Risk Factors
An investment in shares of our common stock involves a high degree of
risk. You should consider carefully the following information about these
risks, together with the other information contained or incorporated by
reference in this prospectus, before you decide whether to buy our common
stock. The occurrence of any of the following risks could have a material
adverse effect on our business, financial condition and results of operations.
Risks relating to our business
Our success depends on our
ability to anticipate, identify and respond rapidly to changes in consumers
fashion tastes, and our failure to adequately evaluate fashion trends could
have a material adverse effect on our business, financial condition and results
of operations.
The apparel industry in general and our core
customer market in particular are subject to rapidly evolving fashion trends
and shifting consumer demands. Accordingly, our success is heavily dependent on
our ability to anticipate, identify and capitalize on emerging fashion trends,
including products, styles and materials that will appeal to our target
consumers. Our failure to anticipate, identify or react appropriately and
timely to changes in styles, trends, brand preferences or desired image
preferences is likely to lead to lower demand for our merchandise, which could
cause, among other things, sales declines, excess inventories and higher
markdowns. The inaccuracy of our forecasts regarding fashion trends could have
a material adverse effect on our business, financial condition and results of
operations.
If we are unsuccessful in
competing with our retail apparel competitors, our market share could decline
or our growth could be impaired and, as a result, our financial results could
suffer.
The retail apparel market is highly competitive with
few barriers to entry. We compete against a diverse group of retailers,
including national off-price apparel chains such as the TJX Companies, Inc.,
Burlington Coat Factory, and Ross Stores, Inc.; mass merchants such as
Wal-Mart and Kmart; smaller discount retail chains that only sell womens
products, such as Rainbow, Dots, Its Fashions! (a subsidiary of The Cato
Corporation) and Simply Fashions; and general merchandise discount stores and
dollar stores, which offer a variety of products, including apparel, for the
value-conscious consumer. We also compete against local off-price and specialty
retail stores, regional retail chains, traditional department stores, and
web-based retail stores and other direct retailers.
The level of competition we face from these
retailers varies depending on the product segment, as many of our competitors
do not offer apparel for the entire family. Our greatest competition is
generally in womens apparel. Many of our competitors are larger than us and
have substantially greater resources than us and, as a result, may be able to
adapt more quickly to changing market conditions, exploit new opportunities,
exert greater pricing pressures on suppliers and open new stores more quickly
and effectively than us. Many of these retailers have better name recognition
among consumers than us and purchase significantly more merchandise from
vendors. These retailers may be able to purchase branded merchandise that we
cannot purchase because of their name recognition and relationships with
suppliers, or they may be able to purchase branded merchandise with better
pricing concessions than us. Our local and regional competitors have extensive
knowledge of the consumer base and may be able to garner more loyalty from
customers than us. If the consumer base we serve is satisfied with the
selection, quality and price of our competitors products, consumers may decide
not to shop in our stores. Additionally, if our existing competitors or other
retailers decide to focus more on our core customers, particularly
African-American consumers, we may have greater difficulty in competing
effectively, our business and results of operations could be adversely
affected, and the market price of our common stock could suffer.
The retail industry periodically has experienced
consolidation and other ownership changes. In the future, other United States
or foreign retailers may consolidate, undergo restructurings or
reorganizations, or realign their affiliations. Any of these developments could
result in our competitors increasing their buying
4
power or market visibility. These developments may
cause us to lose market share and could have a material adverse effect on our
sales, revenues and results of operations.
We could experience a reduction
in sales and revenues or reduced cash flows if we are unable to fulfill our
current and future merchandising needs.
We depend on our suppliers for the continued
availability and satisfactory quality of our merchandise. Most of our suppliers
could discontinue selling to us at any time. Additionally, if the manufacturers
or other owners of brands or trademarks terminate the license agreements under
which some of our suppliers sell our products, we may be unable to obtain
replacement merchandise of comparable fashion appeal or quality, in the same
quantities or at the same prices. If we lose the services of one or more of our
significant suppliers or if one or more of them fail to meet our merchandising
needs, we may be unable to obtain replacement merchandise in a timely manner.
If our existing suppliers cannot meet our increased needs and we cannot locate
alternative supply sources, we may be unable to obtain sufficient quantities of
the most popular items of the nationally recognized brands at attractive
prices, which could negatively impact our sales, revenues and results of
operations.
As an apparel retailer, we rely
on numerous third parties in the supply chain to produce and deliver the
products that we sell, and our business may be negatively impacted by their
failure to comply with applicable law.
As an importer and retailer of goods, we rely on
numerous third parties to supply the products that we sell. Violations of law
by our importers, buying agents, manufacturers or distributors could result in
delays in shipments and receipt of goods and could subject us to fines or other
penalties, any of which could restrict our business activities, increase our
operating expenses or cause our revenues to decline. Further, we are
susceptible to the receipt of counterfeit brands or unlicensed goods. We could
incur liability with manufacturers or other owners of the brands or trademarked
products if we inadvertently receive and sell counterfeit brands or unlicensed
goods and, therefore, it is important that we establish relationships with
reputable vendors to prevent the possibility that we inadvertently receive
counterfeit brands or unlicensed goods. Although we have a quality assurance
team to check merchandise in an effort to assure that we purchase only
authentic brands and licensed goods and are careful in selecting our vendors,
we may receive products that we are prohibited from selling or incur liability
for selling counterfeit brands or unlicensed goods, which could increase our
operating expenses and cause our net income to decline.
If our growth strategy is
unsuccessful, our financial condition and results of operations could suffer
and the market price of our common stock could decline.
Our ability to continue to increase our net sales
and earnings depends, in large part, on opening new stores and operating our
new and existing stores profitably. We opened 40, 36 and 42 new stores in
fiscal 2004, fiscal 2005, and fiscal 2006, respectively. We opened 23 new
stores in the first half of fiscal 2007 and we expect to open an additional 20
to 22 new stores during the remainder of fiscal 2007. If we are unable to open
all of these stores or operate them profitably, we may not achieve our
forecasted sales and earnings growth targets. Additionally, growth of our store
base will place increased demands on our operating, managerial and
administrative resources and may lead to management and operating
inefficiencies, including merchandising, personnel, distribution and integration
problems. These demands and inefficiencies may cause deterioration in the
financial performance of our individual stores and, therefore, our entire
business.
We would experience increased
operating costs and limited amounts of growth if we are unable to obtain
reasonably priced financing.
Although we believe we can meet our future cash
requirements with cash flow from operations and existing cash balances, we may
need to raise additional debt or equity capital in the future to open new
stores, to respond to competitive pressures or to respond to unforeseen
financial requirements. We may not be able to obtain additional capital on
commercially reasonable terms or at all. Our inability to obtain reasonably
priced financing could create increased operating costs and diminished levels
of growth, as we could be
5
forced to incur indebtedness with above market
interest rates or with substantial restrictive covenants, issue equity
securities that dilute the ownership interests of existing stockholders or
scale back our operations and/or store growth strategy.
A significant disruption to our
distribution process or southeastern retail locations could have a material
adverse effect on our business, financial condition and results of operations.
Our ability to distribute our merchandise to our
store locations in a timely manner is essential to the efficient and profitable
operation of our business. We have two distribution centers located in
Savannah, Georgia, one of which also serves as our corporate headquarters, and
a distribution center in Darlington, South Carolina. We are in the process of
doubling the size of our Darlington, South Carolina distribution center, which
we expect will support our growth plans through 2010. Any natural disaster or
other disruption to the operation of any of these facilities due to fire,
hurricane, other natural disaster or any other cause could damage a significant
portion of our inventory or impair our ability to stock our stores and process
product returns to suppliers adequately.
In addition, the southeastern United States, where
all three of our distribution centers are located, is vulnerable to significant
damage or destruction from hurricanes and tropical storms. Although we maintain
insurance on our stores and other facilities, the economic effects of a natural
disaster that affects our distribution centers and/or a significant number of
our stores could increase our operating expenses, impair our cash flows and
reduce our revenues, which could negatively impact the market price of our
common stock.
Our net sales, inventory levels
and earnings fluctuate on a seasonal basis, which makes our business more
susceptible to adverse events that occur during those seasons.
Our net sales and earnings are significantly higher
during the first and fourth quarters each year due to the importance of the
Spring selling season, which includes Easter, and the Fall selling season,
which includes Christmas. Factors negatively affecting us during the first and
fourth quarters, including adverse weather and unfavorable economic conditions,
will have a greater adverse effect on our financial condition than if our
business were less seasonal. For example, unseasonably cool weather in the
weeks preceding Easter in 2007 negatively impacted our net sales for the
thirteen weeks ended May 5, 2007.
To prepare for the Spring and Fall selling seasons,
we must order and keep in stock significantly more merchandise than during
other parts of the year. This seasonality makes our business more susceptible
to the risk that our inventory will not satisfy actual consumer demand. In
addition, any unanticipated demand imbalances during these peak shopping
seasons could require us to sell excess inventory at a substantial markdown or
fail to satisfy our consumers. In either event, our net sales and gross margins
may be lower than historical levels, which could have a material adverse effect
on our business, financial condition and results of operations.
6
We experience fluctuations and
variability in our comparable store sales and quarterly results of operations
and, as a result, the market price of our common stock may fluctuate or decline
substantially.
Our comparable store sales and quarterly results
have fluctuated significantly in the past based on a number of economic,
seasonal and competitive factors, and we expect them to continue to fluctuate
in the future. Since the beginning of fiscal 2003, our quarter-to-quarter
comparable store sales have ranged from a decrease of 3.3% to an increase of
25.0%. The most significant fluctuations were due to the unusually high sales
following Hurricanes Katrina, Rita and Wilma with such positive post-hurricane
impact on sales lasting through the second quarter of fiscal 2006. In addition,
some fiscal years have 53 weeks versus the normal 52 weeks, and this timing
shift can have a significant impact on quarterly and fiscal year sales
comparisons. For example, we expect to see negatively impacted sales
comparisons in the fourth quarter of fiscal 2007, as this fiscal quarter will
have 13 weeks, as compared with 14 weeks in the fourth quarter of fiscal 2006.
Similarly, we expect to see negatively impacted sales comparisons in fiscal 2007,
since this fiscal year has 52 weeks, whereas fiscal 2006 had 53 weeks.
Also, we may be unable to maintain historical levels
of comparable store sales as we execute our growth strategy and expand our
business. This variability could cause our comparable store sales and quarterly
results to fall below the expectations of securities analysts or investors,
which could result in volatility of the market price of our common stock. If
our comparable store sales and quarterly results fail to meet the expectations
of the market generally, the market price of our common stock could decline
substantially.
Our sales and revenues could
decline as a result of general economic and other factors outside of our
control, such as changes in consumer spending patterns and declines in
employment levels.
Downturns, or the expectation of a downturn, in
general economic conditions could adversely affect consumer spending patterns,
our sales and our results of operations. Because apparel generally is a
discretionary purchase, declines in consumer spending patterns may have a more
negative effect on apparel retailers than some other retailers. Therefore, we
may not be able to maintain our historical rate of growth in revenues and
earnings, or remain as profitable, if there is a decline in consumer spending
patterns. In addition, since the majority of our stores are located in the
southeastern United States, our operations are more susceptible to regional
factors than the operations of our more geographically diversified competitors.
Therefore, any adverse economic conditions that have a disproportionate effect
on the southeastern United States could have a greater negative effect on our
sales, revenues and results of operations than on retailers with a more
geographically diversified store base.
If we fail to protect our
trademarks, there could be a negative effect on our brand image and limitations
on our ability to penetrate new markets.
We believe that our Citi Trends trademark is
integral to our store design and our success in building consumer loyalty to
our brand. We have registered this trademark with the U.S. Patent and Trademark
Office. We have also registered, or applied for registration of, additional
trademarks with the U.S. Patent and Trademark Office that we believe are
important to our business. We cannot assure you that these registrations will
prevent imitation of our name, merchandising concept, store design or private
label merchandise or the infringement of our other intellectual property rights
by others. Imitation of our name, concept, store design or merchandise in a
manner that projects lesser quality or carries a negative connotation of our
brand image could have a material adverse effect on our business, financial
condition and results of operations.
In addition, we cannot assure you that others will
not try to block the manufacture or sale of our private label merchandise by
claiming that our merchandise violates their trademarks or other proprietary
rights since other entities may have rights to trademarks that contain the word
Citi or may have rights in similar or competing marks for apparel and/or
accessories. Although we cannot currently estimate the likelihood of success of
any such lawsuit or ultimate resolution of such a conflict, such a controversy
could have a material adverse effect on our business, financial condition and
results of operations.
7
If we fail to implement and
maintain effective internal controls in our business, there could be a material
adverse effect on our business, financial condition, results of operations and
stock price.
Section 404 of the Sarbanes Oxley Act of 2002
requires an annual management assessment of the effectiveness of our internal
controls over financial reporting and a report by our independent registered
public accounting firm regarding the effectiveness of internal controls over
financial reporting. If we fail to maintain the adequacy of our internal
controls, we may be unable to conclude on an ongoing basis that we have
effective internal controls over financial reporting. Moreover, effective
internal controls, particularly those related to revenue recognition and
accounting for inventory/cost of sales, are necessary for us to produce
reliable financial reports and are important to our efforts to prevent
financial fraud. If we cannot produce reliable financial reports or prevent
fraud, our business, financial condition and results of operations could be
harmed, investors could lose confidence in our reported financial information,
the market price of our common stock could decline significantly and we may be
unable to obtain additional financing to operate and expand our business.
Adverse trade restrictions may
disrupt our supply of merchandise. We also face various risks because much of
our merchandise is imported from abroad.
We purchase the products we sell directly from over
1,000 vendors, and a substantial portion of this merchandise is manufactured
outside of the United States and imported by our vendors from countries such as
China and other areas of the Far East, including Taiwan and the Philippines.
The countries in which our merchandise currently is manufactured or may be
manufactured in the future could become subject to new trade restrictions imposed
by the United States or other foreign governments. Trade restrictions,
including increased tariffs or quotas, embargoes, 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 and have a material adverse effect on our business,
financial condition and results of operations. In addition, our merchandise
supply could be impacted if our vendors imports become subject to existing or
future duties and quotas, or if our vendors face increased competition from
other companies for production facilities, import quota capacity and shipping
capacity.
We also face a variety of other risks generally
associated with relying on vendors that do business in foreign markets and
import merchandise from abroad, such as:
political
instability or the threat of terrorism, in particular in countries where our
vendors source merchandise such as Taiwan and the Philippines;
enhanced
security measures at United States and foreign ports, which could delay
delivery of imports;
imposition
of new or supplemental duties, taxes, and other charges on imports;
delayed
receipt or non-delivery of goods due to the failure of foreign-source suppliers
to comply with applicable import regulations;
delayed
receipt or non-delivery of goods due to organized labor strikes or unexpected
or significant port congestion at United States ports; and
local
business practice and political issues, including issues relating to compliance
with domestic or international labor standards, which may result in adverse
publicity.
The United States may impose new initiatives that
adversely affect the trading status of countries where apparel is manufactured.
These initiatives may include retaliatory duties or other trade sanctions that,
if enacted, would increase the cost of products imported from countries where
our vendors acquire merchandise. On March 30, 2007, the United States
government announced that it would impose potentially significant tariffs on
Chinese manufactured products. We will continue to monitor developments
8
in this regard and will determine the impact of such
action on our imports from China as developments occur. Any of these factors
could have a material adverse effect on our sales, revenues and results of
operations.
The removal of import quotas on
textiles and clothing in the future may adversely affect our merchandise
supply, impact our sales and reduce our cash flows.
On January 1, 2005, in accordance with the
World Trade Organization, or the WTO, Agreement on Textiles and Clothing, the
import quotas on textiles and clothing manufactured by countries that are
members of the WTO were eliminated. Subsequently, the United States and Europe
experienced a surge of imported goods from China, a country that benefited from
the removal of the quotas. In response, the United States initially implemented
new quotas against various textile and apparel items from China and ultimately
negotiated an agreement with the Chinese government. The agreement between the
United States and China went into effect in November 2005 and will
continue in effect through December 31, 2008. During that time, China has
agreed to specified quota limits on most textile and apparel products, and the
United States has agreed to use restraint in exercising its right to impose
additional safeguards. Beginning in January 2009, the U.S.-China agreement
and the quotas against Chinese apparel will expire. At that point, the United
States would still have the ability to impose safeguards under the WTO
Agreement on Textiles and Clothing although the requirements for doing so will
be more stringent. The situation in 2009 potentially could be similar to the
experience in 2005, with import surges and a cycle of safeguards and
negotiations. This could create logistical delays in our ability to maintain
required inventory levels and alter cost differentials between vendors that
source domestically and vendors that source more extensively from overseas. We
believe this could lower the cost of apparel products and thereby reduce the
average dollar amount of sales per customer in our stores. Additionally,
retaliatory trade actions could cause a disruption of the supply chain of
products from foreign markets, difficulty in predicting accurately the prices
of merchandise to be imported from a particular country and adverse effects on
our merchandise supply, sales and cash flows.
We depend on the experience and
expertise of our senior management team and key employees, and accordingly, the
loss of the services of R. Edward Anderson or George A. Bellino could have a
material adverse effect on our business strategy, operating costs, financial condition
and results of operations.
The success of our business is dependent upon the
close supervision of all aspects of our business by our senior management,
particularly the operation of our stores, the selection of merchandise and the
site selection for new stores. In addition, we do not have non-competition
agreements with R. Edward Anderson, our Chairman and Chief Executive Officer,
or George A. Bellino, our President and Chief Merchandising Officer.
Accordingly, Messrs. Anderson and/or Bellino could leave us at any time to
begin to work for our competitors or otherwise, which loss of services could
have a material adverse effect on our business strategy, operating costs,
financial condition and results of operations.
Failure to attract, train, assimilate
and retain skilled personnel could have a material adverse effect on our growth
strategy and our financial condition.
Like most retailers, we experience significant
employee turnover rates, particularly among store sales associates and
managers, and our continued growth will require us to hire and train even more
new personnel. We therefore must continually attract, hire and train new
personnel to meet our staffing needs. We constantly compete for qualified
personnel with companies in our industry and in other industries. A significant
increase in the turnover rate among our store sales associates and managers
would increase our recruiting and training costs and could decrease our
operating efficiency and productivity. If we are unable to retain our employees
or attract, train, assimilate or retain other skilled personnel in the future,
we may not be able to service our customers as effectively, thus reducing our
ability to continue our growth and to operate our existing stores as profitably
as we have in the past.
9
Increases in the minimum wage
could have a material adverse effect on our business, financial condition and
results of operations.
The Fair Minimum Wage Act of 2007 became law on May 25,
2007. As a result, the federal minimum wage increased to $5.85 per hour on or
about July 24, 2007; and will increase to (i) $6.55 per hour on or
about July 24, 2008; and (ii) $7.25 per hour on or about July 24,
2009. Additionally, from time to time, legislative proposals are made to
increase the minimum wage in certain individual states. Wage rates for many of
our employees are slightly above the minimum wage. As minimum wage rates
increase, we may need to increase not only the wage rates of those employees whose
wages are below the new minimums, but the wages paid to our other hourly
employees as well. Any increase in the cost of our labor could have a material
adverse effect on our operating costs, financial condition and results of
operations.
Any failure of our management
information systems or the inability of third parties to continue to upgrade
and maintain our systems could have a material adverse effect on our business,
financial condition and results of operations.
We depend on the accuracy, reliability and proper
functioning of our management information systems, including the systems used
to track our sales and facilitate inventory management. We also rely on our
management information systems for merchandise planning, replenishment and
markdowns, as well as other key business functions. These functions enhance our
ability to optimize sales while limiting markdowns and reducing inventory risk
through properly marking down slow-selling styles, reordering existing styles
and effectively distributing new inventory to our stores. We do not currently
have redundant systems for all functions performed by our management
information systems. Any interruption in these systems could impair our ability
to manage our inventory effectively, which could have a material adverse effect
on our business, financial condition and results of operations. To support our
growth, we will need to expand our management information systems, and our
failure to link and maintain these systems adequately could have a material adverse
effect on our business, financial condition and results of operations.
We depend on third-party suppliers to maintain and
periodically upgrade our management information systems, including the software
programs supporting our inventory management functions. This software is
licensed to us by third-party suppliers. If any of these suppliers is unable to
continue to maintain and upgrade these software programs and/or if we are
unable to convert to alternate systems in an efficient and timely manner, it could
result in a material adverse effect on our business, financial condition and
results of operations.
Our ability to attract consumers
to our stores depends on the success of the strip shopping centers and downtown
business districts where our stores are located.
We locate our stores in strip shopping centers,
street front locations and downtown business districts where we believe our
consumers and potential consumers shop. The success of an individual store can
depend on favorable placement within a given strip shopping center or business
district. We cannot control the development of alternative shopping
destinations near our existing stores or the availability or cost of real
estate within existing or new shopping destinations. If our store locations
fail to attract sufficient consumer traffic or we are unable to locate
replacement locations on terms acceptable to us, our business, financial
condition and results of operations could suffer. If one or more of the anchor
tenants located in the strip shopping centers or business districts where our
stores are located close or leave, or if there is significant deterioration of
the surrounding areas in which our stores are located, our business, financial
condition and results of operations may be adversely affected.
Risks relating to our common
stock and offerings pursuant to this prospectus
Our stock price is volatile, and
you may lose all or a part of your investment.
Our stock price is volatile. From our initial public
offering in May 2005 through October 8, 2007, the trading price of
our common stock has ranged from $14.00 to $57.85 per share. As a result of
this volatility,
10
investors may not be able to sell their common stock
at or above their respective purchase prices. The market price for our common
stock may be influenced by many factors, including:
actual
or anticipated fluctuations in our operating results;
changes
in securities analysts recommendations or estimates of our financial performance;
publication
of research reports by analysts;
changes
in market valuations or operating performance of our competitors or companies
similar to ours;
announcements
by us, our competitors or other retailers;
additions
and departures of key personnel;
changes
in accounting principles;
the
passage of legislation or other developments affecting us or our industry;
the
trading volume of our common stock in the public market;
changes
in economic conditions;
financial
market conditions;
natural
disasters, terrorist acts, acts of war or periods of civil unrest; and
the
realization of some or all of the risks described in this section entitled
Risk Factors.
In addition, the stock markets have experienced
significant price and trading volume fluctuations from time to time, and the
market prices of the equity securities of retailers have been extremely
volatile and have recently experienced sharp price and trading volume changes.
These broad market fluctuations may adversely affect the market price of our
common stock. In the past, securities class action litigation has often been
instituted against companies following periods of volatility in their stock
price. This type of litigation, even if it does not result in liability for us,
could result in substantial costs to us and divert managements attention and
resources.
There may be sales of substantial
amounts of our common stock pursuant to this prospectus, or otherwise, which
could cause our stock price to fall.
The selling stockholders hold 4,048,868 shares of
our common stock. Upon the effectiveness of this registration statement of
which this prospectus is a part, the selling stockholders may freely sell all
of their shares in the public market and otherwise. As of October 8, 2007,
14,091,059 shares of our common stock were outstanding. As of October 8,
2007, 569,141 additional shares of our common stock were subject to outstanding
stock options. All of the shares issued and sold in our initial public offering
consummated on May 18, 2005, our secondary offering consummated on January 31,
2006 and our secondary offering consummated on June 18, 2007 are freely
tradable under the securities laws, except for any shares acquired by our affiliates,
as that term is defined in Rule 144 promulgated under the Securities Act
of 1933, as amended, or the Securities Act, which generally includes officers,
directors and holders of 10% or more of our common stock. After the sale of all
of the shares offered in this prospectus, less than 1% of the shares of our
common stock held by existing stockholders will be restricted or control
shares. Such shares may be sold in the public market only if they are
registered or if they qualify for an exemption from registration under Rule 144
promulgated under the Securities Act or otherwise. Future sales of a
substantial number of
11
shares of our common stock could cause our common
stock price to decline significantly and/or impair our ability to raise capital
through the sale of additional stock.
A significant amount of our
common stock is concentrated in the hands of one of our existing stockholders
whose interests may not coincide with yours.
As of October 8, 2007, Hampshire Equity
Partners II, L.P. and certain of its affiliates, which we refer to collectively
as Hampshire Equity Partners, owned approximately 28.7% of our common stock.
Hampshire Equity Partners are selling stockholders and may sell all of their
holdings pursuant to this prospectus, assuming that Hampshire Equity Partners
sell all of their shares covered by this prospectus and do not acquire
additional shares of our common stock. Until such time, Hampshire Equity
Partners have an ability to exercise significant influence over matters
requiring stockholder approval. These matters include the election of directors
and the approval of significant corporate transactions, including potential
mergers, consolidations or sales of all or substantially all of our assets.
Your interests as a holder of our common stock may differ from the interests of
Hampshire Equity Partners. In connection with our initial public offering
consummated on May 18, 2005, we entered into a nominating agreement with
Hampshire Equity Partners II, L.P. pursuant to which we, acting through our
nominating and corporate governance committee, agreed, subject to the
requirements of our directors fiduciary duties, that Hampshire Equity Partners
II, L.P. would be entitled to designate up to two directors to be nominated for
election to our board of directors as long as Hampshire Equity Partners II,
L.P. (together with any of its respective successors and permitted assigns)
maintains a certain percentage of our common stock. Assuming Hampshire Equity
Partners sell all of their shares of our common stock covered by this
prospectus and do not acquire additional shares of our common stock, Hampshire
Equity Partners II, L.P will not have the right to nominate any directors for
election to our board of directors. Notwithstanding the foregoing, as of the
date of this prospectus, Hampshire Equity Partners II, L.P. does not have a
designee on our board of directors.
Securities analysts may not
continue to cover our common stock or they may issue negative reports, which
may have a negative impact on the price of our common stock.
The trading market for our common stock relies, in
part, on the research and reports that industry or financial analysts publish
about our company or our industry. Public statements by these securities
analysts may affect our stock price. If any of the analysts who cover us
downgrades the rating of our common stock, our common stock price would likely
decline. If any of these analysts ceases coverage of our common stock, we could
lose visibility in the market, which in turn could cause our common stock price
to decline. Further, if no analysts continue to cover our common stock, the
lack of research coverage may depress the market price of our common stock.
In addition, rules mandated by the
Sarbanes-Oxley Act of 2002 and a global settlement between the Commission and
securities analysts have caused a number of fundamental changes in how
securities analysts are reviewed and compensated. In particular, many
investment banking firms are now required to contract with independent
financial analysts for their stock research. In this environment, it may be
difficult for companies with smaller market capitalizations, such as our
company, to attract independent financial analysts to cover them, which could
have a negative effect on the market price of our common stock.
We do not currently intend to pay
dividends on our common stock.
We have never declared or paid any cash dividends on
our common stock and do not currently intend to do so for the foreseeable
future. We currently intend to invest our future earnings, if any, to fund our
growth. Therefore, you are not likely to receive any dividends on your common
stock for the foreseeable future.
12
Provisions in our certificate of
incorporation and by-laws and Delaware law may delay, prevent or deter our
acquisition by a third party.
Our second amended and restated certificate of
incorporation, as amended, and our amended and restated by-laws, contain
several provisions that may make it more difficult for a third party to acquire
control of us without the approval of our board of directors. These provisions
include, among other things, a classified board of directors, advance notice
for raising business or making nominations at stockholder meetings and blank
check preferred stock. Blank check preferred stock enables our board of
directors, without stockholder approval, to designate and issue series of
preferred stock with such dividend, liquidation, conversion, voting or other
rights, including convertible securities with no limitations on conversion, as
our board of directors may determine, including rights to dividends and
proceeds in a liquidation that are senior to the common stock.
We are also subject to several provisions of the
Delaware General Corporation Law that could delay, prevent or deter a merger,
acquisition, tender offer, proxy contest or other transaction that might
otherwise result in our stockholders receiving a premium over the market price
for their common stock or may otherwise be in the best interests of our
stockholders.
Our costs have increased and may
continue to increase as a result of being a public company, and complying with
regulations applicable to public companies may adversely affect our business.
As a public company, we have incurred and will
continue to incur significant legal, accounting and other expenses that we did
not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as
well as rules subsequently implemented by the Commission and the Nasdaq
Stock Market, have required changes in recent years in the corporate governance
practices of public companies. These rules and regulations have
significantly increased our legal and financial compliance costs and made
certain compliance activities more time-consuming and costly. We have incurred
and will continue to incur additional costs in, and dedicate significant
resources toward, complying with these requirements, which may divert
managements attention from, and which may in turn adversely affect, our
business. We also expect these laws, rules and regulations to make it more
difficult and more expensive for us to obtain director and officer liability
insurance and we may be required to accept reduced policy limits and coverage
or incur substantially higher costs to obtain the same or similar coverage. As
a result, it may be more difficult for us to attract and retain qualified
persons to serve on our board of directors or as executive officers. We continue
to evaluate and monitor developments with respect to these laws, rules and
regulations, and we cannot predict or estimate the amount of additional costs
we may incur or the timing of such costs. The costs of compliance or our
failure to comply with these laws, rules and regulations could adversely
affect our financial condition, results of operation and the price of our
common stock.
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Certain Relationships with Hampshire
Equity Partners
Management Consulting Agreement
We were party to an Amended and Restated Management
Consulting Agreement effective as of February 1, 2004, with Hampshire
Management Company LLC, an affiliate of Hampshire Equity Partners II, L.P., pursuant
to which it provided us with certain consulting services related to, but not
limited to, our financial affairs, relationships with our lenders, stockholders
and other third-party associates or affiliates, and the expansion of our
business. In connection with our initial public offering in May 2005, the
parties terminated the consulting agreement and we paid Hampshire Management
Company LLC a one time termination fee of $1.2 million in the second quarter of
fiscal 2005.
Stockholders Agreement
Prior to our initial public offering, Hampshire
Equity Partners II, L.P., George Bellino and certain other management
stockholders were party to a Stockholders Agreement dated as of April 13,
1999. The stockholders agreement provided, among other things, that four
members of our Board of Directors were to be designated by Hampshire Equity
Partners
and its affiliates, the stockholders
agreed generally not to transfer their shares and the management stockholders
were granted tag-along rights in the event of a sale of 51% or more of our
stock. We agreed to register shares of our common stock held by the
stockholders under certain circumstances. In connection with our initial public
offering in May 2005, we terminated the stockholders agreement in its
entirety.
Registration Rights Agreement
In connection with our initial public offering, we
entered into a Registration Rights Agreement dated as of May 23, 2005,
with Hampshire Equity Partners II, L.P. Pursuant to the terms and provisions of
the registration rights agreement, Hampshire Equity Partners II, L.P. has the
right, from time to time, subject to certain restrictions, to cause us to
register shares of our common stock held by Hampshire Equity Partners II, L.P.
for sale under the Securities Act on Form S-1 or, if available, on Form S-3
or any similar short-form registration statement. In addition, if at any time
we register additional shares of common stock, Hampshire Equity Partners II,
L.P. will be entitled to include its shares of our common stock in the registration
statement relating to that offering. The registration rights agreement includes
provisions for, among other things, underwritten offerings of shares of our
common stock held by Hampshire Equity Partners pursuant to an underwriting
agreement. We have filed the shelf registration statement of which this
prospectus is a part pursuant to the registration rights agreement.
Nominating Agreement
In connection with our initial public offering, we
entered into a Nominating Agreement dated as of May 23, 2005, with
Hampshire Equity Partners II, L.P. pursuant to which we, acting through our
Nominating and Corporate Governance Committee, agreed, subject to the
requirements of our directors fiduciary duties, that (i) Hampshire Equity
Partners II, L.P. is entitled to designate up to two directors to be nominated
for election to our board of directors as long as Hampshire Equity Partners II,
L.P. (together with any of its respective successors and permitted assigns)
owns in the aggregate at least 40% of the shares of the common stock which it
owned immediately prior to the consummation of our initial public offering or (ii) Hampshire
Equity Partners II, L.P. is entitled to designate one director to be nominated
for election to the board of directors as long as Hampshire Equity Partners II,
L.P. (together with any of its respective successors and permitted assigns)
owns in the aggregate less than 40% and at least 15% of the shares of our
common stock which it owned immediately prior to the consummation of the
initial public offering. If at any time Hampshire Equity Partners II, L.P.
(together with any of its respective successors and permitted assigns) owns
less than 15%, it will not have the right to nominate any directors for
election to our board of directors. Notwithstanding the foregoing, as of the
date of this prospectus, Hampshire Equity Partners II, L.P. does not have a
designee on our board of directors.
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Plan of Distribution
We
are registering the shares of our common stock covered by this prospectus on
behalf of the selling stockholders. As used in this section of the
prospectus, the term selling stockholders includes Hampshire Equity Partners
and other potential selling stockholders as described in the section of
this prospectus entitled Selling Stockholders and any other transferees
(including pledgees and donees) of the shares, but only where the transfer is
not made pursuant to an effective registration statement or Rule 144 under
the Securities Act or pursuant to another exemption from registration under the
Securities Act pursuant to which the shares sold are thereafter freely
transferable without registration and without restriction under the Securities
Act, and only to such a transferee, and provided that the selling stockholder
complies with all applicable law with respect to the transfer of shares to such
transferee and gives us prompt notice of the transfer.
All
costs, expenses and fees in connection with the registration of the shares of
our common stock covered by this prospectus will be borne by us. Underwriting
discounts, brokerage commissions and similar selling expenses, if any,
attributable to the sale of such shares will be borne by the selling
stockholders.
Each
of the selling stockholders may sell their shares of our common stock covered
by this prospectus from time to time and may also decide not to sell all or any
of such shares. The selling stockholders will act independently of us in making
decisions as to the timing, manner and size of each sale. The sales may be made
on the Nasdaq Global Select Market or any other national securities exchange or
any quotation system on which our common stock may be listed or quoted at the
time of sale, in the over-the-counter market or other than in such organized
and unorganized trading markets, in one or more transactions, at:
fixed prices, which may be changed;
prevailing market prices at the time of sale;
varying prices determined at the time of
sale; or
negotiated prices.
The
shares of our common stock covered by this prospectus may be sold by one or
more of the following methods in addition to any other method permitted under
this prospectus:
a block trade in which the broker-dealer so
engaged may attempt to sell the shares as agent, but may position and resell a
portion of the block as principal to facilitate the transaction;
a purchase by a broker-dealer as principal
and resale by such broker-dealer for its own account;
an ordinary brokerage transaction or a
transaction in which the broker solicits purchasers;
a privately negotiated transaction;
an underwritten offering;
securities exchange or quotation system sale
that complies with the rules of the exchange or quotation system;
through short sale transactions following
which the shares are delivered to close out the short position;
through the writing of options relating to
the shares;
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any other method pursuant to applicable law;
or
through a combination of the above methods of
sale.
The
selling stockholders may effect such transactions by selling the shares covered
by this prospectus directly to purchasers, to or through broker-dealers, which
may act as agents for the seller and buyer or principals, or to underwriters
who acquire such shares for their own account and resell them in one or more
transactions. Such broker-dealers or underwriters may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of the shares for whom such broker-dealers may act as
agents or to whom they sell as principal, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions) and such
discounts, concessions, or commissions may be allowed or re-allowed or paid to
dealers.
We
have been advised by Hampshire Equity Partners that they have not, as of the
date of this prospectus, entered into any agreements, understandings or
arrangements with underwriters or broker-dealers regarding the sale of their
shares covered by this prospectus and we have been advised that there is not an
underwriter or broker-dealer acting as of the date of this prospectus in
connection with the proposed sale of such shares by the selling stockholders.
The
selling stockholders and any broker-dealers that participate with the selling
stockholders in the sale of the shares covered by this prospectus may be deemed
to be underwriters within the meaning of Section 2(a)(11) of the
Securities Act and any commissions received by such broker-dealers and any
profit on the resale of such shares sold by them while acting as principals
might be deemed to be underwriting discounts or commissions under the
Securities Act.
The
selling stockholders and any broker-dealer that may be deemed to be underwriters
within the meaning of Section 2(a)(11) of the Securities Act will be
subject to the prospectus delivery requirements of the Securities Act. We will
make copies of this prospectus available to the selling stockholders and have
informed them of their obligation to deliver copies of this prospectus to
purchasers at or before the time of any sale of shares covered by this
prospectus. Such requirement may be satisfied by delivery through the
facilities of the Nasdaq Stock Market pursuant to Rule 153 under the
Securities Act.
The
selling stockholders may enter into derivative transactions with third parties,
or sell securities not covered by this prospectus to third parties in privately
negotiated transactions. In connection with those derivatives, the third
parties may sell the shares covered by this prospectus, including in short sale
transactions. If so, the third party may use the shares pledged by the selling
stockholders or borrowed from the selling stockholders or others to settle
those sales or to close out any related open borrowings of our common stock,
and may use the shares received from the selling stockholders in settlement of
those derivatives to close out any related open borrowings of our common stock.
We will file a supplement to this prospectus to describe any derivative
transaction effected by the selling stockholders and to identify the third
party in such transactions as an underwriter within the meaning of Section 2(a)(11)
of the Securities Act.
The
selling stockholders will be subject to applicable provisions of Regulation M
of the Exchange Act, which provisions may limit the timing of purchases and
sales of any of the shares by the selling stockholders. These restrictions may
affect the marketability of such shares.
In
order to comply with applicable securities laws of some states, the shares
covered by this prospectus may be sold in those jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
shares covered by this prospectus may not be sold unless they have been
registered or qualified for sale in the applicable state or an exemption from
the registration or qualification requirements is available.
The
selling stockholders also may resell all or a portion of the shares covered by
this prospectus in open market transactions in reliance upon Rule 144
under the Securities Act or any other available exemption
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from
required registration under the Securities Act, provided they meet the criteria
and conform to the requirements of such exemption.
We
will file a supplement to this prospectus, if required, pursuant to Rule 424(b) under
the Securities Act upon being notified by a selling stockholder that any
material arrangements have been entered into with a broker-dealer for the sale
of the shares covered by this prospectus through a block trade, special
offering, exchange or secondary distribution or a purchase by a broker-dealer. Such
supplement will disclose:
the name of each such selling stockholder and
of the participating broker-dealer(s);
the number of shares of our common stock
involved;
the price at which such shares were sold;
the commissions paid or discounts or
concessions allowed to such broker-dealer(s), where applicable;
that such broker-dealer(s) did not conduct
any investigation to verify the information set out or incorporated by
reference in this prospectus; and
other facts material to the transaction.
In
addition, upon receiving notice from a selling stockholder that a donee,
pledgee or transferee or other successor-in-interest intends to sell more than
500 of the shares covered by this prospectus, we will file a supplement to this
prospectus pursuant to Rule 424(b) under the Securities Act to
identify the non-sale transferee.
Pursuant
to our registration rights agreement with Hampshire Equity Partners II, L.P.,
we have agreed to use our reasonable best efforts to cause the registration
statement of which this prospectus is a part to become effective and to keep
such registration statement effective until all the shares covered by this
prospectus are sold by Hampshire Equity Partners or may be sold by Hampshire
Equity Partners without any restriction under Rule 144(k) of the
Securities Act.
The
selling stockholders are not restricted as to the price or prices at which they
may sell their shares covered by this prospectus. Sales of such shares may have
an adverse effect on the market price of our common stock. Moreover, the
selling stockholders are not restricted as to the number of shares that may be
sold at any time, and it is possible that a significant number of the shares
could be sold at the same time, which may have an adverse effect on the market
price of our common stock.
Pursuant
to our registration rights agreement with Hampshire Equity Partners II, L.P.,
we have agreed to indemnify and hold Hampshire Equity Partners harmless against
certain liabilities under the Securities Act that could arise in connection
with the sale by Hampshire Equity Partners of their shares covered by this
prospectus. The selling stockholders may agree to indemnify any broker-dealer
or agent that participates in transactions involving sales of the shares
against certain liabilities, including liabilities arising under the Securities
Act.
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