuring fair
value. These tiers include:
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Level 1 Quoted prices in active markets for
identical assets or liabilities. The Companys cash and
cash equivalents of $3,343 and $4,611 as of February 2,
2008 and January 31, 2009, respectively, are reported at
fair value utilizing Level 1 inputs, as quoted current
market prices are readily available.
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Level 2 Inputs other than Level 1 that are
observable, either directly or indirectly, such as quoted prices
for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the
full term of the assets or liabilities.
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Level 3 Unobservable inputs (i.e. projections,
estimates, interpretations, etc.) that are supported by little
or no market activity and that are significant to the fair value
of the assets or liabilities.
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The Company has no financial instruments that would be
considered significant for fair value measurement purposes.
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3.
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Property
and Equipment
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Property and equipment consisted of the following:
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February 2,
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January 31,
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2008
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2009
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Furniture and fixtures
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$
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31,831
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$
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43,327
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Leasehold improvements
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32,868
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42,284
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Automobiles
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18
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18
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Computer equipment and software
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7,688
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11,260
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72,405
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96,889
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Less accumulated depreciation and amortization
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30,083
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40,202
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$
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42,322
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$
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56,687
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Effective April 10, 2008, the Company established a
five-year $60,000 senior secured revolving credit facility (the
Senior Secured Credit Facility) with Bank of America
N.A. The ceiling is expandable at the
F-13
rue2l,
inc. and subsidiary
Notes to
Consolidated Financial
Statements (Continued)
Companys option in increments of $5,000 up to a limit of
$85,000 under certain defined conditions. Availability under the
Senior Secured Credit Facility is collateralized by a first
priority interest in all the Companys assets. The Senior
Secured Credit Facility accrues interest at the Bank of America
base rate, defined at the Companys option as the prime
rate or the Eurodollar rate plus applicable margin which ranges
from 1.25% to 2.00% set quarterly dependent upon average net
availability on the facility during the previous quarter. The
weighted-average interest rate under the Senior Secured Credit
Facility was 3.22% for the year ended January 31, 2009. The
Senior Secured Credit Facility initial borrowing was $27,217.
Proceeds were used for the extinguishment of all of the
Companys long-term debt facilities including the Senior
Revolver, the Term Notes, the Term Note C, the accrued SKM
monitoring fees (each as discussed below) and the Bank of
America commitment fee. The Senior Secured Credit Facility
includes a fixed charge covenant applicable only if net
availability falls below thresholds of 25% in calendar year
2008, 15% in calendar year 2009, and 10% thereafter. The Company
is in compliance with all covenants under the Senior Secured
Credit Facility at January 31, 2009. The Senior Secured Credit
Facility matures in April 2013. As of January 31, 2009
$19,476 was outstanding under the Senior Secured Credit Facility.
Effective May 15, 2003, the Company established a $13,000
senior secured revolving credit facility (the Senior Revolver).
Availability was collateralized by a first priority interest in
the Companys inventory, reduced by the Companys
outstanding gift card liabilities. The facility accrues interest
at the LaSalle base rate, defined at the Companys option
as the prime rate or the Eurodollar rate plus applicable margin
(1.50%), which was 5.75% at February 2, 2008. The borrowing
limit was increased twice since establishment, to $20,000 on
March 17, 2005, and to $27,000 on May 17, 2006.
Effective with the May 17, 2006 amendment, the
facilitys term was extended to April 28, 2008.
Effective February 14, 2006, the facility was amended to
permit the Company to enter into certain transactions with the
Term Note holders as discussed below. The amounts outstanding
under the Senior Revolver were paid upon the establishment of
the Senior Secured Credit Facility on April 10, 2008.
Effective May 15, 2003, the Company entered into a credit
agreement with BNP Paribas (BNPP), that provided for
two term note (Term Notes) facilities
($19,250 Term A and
$10,250 Term B), and with SKM Investment
Fund II and SKM Equity Fund II, LP, majority
stockholders, that provided for a Term C note (Term Note
C) in the amount of $4,750. Additionally, at
February 2, 2008, the Company was obligated to the managers
of SKM funds above, in the amount of $1,177, related to annual
management and advisory fees, which was included in other
long-term liabilities in the Consolidated Balance Sheet at
February 2, 2008. These amounts were paid upon the
establishment of the Senior Secured Credit Facility on
April 10, 2008.
Borrowings on the Term Notes under the credit agreement required
monthly interest payments at (a) the BNPP prime rate or
(b) a Eurodollar rate, plus an applicable margin (3.0%),
which was 6.00% at February 2, 2008. The credit agreement
was collateralized by substantially all of the Companys
assets.
Effective February 14, 2006, the credit facility was
amended to permit the Company to acquire the face amount of
$4,985 of the Term Notes and 1,119 class A common shares of
stock held specifically by term loan bank lender National City
Bank for total consideration of $4,793. The debt acquired by the
Company was sourced through borrowings of $2,397 from term loan
bank lender BNPP and the remainder paid with cash on hand. Upon
acquisition of the stock, the Company placed in treasury 70% of
the shares or 783 shares and reissued the remainder of
336 shares to term loan bank lender BNPP. The proceeds used
to acquire the aforementioned securities were allocated to the
respective instruments based upon their fair value. A gain of
$507 was recognized as a result of the satisfaction of the
National City Bank obligation. This amount was included in
selling, general, and administrative expense in the Consolidated
Statements of Income.
The Term Note C accrued interest at a Eurodollar rate, plus
an applicable margin (3.0%), which was 7.52% at February 2,
2008. All interest and principal were paid upon the
establishment of the Senior Secured Credit Facility on
April 10, 2008.
F-14
rue2l,
inc. and subsidiary
Notes to
Consolidated Financial
Statements (Continued)
All Term Notes (A, B, and C) were scheduled to mature on
April 29, 2008, with balloon payments due at maturity for
Term Note A of $10,061, for Term Note B of $8,341, and
for Term Note C of $4,750. The Company refinanced these
facilities prior to maturity as discussed above.
The table below represents available and outstanding borrowings
on the facilities and interest expense incurred on the
facilities as of and for the year ended January 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available to
|
|
Outstanding
|
|
Interest
|
|
|
Borrow
|
|
Borrowings
|
|
Expense
|
|
Term A Note
|
|
$
|
|
|
|
$
|
|
|
|
$
|
113
|
|
Term B Note
|
|
|
|
|
|
|
|
|
|
|
93
|
|
Term C Note
|
|
|
|
|
|
|
|
|
|
|
86
|
|
Senior Revolver
|
|
|
|
|
|
|
|
|
|
|
51
|
|
Senior Secured Credit Facility(1)
|
|
|
40,524
|
|
|
|
19,476
|
|
|
|
938
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
1,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Additional unused line of credit fees totaling $69 are excluded. |
As a result of the various refinancing arrangements discussed
above, future maturities of long-term debt are as follows:
|
|
|
|
|
Year ending January:
|
|
|
|
|
2010
|
|
$
|
|
|
2011
|
|
|
|
|
2012
|
|
|
|
|
2013
|
|
|
|
|
2014
|
|
|
19,476
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,476
|
|
|
|
|
|
|
Effective May 15, 2003, the Company adopted the 2003
Ownership Incentive Plan pursuant to which key employees,
officers, and directors shall be eligible to receive options to
purchase common stock for an aggregate of up to 19.8% of the
shares of the common stock outstanding based on eligibility,
vesting, and performance standards established by the board of
directors. All share based awards to date have been incentive
stock options. Stock options granted are generally exercisable
over four years subject to certain employment terms and
conditions. The stock options expire ten years from the date of
issuance.
F-15
rue2l,
inc. and subsidiary
Notes to
Consolidated Financial
Statements (Continued)
The fair value of stock options was estimated at the date of
grant using a Black-Scholes option pricing model with the
following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 3,
|
|
|
February 2,
|
|
|
January 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Black-Scholes Option Valuation Assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate(1)
|
|
|
4.7%
|
|
|
|
4.7%
|
|
|
|
4.7%
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility factors for the expected market price of the
Companys common stock(2)
|
|
|
45%
|
|
|
|
55%
|
|
|
|
55%
|
|
Weighted average expected term(3)
|
|
|
7.5 years
|
|
|
|
7.5 years
|
|
|
|
6.3 years
|
|
|
|
|
(1) |
|
Based on the U.S. Treasury yield curve in effect at the time of
grant with a term consistent with the expected life of stock
options. |
|
(2) |
|
Expected stock price volatility is based on comparable
volatilities of peer companies within rue21s industry. |
|
|
|
(3) |
|
Represents the period of time options are expected to be
outstanding. The weighted-average expected option term was
determined using the simplified method, as allowed
by Staff Accounting Bulletin No. 110, Share
Based Payments. The expected term used to value a
share option grant under the simplified method is the midpoint
between the vesting date and the contractual term of the share
option. |
The following table represents stock options granted, vested,
and expired under the 2003 Ownership Incentive Plan for the
fiscal years ended February 2, 2008 and January 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
Common
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
(In years)
|
|
|
(In thousands)
|
|
|
Outstanding February 2, 2008
|
|
|
1,376
|
|
|
$
|
2.186
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
127
|
|
|
$
|
8.000
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(221
|
)
|
|
$
|
0.005
|
|
|
|
|
|
|
|
|
|
Expired or forfeited
|
|
|
(68
|
)
|
|
$
|
1.908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding January 31, 2009
|
|
|
1,214
|
|
|
$
|
2.906
|
|
|
|
7.50
|
|
|
$
|
2,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested January 31, 2009
|
|
|
404
|
|
|
$
|
1.857
|
|
|
|
6.54
|
|
|
$
|
862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 31, 2009, the Company had 656 shares
available for stock grants. We recognized $34, $34 and $0 in
compensation expense related to stock options for the fiscal
years ended February 3, 2007, February 2, 2008 and
January 31, 2009, respectively. The weighted-average fair
value of stock options at the grant date was $0.02, $0.38 and
$0.43 for the fiscal years ended February 3, 2007,
February 2, 2008 and January 31, 2009, respectively.
The intrinsic value of options exercised was $764, $311 and
$617, respectively, in the years ended February 3, 2007,
February 2, 2008 and January 31, 2009. All outstanding
vested options are currently exercisable as of January 31,
2009.
F-16
rue2l,
inc. and subsidiary
Notes to
Consolidated Financial
Statements (Continued)
The following table summarizes information regarding non-vested
outstanding stock options as of January 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
|
Fair Value at
|
|
|
Shares
|
|
Grant Date
|
|
|
(In thousands)
|
|
(Dollars)
|
|
Non-vested as of February 2, 2008
|
|
|
1,174
|
|
|
$
|
0.13
|
|
Granted
|
|
|
127
|
|
|
$
|
0.43
|
|
Vested
|
|
|
(423
|
)
|
|
$
|
0.09
|
|
Cancelled
|
|
|
(68
|
)
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
Non-vested as of January 31, 2009
|
|
|
810
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
As of January 31, 2009, there was $153 of unrecognized
compensation expense related to nonvested stock option awards
that is expected to be recognized over a weighted-average period
of 2.8 years.
All of the Companys operations are conducted from leased
premises. Store leases provide for base rentals, some of which
increase over time, and the payment of a percentage of sales as
additional rent when sales exceed specified levels. Minimum
rentals relating to these leases are recorded on a straight-line
basis. Generally, lease terms are five years in length excluding
renewal options. In addition, the Company is typically
responsible under its leases for maintenance, common area
charges, real estate taxes, and certain other expenses. Point of
sale equipment is also leased by the Company in terms of four
years. All leases are classified as operating leases.
A summary of fixed minimum and contingent rent expense for all
operating leases follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 3,
|
|
|
February 2,
|
|
|
January 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Store Rent:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed minimum
|
|
$
|
15,440
|
|
|
$
|
20,649
|
|
|
$
|
28,057
|
|
Contingent
|
|
|
1,103
|
|
|
|
1,027
|
|
|
|
1,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total store rent, excluding common area maintenance charges,
real estate taxes and certain other expenses
|
|
|
16,543
|
|
|
|
21,676
|
|
|
|
29,096
|
|
Offices, distribution facilities and equipment
|
|
|
2,320
|
|
|
|
2,712
|
|
|
|
3,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Rent Expense
|
|
$
|
18,863
|
|
|
$
|
24,388
|
|
|
$
|
32,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company leases an approximately 190,000 square foot
distribution and office facility, which is accounted for as an
operating lease. The lease agreement expires in fiscal year 2011
with options to renew for two additional five-year terms. Our
principal executive office, approximating 53,000 square
feet, is also under an operating lease agreement. This lease
agreement expires in fiscal year 2017 with an option to renew
for an additional five-year term.
F-17
rue2l,
inc. and subsidiary
Notes to
Consolidated Financial
Statements (Continued)
The table below summarizes future annual minimum lease
obligations under all operating leases as required by the lease
agreements:
|
|
|
|
|
Year ending January:
|
|
|
|
|
2010
|
|
$
|
35,535
|
|
2011
|
|
|
32,720
|
|
2012
|
|
|
28,442
|
|
2013
|
|
|
23,516
|
|
2014
|
|
|
17,927
|
|
Thereafter
|
|
|
38,760
|
|
|
|
|
|
|
Total future lease obligations
|
|
$
|
176,900
|
|
|
|
|
|
|
|
|
7.
|
401(k)
Profit-Sharing Plan
|
The Company sponsors a qualified 401(k) plan with a contributory
profit-sharing feature (the Plan) for eligible
employees. Participants of the 401(k) plan may contribute
up to 15% of pretax annual compensation as defined in the Plan,
subject to certain limitations. The Company matches 25% of the
first 6% of base compensation that a participant contributes to
the Plan. Profit-sharing contributions to the Plan,
as determined by the Board of Directors, are discretionary, but
generally may not exceed 15% of defined annual compensation paid
to all participating employees. 401(k) matching
contributions and profit-sharing contributions to the Plan were
$61, $116 and $119 for the years ended February 3, 2007,
February 2, 2008 and January 31, 2009, respectively,
and are included in selling, general, and administrative expense
in the Consolidated Statements of Income.
The provision for income taxes at February 3, 2007,
February 2, 2008 and January 31, 2009 consists of the
current and deferred elements in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
February 3,
|
|
February 2,
|
|
January 31,
|
|
|
2007
|
|
2008
|
|
2009
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
3,292
|
|
|
$
|
5,422
|
|
|
$
|
4,693
|
|
State
|
|
|
733
|
|
|
|
1,020
|
|
|
|
1,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
4,025
|
|
|
|
6,442
|
|
|
|
6,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction in valuation reserve
|
|
|
(805
|
)
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,707
|
)
|
|
|
(536
|
)
|
|
|
1,967
|
|
State
|
|
|
(61
|
)
|
|
|
14
|
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(2,573
|
)
|
|
|
(522
|
)
|
|
|
1,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
1,452
|
|
|
$
|
5,920
|
|
|
$
|
8,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
rue2l,
inc. and subsidiary
Notes to
Consolidated Financial
Statements (Continued)
The Companys income taxes determined at the statutory rate
for the years ended February 3, 2007, February 2, 2008
and January 31, 2009 differ from the actual rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
February 3,
|
|
February 2,
|
|
January 31,
|
|
|
2007
|
|
2008
|
|
2009
|
|
Effective Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State taxes
|
|
|
4.8
|
%
|
|
|
4.5
|
%
|
|
|
4.4
|
%
|
Valuation allowance
|
|
|
(18.5
|
)%
|
|
|
|
|
|
|
|
|
Non-deductible expenses
|
|
|
0.4
|
%
|
|
|
0.3
|
%
|
|
|
0.4
|
%
|
Tax contingency reserve
|
|
|
(5.0
|
)%
|
|
|
|
|
|
|
|
|
Other
|
|
|
(1.0
|
)%
|
|
|
(0.5
|
)%
|
|
|
(1.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
15.7
|
%
|
|
|
39.3
|
%
|
|
|
38.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fiscal year ended February 3, 2007 effective tax rate
varied significantly from the statutory tax rate of 35% as a
result of two material discrete events. The first of which is
the reversal of income tax reserves due to settlement of the
2004 Internal Revenue Service audit. The second discrete event
was the reversal of the valuation allowance as the Company
determined as of February 3, 2007 that it was more likely
than not that the deferred tax assets would be fully realized.
As a result of temporary differences, the Company has the
following net deferred tax amounts (asset (liability) at
February 3, 2007, February 2, 2008 and January 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 3,
|
|
|
February 2,
|
|
|
January 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
|
|
FIN 48 temporary differences
|
|
$
|
|
|
|
$
|
241
|
|
|
$
|
169
|
|
Federal & State NOLs
|
|
|
12
|
|
|
|
|
|
|
|
|
|
Deferred rent
|
|
|
4,067
|
|
|
|
6,016
|
|
|
|
8,618
|
|
Accrued compensation
|
|
|
423
|
|
|
|
499
|
|
|
|
740
|
|
Accrued reserve
|
|
|
421
|
|
|
|
552
|
|
|
|
143
|
|
Inventory
|
|
|
644
|
|
|
|
435
|
|
|
|
547
|
|
Other
|
|
|
92
|
|
|
|
40
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
5,659
|
|
|
|
7,783
|
|
|
|
10,241
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
(3,086
|
)
|
|
|
(4,689
|
)
|
|
|
(9,046
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
2,573
|
|
|
$
|
3,094
|
|
|
$
|
1,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 3,
|
|
|
February 2,
|
|
|
January 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
Current Deferred tax assets
|
|
$
|
2,218
|
|
|
$
|
2,595
|
|
|
$
|
3,136
|
|
Noncurrent Deferred tax assets (liabilities)
|
|
|
355
|
|
|
|
499
|
|
|
|
(1,941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,573
|
|
|
$
|
3,094
|
|
|
$
|
1,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
rue2l,
inc. and subsidiary
Notes to
Consolidated Financial
Statements (Continued)
The following table summarizes the activity related to our
unrecognized tax benefits:
|
|
|
|
|
Gross balance as of February 3, 2007
|
|
$
|
|
|
Prior period tax positions increase
|
|
|
228
|
|
|
|
|
|
|
Gross balance as of February 2, 2008
|
|
|
228
|
|
Prior period tax positions (decrease)
|
|
|
(82
|
)
|
|
|
|
|
|
Gross balance as of January 31, 2009
|
|
$
|
146
|
|
|
|
|
|
|
The gross amount of unrecognized tax benefits as of
February 3, 2007, February 2, 2008 and
January 31, 2009 was $0, $228 and $146, respectively, of
which $23 would affect the effective tax rate if recognized.
Over the next 12 months the company believes that there
will be no material change in unrecognized tax benefits.
The company classifies interest and penalties as an element of
tax expense. The amount of tax related interest and penalties
for fiscal years ended February 2, 2008 and
January 31, 2009 was not material.
rue21, inc. files U.S. Federal Tax returns as well as
various state tax returns. The Companys U.S. Federal tax
return for the filing period 2004 has been examined by the
Internal Revenue Service, which resulted in a no change audit.
rue21, inc.s federal tax returns are open for further
audit by taxing authorities for the periods of 2005
through 2008. The principal state jurisdictions that remain
open to examination for the periods 2004 and forward
are: Pennsylvania, Texas, North Carolina, Illinois, and
West Virginia.
|
|
9.
|
Commitments
and Contingencies
|
From time to time, the Company is involved in litigation
relating to claims arising out of the normal course of business.
As of the date hereof, the Company is involved in no litigation
that the Company believes will have a material adverse effect on
its consolidated financial condition, results of operation, or
liquidity.
|
|
10.
|
Related
Party Transactions
|
The Company and two funds managed by Apax Partners, L.P.
(Apax) and BNP Paribas of North America, Inc.
(BNP), entered into a shareholders agreement
in 2003. This agreement among other things: (1) set the
composition of the board of directors; (2) insured the
continuity of management; and (3) limited share transfers.
In addition, as long as Apax owned at least 25% of the
outstanding shares, the Company was required to pay an annual
fee of $250 in exchange for certain financial advisory services.
This fee has been paid for the years ended February 3,
2007, February 2, 2008 and January 31, 2009.
F-20
rue2l,
inc. and subsidiary
Notes to
Consolidated Financial
Statements (Continued)
|
|
11.
|
Selected
Quarterly Financial Data (Unaudited)
|
The following table sets forth certain unaudited quarterly
financial information (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
May 3,
|
|
August 2,
|
|
November 1,
|
|
January 31,
|
|
|
2008
|
|
2008
|
|
2008
|
|
2009
|
|
Fiscal Year 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
76,779
|
|
|
$
|
98,058
|
|
|
$
|
97,464
|
|
|
$
|
119,113
|
|
Gross Profit
|
|
|
25,218
|
|
|
|
34,714
|
|
|
|
35,149
|
|
|
|
38,480
|
|
Net Income
|
|
|
836
|
|
|
|
4,315
|
|
|
|
2,890
|
|
|
|
4,598
|
|
Basic earnings per share
|
|
|
0.04
|
|
|
|
0.20
|
|
|
|
0.13
|
|
|
|
0.21
|
|
Diluted earnings per share
|
|
|
0.04
|
|
|
|
0.19
|
|
|
|
0.13
|
|
|
|
0.20
|
|
Weighted average basic shares outstanding
|
|
|
21,873
|
|
|
|
21,895
|
|
|
|
21,953
|
|
|
|
22,046
|
|
Weighted average diluted shares outstanding
|
|
|
22,849
|
|
|
|
22,850
|
|
|
|
22,822
|
|
|
|
22,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
May 5,
|
|
August 4,
|
|
November 3,
|
|
February 2,
|
|
|
2007
|
|
2007
|
|
2007
|
|
2008
|
|
Fiscal Year 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
63,745
|
|
|
$
|
77,282
|
|
|
$
|
72,929
|
|
|
$
|
82,931
|
|
Gross Profit
|
|
|
21,097
|
|
|
|
26,902
|
|
|
|
25,558
|
|
|
|
28,296
|
|
Net Income
|
|
|
535
|
|
|
|
3,288
|
|
|
|
1,855
|
|
|
|
3,455
|
|
Basic earnings per share
|
|
|
0.02
|
|
|
|
0.15
|
|
|
|
0.09
|
|
|
|
0.16
|
|
Diluted earnings per share
|
|
|
0.02
|
|
|
|
0.14
|
|
|
|
0.08
|
|
|
|
0.15
|
|
Weighted average basic shares outstanding
|
|
|
21,695
|
|
|
|
21,695
|
|
|
|
21,702
|
|
|
|
21,783
|
|
Weighted average diluted shares outstanding
|
|
|
22,865
|
|
|
|
22,867
|
|
|
|
22,847
|
|
|
|
22,848
|
|
The sum of the quarterly income per common share may not equal
the full year amount as the computations of the weighted average
common shares outstanding for basic and diluted shares
outstanding for each quarter and the full year are performed
independently.
F-21
rue21,
inc. and subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
August 2,
|
|
|
August 1,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,611
|
|
|
$
|
7,385
|
|
|
$
|
8,668
|
|
Merchandise inventory, net
|
|
|
66,838
|
|
|
|
71,714
|
|
|
|
92,987
|
|
Prepaid expenses and other current assets
|
|
|
9,164
|
|
|
|
9,103
|
|
|
|
12,883
|
|
Deferred tax assets
|
|
|
3,135
|
|
|
|
2,777
|
|
|
|
3,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
83,748
|
|
|
|
90,979
|
|
|
|
118,012
|
|
Net property and equipment
|
|
|
56,687
|
|
|
|
46,453
|
|
|
|
65,444
|
|
Other assets
|
|
|
765
|
|
|
|
649
|
|
|
|
819
|
|
Deferred tax assets
|
|
|
|
|
|
|
686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
141,200
|
|
|
$
|
138,767
|
|
|
$
|
184,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of term debt
|
|
$
|
|
|
|
$
|
194
|
|
|
$
|
|
|
Accounts payable
|
|
|
60,449
|
|
|
|
65,759
|
|
|
|
78,669
|
|
Accrued expenses and other current liabilities
|
|
|
14,969
|
|
|
|
12,066
|
|
|
|
16,574
|
|
Accrued payroll and related taxes
|
|
|
7,532
|
|
|
|
5,789
|
|
|
|
7,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
82,950
|
|
|
|
83,808
|
|
|
|
103,182
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
19,476
|
|
|
|
27,567
|
|
|
|
29,234
|
|
Deferred rent, tenant allowance and other long-term liabilities
|
|
|
18,440
|
|
|
|
16,436
|
|
|
|
23,068
|
|
Deferred tax liabilities
|
|
|
1,941
|
|
|
|
|
|
|
|
1,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
39,857
|
|
|
|
44,003
|
|
|
|
54,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
122,807
|
|
|
|
127,811
|
|
|
|
157,345
|
|
Common stock par value, $0.004 per share; 50,000
authorized, 21,896, 22,090 and 22,091 shares issued
|
|
|
88
|
|
|
|
88
|
|
|
|
88
|
|
Additional paid in capital
|
|
|
13
|
|
|
|
65
|
|
|
|
37
|
|
Retained earnings
|
|
|
18,292
|
|
|
|
10,803
|
|
|
|
26,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
18,393
|
|
|
|
10,956
|
|
|
|
26,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
141,200
|
|
|
$
|
138,767
|
|
|
$
|
184,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-22
rue21,
inc. and subsidiary
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
August 2,
|
|
|
August 1,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except per share data)
|
|
|
Net sales
|
|
$
|
174,837
|
|
|
$
|
233,104
|
|
Cost of goods sold (includes certain buying and distribution
costs)
|
|
|
114,904
|
|
|
|
150,194
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
59,933
|
|
|
|
82,910
|
|
Selling, general, and administrative expense
|
|
|
45,280
|
|
|
|
61,082
|
|
Depreciation and amortization expense
|
|
|
5,274
|
|
|
|
7,774
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
9,379
|
|
|
|
14,054
|
|
Interest expense, net
|
|
|
904
|
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
8,475
|
|
|
|
13,757
|
|
Income tax expense
|
|
|
3,322
|
|
|
|
5,440
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,153
|
|
|
$
|
8,317
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.24
|
|
|
$
|
0.38
|
|
Diluted earnings per common share
|
|
$
|
0.23
|
|
|
$
|
0.36
|
|
Weighted average basic shares outstanding
|
|
|
21,880
|
|
|
|
22,090
|
|
Weighted average diluted shares outstanding
|
|
|
22,845
|
|
|
|
23,004
|
|
See accompanying notes.
F-23
rue21,
inc. and subsidiary
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
August 2,
|
|
|
August 1,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
|
(Unaudited)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,153
|
|
|
$
|
8,317
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
5,274
|
|
|
|
7,774
|
|
Deferred taxes
|
|
|
(369
|
)
|
|
|
(419
|
)
|
Share based compensation
|
|
|
|
|
|
|
24
|
|
Changes in:
|
|
|
|
|
|
|
|
|
Merchandise inventory
|
|
|
(24,561
|
)
|
|
|
(26,149
|
)
|
Accounts payable
|
|
|
29,444
|
|
|
|
18,220
|
|
Other Assets and Liabilities
|
|
|
(972
|
)
|
|
|
3,188
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
13,969
|
|
|
|
10,955
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(9,526
|
)
|
|
|
(16,656
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(9,526
|
)
|
|
|
(16,656
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
Net borrowings under revolver
|
|
|
22,751
|
|
|
|
9,758
|
|
Payments on long-term debt
|
|
|
(23,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for financing activities
|
|
|
(401
|
)
|
|
|
9,758
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
4,042
|
|
|
|
4,057
|
|
Cash and cash equivalents, beginning of period
|
|
|
3,343
|
|
|
|
4,611
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
7,385
|
|
|
$
|
8,668
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-24
rue21, inc. (the Company or rue21) is a
specialty retailer of junior and young mens apparel and
accessories in various strip centers, regional malls and outlet
centers throughout the United States. Sales are generally
transacted for cash or checks and through the acceptance of
third-party credit and debit cards.
The consolidated financial statements include all the accounts
of the Company and its wholly-owned subsidiary
r services, llc. All intercompany transactions
and balances have been eliminated in consolidation.
The condensed consolidated balance sheets as of August 1,
2009 and the condensed consolidated statements of income and
cash flows for the twenty-six week periods ended August 1,
2009 and August 2, 2008 have been prepared by the company
and have not been audited. In the opinion of management, all
adjustments, consisting of only normal recurring adjustments
necessary for the fair presentation of the financial position,
results of operation and cash flows, have been made.
Certain information and footnote disclosure normally included in
financial statements prepared in accordance with accounting
principles generally accepted have been condensed or omitted.
These financial statements should be read in conjunction with
the financial statements and notes thereto included in the
consolidated financial statements for the fiscal year ended
January 31, 2009.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions. These
estimates and assumptions affect the reported amounts of assets
and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. On an
ongoing basis, management reviews its estimates based on
currently available information. Changes in facts and
circumstances may result in revised estimates.
The results of operations for the twenty-six week period ended
August 1, 2009 are not necessarily indicative of the
operating results for the full fiscal year.
Recent
Accounting Pronouncements
In May 2009, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) 165, Subsequent
Events (SFAS 165), which establishes
guidance regarding the Companys accounting for and
disclosure of subsequent events. SFAS 165 requires
management to evaluate, as of each reporting period events or
transactions that occur after the balance sheet date through the
date that the financial statements are issued or are available
to be issued. The Company adopted SFAS 165 as of
August 1, 2009 and the adoption did not have a material
impact on the Companys Consolidated Financial Statements.
In July 2009, the FASB issued SFAS 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles, a replacement of FASB Statement
No. 162 (SFAS 168).
SFAS 168 establishes the FASB Accounting Standard
Codification as the single source of authoritative accounting
principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial
statements in conformity with Generally Accepted Accounting
Principles. The Company will adopt SFAS 168 beginning in
the third quarter of fiscal year 2009. The Company does not
expect the adoption of SFAS 168 to have a material impact
on its Consolidated Financial Statements.
Effective February 1, 2009, the Company adopted
SFAS No. 157, Fair Value Measurements
(SFAS No. 157), for non-financial
assets and non-financial liabilities, and it did not have a
material impact on the Companys consolidated financial
statements. In October 2008, the FASB issued Staff Position
F-25
rue2l,
inc. and subsidiary
Notes to
Unaudited Condensed Consolidated Financial
Statements (Continued)
No. FAS 157-3,
Determining the Fair Value of a Financial Asset When
the Market for That Asset is Not Active (FSP
FAS 157-3),
which clarified the application of SFAS No. 157 in
cases where a market is not active. The Company has considered
the guidance provided by FSP
FAS 157-3
in its determination of fair values as of January 31, 2009,
and the impact on its Consolidated Financial Statements was not
material.
In December 2007, the SEC issued Staff Accounting
Bulletin 110, Share-Based Payments
(SAB 110). SAB 110 allows for continued
use of the simplified method for estimating the expected term of
plain vanilla share option grants under specified
conditions. The expected term used to value a share option grant
under the simplified method is the midpoint between the vesting
date and the contractual term of the share option. SAB 110
eliminates the December 31, 2007 sunset provision
previously specified in SAB 107. SAB 110 is effective
for share option grants made on or after January 1, 2008.
The Company has utilized the simplified method for estimating
the expected term of its stock option grants under SAB 107
and SAB 110 and will continue to utilize this simplified
method until the Company has sufficient historical exercise data
to provide a reasonable basis to estimate the expected term.
Effective April 10, 2008, the Company established a
five-year $60,000 senior secured revolving credit facility (the
Senior Secured Credit Facility) with Bank of
America, N.A. The Senior Secured Credit Facility ceiling is
expandable at the Companys option in increments of $5,000
up to a limit of $85,000 under certain defined conditions.
Availability under the Senior Secured Credit Facility is
collateralized by a first priority interest in all the
Companys assets. The Senior Secured Credit Facility
accrues interest at the Bank of America base rate, defined at
the Companys option as the prime rate or the Eurodollar
rate plus applicable margin which ranges from 1.25% to 2.00% set
quarterly dependent upon average net availability on the Senior
Secured Credit Facility during the previous quarter a Fixed
Charge covenant applicable only if net availability falls below
thresholds of 25% in calendar year 2008, 15% in calendar year
2009, and 10% thereafter. The Company is in compliance with all
covenants under the Senior Secured Credit Facility at
August 1, 2009. The Senior Secured Credit Facility matures
in April 2013. As of January 31, 2009, August 2, 2008,
and August 1, 2009, $19,476, $27,567 and $29,234,
respectively, was outstanding under our Senior Secured Credit
Facility.
Earnings per common share has been computed as follows ($ in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
|
August 2,
|
|
August 1,
|
|
|
2008
|
|
2009
|
|
Net Income
|
|
$
|
5,153
|
|
|
$
|
8,317
|
|
Weighted average basic shares
|
|
|
21,880
|
|
|
|
22,090
|
|
Impact of dilutive securities
|
|
|
965
|
|
|
|
914
|
|
|
|
|
|
|
|
|
|
|
Weighted average dilutive shares
|
|
|
22,845
|
|
|
|
23,004
|
|
|
|
|
|
|
|
|
|
|
Per common share:
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.24
|
|
|
$
|
0.38
|
|
Diluted earnings per share
|
|
$
|
0.23
|
|
|
$
|
0.36
|
|
Equity awards to purchase 496 and 669 shares of common
stock for the twenty-six weeks ended August 2, 2008 and
August 1, 2009, respectively, were outstanding, but were
not included in the computation of weighted average diluted
common share amounts as the effect of doing so would have been
anti-dilutive.
F-26
rue2l,
inc. and subsidiary
Notes to
Unaudited Condensed Consolidated Financial
Statements (Continued)
Effective May 15, 2003, the Company adopted the 2003
Ownership Incentive Plan pursuant to which key employees,
officers, and directors shall be eligible to receive options to
purchase common stock for an aggregate of up to 19.8% of the
shares of the common stock outstanding based on eligibility,
vesting, and performance standards established by the board of
directors. All share based awards to date have been incentive
stock options. Stock options granted are generally exercisable
over four years subject to certain employment terms and
conditions. The stock options begin to expire ten years from the
date of issuance.
The fair value of stock options was estimated at the date of
grant using a Black-Scholes option pricing model with the
following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks
|
|
Twenty-Six Weeks
|
|
|
Ended
|
|
Ended
|
|
|
August 2,
|
|
August 1,
|
|
|
2008
|
|
2009
|
|
Black-Scholes Option Valuation Assumptions:
|
|
|
|
|
|
|
|
|
Risk-free interest rate(1)
|
|
|
4.7
|
%
|
|
|
2.6
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
Volatility factors for the expected market price of the
Companys common stock(2)
|
|
|
55
|
%
|
|
|
60
|
%
|
Weighted average expected term(3)
|
|
|
6.3
|
years
|
|
|
6.3
|
years
|
|
|
|
(1)
|
|
Based on the U.S. Treasury yield
curve in effect at the time of grant with a term consistent with
the expected life of stock options.
|
|
(2)
|
|
Expected stock price volatility is
based on comparable volatilities of peer companies within
rue21s industry.
|
|
(3)
|
|
Represents the period of time
options are expected to be outstanding. The weighted-average
expected option term was determined using the simplified
method, as allowed by Staff Accounting
Bulletin No. 110, Share Based
Payment. The expected term used to value a share
option grant under the simplified method is the midpoint between
the vesting date and the contractual term of the share option.
|
The following table represents stock options granted, vested,
and expired under the 2003 Ownership Incentive Plan for the year
ended January 31, 2009 and the twenty-six weeks ended
August 1, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted-
|
|
Average
|
|
|
|
|
Common
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
Stock
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
Options
|
|
Price
|
|
Term
|
|
Value
|
|
|
|
|
|
|
(In years)
|
|
(In thousands)
|
|
Outstanding January 31, 2009
|
|
|
1,214
|
|
|
$
|
2.91
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
370
|
|
|
|
11.35
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1
|
)
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
Expired or forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding August 1, 2009
|
|
|
1,583
|
|
|
|
4.88
|
|
|
|
7.69
|
|
|
$
|
10,946
|
|
Exercisable at August 1, 2009
|
|
|
664
|
|
|
|
2.42
|
|
|
|
6.58
|
|
|
$
|
6,221
|
|
We recognized $0 and $24 in compensation expense related to
stock options for the twenty-six weeks ended August 2, 2008
and August 1, 2009, respectively.
F-27
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution.
|
The following table sets forth all costs and expenses, other
than the underwriting discounts and commissions payable by us,
in connection with the offer and sale of the securities being
registered. All amounts shown are estimates except for the SEC
registration fee and the FINRA filing fee.
|
|
|
|
|
SEC registration fee
|
|
$
|
7,815
|
|
FINRA filing fee
|
|
$
|
13,000
|
|
NASDAQ listing fee
|
|
$
|
5,000
|
|
Printing expenses
|
|
$
|
400,000
|
|
Legal fees and expenses
|
|
$
|
800,000
|
|
Accounting fees and expenses
|
|
$
|
1,000,000
|
|
Miscellaneous expenses
|
|
$
|
1,800,000
|
|
|
|
|
|
|
Total expenses
|
|
$
|
4,025,815
|
|
|
|
|
|
|
|
|
Item 14.
|
Indemnification
of Directors and Officers.
|
We intend to reincorporate as a Delaware corporation prior to
the completion of this offering. Unless otherwise indicated, all
information in this registration statement assumes that we have
reincorporated in Delaware prior to the completion of this
offering. Upon completion of the reincorporation, we will be
subject to the DGCL.
Section 102(b)(7) of the DGCL allows a corporation to
provide in its certificate of incorporation that a director of
the corporation will not be personally liable to the corporation
or its stockholders for monetary damages for breach of fiduciary
duty as a director, except where the director breached the duty
of loyalty, failed to act in good faith, engaged in intentional
misconduct or knowingly violated a law, authorized the payment
of a dividend or approved a stock repurchase in violation of
Delaware corporate law or obtained an improper personal benefit.
Our amended and restated certificate of incorporation will
provide for this limitation of liability.
Section 145 of the DGCL, or Section 145, provides that
a Delaware corporation may indemnify any person who was, is or
is threatened to be made, party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in
the right of such corporation), by reason of the fact that such
person is or was an officer, director, employee or agent of such
corporation or is or was serving at the request of such
corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses
(including attorneys fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding,
provided such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the
corporations best interests and, with respect to any
criminal action or proceeding, had no reasonable cause to
believe that his or her conduct was illegal. A Delaware
corporation may indemnify any persons who are, were or are a
party to any threatened, pending or completed action or suit by
or in the right of the corporation by reasons of the fact that
such person is or was a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include
expenses (including attorneys fees) actually and
reasonably incurred by such person in connection with the
defense or settlement of such action or suit, provided such
person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the corporations best
interests, provided that no indemnification is permitted without
judicial approval if the officer, director, employee or agent is
adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense
of any action referred to above, the corporation must indemnify
him against the expenses which such officer or director has
actually and reasonably incurred.
II-1
Section 145 further authorizes a corporation to purchase
and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation or is or
was serving at the request of the corporation as a director,
officer, employee or agent of another corporation or enterprise,
against any liability asserted against him and incurred by him
in any such capacity, or arising out of his or her status as
such, whether or not the corporation would otherwise have the
power to indemnify him under Section 145.
Our amended and restated certificate of incorporation will
provide that we must indemnify our directors and officers to the
fullest extent authorized by the DGCL and must also pay expenses
incurred in defending any such proceeding in advance of its
final disposition upon delivery of an undertaking, by or on
behalf of an indemnified person, to repay all amounts so
advanced if it should be determined ultimately that such person
is not entitled to be indemnified under this section or
otherwise.
We intend to enter into indemnification agreements with each of
our current directors and officers. These agreements will
require us to indemnify these individuals to the fullest extent
permitted under Delaware law against liabilities that may arise
by reason of their service to us, and to advance expenses
incurred as a result of any proceeding against them as to which
they could be indemnified.
The indemnification rights set forth above shall not be
exclusive of any other right which an indemnified person may
have or hereafter acquire under any statute, provision of our
amended and restated certificate of incorporation, our amended
and restated bylaws, agreement, vote of stockholders or
disinterested directors or otherwise.
We expect to maintain standard policies of insurance that
provide coverage (1) to our directors and officers against
loss rising from claims made by reason of breach of duty or
other wrongful act and (2) to us with respect to
indemnification payments that we may make to such directors and
officers.
The proposed form of Purchase Agreement to be filed as
Exhibit 1.1 to this Registration Statement provides for
indemnification to our directors and officers by the
underwriters against certain liabilities.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities.
|
Set forth below is information regarding shares of our common
stock issued, and stock options granted, by us within the past
three years that were not registered under the Securities Act.
Also included is the consideration, if any, received by us for
such shares or stock option grants and information relating to
the section of the Securities Act, or rule of the SEC, under
which exemption from registration was claimed.
1. On August 1, 2006, we granted options to purchase
464,500 shares of our common stock at an exercise price of
$0.005 per share to employees under our 2003 Plan. We did not
grant any stock options outside of our 2003 Plan.
2. From January 2007 through August 1, 2007, we
granted options to purchase 102,500 shares of our common
stock at an exercise price of $0.39 per share on a weighted
average basis to employees under our 2003 Plan. We did not grant
any stock options outside of our 2003 Plan.
3. On January 4, 2008, we granted options to purchase
374,500 shares of our common stock at an exercise price of
$8.00 per share to employees under our 2003 Plan. We did not
grant any stock options outside of our 2003 Plan.
4. From February 2008 through March 2009, we granted
options to purchase 170,000 shares of our common stock at
an exercise price of $8.00 per share to employees under our 2003
Plan. We did not grant any stock options outside of our 2003
Plan.
5. On July 24, 2009, we granted options to purchase
326,500 shares of our common stock at an exercise price of
$11.80 per share to employees under our 2003 Plan. We did not
grant any stock options outside of our 2003 Plan.
6. On August 21, 2009, we granted 42,480 options
to purchase shares of our common stock at an exercise price of
$11.80 per share to employees under our 2003 Plan. We did
not grant any stock options outside of our 2003 Plan.
II-2
The offers, sales and issuances of the securities described
above were deemed to be exempt from registration under the
Securities Act in reliance upon Rule 701 of the Securities
Act or Section 4(2) of the Securities Act. The offers,
sales and issuances of the securities that were deemed to be
exempt in reliance on Rule 701 were transactions under
compensatory benefit plans and contracts relating to
compensation as provided under Rule 701. The offers, sales
and issuances of the securities that were deemed to be exempt in
reliance upon Section 4(2) were each transactions not
involving any public offering, and all recipients of these
securities were accredited investors within the meaning of
Rule 501 of Regulation D of the Securities Act. The
recipients of the foregoing securities were our employees,
directors or bona fide consultants and received the
securities under our 2003 Plan. Appropriate legends were affixed
to the securities issued in these transactions. Each of the
recipients of securities in these transactions had adequate
access, through employment, business or other relationships, to
information about us.
|
|
Item 16.
|
Exhibits
and Financial Statement Schedules.
|
(a) Exhibits
The exhibit index attached hereto is incorporated herein by
reference.
(b) Financial
Statement Schedules
No financial statement schedules are provided because the
information called for is not applicable or is shown in the
financial statements or notes thereto.
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the purchase agreement,
certificates in such denominations and registered in such names
as required by the underwriters to permit prompt delivery to
each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the provisions referenced in Item 14 of this registration
statement or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective; and
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at the time shall
be deemed to be the initial bona fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act, the
registrant has duly caused this Amendment No. 3 to the
registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Warrendale,
Pennsylvania on November 2, 2009.
rue21, inc.
Name: Robert N. Fisch
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act, this
Amendment No. 3 to the registration statement has been
signed by the following persons in the capacities indicated on
the date indicated below:
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Robert
N. Fisch
Robert
N. Fisch
|
|
President, Chief Executive Officer and Chairman (principal
executive officer)
|
|
November 2, 2009
|
|
|
|
|
|
/s/ Keith
A. McDonough
Keith
A. McDonough
|
|
Senior Vice President and Chief Financial Officer (principal
financial officer and principal accounting officer)
|
|
November 2, 2009
|
|
|
|
|
|
*
Mark
F. Darrel
|
|
Director
|
|
November 2, 2009
|
|
|
|
|
|
*
John
F. Megrue, Jr.
|
|
Director
|
|
November 2, 2009
|
|
|
|
|
|
*
Alex
S. Pellegrini
|
|
Director
|
|
November 2, 2009
|
|
|
|
|
|
|
|
*By:
|
|
/s/ Keith
A. McDonough
Keith
A. McDonough, as Attorney-in-Fact
|
|
|
|
|
II-4
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1
|
|
Form of Purchase Agreement.
|
|
3
|
.1
|
|
Amended and Restated Articles of Incorporation of rue21, inc.,
as currently in effect.
|
|
3
|
.2
|
|
Amended and Restated Bylaws of rue21, inc., as currently in
effect.
|
|
3
|
.3*
|
|
Form of Amended and Restated Certificate of Incorporation of
rue21, inc., to be effective upon completion of this offering.
|
|
3
|
.4*
|
|
Form of Amended and Restated Bylaws of rue21, inc., to be
effective upon completion of this offering
|
|
4
|
.1*
|
|
Specimen Common Stock Certificate.
|
|
5
|
.1*
|
|
Form of Opinion of Kirkland & Ellis LLP.
|
|
10
|
.1
|
|
Employment Agreement, dated as of January 1, 2008, between
rue21, inc. and Robert N. Fisch.+
|
|
10
|
.2
|
|
Shareholders Agreement, dated as of May 15, 2003,
between rue21, inc., SKM Equity Fund II, L.P., SKM
Investment Fund II, funds advised by Apax Partners, L.P.,
BNP Paribas of North America, Inc., UnionBalCal Equities, Inc.
and National City Bank of Pennsylvania.
|
|
10
|
.3
|
|
rue21, inc. Amended and Restated 2003 Ownership Incentive Plan.+
|
|
10
|
.4
|
|
Form of rue21, inc. 2009 Omnibus Incentive Plan.+
|
|
10
|
.5
|
|
Credit Agreement, dated April 10, 2008, among rue21, inc.,
as lead borrower, the borrowers named therein, r services llc,
as guarantor and Bank of America, N.A. as administrative agent,
collateral agent, swing line lender and letter of credit issuer,
and the other lender parties thereto.
|
|
10
|
.6
|
|
Security Agreement, dated April 10, 2008, by and among
rue21, inc., as lead borrower, r services llc, as guarantor, and
Bank of America, N.A., as collateral agent.
|
|
10
|
.7
|
|
Guaranty, dated April 10, 2008, by r services llc, as
guarantor, in favor of Bank of America, N.A., as administrative
agent and collateral agent.
|
|
10
|
.8
|
|
Lease Agreement, dated June 28, 1999, by and between West
Virginia Economic Development Authority, as landlord, and
Pennsylvania Fashions, Inc., as tenant.
|
|
10
|
.8.1
|
|
Amendment to Lease Agreement, dated April 1, 2001, by and
between West Virginia Economic Development Authority, as
landlord, and Pennsylvania Fashions, Inc., as tenant.
|
|
10
|
.9
|
|
First Amendment to Lease, dated April 1, 2002, by and
between West Virginia Economic Development Authority, as
landlord, and Pennsylvania Fashions, Inc., as tenant.
|
|
10
|
.10
|
|
Letter Agreement, dated May 15, 2003, by and between Apax
Partners, L.P., as successors to Saunders Karp &
Megrue, LLC and rue21, inc.
|
|
10
|
.11
|
|
Form of Termination Agreement, by and between rue21, inc. and
Apax Partners, L.P.
|
|
10
|
.12*
|
|
Form of Indemnification Agreement.
|
|
10
|
.13
|
|
Form of Non-Qualified Stock Option Agreement.+
|
|
10
|
.14
|
|
Form of Stock Appreciation Rights Agreement.+
|
|
10
|
.15
|
|
Form of Restricted Stock Unit Agreement.+
|
|
10
|
.16
|
|
Form of Restricted Stock Agreement.+
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP, independent registered
public accounting firm.
|
|
23
|
.2*
|
|
Consent of Kirkland & Ellis LLP (included in
Exhibit 5.1).
|
|
24
|
.1
|
|
Powers of Attorney (included on signature page).
|
|
99
|
.1
|
|
Consent of Director Nominee
|
|
|
|
* |
|
To be filed by amendment. |
|
+ |
|
Indicates a management contract or compensatory plan or
arrangement. |
|
|
|
Previously filed. |