United States Securities And Exchange Commission

Washington, D.C. 20549

(AMENDMENT NO.___)

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ULTA SALON, COSMETICS & FRAGRANCE, INC.

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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 2, 2011

 

 

 

 

 

TO THE STOCKHOLDERS OF ULTA SALON, COSMETICS & FRAGRANCE, INC.:

 

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Ulta Salon, Cosmetics & Fragrance, Inc. (“Ulta” or the “Company”), a Delaware corporation, will be held on Thursday, June 2, 2011, at 10:00 A.M. local time, at Ulta’s headquarters located at 1000 Remington Blvd., Suite 120, Bolingbrook, Illinois 60440, for the following purposes:

 

 

The foregoing items of business are more fully described in the Proxy Statement accompanying this Notice.

 

The Board of Directors has fixed the close of business on April 11, 2011, as the record date for the determination of stockholders entitled to notice of and to vote on the items listed above at this Annual Meeting and at any adjournment or postponement thereof.

 

By Order of the Board of Directors

 

 

Robert S. Guttman

Senior Vice President, General Counsel and Secretary

 

May 2, 2011

 

Important notice regarding availability of proxy materials
for Ulta’s 2011 Annual Meeting of Stockholders to be held on June 2, 2011:

 

The Proxy Statement and Annual Report to Stockholders on Form 10-K
for the year ended January 29, 2011 are available at http://ir.ulta.com.

 

Brokers cannot vote for Proposals 1, 3, 4 and 5 without your instructions.

 

YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, KINDLY MARK, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE (WHICH IS POSTAGE PREPAID, IF MAILED IN THE UNITED STATES). EVEN IF YOU HAVE GIVEN YOUR PROXY, YOU MAY STILL REVOKE YOUR PROXY AND VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE NOTE, HOWEVER, THAT IF YOUR SHARES OF RECORD ARE HELD BY A BROKER, BANK OR OTHER NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE RECORD HOLDER A PROXY ISSUED IN YOUR NAME.

 

TABLE OF CONTENTS

 

 

1000 Remington Blvd., Suite 120
Bolingbrook, IL 60440

 

 

PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS

JUNE 2, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Record Holders — If your shares are registered directly in your name with our Transfer Agent, American Stock Transfer & Trust Company, you are considered, with respect to those shares, the stockholder of record or Record Holder. As the stockholder of record, you have the right to grant your voting proxy directly to Ulta or to vote in person at the Annual Meeting. We have enclosed or sent a Proxy Card for you to use.

 

Beneficial Owner — If your shares are held in a brokerage account or by another nominee, you are considered the Beneficial Owner of shares held in street name, and these proxy materials are being forwarded to you automatically, along with a voting instruction card from your broker, trustee or nominee. As a Beneficial Owner, you have the right to direct your broker, trustee or nominee how to vote and are also invited to attend the Annual Meeting. Since a Beneficial Owner is not the stockholder of record, you may not vote these shares in person at the meeting unless you obtain a “legal proxy” from the broker, trustee or nominee that holds your shares, giving you the right to vote the shares at the meeting. Your broker, trustee or nominee has enclosed or provided voting instructions for you to use in directing how to vote your shares. If you do not provide specific voting instructions to your broker by May 23, 2011 (10 days before the Annual Meeting), your broker can vote your shares with respect to “discretionary” items, but not with respect to “non-discretionary” items. The election of Directors (Proposal 1), the advisory vote on executive compensation (Proposal 3), the advisory vote on the frequency of future advisory votes on executive compensation (Proposal 4) and the approval of the 2011 Incentive Award Plan (Proposal 5) are considered non-discretionary items, while the ratification of the appointment of our independent registered public accounting firm (Proposal 2) is considered a discretionary item. On non-discretionary items for which you do not give your broker instructions, the shares will be treated as broker non-votes.

 

 

 

To ensure that your vote is recorded promptly, please vote as soon as possible, even if you plan to attend the Annual Meeting in person. Most stockholders have two options for submitting their votes:

 

 

For further instructions on voting, see your Proxy Card. If you attend the Annual Meeting, you may also submit your vote in person, and any previous votes that you submitted by mail will be superseded by the vote that you cast at the Annual Meeting. Please note, however, that if your shares are held of record by a broker, bank or other nominee and you wish to vote at the Annual Meeting, you must obtain from the Record Holder a legal proxy issued in your name.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Over the course of Ulta’s history, the Board of Directors has developed corporate governance practices consistent with its duties of good faith, due care and loyalty, to help fulfill its responsibilities to our stockholders.

 

Board of Directors meetings and committees

 

During the fiscal year ended January 29, 2011, the Board of Directors held 13 meetings. Commencing fiscal year 2003, Mr. Eck became our Non-Executive Chairman and typically presides over meetings of the full Board as well as executive sessions. The Board of Directors has an audit committee, a nominating and corporate governance committee and a compensation committee. In June 2010, certain of our directors and other stockholders registered and sold shares of our common stock in a secondary offering. Due to the interest of those certain directors in this transaction, the Board of Directors formed an independent special committee to consider issues related to the secondary offering. The special committee met 2 times during the 2010 fiscal year and was comprised of Messrs. Eck, DiRomualdo, Heilbronn, Philippin and Rubin. During fiscal year 2010, Mr. Lebow attended fewer than 75% of the aggregate meetings of the Board of Directors and of the committees on which he served that were held during the period for which he was a Director or committee member. Directors are invited and are expected to attend the Annual Meeting of Stockholders, and all but one of our Directors then in office attended our 2010 Annual Meeting of Stockholders.

 

Committee Composition:  The following table provides the composition of each of our committees as of January 29, 2011:

 

 

 

 

 

Board leadership structure

 

We currently separate the roles of Chief Executive Officer and Chairman of the Board in recognition of the differences between these two roles. Our Board is led by an independent, non-executive Chairman. We believe that this leadership structure enhances the accountability of the Chief Executive Officer to the Board, strengthens the Board’s independence from management and ensures a greater role for the independent Directors in the oversight of our Company. In addition, separating these roles allows our Chief Executive Officer to focus his efforts on running our business and managing our Company in the best interests of our stockholders, while the Chairman provides

guidance to the Chief Executive Officer and sets the agenda for Board meetings and establishes priorities and procedures for the work of the full Board. The Chairman presides over meetings of the full Board as well as executive sessions, which the Board generally holds several times a year, both telephonically and in conjunction with in-person meetings of the full Board. The Board recognizes that no single leadership model is right for all companies and at all times and that, depending on the circumstances, other leadership models, such as combining the Chairman and Chief Executive Officer roles, might be appropriate. Accordingly, the Board periodically reviews its leadership structure.

 

Independence

 

Board member independence is an essential element of Ulta corporate governance. The Board of Directors has determined that each of the current non-employee Directors and each nominee for Director is free of any relationship that would interfere with his or her individual exercise of independent judgment with regard to Ulta. Chuck Rubin, Chief Executive Officer and President, is currently the sole member of the Board of Directors that is not independent due to his office with Ulta. Each member of the nominating and corporate governance committee, compensation committee and audit committee satisfy the current independence requirements of NASDAQ and the SEC.

 

Board role in risk oversight

 

Our Board of Directors oversees an enterprise-wide approach to risk management, designed to support the achievement of organizational objectives, including strategic objectives, to improve long-term organizational performance and enhance stockholder value. Management is responsible for the Company’s day-to-day risk management activities and processes, and our Board’s role is to engage in informed oversight of and provide direction with respect to such risk management activities and processes. The Board recognizes that a fundamental part of risk management is not only understanding the risks our Company faces and the steps management is taking to manage those risks, but also understanding what level of risk is appropriate for our Company. As such, the Board focuses on understanding the nature of our enterprise risks, including operational, financial, legal and regulatory, strategic and reputational risks, as well as the adequacy of our risk assessment and risk management processes. To facilitate such an understanding, the Board and its committees receive management updates on our business operations, financial results and strategy, and the Board discusses and provides direction with respect to risks related to those topics.

 

While the Board has the ultimate oversight responsibility for the risk management process, various committees of the Board also have responsibility for risk management. The audit committee oversees risks associated with financial accounting and audits, as well as internal control over financial reporting. The audit committee assists the Board in its oversight by discussing with management our Company’s risk assessment and management policies, the Company’s significant financial risk exposures and the actions taken by management to limit, monitor or control such exposures. The compensation committee oversees the risks relating to the Company’s compensation policies and practices. In setting compensation, the compensation committee strives to create incentives that encourage a level of risk-taking behavior consistent with the Company’s business strategy. The compensation committee also oversees the risks relating to the Company’s management development and leadership succession. The nominating and corporate governance committee oversees the implementation of the Company’s Code of Business Conduct and monitors compliance therewith.

 

Nominating and corporate governance committee

 

The nominating and corporate governance committee acts under a written charter that was approved by the Board of Directors and has been published under “Corporate Governance” in the Investor Relations section of the Ulta website at http://ir.ulta.com. The primary responsibility of the nominating and corporate governance committee is to recommend to the Board of Directors candidates for nomination as Directors and membership on committees of the Board. The committee reviews the performance and independence of each Director, and in appropriate circumstances, may recommend the removal of a Director for cause. The committee oversees the

evaluation of the Board of Directors and makes recommendations to improve performance. The committee also recommends to the Board of Directors policies with respect to corporate governance. During fiscal year 2010, the nominating and corporate governance committee was composed of the following independent Directors: Messrs. Heilbronn (Chairman) and Sisteron and Ms. Nagler. The Board of Directors has determined that each committee member qualifies as a “nonemployee director” under rules and regulations of the Securities and Exchange Commission (the “SEC”), as well as the independence requirements of NASDAQ. The nominating and corporate governance committee met 2 times during fiscal year 2010.

 

Nominating and corporate governance committee charter

 

The nominating and corporate governance committee charter identifies the roles and responsibilities that govern the nominating and corporate governance committee, such as:

 

 

Nomination process — qualifications

 

The nominating and corporate governance committee is responsible for reviewing the appropriate skills and characteristics required of Directors in the context of prevailing business conditions, and in its nominating committee capacity, for making recommendations regarding the size and composition of the Board of Directors. The objective of the nominating and corporate governance committee is to create and sustain a Board of Directors that brings to Ulta a variety of perspectives and skills derived from high-quality business and professional experience. Pursuant to its charter, the nominating and corporate governance committee annually assesses the experience, expertise, capabilities, skills and diversity of the members of the Board, individually and collectively, and considers these factors when evaluating Director candidates. In this regard, both the Board and the nominating and corporate governance committee believe that it is essential for Board members to represent diverse viewpoints based upon differences in professional experience, education, skill and other individual qualities and attributes that contribute to an active, effective Board. Although there are no specific minimum qualifications that a Director candidate must possess, the nominating and corporate governance committee recommends those candidates who possess the highest personal and professional integrity, have prior experience in corporate management and the industry, maintain academic or operational expertise in an area of our business and demonstrate practical and mature business judgment.

 

We will consider all stockholder recommendations for candidates for the Board of Directors and, to date, we have not received a timely Director nominee from a stockholder. Stockholders who want to suggest a candidate for consideration should send a written notice, addressed to the Corporate Secretary at our principal executive offices at 1000 Remington Blvd., Suite 120, Bolingbrook, IL 60440. Further details about the nomination process may be found in the answer to Question 14 above, entitled “Nomination of Directors — How do I submit a proposed Director nominee to the Board of Directors for consideration?”

This notice must include the following information for each candidate the stockholder proposes to nominate: (1) name, age, business address and residence address, (2) principal occupation or employment, (3) class and number of shares of capital stock beneficially owned by such candidate and (4) and any other information relating to the candidate that is required to be disclosed in solicitations for proxies for the election of Directors pursuant to applicable SEC rules. In addition, the stockholder giving such notice must include his or her (1) name and record address and (2) the class and number of shares such stockholder beneficially owns.

 

We also consider potential Director candidates recommended by current Directors, officers, employees and others. We may also retain the services of search firms to provide us with candidates, especially when we are looking for a candidate with a particular expertise, quality, skill or background. The nominating and corporate governance committee screens all potential candidates in the same manner, regardless of the source of the recommendation. Our review is typically based on any written materials provided with respect to potential candidates, and we review such materials to determine the qualifications, experience and background of the candidates. Final candidates are typically interviewed by members of the committee and other members of the Board, as appropriate. In making its determinations, the committee evaluates each individual in the context of our Board of Directors as a whole, with the objective of assembling a group that can best perpetuate the success of our Company and represent stockholder interests through the exercise of sound judgment. After review and deliberation of all feedback and data, the committee makes a recommendation to the full Board of Directors regarding whom should be nominated by the Board of Directors.

 

Code of Business Conduct

 

All Ulta employees, officers and members of the Board of Directors must act ethically at all times and in accordance with the policies comprising the Ulta Code of Business Conduct. We demand full compliance with this policy from employees, officers and members of the Board of Directors, including our Chief Executive Officer, Chief Financial Officer and such other individuals performing similar functions. Moreover, all corporate employees, officers and members of the Board of Directors have signed a certificate acknowledging that they have read, understood and will continue to comply with the policy, and all corporate employees and officers are required to read and acknowledge this policy on an annual basis. Ulta includes the Code of Business Conduct in new hire materials for all corporate employees. The policy is published and any amendments or waivers thereto will be published under “Corporate Governance” in the Investor Relations section of the Ulta website located at http://ir.ulta.com.

 

Disclosure committee

 

The disclosure committee is a management committee that acts under a written charter approved by the audit committee. Its primary responsibility is to assist our Chief Executive Officer and Chief Financial Officer in fulfilling their responsibility for oversight of the accuracy and timeliness of our disclosures. Management and the disclosure committee have established disclosure controls and procedures designed to ensure that disclosures required by the SEC and other written information to be disclosed to the investment community are recorded, processed, summarized and reported accurately on a timely basis. These disclosure controls and procedures are monitored and evaluated for their effectiveness on a regular basis. The disclosure committee, in conjunction with management, reviews and approves the preparation of SEC filings and various documents distributed to the investment community containing financial information or other material information. The disclosure committee discusses all relevant information with our Chief Executive Officer and Chief Financial Officer and, if needed, the Board of Directors and the audit committee.

 

Stockholder communication

 

Any stockholder is free to communicate in writing with the Board of Directors on matters pertaining to Ulta by addressing their comments to the Board of Directors, c/o General Counsel, Ulta Salon, Cosmetics & Fragrance, Inc., 1000 Remington Blvd., Suite 120, Bolingbrook, IL 60440, or by e-mail at InvestorRelations@ulta.com. Our General Counsel will review all correspondence addressed to our Board of Directors, or any individual Director, for

any inappropriate correspondence and correspondence more suitably directed to management. Our General Counsel will forward appropriate stockholder communications to our Board of Directors prior to the next regularly scheduled meeting of our Board of Directors following the receipt of the communication. Our General Counsel will summarize all correspondence not forwarded to our Board of Directors and make the correspondence available to our Board of Directors for its review upon our Board of Directors’ request.

 

PROPOSAL ONE

 

 

Our Amended and Restated Certificate of Incorporation provides that our Board of Directors be divided into three classes designated Class I, Class II and Class III, with each class consisting, as nearly as possible, of one-third of the total number of Directors. Each class serves a three-year term with one class being elected at each year’s annual meeting of stockholders, beginning in 2008. Vacancies on our Board of Directors may be filled by persons elected by a majority of the remaining Directors. A Director elected by our Board of Directors to fill a vacancy, including a vacancy created by an increase in size of our Board of Directors, will serve for the remainder of the full term of the class of Directors in which the vacancy occurred and until that Director’s successor is elected and qualified.

 

The Board of Directors is presently composed of eight members, seven of whom are non-employee, independent Directors. Each Director was elected to the Board of Directors to serve until a successor is duly elected and qualified or until his or her death, resignation or removal. There is currently one vacancy resulting from the planned resignation of Ms. Kirby effective March 17, 2011. The Board expects to fill this vacancy as soon as practicable. Messrs. Eck, Philippin and Sisteron are the Class I Directors whose terms expire in 2011. Mr. Sisteron will not stand for re-election at this Annual Meeting. Messrs. Eck and Philippin are nominees for re-election, and Kenneth T. Stevens is a nominee for election to the Board of Directors. Mr. Stevens, who is standing for election by the stockholders at this Annual Meeting for the first time, was first identified as a candidate for the Board of Directors by our Chief Executive Officer and was recommended by the nominating and corporate governance committee. If elected at the Annual Meeting, each of the nominees would serve until the 2014 Annual Meeting of Stockholders and until their successors are elected and qualified, or until their death, resignation or removal. Messrs. Defforey and DiRomualdo and Ms. Nagler are the Class II Directors with terms expiring in 2012, and Messrs. Heilbronn and Rubin are the Class III Directors with terms expiring in 2013.

 

The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and entitled to vote at the Annual Meeting will be required to approve the nominees for election and re-election. Abstentions will be counted toward the tabulation of votes cast on proposals presented to the stockholders and will have the same effect as negative votes. Broker non-votes will be counted towards a quorum, but will not be counted for any purpose in determining whether this matter has been ratified.

Set forth below is biographical information for each nominee for election for a three-year term expiring at the 2014 Annual Meeting:

 

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF EACH NAMED NOMINEE

 

Directors continuing in office until the 2012 Annual Meeting:

 

Directors continuing in office until the 2013 Annual Meeting:

 

Directors not standing for reelection at the 2011 Annual Meeting:

 

 

The following table provides information related to the compensation of our non-employee Directors earned for fiscal 2010:

 

 

 

 

The following table sets forth the outstanding options held by our non-employee Directors as of January 29, 2011:

 

 

We strive to promote an ownership mentality among our key leadership and Board of Directors. As such, the Company utilizes equity compensation to encourage our Directors to maintain a stock ownership investment in the Company under appropriate circumstances. Additionally, during fiscal 2009 and upon the recommendation of the compensation committee, the Board approved the introduction of a cash compensation component in order to attract and retain certain qualified Directors. As shown in the above tables, the Board approved an annual fee of $40,000 for each of Lorna E. Nagler and Charles Philippin for fiscal 2010, to be paid quarterly in arrears. In fiscal 2009, the Board also approved an option for Ms. Nagler to purchase 50,000 shares of our common stock, to be granted in three annual installments with each installment vesting equally over four years. During fiscal 2008, we granted Mr. Philippin an option to purchase 50,000 shares of our common stock for his services as a Director. These options vest equally over four years. In addition, during fiscal 2010 the Board agreed to pay an annual fee of $40,000 to Hervé J.F. Defforey, to be paid quarterly in arrears beginning in the third quarter of fiscal 2010.

 

The audit committee of the Board of Directors has appointed Ernst & Young LLP as our independent registered public accounting firm for the fiscal year 2011, ending January 28, 2012. Services provided to Ulta by Ernst & Young LLP in fiscal year 2010 are described under “Fees to Independent Registered Public Accounting Firm” below. Additional information regarding the audit committee is provided on page 21.

 

Ernst & Young LLP has audited the financial statements of Ulta since 1997. Representatives of Ernst & Young LLP will be present at the Annual Meeting to respond to appropriate questions and to make such statements as they may desire.

 

Stockholder ratification of the selection of Ernst & Young LLP as our independent registered public accounting firm is not required by our Bylaws or otherwise. However, the Board of Directors is submitting the selection of Ernst & Young LLP to the stockholders for ratification as a matter of good corporate governance practice. If the stockholders fail to ratify the selection, the audit committee will reconsider whether or not to retain that firm. Even if the selection is ratified, the audit committee, in its discretion, may direct the appointment of a different independent registered public accounting firm at any time during the year if it determines that such a change would be in the best interests of Ulta and our stockholders.

 

The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and entitled to vote at the Annual Meeting will be required to ratify the selection of Ernst & Young LLP. Abstentions will be counted toward the tabulation of votes cast on proposals presented to the stockholders and will have the same effect as negative votes. Broker non-votes will be counted towards a quorum, but will not be counted for any purpose in determining whether this matter has been ratified.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” PROPOSAL TWO

 

FEES TO INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The following table sets forth the aggregate fees billed by Ernst & Young LLP for professional services rendered for fiscal years 2010 and 2009:

 

 

 

 

The audit committee has approved all professional fees paid to Ernst & Young LLP.

The audit committee has established procedures for the pre-approval of all audit and permitted non-audit-related services provided by our independent registered public accounting firm. The procedures include, in part, that: (1) the audit committee, on an annual basis, shall pre-approve the independent registered public accounting firm’s engagement letter/annual service plan; (2) the audit committee must pre-approve any permitted service not included in the annual service plan; (3) the audit committee chairman may pre-approve any permitted service between regularly scheduled meetings, as applicable, and a report of such services and related fees are to be disclosed to the full audit committee at the next scheduled meeting; and (4) the audit committee will review a summary of the services provided and the fees paid on an annual basis.

 

The audit committee provides assistance to the Board of Directors in fulfilling its responsibility to our stockholders, potential stockholders and the investment community relating to corporate accounting, financial, management and reporting practices, the system of internal controls and the auditing process. Specifically, the audit committee assists the Board of Directors in monitoring the integrity of our financial statements, our independent registered public accounting firm’s qualifications and independence, the performance of our audit function and independent registered public accounting firm, our compliance with legal and regulatory requirements and our policies with respect to risk assessment and risk management. The audit committee has direct responsibility for the appointment, compensation, retention (including termination) and oversight of our independent registered public accounting firm, and our independent registered public accounting firm reports directly to the audit committee.

 

During fiscal year 2010, the audit committee was composed of the following independent Directors: Messrs. Defforey, DiRomualdo and Philippin. Each of Messrs. Defforey, DiRomualdo and Philippin has been designated by the Board of Directors as an “audit committee financial expert” as defined in applicable SEC Rules. The Board of Directors made a qualitative assessment of each member’s level of knowledge and experience based on a number of factors, including education and work, management and director experience. The Board of Directors has determined that each committee member qualifies as a “nonemployee director” under SEC rules and regulations, as well as the independence requirements of NASDAQ. All members of our audit committee are financially literate and are independent, as independence is defined in Rule 5605(a)(2) of the NASDAQ listing standards and Section 10A(m)(3) of Exchange Act. As noted, the audit committee met 15 times during fiscal year 2010, and its report is presented below. The audit committee acts under a written charter that was adopted by the Board of Directors and has been published under “Corporate Governance” in the Investor Relations section of the Ulta website located at http://ir.ulta.com.

 

The audit committee assists the Board of Directors in fulfilling its responsibility for oversight of the quality and integrity of the accounting, auditing and financial reporting practices of Ulta.

 

The audit committee oversees Ulta’s financial process on behalf of the Board of Directors. Management has the primary responsibility for the financial statements and the reporting process, including the systems of internal controls. Ulta has an Internal Audit Department that is actively involved in examining and evaluating Ulta’s financial, operational and information systems activities and reports functionally to the Chair of the audit committee and administratively to management. In fulfilling its oversight responsibilities, the audit committee reviewed and discussed with management the periodic reports, including the audited financial statements in our Annual Report on Form 10-K. This included a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments and the clarity of disclosures in the financial statements.

 

The audit committee reviewed with the independent registered public accounting firm, who is responsible for expressing an opinion on the conformity of those audited financial statements with accounting principles generally accepted in the United States, its judgments as to the quality, not just the acceptability, of Ulta’s accounting principles and such other matters as are required to be discussed with the audit committee under generally accepted auditing standards, including Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1. AU Section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T. In addition, the audit committee has discussed with the independent registered public accounting firm the firm’s independence from management and Ulta, including the matters in the written disclosures and the Letter from the Independent Registered Public Accounting Firm required by applicable requirements of the Public Company Accounting Oversight Board regarding the firm’s communications with the audit committee concerning independence.

 

The audit committee discussed with Ulta’s independent registered public accounting firm the overall scope and plans for their audit and developed a pre-approval process for all independent registered public accounting firm services. The audit committee meets with the independent registered public accounting firm, with and without management present, to discuss the results of their examination, their evaluation of Ulta’s internal and disclosure controls and the overall quality of Ulta’s financial reporting. The audit committee held 15 meetings during fiscal year 2010.

 

In reliance on the reviews and discussions referred to above, the audit committee recommended to the Board of Directors, and the Board of Directors approved, that the audited financial statements be included in Ulta’s Annual Report on Form 10-K for the fiscal year 2010, ended January 29, 2011, for filing with the SEC. The audit committee has appointed Ernst & Young LLP to be Ulta’s independent registered public accounting firm for the fiscal year 2011, ending January 28, 2012.

 

 

Audit Committee of the Board of Directors

 

Hervé J.F. Defforey (Chairman)

Robert F. DiRomualdo

Charles J. Philippin

 

 

The compensation committee met 13 times during fiscal year 2010, and its report is presented below. During fiscal year 2009, the compensation committee was composed of the following independent Directors: Messrs. Eck (Chairman) and Heilbronn and Ms. Nagler; Mr. Lebow also served as a member of the committee during fiscal year 2010, but left the committee in April of 2010. The Board of Directors has determined that each current committee member qualifies as a “nonemployee director” under the rules and regulations of the SEC, as well as the independence requirements of NASDAQ. The compensation committee acts under a written charter that was adopted by the Board of Directors and has been published under “Corporate Governance” in the Investor Relations section of the Ulta website located at http://ir.ulta.com. Under this charter, the compensation committee is responsible for:

 

 

The compensation committee may delegate under its charter any of its responsibilities to a subcommittee, but only to the extent consistent with our Bylaws, Articles of Incorporation, Section 162(m) of the Internal Revenue Code and NASDAQ rules. In connection with the performance of its duties, during 2010 the compensation committee sought the input of Lyn Kirby, our former Chief Executive Officer, and Mr. Rubin, our current Chief Executive Officer, with respect to other executives’ compensation.

 

Compensation consultant

 

During fiscal 2010 the compensation committee engaged Towers Watson and Pay Governance, as their outside consultants, to provide information regarding market comparisons for certain positions and general executive compensation advice. In those capacities, both Towers Watson and Pay Governance were engaged directly by the compensation committee. The compensation committee changed compensation consultants in 2010 when their primary consultants at Towers Watson joined Pay Governance. Pay Governance is an independent executive compensation consulting firm formed by former Towers Watson consultants.

 

Compensation risk

 

The Company reviewed its compensation plans, practices and policies and determined that it does not have any such plans, practices and policies that create risks that are reasonably likely to have a material adverse effect on the Company based on the following:

 

 

 

Compensation committee interlocks and insider participation

 

None of the members of our compensation committee has at any time been one of our officers or employees. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee, or other committee serving an equivalent function, of any entity that has one or more executive officers serving on our Board of Directors or compensation committee.

 

REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS²

 

The compensation committee has reviewed and discussed the following Compensation Discussion and Analysis (CD&A) with management. Based on this review and discussion, the compensation committee recommended to the Board of Directors that the CD&A be included in Ulta’s fiscal 2010 Annual Report on Form 10-K and this Proxy Statement.

 

Compensation Committee of the Board of Directors

 

Dennis K. Eck (Chairman)

Charles Heilbronn

Lorna Nagler

 

Philosophy

 

Our executive compensation philosophy is to provide compensation opportunities that attract, retain and motivate talented key executives. We accomplish this by:

 

 

 

 

 

Our compensation program consists of a fixed base salary, variable cash bonus and stock option awards, with a significant portion weighted towards the variable components. This mix of compensation is intended to ensure that total compensation reflects our overall success or failure and to motivate executive officers to meet appropriate performance measures.

 

Overview of 2010 compensation

 

In 2010 we transitioned Chief Executive Officers, from Lyn Kirby to Chuck Rubin. As part of that transition, we entered into an employment agreement with Mr. Rubin, which included certain cash and special equity grants that were necessary to induce him to accept employment with the Company. Also in connection with this transition, we entered into an agreement with Ms. Kirby to assist with the successful transition of her duties to Mr. Rubin. Additionally, Mr. L’Heureux separated from the Company on January 19, 2011, and in connection therewith received certain severance payments and additional benefits pursuant to a voluntary separation and release agreement. All of these agreements are described in more detail below.

 

More generally, we continued our bonus plan with a company-wide performance goal relating to earnings set at or above our budget for 2010, while retaining a discretionary piece to take into account the continued instability in the economic environment. We again out-performed our targeted earnings goals for 2010 resulting in bonuses for that portion at the maximum level. Mr. Rubin’s and Ms. Kirby’s bonuses for 2010 were prorated to reflect their period of employment. Except for the special grants of restricted stock to Mr. Rubin, we continued to use stock options as our primary means of providing long-term incentives for our named executive officers and made grants in accordance with our normal annual program. Due to our better than expected performance in 2009, and having previously frozen salaries in 2009, we also increased salaries for our named executive officers for 2010 in line with general market increases.

 

Peer group

 

In general, the Compensation Committee evaluated the competitive marketplace for our executive compensation in 2010 against the following market-based surveys and a pre-determined peer group set in consultation with Towers Watson:

 

 

The compensation committee does not rely solely on the peer group or survey data in making its individual compensation determinations, but rather the compensation committee considers our Chief Executive Officer’s input as to an executive’s performance and internal pay equity among current executives and newly hired executives. The compensation committee also considers the accounting and tax impact of each element of compensation and in the past has tried to minimize the compensation expense impact of equity grants on our financial statements, while minimizing the tax consequences to executives.

 

In connection with evaluating merit and market increases in base salary, the compensation committee reviewed aggregated data from the following surveys in order to determine the market level of salary increases:

 

 

In determining the additional base salary market adjustment for Mr. Bodnar discussed below, the compensation committee reviewed data provided by Mr. Rubin and prepared by an executive search firm with respect to comparable CFO positions at the following companies:

 

 

Base salary

 

Base salaries are reviewed annually and are set based on individual contract and hiring negotiation, competitiveness versus the external market and internal merit increase budgets. Based on a review of marketplace salary increases contained in the surveys described above, as well as the compensation committee’s assessment of current economic and other market conditions, each year management proposes a merit baseline percentage increase in salaries. Our Chief Executive Officer then recommends to the compensation committee adjustments to the baseline percentage (either up or down) based on his or her assessment of an individual’s performance, with input from the human resources department. As discussed above, base salaries were increased by 2.3% for 2010 based on merit.

 

Mr. Rubin’s base salary was set at the time of his hiring to be in line with the median of our peer group and the market surveys described above for a Chief Operating Officer and President position, with the intent to succeed to the Chief Executive Officer position.

 

In August 2010, the compensation committee, upon the recommendation of Mr. Rubin, further increased Mr. Bodnar’s salary to $425,000 to bring Mr. Bodnar’s compensation (base and target incentive) in line with the market for his position and responsibilities at comparable retail and high-growth companies as demonstrated by the market data discussed above.

Annual bonuses

 

Under the terms of her contract entered into in 2008, Ms. Kirby’s target bonus is 100% of her base salary, with a maximum bonus equal to 200% of her base salary. Her target and maximum were set based on Towers Watson’s input during the 2008 contract negotiations to approximate the median for chief executive officers in the survey data and peer group discussed above. Under the terms of his contract, Mr. Rubin’s target bonus similarly is set at 100% of his base salary with a maximum bonus equal to 200% of his base salary. His bonus was set to be in line with Ms. Kirby’s and was determined at the time to approximate the median for his role based on the survey data and peer group discussed above. Both Mr. Rubin and Ms. Kirby agreed to pro rate their bonuses for 2010 for the period of time worked. Mr. Bodnar’s target bonus was 50% of his base salary, and Mr. Guttman and Mr. L’Heureux had a target bonus of 40% of their base pay.

 

In fiscal 2010, the bonuses for our named executive officers were based on achievement of one quantifiable objective performance target weighted at 80% of the bonus opportunity. The remaining 20% of the bonus opportunity was based on discretionary performance reviews. The performance target for 2010 was $94 million of earnings before income taxes, adjusted for certain accounting charges required under generally accepted accounting principles and non-recurring charges (“EBT”).

 

No bonus was payable unless performance under the EBT goal exceeded 80% of the target. A maximum of 250% of target could be earned by Messrs. Bodnar, L’Heureux and Guttman and 200% under Ms. Kirby’s and Mr. Rubin’s contracts. In setting the EBT target, the compensation committee believes that excluding the impact of non-recurring charges and certain other accounting charges is appropriate because these are items over which management has no control. Actual EBT for fiscal 2010 was $118 million (vs. target of $94 million) resulting in a payout of $425,006, $237,569 and $234,175 for Messrs Bodnar, Guttman and L’Heureux, respectively, and $943,554 and $1,121,177 for Ms. Kirby and Mr. Rubin, which reflects their pro rated bonuses for 2010.

 

The compensation committee and the Board of Directors, based on Mr. Rubin’s input, assessed Messrs. Bodnar’s and Guttman’s performance during the year to determine the discretionary portion of the bonus payable. Based on this assessment, Mr. Bodnar received $53,126 and Mr. Guttman received $29,696 (each representing 125% of the 20% discretionary portion of their bonus). The 125% payout of the discretionary bonus component to Messrs. Bodnar and Guttman was based upon their 2010 individual performance, including efforts related to the Company’s secondary offering in June 2010 and their work in insuring the forward progress of the Company during the CEO transition. As part of his separation from the Company, Mr. L’Heureux was guaranteed 100% of the discretionary portion of his bonus for 2010 fiscal year.

 

Ms. Kirby and Mr. Rubin received the maximum bonus of 200% of their base salary (pro rated for 2010) based solely on achievement of the EBT goal, and therefore were not eligible for any additional discretionary bonus.

 

LTIP

 

We provide long-term incentives through annual option grants to our executives and certain other employees, which we refer to as our “LTIP”. In addition, certain employees are eligible to receive grants of stock options upon hire or promotion. All executives, other than Ms. Kirby, were eligible for the LTIP. Ms. Kirby was entitled to significant option grants under her employment agreement. As a result, the compensation committee determined that Ms. Kirby did not need any additional equity compensation under the LTIP. Mr. Rubin did not participate in LTIP grants in 2010 due to the grants he received in connection with the commencement of his employment, which are more fully described below. However, he will be eligible to participate in the LTIP beginning in 2011.

 

Under the LTIP each employee receives an option grant based on a methodology that provides value equal to a targeted percentage of base salary. This targeted percentage was determined based on input from Towers Watson as to market median practices for long term incentives. The compensation committee approved the target percentage of base salary for LTIP of 55% for Mr. Bodnar, and 50% for Mr. Guttman and Mr. L’Heureux. Beginning in 2011, Mr. Rubin’s participation in the LTIP will be targeted at 200% of base salary.

Option grants under the LTIP generally have the following characteristics:

 

 

Under Ms. Kirby’s succession agreement, option awards continued to vest for as long as she remained on the Board of Directors, and the post-termination exercise period would not begin until she left the Board of Directors. Pursuant to her contract, she received a stock option grant in 2010, for 200,000 options. However, as discussed below regarding its option granting policy, the compensation committee has a policy of making option grants only after the market has been fully informed and executives have engaged in trading. Under the terms of her contract, Ms. Kirby’s 2010 options were to be granted on the first day on which executives were allowed to trade in our shares following our fiscal 2009 earnings release, which would normally be the third trading day following the earnings release. However, due to their knowledge of the pending hiring of Mr. Rubin, Ms. Kirby and certain other executives were not allowed to trade in our shares following the fiscal 2009 earnings release. As a result, Ms. Kirby’s options could not be granted at that time. However, if the options had been granted at that time, the exercise price of the options would have been $22.86. In connection with negotiation of her succession agreement, the Company agreed to make Ms. Kirby’s 2010 option grant at a price equal to the greater of $22.86 or the fair market value on the date of grant (as is required under the plan), and to pay Ms. Kirby in cash the difference, if any, between the actual exercise price and $22.86 per share. This agreement protected Ms. Kirby from any loss resulting from the delay in granting her options, which the compensation committee believed fair. Ms. Kirby’s option grant for 2010 was at an exercise price of $22.86, resulting in no extra payment to Ms. Kirby.

 

Special Payments to Mr. Rubin Upon Hiring

 

In connection with the negotiation of Mr. Rubin’s employment agreement and his hiring initially as our Chief Operating Officer and President with the intent to make him our Chief Executive Officer, it was necessary to make the following payments to Mr. Rubin for the following reasons:

 

 

Option granting policy

 

We have adopted a general policy of making LTIP and other stock option grants and setting the exercise price for such options based on the closing price of our stock on the third business day following the date our earnings announcement is made for each fiscal quarter. This timing of option grants is, thus, generally consistent with when our executives and directors would be allowed to trade in our common stock under our insider trading policy. The compensation committee determined that setting the exercise price for stock options at this time was prudent in that it allowed for the market to process all reported public information prior to pricing stock options. Such a practice thereby eliminates any potential manipulation regarding the timing of stock option grants. All stock option grants are approved in advance by the compensation committee.

 

Benefits, perquisites and tax-gross-ups

 

Executives are allowed to defer compensation under our non-qualified deferred compensation plan, which is more fully described in the narrative to the Non-Qualified Deferred Compensation Table below. For all eligible employees, we offer a 401(k) plan with matching contributions equal to 50% of contributions made up to 3% of eligible compensation. We also offer to eligible employees group health, life, accident and disability insurance. In addition, all employees are entitled to a discount on purchases at our stores.

 

The State of New York has been imposing income tax liabilities on our employees who are not residents of New York based on the amount of work for Ulta that these employees perform in New York (including business meetings and attendance at trade shows). This impacts a number of our employees who are not residents of New York, including Ms. Kirby and Mr. Rubin. Because a large portion of the beauty industry is concentrated in New York, we require certain of our employees to travel to and work in New York from time to time. However, as the income tax rates applicable in New York are substantially higher than those in Illinois, it is more expensive for our employees, on a tax basis, if we ask them to work in New York. Because we do not want to provide a disincentive to our employees to work from time to time in New York, and because the nature of their work requires travel to New York, the compensation committee has determined that it is in our best interests to gross-up non-New York employees for any differences in taxes paid on income in New York versus the rate that such employees would have paid in their home state. This tax gross-up is applicable to all employees impacted, not just executives.

 

The Company also agreed to pay Mr. Rubin’s and Ms. Kirby’s legal fees, up to a negotiated maximum, incurred in connection with negotiation and entering into his employment agreement and her succession agreement, as necessary costs associated with a smooth transition.

 

Severance

 

Under the terms of his employment agreement, Mr. Rubin could be entitled to certain severance benefits more fully described below under “Severance and Change in Control Benefits.” The compensation committee determined that such benefits were within market practices based on the information provided by Towers Watson in connection with his hiring. As Ms. Kirby resigned in 2010, she was ineligible for severance under her contract.

 

In addition, Mr. Guttman is entitled to severance under the terms of his offer of employment, as more fully described below under “Severance and Change in Control Benefits.” Severance for Mr. Guttman was considered a necessary part of his compensation package in order to attract him to join Ulta. Mr. Bodnar would be expected to receive severance as well, if he were involuntarily terminated by the Company for reasons other than cause.

 

Mr. L’Heureux entered into a voluntary separation and release agreement upon his separation on January 19, 2011, which provided in exchange for a release of all claims, for him to receive one year’s salary payable in installments, a full bonus for fiscal 2010 (with the 20% discretionary portion of the bonus payable at 100%) and full vesting in certain stock options that would otherwise have vested on March 24, 2011.

Accounting and tax considerations

 

The compensation committee also considers the accounting and tax impact of each element of compensation and in the past has tried to minimize the compensation expense impact of equity grants on our financial statements, while minimizing the tax consequences to executives.

 

A goal of the compensation committee is to comply with the requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended. Section 162(m) limits the tax deductibility for public companies of annual compensation in excess of $1,000,000 paid to our Chief Executive Officer and any of our three other most highly compensated executive officers, other than our Chief Financial Officer. However, performance-based compensation that has been approved by our stockholders is excluded from the $1,000,000 limit if, among other requirements, the compensation is payable only upon the attainment of pre-established, objective performance goals and the committee of our Board of Directors that establishes such goals consists only of “outside directors.” The compensation committee is composed solely of outside directors.

 

The compensation committee considers the anticipated tax treatment to us and our executive officers when reviewing executive compensation and our compensation programs. While the tax impact of any compensation arrangement is one factor to be considered, such impact is evaluated in light of the compensation committee’s overall compensation philosophy and objectives. The compensation committee will consider ways to maximize the deductibility of executive compensation, while retaining the discretion it deems necessary to compensate officers in a manner commensurate with performance and the competitive environment for executive talent. From time to time, the compensation committee may award compensation to our executive officers which is not fully deductible if it determines that such award is consistent with its philosophy and is in our and our stockholders’ best interests.

 

Our 2007 Incentive Award Plan has been designed and implemented with the intent to allow us to pay performance-based compensation under Section 162(m) of the Internal Revenue Code. Accordingly, stock option grants under the 2007 Incentive Award Plan should be performance based and therefore deductible under Section 162(m). The special cash award and the restricted stock grants to Mr. Rubin were not performance based and therefore will likely not be deductible in part by the Company.

Summary compensation table

 

The following table sets forth the compensation of our Chief Executive Officer, Chief Financial Officer and our other most highly compensated executive officers for our fiscal year ending January 29, 2011. We refer to these individuals collectively as the NEOs.

 

 

 

 

 

 

Grants of plan-based awards

 

The following table sets forth certain information with respect to grants of plan-based awards for fiscal 2010 to the NEOs.

 

 

 

 

Outstanding equity awards as of January 29, 2011

 

The following table presents information concerning restricted stock and options to purchase shares of our common stock held by the NEOs as of January 29, 2011.

 

 

 

 

 

Option Exercises and Stock Vested

 

 

 

 

2010 Non-qualified Deferred Compensation

 

The table below sets forth certain information as of January 29, 2011 with respect to the non-qualified deferred compensation plans in which our named executive officers participate.

 

 

 

 

 

The Ulta Nonqualified Deferred Compensation Plan became effective January 1, 2009. Participants may defer up to 75% of their base salary and 100% of their annual cash bonus. We do not match or make any other contributions to the plan. Participants may direct the investment of their contributions to the plan among several mutual funds, similar to those available under our 401(k) plan.

 

Severance and Change in Control Benefits

 

In the event that Mr. Rubin’s employment is terminated without cause, he will be entitled to the following as severance subject to his providing a general release of claims:

 

 

For this purpose “Cause” shall mean Mr. Rubin’s:

 

 

Any act or failure to act shall be considered “willful” only if done or omitted to be done without a good faith, reasonable belief that such act or failure to act was in our best interests. Mr. Rubin will have ten business days to cure any curable act after written notice from the Company of cause. Mr. Rubin’s employment may be terminated without cause retroactively, if such reasons are later discovered after his termination.

 

In connection with his employment agreement, Mr. Rubin entered into an agreement not to disclose or use our confidential information at any time. He also agreed not to work for, or otherwise be involved with, any competitor for a period of eighteen months following his termination for any reason.

In the event that Mr. Guttman’s employment is terminated without cause, he will be entitled to a lump-sum payment equal to six months salary, which may be extended to one year’s salary upon Board approval, subject to providing a general release of claims. In addition, if his employment is terminated without cause within 12 months following a change in control, he will vest in all options that he holds regardless of when granted. Mr. L’Heureux entered into a voluntary separation and release agreement upon his separation on January 19, 2011, which, in exchange for a release of all claims, provided for him to receive one year’s salary payable in installments, a full bonus for fiscal 2010 (with the 20% discretionary portion of the bonus payable at 100%), and full vesting in certain stock options that would otherwise have vested on March 24, 2011.

 

Although Mr. Bodnar does not have a contractual right to severance, we would likely also pay him at least six months severance in connection with a termination without cause in exchange for a general release of claims similar to Mr. Guttman. In addition, if his employment is terminated without cause within 12 months following a change in control, he will vest in all options that he holds regardless of when granted.

 

Ms. Kirby resigned her employment in September 2010 and as a result was not entitled to any severance.

 

The following chart sets forth the amount that Messrs. Rubin, Bodnar and Guttman would receive in the event that their employment were terminated without cause, for good reason, or due to death or disability, or in connection with a change in control, on the last day of the 2010 fiscal year, January 29, 2011, and assuming the exercise of all options the vesting of which is accelerated upon such event. With respect to Mr. L’Heureux, the following chart sets forth the amount he is entitled to receive upon his separation on January 19, 2011 as severance and the value of stock options the vesting of which were accelerated as a result of such separation, but does not include his bonus for 2010 fiscal year, as that was deemed earned at the time of his separation. These amounts do not include any value for amounts payable under insurance policies applicable to employees in general.

 

 

 

PROPOSAL THREE

 

The Board of Directors is committed to excellence in governance. As part of that commitment, and pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and Section 14A of the Securities Exchange Act of 1934, as amended, Ulta is asking stockholders to vote on a resolution to approve the compensation of our named executive officers as disclosed in this Proxy Statement. This advisory resolution, commonly referred to as a “say-on-pay” resolution, is non-binding on the Company and the Board of Directors. However, the Board and the Compensation Committee value the opinions of the stockholders and will carefully consider the outcome of the vote when making future compensation decisions.

 

As described more fully in the Compensation Discussion and Analysis (CD&A) section of this Proxy Statement, our executive compensation program is structured to provide compensation opportunities that: (1) reflect the competitive marketplace in which the Company operates; (2) link annual incentive compensation to Company performance goals that support stockholder value; (3) focus a significant portion of an executive’s compensation on equity-based incentives to align interests closely with stockholders; and (4) attract, motivate and retain key executives who are critical to our long-term success. A significant portion of the Company’s executive compensation is performance-based, and we emphasize such incentives to ensure that total compensation reflects our overall success or failure and to motivate executive officers to meet appropriate performance measures.

 

We believe that the fiscal 2010 compensation of our named executive officers was appropriate and aligned with the Company’s performance. We urge stockholders to read the CD&A section of this Proxy Statement, as well as the Summary Compensation Table and the related tables and disclosures, for a more complete understanding of how our executive compensation policies and procedures operate.

 

The Company is asking stockholders to approve the following advisory resolution at the 2011 Annual Meeting:

 

RESOLVED, that the stockholders of Ulta Salon, Cosmetics & Fragrance, Inc. (the “Company”) approve, on an advisory basis, the compensation of the Company’s named executive officers as disclosed in this Proxy Statement pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion thereto.

 

Because the vote is advisory, it will not be binding upon the Board or the Compensation Committee. However, the Compensation Committee will consider the outcome of the vote in determining future compensation policies and decisions.

 

The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and entitled to vote at the Annual Meeting will be required to approve the advisory resolution on executive compensation. Abstentions will be counted toward the tabulation of votes cast on proposals presented to the stockholders and will have the same effect as negative votes. Broker non-votes will be counted towards a quorum, but will not be counted for any purpose in determining whether this matter has been ratified.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” PROPOSAL THREE

PROPOSAL FOUR

 

In addition to providing stockholders with the opportunity to cast an advisory “say on pay” vote on executive compensation, Ulta is also asking stockholders to vote on whether future stockholder advisory votes on the Company’s executive compensation should be held every one, two or three years.

 

For the following reasons, we recommend that our stockholders select a frequency of every three years:

 

 

We encourage our stockholders to evaluate our executive compensation programs over a multi-year horizon. In addition, we believe that a vote every three years on executive compensation reflects the appropriate time frame for our Compensation Committee and the Board of Directors to evaluate the results of the most recent advisory vote on executive compensation, to discuss the implications of that vote with stockholders to the extent needed, to develop and implement any adjustments to our executive compensation programs that may be appropriate in light of a past advisory vote on executive compensation, and for stockholders to see and evaluate the Compensation Committee’s actions in context. In this regard, because the advisory vote on executive compensation occurs after we have already implemented our executive compensation programs for the current year, and because the different elements of compensation are designed to operate in an integrated manner and to complement one another, we expect that in certain cases it may not be appropriate or feasible to fully address and respond to any one year’s advisory vote on executive compensation by the time of the following year’s annual meeting.

 

We view the advisory vote on executive compensation as an additional, but not exclusive, opportunity for our stockholders to communicate with us regarding their views on the Company’s executive compensation programs. In addition, we are concerned that an annual advisory vote on executive compensation could lead to a near-term perspective inappropriately bearing on our executive compensation programs. Finally, although we believe that holding an advisory vote on executive compensation every three years will reflect the right balance of considerations in the normal course, we will periodically reassess that view and can provide for an advisory vote on executive compensation on a more frequent basis if changes in our compensation programs or other circumstances suggest that such a vote would be appropriate.

 

This advisory vote is non-binding on the Company and the Board of Directors. While the Board and the Compensation Committee value the opinions of the stockholders and will consider the outcome of the vote when determining the frequency of future say on pay votes, the Board may decide that it is in the best interest of the Company and the stockholders to hold an advisory vote on executive compensation more or less frequently than the option approved by the stockholders.

 

The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and entitled to vote at the Annual Meeting will be required to approve the vote regarding the frequency of an advisory vote on the compensation of our named executive officers. However, if none of the frequency alternatives receives a majority vote, we will consider the frequency that receives the highest number of votes by stockholders to be the frequency that has been selected by our stockholders. Abstentions and broker non-votes will be counted towards a quorum, but will not be counted for any other purpose with respect to this matter.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF “EVERY THREE YEARS” WITH RESPECT TO PROPOSAL FOUR

PROPOSAL FIVE

 

APPROVAL OF

 

We are requesting that our stockholders vote in favor of adopting the Ulta Salon, Cosmetics & Fragrance, Inc. 2011 Incentive Award Plan (the “2011 Plan”), which was approved originally by the Board of Directors on April 26, 2011. A summary of the principal provisions of the 2011 Plan is set forth below. The summary is qualified by reference to the full text of the 2011 Plan, which is attached as Appendix A to this Proxy Statement.

 

The 2011 Plan was adopted in order to allow us to continue providing equity compensation to employees and members of the Board as a competitive compensation practice and to align the interests of our employees and Board members with our stockholders. The 2011 Plan is intended to replace 2007 Incentive Award Plan (the “2007 Plan”), which as of April 26, 2011 has only 746,431 shares (plus any shares returned due to forfeitures) available for future awards, which represents about the historical level of our annual equity grants. Therefore, unless the 2011 Plan is approved we will not be able to continue making equity compensation grants to our employees or directors. As discussed in greater detail in the Compensation Discussion and Analysis section in this Proxy Statement, one of the methods by which we execute our compensation philosophy is by focusing a significant portion of our executive’s compensation on equity-based incentives, which are designed to align our executives’ interests closely with those of our stockholders.

 

The 2011 Plan provides for the grant of options (both nonqualified and incentive stock options), stock appreciation rights (“SARs”), restricted stock, restricted stock units, performance awards, dividend equivalent rights, stock payments, deferred stock and cash-based awards (collectively, “Awards”).

 

Under the terms of the 2011 Plan, the total number of shares of our common stock initially reserved for issuance under Awards is (i) 4,750,000 plus (ii) shares that are available for grant under or subject to awards which are forfeited or cancelled under the 2007 Plan, as discussed in greater detail below.

 

Shares Subject to 2011 Plan

 

Under the 2011 Plan, the aggregate number of shares of our common stock that may be issued is (i) 4,750,000 plus (ii) any shares that are available for grant under the prior plans on the effective date of the 2011 Plan or are subject to awards under prior plans, which after the effective date are forfeited or lapse unexercised or are settled in cash and are not issued under such prior plans. However, because the 2011 Plan has a fungible share design, grants of full value awards (restricted stock, restricted stock units, deferred stock and stock payments) will reduce the aggregate number of shares available under the 2011 Plan by 1.5 shares for each share delivered in settlement of a full value award.

 

The 2011 Plan provides for specific limits on the number of shares that may be subject to different types of Awards:

 

 

The shares of our common stock available under the 2011 Plan may be either previously authorized and unissued shares, treasury shares or shares purchased on the open market. The 2011 Plan provides for appropriate adjustments in the number and kind of shares subject to the 2011 Plan and to outstanding Awards thereunder in the event of a corporate event or transaction, including a merger, consolidation, reorganization, recapitalization, separation, partial or complete liquidation, stock split, stock dividend, reverse stock split, split up, spin-off or other

distribution of stock or property, combination of shares, exchange of shares or other similar change in capital structure.

 

If any shares subject to an Award under the 2011 Plan or a prior plan expire or are forfeited or are settled in cash in lieu of shares, or exchanged prior to the issuance of shares for an Award not involving shares, then the shares subject to such Award under the 2011 Plan or a prior plan shall be available again for grant under the 2011 Plan. However, the following shares will not be available for future grants under the 2011 Plan: (1) shares used to pay the exercise price of an option or to satisfy a tax withholding obligation of an Award; (2) shares subject to SARs that are not issued in connection with the exercise of such SARs; and (3) shares purchased on the open market with cash proceeds from the exercise of options.

 

On April 26, 2011, the closing price of a share of our common stock on the NASDAQ was $52.57.

 

Administration

 

The 2011 Plan is generally administered by our Compensation Committee (the “Committee”) or any subcommittee thereof; provided, that a subcommittee of our Board of Directors may also function as the Committee. The Committee is authorized to determine the individuals who will receive Awards (the “Participants”), when they will receive Awards, the number of shares to be subject to each Award, the price of the Awards granted, payment terms, payment method and the expiration date applicable to each Award. The Committee is also authorized to adopt, amend and rescind rules relating to the administration of the 2011 Plan. The Committee may from time to time delegate its authority to grant or amend awards to officers of the company, provided that the full Board, acting by a majority of its members, must conduct the general administration of the 2011 Plan with respect to non-employee directors. In addition, the Committee may not delegate its authority with respect to senior executives of the Company who are subject to Section 16 of the Securities Exchange Act of 1934, as amended, or any individual who is subject to Section 162(m) of the Internal Revenue Code (the “Code”).

 

Amendment and Termination

 

The Committee or the Board may terminate, amend, or modify the 2011 Plan at any time; provided, however, that stockholder approval will be obtained for any amendment to the extent necessary and desirable to comply with any applicable law, regulation or stock exchange rule, to increase the number of shares available under the 2011 Plan or to permit the Committee to grant options with a price below fair market value on the date of grant. In addition, absent stockholder approval, no option or SAR may be amended to reduce the per share exercise price of the shares subject to such option or SAR below the per share exercise price as of the date the option or SAR was granted and, except to the extent permitted by the 2011 Plan in connection with certain changes in capital structure, no option or SAR may be granted in exchange for, or in connection with, the cancellation or surrender of an option or SAR having a higher per share exercise price.

 

In no event may an Award be granted pursuant to the 2011 Plan on or after the tenth anniversary of the date the stockholders approve the 2011 Plan.

 

Eligibility

 

Awards under the 2011 Plan may be granted to individuals who are our employees, our non-employee directors and our consultants. However, options which are intended to qualify as ISOs (as defined below) may only be granted to employees.

 

Awards

 

The following briefly describes the principal features of the various Awards that may be granted under the 2011 Plan.

Options — Options provide for the right to purchase our common stock at a specified price and usually will become exercisable in the discretion of the Committee in one or more installments after the grant date. The option exercise price may be paid in:

 

 

The Committee may at anytime substitute SARs for options granted under the 2011 Plan. Options may take two forms: non-statutory options (NSOs) and incentive stock options (ISOs). NSOs may be granted for any term specified by the Committee, but shall not exceed ten years. ISOs will be designed to comply with the provision of the Code and will be subject to certain restrictions contained in the Code in order to qualify as ISOs. Among such restrictions ISOs must:

 

 

No ISO may be granted under the 2011 Plan after ten years from the date the 2011 Plan is approved by our stockholders.

 

Restricted Stock — A restricted stock award is the grant of shares of our common stock at a price determined by the Committee (which price may be zero) that is nontransferable and unless otherwise determined by the Committee at the time of award, may be forfeited upon termination of employment or service during a restricted period. The Committee shall also determine in the Award agreement whether the Participant will be entitled to vote the shares of restricted stock and or receive dividends on such shares. Restricted stock granted to employees and consultants will vest according to the terms of each individual Award agreement, as determined by the Committee.

 

Stock Appreciation Rights — SARs provide for the payment to the holder based upon increases in the price of our common stock over a set base price. SARs may be granted in connection with stock options or other Awards or separately. The term of each SAR is set by the Committee, but shall not exceed 10 years from the date of grant. Payment for SARs may be made in cash, our common stock or any combination of the two.

 

Restricted Stock Units — Restricted stock units represent the right to receive shares of our common stock at a specified date in the future, subject to forfeiture of such right. If the restricted stock unit has not been forfeited, then

on the date specified in the Award agreement we shall deliver to the holder of the restricted stock unit, unrestricted shares of our common stock which will be freely transferable. The Committee will specify the vesting requirements in each Award agreement.

 

Dividend Equivalents — Dividend equivalents represent the value of the dividends per share we pay, calculated with reference to the number of shares covered by an Award (other than a dividend equivalent award) held by the Participant. These may be paid in cash or stock. Dividend Equivalents paid in cash do not count against the share and award limits under the 2011 Plan. Dividend Equivalents granted on Awards that vest based on satisfaction of performance criteria will be paid out only once the performance criteria is satisfied and the Awards vest.

 

Performance Awards — Performance awards are denominated in cash or shares of our common stock and are linked to satisfaction of performance criteria established by the Committee. If the Committee determines that the Award is intended to meet the requirements of “qualified performance based compensation” and therefore be deductible under Section 162(m) of the Code, then the performance criteria on which the Award will be based shall be with reference to any one or more of the following:

 

 

 

any of which may be measured either in absolute terms or as compared to any incremental increase or decrease or as compared to results of a peer group or to market performance indicators or indices.

 

Stock Payments — Payments to Participants of bonuses or other compensation under the 2011 Plan may be made in the form of our common stock.

 

Deferred Stock — Deferred stock typically is awarded without payment of consideration and is subject to vesting conditions, including satisfaction of performance criteria. Like restricted stock, deferred stock may not be sold or otherwise transferred until the vesting conditions are removed or expire. Unlike restricted stock, deferred stock is not actually issued until the deferred stock award has vested. Recipients of deferred stock also will have no voting or dividend rights prior to the time when the vesting conditions are met and the deferred stock is delivered.

 

Vesting in Full Value Awards — Grants of full value awards (restricted stock, restricted stock units, deferred stock and stock payments) made to employees and consultants will vest over a period of not less than three years, unless vesting is based on performance objectives, in which case such Awards will not vest over a period of less than a one year performance period. However, the Committee may accelerate vesting upon death, disability or retirement, and if necessary to induce an individual to accept employment with the Company, may issue up to 10% of the shares reserved for issuance under the 2011 Plan without the foregoing minimum vesting provisions.

 

Changes in Control

 

In connection with a change in control, unless, all Awards are assumed or converted in the transaction, the Committee may cause each such Award to become fully vested and exercisable and all forfeiture restrictions on such Awards will lapse. In addition, all restricted stock units, deferred stock and performance stock may become deliverable. If an Award is assumed or substituted for an equivalent Award and a Participant’s service is terminated without cause or for good reason within twelve months following the change in control, then such Participant will become fully vested in the assumed or substituted Award.

 

Adjustments upon Certain Events

 

In the event of a stock dividend, stock split, combination or exchange of shares, merger, consolidation, spin-off, recapitalization or other distribution (other than normal cash dividends) of company assets to stockholders, or other similar changes affecting the shares or share price of company stock, the Committee shall make equitable

adjustments to reflect changes with respect to (i) the terms and conditions of any outstanding Awards, (ii) the number and kind of shares subject to an Award, (iii) the aggregate number and kind of shares that may be issued under the 2011 Plan, and (iv) the grant or exercise price per share for any outstanding Awards. In addition, upon such events the Committee may provide (i) for the termination of any Awards in exchange for cash equal to the amount the holder would otherwise be entitled to if he had exercised the Award, (ii) for the full vesting, exercisability or payment of any Award, (iii) for the assumption of such Award by any successor, (iv) for the replacement of such Award with other rights or property, (v) the adjustment of the number and type of shares and/or the terms and conditions of the Awards which may be granted in the future or (v) that Awards cannot vest, be exercised or become payable after such event.

 

Awards Not Transferable

 

Generally, the Awards may not be pledged, assigned or otherwise transferred other than by will or by laws of descent and distribution. The Committee may allow Awards other than ISOs to be transferred for estate or tax planning purposes to members of the holder’s family, charitable institutions or trusts for the benefit of family members.

 

Prohibition on Repricing

 

The 2011 Plan prohibits the Committee from repricing options and SARs without the approval of stockholders, including a repricing accomplished through the cancellation of an option or in exchange for cash or another award when the exercise price of the option or the base measurement price of the SAR exceeds the current fair market value of the common stock subject to such option or SAR.

 

Clawback

 

The 2011 Plan allows the Committee to subject Awards under the 2011 Plan to rights of forfeiture and recovery in the event that the Participant competes with the Company or acts in a manner inimical, contrary or harmful to the interests of the Company, or is otherwise terminated for cause.

 

Miscellaneous

 

As a condition to the issuance or delivery of stock or payment of other compensation pursuant to the exercise or lapse of restrictions on any Award, the Company has the authority to require Participants to discharge all applicable withholding tax obligations. Shares held by or to be issued to a Participant may also be used to discharge tax withholding obligations, subject to the discretion of the Committee to disapprove of such use.

 

The 2011 Plan will expire and no further Awards may be granted after the tenth anniversary.

 

Federal Income Tax Consequences

 

The tax consequences of the 2011 Plan under current federal law are summarized in the following discussion. This discussion is limited to the general tax principles applicable to the 2011 Plan and is intended for general information only. State and local income taxes are not discussed. Tax laws are complex and subject to change and may vary depending on individual circumstances and from locality to locality. The tax information summarized is not tax advice.

 

Nonqualified Stock Options — For federal income tax purposes, an optionee generally will not recognize taxable income at the time a non-qualified stock option is granted under the 2011 Plan. The optionee will recognize ordinary income, and the Company generally will be entitled to a deduction, upon the exercise of a non-qualified stock option. The amount of income recognized (and the amount generally deductible by the Company) generally will be equal to the excess, if any, of the fair market value of the shares at the time of exercise over the aggregate exercise price paid for the shares, regardless of whether the exercise price is paid in cash, shares or other property.

An optionee’s basis for the stock for purposes of determining his or her gain or loss upon a subsequent disposition of the shares generally will be the fair market value of the stock on the date of exercise of the non-qualified stock option, and any subsequent gain or loss will generally be taxable as capital gain or loss.

 

Incentive Stock Options — An optionee generally will not recognize taxable income either at the time an incentive stock option is granted or when it is exercised. However, the amount by which the fair market value of the shares at the time of exercise exceeds the exercise price will be an “item of tax preference” to the optionee for purposes of alternative minimum tax. Generally, upon the sale or other taxable disposition of the shares acquired upon exercise of an incentive stock option, the optionee will recognize taxable income. If shares acquired upon the exercise of an incentive stock option are held for the longer of two years from the date of grant or one year from the date of exercise, the gain or loss (in an amount equal to the difference between the fair market value on the date of sale and the exercise price) upon disposition will be treated as a long-term capital gain or loss, and the company will not be entitled to any deduction. If this holding period is not met and the stock is sold for a gain, then the difference between the option price and the fair market value of the stock on the date of exercise will be taxed as ordinary income and any gain over that will be eligible for long- or short-term capital gain treatment. If the holding period is not met and the shares are disposed of for less than the fair market value on the date of exercise, then the amount of ordinary income is limited to the excess, if any, of the amount realized over the exercise price paid. The Company generally will be entitled to a deduction in the amount of any ordinary income recognized by the optionee.

 

Stock Appreciation Rights — No taxable income is generally recognized upon the receipt of a SAR. Upon exercise of a SAR, the cash or the fair market value of the shares received generally will be taxable as ordinary income in the year of such exercise. The Company generally will be entitled to a compensation deduction for the same amount which the recipient recognizes as ordinary income.

 

Restricted Stock — A Participant to whom restricted stock is issued generally will not recognize taxable income upon such issuance and the Company generally will not be entitled to a deduction, unless an election is made by the Participant under Section 83(b) of the Code. However, when restrictions on shares of restricted stock lapse, such that the shares are no longer subject to a substantial risk of forfeiture, the Participant generally will recognize ordinary income and the Company generally will be entitled to a deduction for an amount equal to the excess of the fair market value of the shares on the date such restrictions lapse over the purchase price thereof. If an election is made under Section 83(b) of the Code, then the Participant generally will recognize ordinary income on the date of issuance equal to the excess, if any, of the fair market value of the shares on that date over the purchase price therefor and the Company will be entitled to a deduction for the same amount.

 

Restricted Stock Unit — A Participant will generally not recognize taxable income upon the grant of a restricted stock unit. However, when the shares are delivered to the Participant, the value of such shares at that time will be taxable to the Participant as ordinary income. Generally, the Company will be entitled to a deduction for an amount equal to the amount of ordinary income recognized by the Participant.

 

Performance Awards — A Participant who has been granted a performance award (either performance unit or stock) generally will not recognize taxable income at the time of grant, and the company will not be entitled to a deduction at that time. When an award is paid, whether in cash or shares, the Participant generally will recognize ordinary income, and the Company will be entitled to a corresponding deduction.

 

Section 162(m) Limitation — In general, under Section 162(m), income tax deductions of publicly-held corporations may be limited to the extent total compensation (including base salary, annual bonus, stock option exercises and non-qualified benefits paid) for certain executive officers exceeds $1,000,000 (less the amount of any “excess parachute payments” as defined in Section 280G of the Code) in any one year. However, under Section 162(m), the deduction limit does not apply to certain “performance-based compensation” established by an independent compensation committee which is adequately disclosed to, and approved by, stockholders. In particular, stock options and SARs will satisfy the “performance-based compensation” exception if the awards are made by a qualifying compensation committee, the 2011 Plan sets the maximum number of shares that can be granted to any person within a specified period and the compensation is based solely on an increase in the stock

price after the grant date (i.e., the option exercise price is equal to or greater than the fair market value of the stock subject to the award on the grant date). Restricted stock, restricted stock units and performance unit/share Awards granted under the 2011 Plan may qualify as “qualified performance-based compensation” for purposes of Section 162(m) if such awards are granted or vest upon preestablished objective performance measures based on the performance goals described above under the section entitled “Performance Awards”.

 

We have attempted to structure the 2011 Plan in such a manner that the Committee may determine the terms and conditions of Awards granted thereunder in order to determine whether the remuneration attributable to such Awards will be subject to the $1,000,000 limitation. We have not, however, requested a ruling from the IRS or an opinion of counsel regarding this issue. This discussion will neither bind the IRS nor preclude the IRS from taking a contrary position with respect to the 2011 Plan.

 

2011 Plan Benefits

 

The number of Awards that an individual Participant may receive under the 2011 Plan is in the discretion of the Committee and therefore cannot be determined in advance. However, for illustrative purposes only, in 2010 the following amounts were granted to the named executive officers and the other groups of individuals named below under the 2007 Plan.

 

 

Equity Compensation Plan

 

The following table provides certain information as of April 26, 2011 about our common stock that may be issued under our existing equity compensation plans:

 

Equity Compensation Plan Information