**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-Q**

** **
| **(Mark  One)**                                                                                                                         |
|-----------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                              |
| **x**                                                                                                                                   | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                              | ** ** | ** ** |
| **For the quarterly period ended March 30,  2008**                                                                                 |
| ** **                                                                                                                              | ** ** | ** ** |
| **Or**                                                                                                                                  |
| ** **                                                                                                                              | ** ** | ** ** |
| **o**                                                                                                                                   | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                              | ** ** | ** ** |
| **For the transition period from           to        ** |

 

**Commission file number: 001-33048**

** **

**Bare Escentuals, Inc.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                     | ** ** | **20-1062857**       |
|----------------------------------|------------|----------------------|
| (State  or other jurisdiction of |       | (I.R.S.  Employer    |
| incorporation  or organization)  |       | Identification  No.) |

 

**71Stevenson Street, 22****nd Floor**

**SanFrancisco, CA 94105**

(Address of principal executiveoffices with zip code)

 

**(415) 489-5000**

(Registrant’s telephone number,including area code)

 

**N/A**

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

 

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

 

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

 

| Large  accelerated filer x                     |   |                              | Accelerated filer o |
|------------------------------------------------|--------|-----------------------------------|--------------------------|
|                                           |   |                              |
| Non-accelerated  filer   o                |   | Smaller  reporting company o |
| (Do  not check if a smaller reporting company) |   |                              |

 

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

YES      o  NO      x

 

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

 

 

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**Tableof Contents**

 

**Bare Escentuals, Inc.**

 

**INDEX**

 
| **PART I—FINANCIAL  INFORMATION** |                                                                                                                |
|---------------------------------------------|---------------------------------------------------------------------------------------------------------------------|
| Item 1                                 | Financial Statements (unaudited):                                                                                   | 3 |
|                                        | Condensed Consolidated Balance Sheets —  March 30, 2008 and December 30, 2007                        | 3 |
|                                        | Condensed Consolidated Statements of  Income—Three Months Ended March 30, 2008 and April 1, 2007     | 4 |
|                                        | Condensed Consolidated Statements of Cash  Flows—Three Months Ended March 30, 2008 and April 1, 2007 | 5 |
|                                        | Notes to Condensed Consolidated Financial  Statements                                                               | 6 |
| Item 2                                 | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                         | 17 |
| Item 3                                 | Quantitative and Qualitative Disclosures  About Market Risk                                                         | 27 |
| Item 4                                 | Controls and Procedures                                                                                             | 27 |
|                                        |                                                                                                                |
| **PART II—OTHER INFORMATION**     |                                                                                                                |
| Item 1                                 | Legal Proceedings                                                                                                   | 28 |
| Item 1A                                | Risk Factors                                                                                                        | 28 |
| Item 2                                 | Unregistered Sales of Equity Securities and  Use of Proceeds                                                        | 29 |
| Item 3                                 | Defaults Upon Senior Securities                                                                                     | 29 |
| Item 4                                 | Submission of Matters to a Vote of Security  Holders                                                                | 29 |
| Item 5                                 | Other Information                                                                                                   | 29 |
| Item 6                                 | Exhibits                                                                                                            | 29 |
| Signatures                                  |                                                                                                                | 30 |
| Exhibit Index                          |                                                                                                                |   |
| Certifications                              |                                                                                                                |   |
|                                             |                                                                                                                     |  |  |

 

2

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** **

**PART I—FINANCIALINFORMATION**

 

**ITEM 1.   FINANCIAL STATEMENTS**

 

**BAREESCENTUALS, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(inthousands, except per share data)**

 
| ** **                                                                                                                                                                                        | ** ** | **March 30,  2008** | ** ** | **December 30,  2007(a)** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                                                                        | ** ** | **(unaudited)**          | ** ** | ** **                     | ** ** |
| **ASSETS**                                                                                                                                                                                        | ** ** | ** **               | ** ** | ** **                     | ** ** |
| Current  assets:                                                                                                                                                                                  |       |                     |       |                           |       |
| Cash and cash equivalents                                                                                                                                                                         |       | $                        | 37,662     |                           | $          | 32,117 |   |
| Inventories                                                                                                                                                                                       |       | 69,569                   |       | 59,643                         |       |
| Accounts receivable, net of allowances of  $4,746 and $7,638 at March 30, 2008 and  December 30, 2007, respectively                                                           |       | 37,846                   |       | 43,369                         |       |
| Prepaid expenses and other current assets                                                                                                                                                         |       | 9,169                    |       | 9,393                          |       |
| Deferred tax assets, net                                                                                                                                                                          |       | 7,410                    |       | 7,410                          |       |
| Total current assets                                                                                                                                                                              |       | 161,656                  |       | 151,932                        |       |
| Property and equipment, net                                                                                                                                                                       |       | 46,228                   |       | 43,876                         |       |
| Goodwill                                                                                                                                                                                          |       | 15,409                   |       | 15,409                         |       |
| Intangible assets, net                                                                                                                                                                            |       | 9,168                    |       | 9,908                          |       |
| Deferred tax assets, net                                                                                                                                                                          |       | 765                      |       | —                         |       |
| Other assets                                                                                                                                                                                      |       | 2,704                    |       | 2,780                          |       |
| Total assets                                                                                                                                                                                      |       | $                        | 235,930    |                           | $          | 223,905 |   |
| ** **                                                                                                                                                                                        | ** ** | ** **               | ** ** | ** **                     | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ DEFICIT**                                                                                                                                                   | ** ** | ** **               | ** ** | ** **                     | ** ** |
| Current liabilities:                                                                                                                                                                              |       |                     |       |                           |       |
| Current portion of long-term debt                                                                                                                                                                 |       | $                        | 17,216     |                           | $          | 17,901 |   |
| Accounts payable                                                                                                                                                                                  |       | 25,406                   |       | 22,041                         |       |
| Accrued liabilities                                                                                                                                                                               |       | 17,696                   |       | 25,141                         |       |
| Income taxes payable                                                                                                                                                                              |       | 2,238                    |       | 2,648                          |       |
| Total current liabilities                                                                                                                                                                         |       | 62,556                   |       | 67,731                         |       |
|                                                                                                                                                                                              |       |                     |       |                           |       |
| Long-term debt, less current portion                                                                                                                                                              |       | 234,137                  |       | 247,032                        |       |
| Other liabilities                                                                                                                                                                                 |       | 15,620                   |       | 13,629                         |       |
|                                                                                                                                                                                              |       |                     |       |                           |       |
| Commitments and contingencies                                                                                                                                                                     |       |                     |       |                           |       |
|                                                                                                                                                                                              |       |                     |       |                           |       |
| Stockholders’ deficit:                                                                                                                                                                       |       |                     |       |                           |       |
| Preferred stock; $0.001 par value;  10,000 shares authorized; zero shares issued and outstanding                                                                                             |       | —                   |       | —                         |       |
| Common stock; $0.001 par value;  200,000 shares authorized; 91,341 and 91,159 shares issued and  outstanding at March 30, 2008 and December 30, 2007,  respectively |       | 91                       |       | 91                             |       |
| Additional paid–in capital                                                                                                                                                                   |       | 420,374                  |       | 416,524                        |       |
| Accumulated other comprehensive loss                                                                                                                                                              |       | (3,073                   | )          | (1,544                         | )          |
| Accumulated deficit                                                                                                                                                                               |       | (493,775                 | )          | (519,558                       | )          |
| Total stockholders’ deficit                                                                                                                                                                  |       | (76,383                  | )          | (104,487                       | )          |
| Total liabilities and stockholders’ deficit                                                                                                                                                  |       | $                        | 235,930    |                           | $          | 223,905 |   |

 

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

 

See accompanying notes.

 

3

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**BAREESCENTUALS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME**

**(inthousands, except per share data)**

 
| ** **                                                                      | ** ** | **Three months ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                      | ** ** | **March 30,  2008**         | ** ** | **April 1,  2007** | ** ** |
| ** **                                                                      | ** ** | **(unaudited)**                  | ** ** |
| Sales, net                                                                      |       | $                                | 140,358    |   | $ | 115,613 |   |
| Cost of goods sold                                                              |       | 38,657                           |       | 33,450 |   |
| Gross profit                                                                    |       | 101,701                          |       | 82,163 |   |
| Expenses:                                                                       |       |                             |       |   |   |
| Selling, general and administrative                                             |       | 50,464                           |       | 39,185 |   |
| Depreciation and amortization, relating to  selling, general and administrative |       | 2,621                            |       | 940 |   |
| Stock-based compensation, relating to  selling, general and administrative      |       | 1,912                            |       | 1,611 |   |
| Operating income                                                                |       | 46,704                           |       | 40,427 |   |
| Interest expense                                                                |       | (4,644                           | )          | (6,811 | ) |
| Other income, net                                                               |       | 707                              |       | 341 |   |
| Income before provision for income taxes                                        |       | 42,767                           |       | 33,957 |   |
| Provision for income taxes                                                      |       | 16,984                           |       | 13,552 |   |
| Net income                                                                      |       | $                                | 25,783     |   | $ | 20,405 |   |
|                                                                            |       |                             |       |   |   |
| Net income per share:                                                           |       |                             |       |   |   |
| Basic                                                                           |       | $                                | 0.28       |   | $ | 0.23 |   |
| Diluted                                                                         |       | $                                | 0.28       |   | $ | 0.22 |   |
|                                                                            |       |                             |       |   |   |
| Weighted-average shares used in per share  calculations:                        |       |                             |       |   |   |
| Basic                                                                           |       | 91,260                           |       | 89,428 |   |
| Diluted                                                                         |       | 93,277                           |       | 92,632 |   |

 

See accompanying notes.

 

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**BAREESCENTUALS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands)**

 
| ** **                                                                              | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                              | ** ** | **March 30,  2008**         | ** ** | **April 1,  2007** | ** ** |
| ** **                                                                              | ** ** | **(unaudited)**                  | ** ** |
| **Operating activities**                                                                |       |                             |       |   |   |
| Net income                                                                              |       | $                                | 25,783     |   | $ | 20,405 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:      |       |                             |       |   |   |
| Depreciation of property and equipment                                                  |       | 1,881                            |       | 940 |   |
| Amortization of intangible assets                                                       |       | 740                              |       | — |   |
| Amortization of debt issuance costs                                                     |       | 67                               |       | 63 |   |
| Stock-based compensation                                                                |       | 1,912                            |       | 1,611 |   |
| Excess tax benefit from stock option  exercises and disqualifying disposition of shares |       | (1,180                           | )          | (518 | ) |
| Deferred income tax benefit                                                             |       | (343                             | )          | (482 | ) |
| Changes in assets and liabilities:                                                      |       |                             |       |   |   |
| Inventories                                                                             |       | (9,926                           | )          | 2,739 |   |
| Accounts receivable                                                                     |       | 5,523                            |       | (6,962 | ) |
| Income taxes                                                                            |       | 588                              |       | 7,182 |   |
| Prepaid expenses and other current assets                                               |       | 224                              |       | 797 |   |
| Other assets                                                                            |       | 9                                |       | (746 | ) |
| Accounts payable and accrued liabilities                                                |       | (4,080                           | )          | (6,875 | ) |
| Other liabilities                                                                       |       | 101                              |       | (398 | ) |
| Net cash provided by operating activities                                               |       | 21,299                           |       | 17,756 |   |
| ** **                                                                              | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Investing activities**                                                                |       |                             |       |   |   |
| Purchase of property and equipment                                                      |       | (5,532                           | )          | (3,870 | ) |
| Proceeds from sale of property and  equipment                                           |       | 1,299                            |       | — |   |
| Net cash used in investing activities                                                   |       | (4,233                           | )          | (3,870 | ) |
|                                                                                    |       |                             |       |   |   |
| **Financing activities**                                                                |       |                             |       |   |   |
| Repayments on First Lien Term Loans                                                     |       | (13,580                          | )          | (14,263 | ) |
| Proceeds from issuance of common stock in  public offering                              |       | —                           |       | 18,995 |   |
| Payment of transaction costs in connection  with the public offering                    |       | —                           |       | (891 | ) |
| Excess tax benefit from stock option  exercises and disqualifying disposition of shares |       | 1,180                            |       | 518 |   |
| Exercise of stock options                                                               |       | 940                              |       | 33 |   |
| Net cash (used in) provided by financing  activities                                    |       | (11,460                          | )          | 4,392 |   |
| Effect of foreign currency exchange rate  changes on cash                               |       | (61                              | )          | — |   |
| Net increase in cash and cash equivalents                                               |       | 5,545                            |       | 18,278 |   |
| Cash and cash equivalents, beginning of  period                                         |       | 32,117                           |       | 20,875 |   |
| Cash and cash equivalents, end of period                                                |       | $                                | 37,662     |   | $ | 39,153 |   |
|                                                                                    |       |                             |       |   |   |
| **Supplemental disclosure of cash flow  information**                                   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Cash paid for interest                                                                  |       | $                                | 4,300      |   | $ | 6,596 |   |
| Cash paid for income taxes                                                              |       | $                                | 14,895     |   | $ | 7,858 |   |

 

See accompanying notes.

 

5

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**BAREESCENTUALS, INC.**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**1.    Business**

 

Bare Escentuals, Inc.,together with its subsidiaries (“Bare Escentuals” or the “Company”),develops, markets, and sells branded cosmetics, skin care and body careproducts under the *bareMinerals,bareVitamins, RareMinerals**, i.d.,*andnamesake *Bare Escentuals* brandsand professional skin care products under the *mdformulations* brand. The *bareMinerals*cosmetics, particularly the core foundation products which aremineral-based, offer a highly differentiated, healthy alternative toconventional cosmetics. The Company uses a multi-channel distribution modelconsisting of infomercials; home shopping television on QVC; premium wholesale,including Sephora, Ulta and department stores; company-owned boutiques; spasand salons and online shopping. The Company also sells products internationallyin the UK, Japan, France and Germany as well as in smaller internationalmarkets via distributors.

 

**2.     Summary of Significant Accounting Policies**

 

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

 

***Unaudited InterimFinancial Information***

 

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

 

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

 

***Fiscal Quarter***

 

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

 

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***Concentration of Credit Riskand Credit Risk Evaluation***

 

Financial instrumentsthat potentially subject the Company to concentrations of credit risk consistprimarily of cash and cash equivalents and accounts receivable. Cash and cashequivalents are held by or invested in various domestic financial institutionswith high credit standing. Management believes that these financialinstitutions are financially sound and, accordingly, minimal credit risk existswith respect to these balances.

 

Sales generated throughcredit card purchases for the three months ended March 30, 2008 and April 1,2007 were approximately 45.6% and 49.0% of total net sales, respectively. TheCompany uses third parties to collect its credit card receivables and, as aconsequence, believes that its credit risks related to these channels ofdistribution are limited. The Company performs ongoing credit evaluations ofits wholesale customers not paying by credit card and acquires credit insurancefor certain international distributor customers. Generally, the Company doesnot require collateral. An allowance for doubtful accounts is determined withrespect to those amounts that the Company has determined to be doubtful ofcollection using specific identification of doubtful accounts and an aging ofreceivables analysis based on invoice due dates. Actual collection losses maydiffer from management’s estimates, and such differences could be material tothe Company’s consolidated financial position, results of operations, and cashflows. Uncollectible receivables are written off against the allowance fordoubtful accounts when all efforts to collect them have been exhausted, andrecoveries are recognized when they are received. Generally, accounts receivableare past due after 30 days of an invoice date unless special payment termsare provided.

 

The table below setsforth the percentage of consolidated accounts receivable, net for customers whorepresented 10% or more of consolidated accounts receivable, which are includedin the wholesale segment:

 
| ** ** | ** ** | **March 30,  2008** | ** ** | **December 30,  2007** | ** ** |
|------------|------------|--------------------------|------------|-----------------------------|------------|
| Customer A |       | 16                       | %          | 15                          | %          |
| Customer B |       | 21                       | %          | 17                          | %          |
| Customer C |       | 32                       | %          | 42                          | %          |

 

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

 
| ** ** | ** ** | **Three months ended** | ** ** |
|------------|------------|----------------------------------|------------|
| ** ** | ** ** | **March 30,  2008**         | ** ** | **April 1,  2007** | ** ** |
| Customer A |       | 13                               | %          | 12 | % |
| Customer B |       | 13                               | %          | 15 | % |
| Customer C |       | 16                               | %          | 15 | % |

 

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

 

***DerivativeFinancial Instruments***

 

The Company accounts for derivative financialinstruments in accordance with Statement of Financial Accounting Standards No. 133,*Accounting for Derivative Instruments and HedgingActivities*, as amended (“SFAS No. 133”), which establishesaccounting and reporting standards for derivative instruments, includingcertain derivative instruments embedded in other contracts, and for hedgingactivities.  SFAS No. 133 also requires the recognition of allderivative instruments as either assets or liabilities on the balance sheet andthat they be measured at fair value.

 

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

 

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

 

7

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

 

***Earnings per Share***

 

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

 
| ** **                                                                    | ** ** | **Three months ended** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                    | ** ** | **March 30,  2008**         | ** ** | **April 1,  2007** | ** ** |
| Numerator:                                                                    |       |                             |       |   |   |
| Net income                                                                    |       | $25,783                          |       | $20,405 |   |
|                                                                          |       |                             |       |   |   |
| Denominator:                                                                  |       |                             |       |   |   |
| Weighted average common shares used in per  share calculations — basic   |       | 91,260                           |       | 89,428 |   |
| Add: Common stock equivalents from exercise  of stock options                 |       | 2,017                            |       | 3,204 |   |
| Weighted-average  common shares used in per share calculations — diluted |       | 93,277                           |       | 92,632 |   |
| Net income per share                                                          |       |                             |       |   |   |
| Basic                                                                         |       | $0.28                            |       | $0.23 |   |
| Diluted                                                                       |       | $0.28                            |       | $0.22 |   |

 

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

 

***Comprehensive Income***

 

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

 

***Recent Accounting Pronouncements***

 

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

 

8

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In February 2007,the FASB issued SFAS No. 159, *FairValue Option for Financial Assets and Financial Liabilities.*Statement 159 permits entities to choose to measure many financial instruments,and certain other items, at fair value. Statement 159 also establishespresentation and disclosure requirements designed to facilitate comparisonsbetween entities that choose different measurement attributes for similar typesof assets and liabilities. The provisions of Statement 159 are effective forfiscal years beginning after November 15, 2007. The Company adoptedStatement 159 on December 31, 2007. The Company did not elect the fairvalue option for any of its eligible financial assets or liabilities.

 

In December 2007,the SEC issued Staff Accounting Bulletin No. 110 (“SAB 110”).SAB 110 amends and replaces Question 6 of Section D.2 of Topic 14, “Share-BasedPayment,” of the Staff Accounting Bulletin series. Question 6 of Section D.2of Topic 14 expresses the views of the staff regarding the use of the “simplified”method in developing an estimate of the expected term of “plain vanilla” shareoptions and allows usage of the “simplified” method for share option grantsprior to December 31, 2007. SAB 110 allows public companies which donot have historically sufficient experience to provide a reasonable estimate tocontinue to use the “simplified” method for estimating the expected term of “plainvanilla” share option grants after December 31, 2007. The Company adoptedSAB 110 on December 31, 2007. The Company is continuing to use the “simplified”method until it has enough historical experience to provide a reasonableestimate of expected term in accordance with SAB 110.

 

 In December 2007,the FASB issued SFAS No. 141 (Revised 2007), *Business Combinations.* Statement 141-R will significantlychange the accounting for future business combinations after adoption.Statement 141-R establishes principles and requirements for how the acquirer ofa business recognizes and measures in its financial statements the identifiableassets acquired, the liabilities assumed, and any non-controlling interest inthe acquired business. Statement 141-R also provides guidance for recognizingand measuring the goodwill acquired in the business combination and determineswhat information to disclose to enable users of the financial statements toevaluate the nature and financial effects of the business combination.Statement 141-R is effective for fiscal years, and interim periods within thosefiscal years, beginning on or after December 15, 2008. Earlier adoption isprohibited. The Company will adopt Statement 141-R beginning in its fiscal yearending January 3, 2010, as required. The Company is still evaluating the impact Statement 141-R may have onits financial position or results of operations.

 

InMarch 2008, the FASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities*, an amendment ofFASB Statement No. 133.  Statement161 amends and expands the disclosure requirements of Statement 133 with theintent to provide users of financial statements with an enhanced understandingof: 1) How and why an entity uses derivative instruments; 2) How derivativeinstruments and related hedged items are accounted for under Statement 133 andits related interpretations and 3) How derivative instruments and relatedhedged items affect an entity’s financial position, financial performance andcash flows. This statement is effective for financial statements issued forfiscal years and interim periods beginning after November 15, 2008, withearly application encouraged. The Company will adopt Statement 161 in itsfiscal year ending January 3, 2010, as required.  The Company has not completed its evaluationof Statement 161 but it will not impact its financial position or results ofoperations as it is disclosure-only in nature.

 

**3.****              Acquisition**

 

On April 3,2007, the Company completed its acquisition of U.K.-based CosmeceuticalsLimited (“Cosmeceuticals”), which distributes Bare Escentuals’ *bareMinerals*, *md formulations* and *MDForte* brands primarily to spas and salons and QVC U.K.  Theacquired entity has been renamed Bare Escentuals UK Ltd.  The Company’sprimary reason for the acquisition was to reacquire its distribution rights andto expand its market share.  Theconsideration for the purchase was cash of $23.1 million, comprised of$22.4 million in cash consideration and $0.7 million of transactioncosts. The Company’s consolidated financial statements include the operatingresults of the business acquired from the date of acquisition. Pro formaresults of operations have not been presented because the effect of theacquisition was not material.

 

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

 

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

 

9

----

 

# **4.****              Inventories**

#  

Inventories consisted ofthe following (in thousands):

 
| ** **                   | ** ** | **March 30,  2008** | ** ** | **December 30,  2007** | ** ** |
|------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw materials and components |       | $                        | 2,667      |                        | $          | 3,007 |   |
| Finished goods               |       | 66,902                   |       | 56,636                      |       |
|                         |       | $                        | 69,569     |                        | $          | 59,643 |   |

 

# **5.****              Propertyand Equipment, Net**

#  

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

 
| ** **                                | ** ** | **March 30,  2008** | ** ** | **December 30,  2007** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Furniture and equipment                   |       | $                        | 9,783      |                        | $          | 8,719 |   |
| Computers and software                    |       | 14,922                   |       | 13,890                      |       |
| Leasehold improvements                    |       | 28,341                   |       | 28,291                      |       |
|                                      |       | 53,046                   |       | 50,900                      |       |
| Accumulated depreciation and amortization |       | (11,250                  | )          | (9,369                      | )          |
|                                      |       | 41,796                   |       | 41,531                      |       |
| Construction-in-progress                  |       | 4,432                    |       | 2,345                       |       |
| Property and equipment, net               |       | $                        | 46,228     |                        | $          | 43,876 |   |

 

# **6.****              IntangibleAssets, Net**

#  

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

 
| ** **                     | ** ** | **March 30,  2008** | ** ** | **December 30,  2007** | ** ** |
|--------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Customer relationships         |       | $                        | 8,000      |                        | $          | 8,000 |   |
| Trademarks                     |       | 3,233                    |       | 3,233                       |       |
| Domestic customer base         |       | 939                      |       | 939                         |       |
| International distributor base |       | 820                      |       | 820                         |       |
| Non-compete agreements         |       | 900                      |       | 900                         |       |
|                           |       | 13,892                   |       | 13,892                      |       |
| Accumulated amortization       |       | (4,724                   | )          | (3,984                      | )          |
| Intangible assets, net         |       | $                        | 9,168      |                        | $          | 9,908 |   |

 

# **7.****              OtherAssets**

#  

Other assets consisted ofthe following (in thousands):

 
| ** **                                                                                                                              | ** ** | **March 30,  2008** | ** ** | **December 30,  2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Debt issuance costs, net of accumulated  amortization of $405 and $338 at March 30, 2008 and December 30,  2007, respectively |       | $                        | 713        |                        | $          | 780 |   |
| Other assets                                                                                                                            |       | 1,991                    |       | 2,000                       |       |
|                                                                                                                                    |       | $                        | 2,704      |                        | $          | 2,780 |   |

 

10

----

 

# **8.****              AccruedLiabilities**

#  

Accrued liabilitiesconsisted of the following (in thousands):

 
| ** **                                 | ** ** | **March 30,  2008** | ** ** | **December 30,  2007** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Interest                                   |       | $                        | 822        |                        | $          | 971 |   |
| Employee compensation and benefits         |       | 5,904                    |       | 9,394                       |       |
| Purchase price for acquisition             |       | —                   |       | 2,526                       |       |
| Gift certificates and customer liabilities |       | 2,038                    |       | 2,500                       |       |
| Sales taxes and local business taxes       |       | 2,011                    |       | 2,434                       |       |
| Royalties                                  |       | 2,184                    |       | 2,146                       |       |
| Other                                      |       | 4,737                    |       | 5,170                       |       |
|                                       |       | $                        | 17,696     |                        | $          | 25,141 |   |

 

# **9.****              RevolvingLines of Credit**

#  

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

 

# **10.****       Long-TermDebt**

#  

Long-term debt consistedof the following (in thousands):

 
| ** **                                    | ** ** | **March 30,  2008** | ** ** | **December 30,  2007** | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| First Lien Term Loan                          |       | $                        | 251,353    |                        | $          | 264,933 |   |
| Less current portion                          |       | (17,216                  | )          | (17,901                     | )          |
| Total long-term debt, net of current  portion |       | $                        | 234,137    |                        | $          | 247,032 |   |

 

## **First Lien Term Loans**

##  

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

 

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

 

**ScheduledMaturities of Long-Term Debt**

 

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

 
| Year ending:                                    | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------|------------|
| Remainder of the year ending  December 28, 2008 |       | $          | 13,773     |   |
| January 3, 2010                                 |       | 13,773     |       |
| January 2, 2011                                 |       | 13,773     |       |
| January 1, 2012                                 |       | 158,386    |       |
| December 30, 2012                               |       | 51,648     |       |
|                                                 |       | $          | 251,353    |   |

 

11

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# **11.****  Commitmentsand Contingencies**

#  

## ***Lease Commitments***

##  

The Company leases retailboutiques, distribution facilities, office space and certain office equipmentunder noncancelable operating leases with various expiration dates through January 2019.Additionally, the Company subleases certain real property to third parties.Portions of these payments are denominated in foreign currencies and weretranslated in the tables below based on their respective U.S. dollar exchangerates at March 30, 2008. These future payments are subject to foreigncurrency exchange rate risk. The future minimum annual payments and anticipatedsublease income under such leases in effect at March 30, 2008, were asfollows (in thousands):

 
| ** **                                           | ** ** | **Minimum  Rental  Payments** | ** ** | **Sublease  Rental  Income** | ** ** | **Net  Minimum  Lease  Payments** | ** ** |
|------------------------------------------------------|------------|-------------------------------|------------|------------------------------|------------|-----------------------------------|------------|
| Year ending:                                         |       |                          |       |                         |       |                              |       |
| Remainder of the year ending  December 28, 2008 |       | $                             | 6,240      |                         | $          | 22                                |       | $ | 6,218 |   |
| January 3, 2010                                 |       | 10,672                        |       | 30                           |       | 10,642                            |       |
| January 2, 2011                                 |       | 10,340                        |       | 30                           |       | 10,310                            |       |
| January 1, 2012                                 |       | 10,105                        |       | 30                           |       | 10,075                            |       |
| December 30, 2012                               |       | 10,261                        |       | 1                            |       | 10,260                            |       |
| Thereafter                                           |       | 41,795                        |       | —                       |       | 41,795                            |       |
|                                                 |       | $                             | 89,413     |                         | $          | 113                               |       | $ | 89,300 |   |

 

Many of the Company’sretail boutique leases require additional contingent rents when certain salesvolumes are reached. Total rent expense was $4,421,000 and $2,551,000 for thethree months ended March 30, 2008 and April 1, 2007,respectively.  Total rent expenseincluded contingent rentals of $556,000 and $531,000 for the three months endedMarch 30, 2008 and April 1, 2007, respectively.  Several leases entered into by the Companyinclude options that may extend the lease term beyond the initial commitmentperiod, subject to terms agreed to at lease inceptions. As of March 30,2008, under the terms of its corporate office lease, the Company hadoutstanding an irrevocable standby letter of credit of $100,000 to the lessorfor the term of the lease.

 

## ***Royalty Agreements***

##  

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

 

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

 

***Contingencies***

 

The Company is involvedin various legal and administrative proceedings and claims arising in theordinary course of its business. The ultimate resolution of such claims wouldnot, in the opinion of management, have a material effect on the Company’sfinancial position or results of operation.

 

12

----

 

# **12.****  FairValue Measurements**

#  

The Company adopted Statement 157 on December 31,2007 for financial assets and liabilities. The Company also adopted Statement159 in which entities are permitted to choose to measure many financialinstruments and certain other items at fair value. The Company did not electthe fair value option for any of its eligible financial assets or liabilitiesunder FAS 159.

 

SFASNo. 157 established a three-tier hierarchy for fair value measurements,which prioritizes the inputs used in measuring fair value as follows:

 

·                  Level1 – observable inputs such as quoted prices for identical instruments in activemarkets.

·                  Level2 – inputs other than quoted prices in active markets that are observableeither directly or indirectly through corroboration with observable market data.

·                  Level3 – unobservable inputs in which there is little or no market data, which wouldrequire the Company to develop its own assumptions.

 

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

 

Thefollowing table presents the Company’s financial assets and liabilitiesmeasured at fair value on a recurring basis as of March 30, 2008 subjectto the disclosure requirements of Statement 157 (in thousands):

 
| ** **            | ** ** | ** ** | ** ** | **Fair Value Measurements Using** | ** ** |
|-----------------------|------------|------------|------------|--------------------------------------------------|------------|
| ** **            | ** ** | **Total**  | ** ** | **Level 1**                                 | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                  |       |       |       |                                             |       |   |   |   |   |
| Other assets:         |       |       |       |                                             |       |   |   |   |   |
| Deferred compensation |       | $          | 1,443      |                                             | $          | — |   | $ | 1,443 |   | $ | — |   |
|                  |       |       |       |                                             |       |   |   |   |   |
| Other liabilities:    |       |       |       |                                             |       |   |   |   |   |
| Interest rate swap    |       | $          | 4,986      |                                             | $          | — |   | $ | 4,986 |   | $ | — |   |
| Deferred compensation |       | 1,340      |       | —                                           |       | 1,340 |   | — |   |
| Total liabilities     |       | $          | 6,326      |                                             | $          | — |   | $ | 6,326 |   | $ | — |   |

#  

# **13.****  IncomeTaxes**

#  

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation 48 (“FIN48”), *Accounting for Uncertainty in IncomeTaxes*. FIN 48 clarifies the accounting for uncertainty in incometaxes recognized in accordance with SFAS 109, *Accountingfor Income Taxes*. FIN 48 prescribes a comprehensive model for how acompany should recognize, measure, present and disclose in its financialstatements uncertain tax positions that the Company has taken or expects totake on a tax return.  The Companyadopted FIN 48 on January 1, 2007.

 

As of March 30, 2008, thetotal amount of net unrecognized tax benefits was $4,728,000.  This amount includes $1,690,000 of netunrecognized tax benefits that, if recognized, would affect the effective taxrate.  The Company accrues interestrelated to unrecognized tax benefits in its provision for income taxes.  As of March 30, 2008, the Company hadapproximately $463,000 of accrued interest, net of tax, related to uncertaintax positions.

 

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

 

13

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

 

# **14.****  Stock-BasedEmployee Compensation Plans**

#  

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

 

## **2004 Equity Incentive Plan**

##  

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

 

In conjunction with theadoption of the 2006 Equity Incentive Plan in September 2006, noadditional options are permitted to be granted under the 2004 Plan. Inaddition, any outstanding options cancelled under the 2004 Plan will becomeavailable to grant under the 2006 Equity Incentive Plan.

 

A summary of activityunder the 2004 Plan is set forth below.

 
| ** **                        | ** ** | ** **                             | ** ** | **Options Outstanding** | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **Options  Available  for Grant** | ** ** | **Number of  Shares**   | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| Balance at December 30, 2007 |       | —                                 |       | 4,364,136                    |       | $ | 2.56 |   |
| Exercised                         |       | —                                 |       | (182,413                     | )          | 5.11 |   |
| Canceled                          |       | 70,792                                 |       | (70,792                      | )          | 4.75 |   |
| Rolled over to 2006 Plan          |       | (70,792                                | )          | —                       |       | — |   |
| Balance at March 30, 2008    |       | —                                 |       | 4,110,931                    |       | $ | 2.41 |   |

 

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

#  

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

 

**2006 Equity Incentive Plan**

 

On September 12, 2006, the Company’sstockholders approved the 2006 Equity Incentive Award Plan (the “2006 Plan”)for executives, directors, employees and consultants of the Company. A total of4,500,000 shares of the Company’s Common Stock have been reserved for issuanceunder the 2006 Plan. Awards are granted with an exercise price equal to theclosing market price of the Company’s Common Stock at the date of grant. Thoseawards generally vest over a period of four or five years from the date ofgrant and have a maximum term of ten years.

 

14

----

 

A summary of activityunder the 2006 Plan is set forth below:

 
| ** **                        | ** ** | ** **                             | ** ** | **Options Outstanding** | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **Options  Available  for Grant** | ** ** | **Number of  Shares**   | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| Balance at December 30, 2007 |       | 4,934,757                              |       | 350,800                      |       | $ | 29.53 |   |
| Rolled over from 2004 Plan        |       | 70,792                                 |       | —                       |       | — |   |
| Granted                           |       | (216,150                               | )          | 216,150                      |       | 23.82 |   |
| Exercised                         |       | —                                 |       | (350                         | )          | 22.00 |   |
| Canceled                          |       | 23,800                                 |       | (23,800                      | )          | 33.11 |   |
| Balance at March 30, 2008    |       | 4,813,199                              |       | 542,800                      |       | $ | 27.11 |   |

 

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

 

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

 

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

 

**15.****          Segmentand Geographic Information**

 

Operating segments are defined as components of an enterprise engagingin business activities about where separate financial information is availablethat is evaluated regularly by the Chief Operating Decision Maker (“CODM”) indeciding how to allocate resources and assessing performance. The Company’sChief Executive Officer has been identified as the CODM as defined by Statement131, *Disclosures about Segments of anEnterprise and Related Information*. The Company has determined thatit operates in two business segments: Retail with sales to end users, andWholesale with sales to resellers. These reportable segments are strategicbusiness units that are managed separately based on the fundamental differencesin their operations. The Retail segment consists of sales directly to end usersthrough Company-owned boutiques and infomercials. The Wholesale segmentconsists of sales to resellers, home shopping television, specialty beautyretailers, spas and salons, and international distributors. The following tablepresents certain financial information for each segment. Operating income isthe gross margin of the segment less direct expenses of the segment. Some directexpenses, such as media and advertising spend, do impact the performance of theother segment, but these expenses are recorded in the segment they directlyrelate to and are not allocated to each segment. The Corporate column includesunallocated selling, general and administrative expenses, depreciation andamortization and stock-based compensation expenses. Corporate selling, generaland administrative expenses include headquarters facilities costs, distributioncenter costs, product development costs, corporate headcount costs and othercorporate costs, including information technology, finance, accounting, legaland human resources costs.  These items,while often times related to the operations of a segment, are not considered bysegment operating management and the CODM in assessing segment performance.

 
| ** **                                 | ** ** | **Retail** | ** ** | **Wholesale** | ** ** | **Corporate** | ** ** | **Total**  | ** ** |
|--------------------------------------------|------------|------------|------------|---------------|------------|---------------|------------|------------|------------|
| **Three Months ended March 30, 2008** | ** ** | ** ** | ** ** | ** **    | ** ** | ** **    | ** ** | ** ** | ** ** |
| Sales, net                                 |       | $          | 56,409     |          | $          | 83,949        |       | $          | —     |   | $ | 140,358 |   |
| Cost of goods sold                         |       | 11,253     |       | 27,404        |       | —        |       | 38,657     |       |
| Gross profit                               |       | 45,156     |       | 56,545        |       | —        |       | 101,701    |       |
| Operating expenses:                        |       |       |       |          |       |          |       |       |       |
| Selling, general and administrative        |       | 24,253     |       | 3,881         |       | 22,330        |       | 50,464     |       |
| Depreciation and amortization              |       | 553        |       | 97            |       | 1,971         |       | 2,621      |       |
| Stock-based compensation                   |       | —     |       | —        |       | 1,912         |       | 1,912      |       |
| Total expenses                             |       | 24,806     |       | 3,978         |       | 26,213        |       | 54,997     |       |
| Operating income (loss)                    |       | 20,350     |       | 52,567        |       | (26,213       | )          | 46,704     |       |
| Interest expense                           |       |       |       |          |       |          |       | (4,644     | )          |
| Other income, net                          |       |       |       |          |       |          |       | 707        |       |
| Income before provision for income taxes   |       |       |       |          |       |          |       | 42,767     |       |
| Provision for income taxes                 |       |       |       |          |       |          |       | 16,984     |       |
| Net income                                 |       |       |       |          |       |          |       | $          | 25,783     |   |
|                                            |            |            |            |               |            |               |            |            |            |  |  |  |  |

 

15

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| ** **                                | ** ** | **Retail** | ** ** | **Wholesale** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|------------|------------|---------------|------------|---------------|------------|-----------|------------|
| **Three Months ended April 1, 2007** |       |       |       |          |       |          |       |      |       |
| Sales, net                                |       | $          | 51,408     |          | $          | 64,205        |       | $         | —     |   | $ | 115,613 |   |
| Cost of goods sold                        |       | 10,912     |       | 22,538        |       | —        |       | 33,450    |       |
| Gross profit                              |       | 40,496     |       | 41,667        |       | —        |       | 82,163    |       |
| Operating expenses:                       |       |       |       |          |       |          |       |      |       |
| Selling, general and administrative       |       | 22,064     |       | 3,031         |       | 14,090        |       | 39,185    |       |
| Depreciation and amortization             |       | 365        |       | 15            |       | 560           |       | 940       |       |
| Stock-based compensation                  |       | —     |       | —        |       | 1,611         |       | 1,611     |       |
| Total expenses                            |       | 22,429     |       | 3,046         |       | 16,261        |       | 41,736    |       |
| Operating income (loss)                   |       | 18,067     |       | 38,621        |       | (16,261       | )          | 40,427    |       |
| Interest expense                          |       |       |       |          |       |          |       | (6,811    | )          |
| Other income, net                         |       |       |       |          |       |          |       | 341       |       |
| Income before provision for income taxes  |       |       |       |          |       |          |       | 33,957    |       |
| Provision for income taxes                |       |       |       |          |       |          |       | 13,552    |       |
| Net income                                |       |       |       |          |       |          |       | $         | 20,405     |   |
|                                           |            |            |            |               |            |               |            |           |            |  |  |  |  |

 

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

 
| ** ** | ** ** | **March 30,  2008** | ** ** | **December 30,  2007** | ** ** |
|------------|------------|--------------------------|------------|-----------------------------|------------|
| Retail     |       | $                        | 20,499     |                        | $          | 17,327 |   |
| Wholesale  |       | 1,021                    |       | 925                         |       |
| Corporate  |       | 25,256                   |       | 26,201                      |       |
|       |       | $                        | 46,776     |                        | $          | 44,453 |   |

 

Long-lived assets allocated to the retail segment consist of fixedassets and deposits for retail stores. Long-lived assets allocated to thewholesale segment consist of fixed assets located at a wholesale customer.Long-lived assets in the corporate segment consist of fixed assets, toolingcosts and deposits related to the Company’s corporate offices and distributioncenters.

 

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

 
| ** **    | ** ** | **March 30,  2008** | ** ** | **December 30,  2007** | ** ** |
|---------------|------------|--------------------------|------------|-----------------------------|------------|
| United States |       | $                        | 45,934     |                        | $          | 42,191 |   |
| International |       | 842                      |       | 2,262                       |       |
|          |       | $                        | 46,776     |                        | $          | 44,453 |   |

 

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

 
| ** **    | ** ** | **Three months ended** | ** ** |
|---------------|------------|----------------------------------|------------|
| ** **    | ** ** | **March 30,  2008**         | ** ** | **April 1,  2007** | ** ** |
| United States |       | $                                | 126,290    |   | $ | 107,265 |   |
| International |       | 14,068                           |       | 8,348 |   |
| Sales, net    |       | $                                | 140,358    |   | $ | 115,613 |   |

 

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**ITEM2.****     MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Forward-Looking Statements**

 

This section and other partsof this Quarterly Report on Form 10-Q contain forward-looking statementsthat involve risks and uncertainties. In some cases, forward-looking statementscan be identified by words such as “anticipates,” “expects,” “believes,” “plans,”“predicts,” and similar terms. Such forward-looking statements are based oncurrent expectations, estimates and projections about our industry, management’sbeliefs and assumptions made by management. Forward-looking statements are notguarantees of future performance and our actual results may differ materiallyfrom the results discussed below and in the forward-looking statements. Factorsthat might cause such differences include, but are not limited to thosediscussed in Part II, Item 1A, “Risk Factors” below and Item 1A of ourAnnual Report on Form 10-K for the year ended December 30, 2007 filedwith the SEC on February 28, 2008. The following discussion should be readin conjunction with the Company’s consolidated financial statements and relatednotes hereto included elsewhere in this Quarterly Report on Form 10-Q.Except as required by law, we expressly disclaim any obligation to updatepublicly any forward-looking statements, whether as result of new information,future events or otherwise.

 

**Executive Overview**

 

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

 

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

 

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

 

•                  Our retail segment, which ischaracterized by sales directly to end users, consists of our infomercials,which include sales through our websites *www.bareminerals.com,*and company-owned boutiques, which include sales through our websites *www.bareescentuals.com*and*www.mdformulations.com.*We believe that our infomercialbusiness helps us to build brand awareness, communicate the benefits of ourcore products and establish a base of recurring revenue because a substantialpercentage of new consumers participate in our continuity program. Ourcompany-owned boutiques enhance our ability to build strong consumerrelationships and promote additional product use through personaldemonstrations and product consultations.

 

•                  Our wholesale segment, which ischaracterized by sales to resellers, includes premium wholesale; home shoppingtelevision; spas and salons; and international distributors. Our sales throughhome shopping television help us to build brand awareness, educate consumersthrough live product demonstrationsand develop close connections with our consumers. We also sell to retailersthat we believe feature our products in settings that support and reinforce ourbrand image and provide a premium in-store experience. Similarly, our spa andsalon customers provide an informative and treatment-focused environment inwhich aestheticians and spa professionals can communicate the benefits of ourproducts. Finally, we sell our products in a number of major internationalmarkets including the UK, Japan, France and Germany as well as into othercountries through a network of third-party distributors.

 

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

 

17

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**Basis of Presentation**

 

We recognizerevenue in accordance with the requirements of Staff Accounting Bulletin No. 104*Revenue Recognition*, and otherapplicable revenue recognition guidance and interpretations. The Companyrecords revenue when all four of the following criteria are met: (i) persuasiveevidence that an arrangement exists; (ii) delivery of the products and/orservices has occurred; (iii) the selling price is fixed or determinable;and (iv) collectibility is reasonably assured. Revenue is recognized whenmerchandise is shipped from a warehouse to wholesale customers, infomercialcustomers and online shopping customers or when purchased by consumers atcompany-owned boutiques, each net of estimated returns (except in the case ofour consignment sales). For our consignment sales, we recognize sales, net ofestimated returns, upon shipment from our consignment partners to theircustomers. We recognize postage and handling charges we bill to customers asrevenue upon shipment of the related merchandise.

 

Our cost of goods soldconsists of the costs associated with the sourcing of our products, includingthe cost of the product and associated manufacturing costs, inbound freightcharges, royalties and internal transfer costs. Additionally, cost of goodssold includes postage and handling costs incurred upon shipment of merchandise.Our gross profit is dependent upon a variety of factors, including changes inthe relative sales mix across our business segments, changes in the mix ofproducts sold and fluctuations in material costs. Our gross margins differsignificantly between product lines and our business segments, with sales inour retail segment generally yielding higher gross margins than our wholesalesegment. These factors may cause gross profit and margins to fluctuate fromquarter to quarter. We anticipate that our cost of goods sold will increase inabsolute dollars as we increase our total sales but will remain generallyconsistent with historical periods on an annual basis as a percentage of netsales depending on the mix of sales among our distribution channels.

 

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

 

Depreciation andamortization includes charges for the depreciation of property and equipmentand the amortization of intangible assets. We anticipate that our depreciationand amortization expense will increase in absolute dollars as we continue toopen new boutiques, invest in information systems and amortize intangibleassets in connection with our acquisition. We record our depreciation and amortization as a separateline item in our statement of operations because all of this expense relates toselling, general and administrative costs.

 

Stock-based compensationincludes charges incurred in recognition of compensation expense associatedwith grants of stock options and stock purchases. We record our stock-basedcompensation on a separate operating expense line item in our statement ofoperations due to the fact that, to date, all of our stock-based awards havebeen made to employees whose salaries are classified as selling, general and administrativecosts. We anticipate that our stock-based compensation expense will increase inabsolute dollars as we continue to grant additional options in the future.

 

Interest expense includesinterest costs associated with our credit facilities and the amortization ofdeferred financing costs associated with these credit facilities. We anticipatethat our interest expense in the future will decrease in absolute terms and asa percentage of net sales as we continue to make scheduled repayments of our outstandingindebtedness.

 

18

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Provision for incometaxes depends on the statutory tax rates in the countries where we sell ourproducts. Historically, we have only been subject to taxation in the UnitedStates, but as we have expanded our international operations we have becomesubject to foreign taxation at varying statutory rates. Therefore, oureffective tax rate could fluctuate accordingly. For fiscal 2008, we anticipatethat our effective tax rate will be approximately 40% of our income beforeprovision for income taxes.

 

**Results of Operations**

 

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

 

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                               | ** ** | **Three months ended**                      | ** ** |
|------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                               | ** ** | **March 30,  2008**                              | ** ** | **April 1,  2007** | ** ** |
| ** **                               | ** ** | **(in thousands, except percentages)** | ** ** |
| Sales, net                               |       | $                                                     | 140,358    |   | 100.0 | % | $ | 115,613 |   | 100.0 | % |
| Cost of goods sold                       |       | 38,657                                                |       | 27.5 |   | 33,450 |   | 28.9 |   |
| Gross profit                             |       | 101,701                                               |       | 72.5 |   | 82,163 |   | 71.1 |   |
| Expenses:                                |       |                                                  |       |   |   |   |   |   |   |
| Selling, general and administrative      |       | 50,464                                                |       | 35.9 |   | 39,185 |   | 33.9 |   |
| Depreciation and amortization            |       | 2,621                                                 |       | 1.9 |   | 940 |   | 0.8 |   |
| Stock-based compensation                 |       | 1,912                                                 |       | 1.4 |   | 1,611 |   | 1.4 |   |
| Operating income                         |       | 46,704                                                |       | 33.3 |   | 40,427 |   | 35.0 |   |
| Interest expense                         |       | (4,644                                                | )          | (3.3 | ) | (6,811 | ) | (5.9 | ) |
| Other income, net                        |       | 707                                                   |       | 0.5 |   | 341 |   | 0.3 |   |
| Income before provision for income taxes |       | 42,767                                                |       | 30.5 |   | 33,957 |   | 29.4 |   |
| Provision for income taxes               |       | 16,984                                                |       | 12.1 |   | 13,552 |   | 11.7 |   |
| Net income                               |       | $                                                     | 25,783     |   | 18.4 | % | $ | 20,405 |   | 17.7 | % |

 

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

 
| ** **                 | ** ** | **Three months ended**                      | ** ** |
|----------------------------|------------|-------------------------------------------------------|------------|
| ** **                 | ** ** | **March 30,  2008**                              | ** ** | **April 1,  2007** | ** ** |
| ** **                 | ** ** | **(in thousands, except percentages)** | ** ** |
| Retail                     |       | $                                                     | 30,679     |   | 21.9 | % | $ | 34,274 |   | 29.7 | % |
| Infomercial                |       | 25,730                                                |       | 18.3 |   | 17,134 |   | 14.8 |   |
| Boutiques                  |       | 56,409                                                |       | 40.2 |   | 51,408 |   | 44.5 |   |
| Total retail               |       |                                                  |       |   |   |   |   |   |   |
| Wholesale                  |       | 44,974                                                |       | 32.0 |   | 35,580 |   | 30.8 |   |
| Premium wholesale          |       | 17,877                                                |       | 12.7 |   | 13,694 |   | 11.8 |   |
| Home shopping television   |       | 16,647                                                |       | 11.9 |   | 9,959 |   | 8.6 |   |
| Spas and salons            |       | 4,451                                                 |       | 3.2 |   | 4,972 |   | 4.3 |   |
| International distributors |       | 83,949                                                |       | 59.8 |   | 64,205 |   | 55.5 |   |
| Total wholesale            |       | $                                                     | 140,358    |   | 100.0 | % | $ | 115,613 |   | 100.0 | % |
| Sales, net                 |       |                                                  |       |   |   |   |   |   |   |
|                            |            |                                                       |            |  |  |  |  |  |  |  |  |  |

 

19

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

 
| ** **                 | ** ** | **Three months ended**                      | ** ** |
|----------------------------|------------|-------------------------------------------------------|------------|
| ** **                 | ** ** | **March 30,  2008**                              | ** ** | **April 1,  2007** | ** ** |
| ** **                 | ** ** | **(in thousands, except percentages)** | ** ** |
| Retail                     |       | $                                                     | 45,156     |   | 80.1 | % | $ | 40,496 |   | 78.8 | % |
| Wholesale                  |       | 56,545                                                |       | 67.4 |   | 41,667 |   | 64.9 |   |
| Gross  profit/gross margin |       | $                                                     | 101,701    |   | 72.5 | % | $ | 82,163 |   | 71.1 | % |

 

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

 

**Sales, net**

 

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

 

***Retail.***Net retail sales increased9.7% to $56.4 million in the three months ended March 30, 2008 from $51.4million in the three months ended April 1, 2007. Net sales from boutiquesincreased 50.2% to $25.7 million in the three months ended March 30, 2008from $17.1 million in the three months ended April 1, 2007, due primarilyto a net increase of 20 boutiques open as of March 30, 2008 compared to April 1,2007. As of March 30, 2008 and April 1, 2007, we had 53 and 33open company owned boutiques, respectively. Offset against this was a decreaseof 10.5% in net sales from infomercials to $30.7 million in the three monthsended March 30, 2008 from $34.3 million in the three months ended April 1,2007, due to a decline in the performance of our current infomercial comparedto our prior infomercial.

 

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

 

**Gross profit**

 

Gross profit increased23.8% to $101.7 million in the three months ended March 30, 2008 from$82.2 million in the three months ended April 1, 2007. Our retail segmentgross profit increased 11.5% to $45.2 million in the three months ended March 30,2008 from $40.5 million in the three months ended April 1, 2007, driven bygrowth in our boutiques sales channel. Our wholesale segment gross profitincreased 35.7% to $56.5 million in the three months ended March 30, 2008from $41.7 million in the three months ended April 1, 2007, due toincreases in sales across our premium wholesale, home shopping television andspas and salons distribution channels.

 

Gross margin increased approximately 1.4% to72.5% in the three months ended March 30, 2008 from 71.1% in the threemonths ended April 1, 2007 primarily due to increasing margins in bothsegments. Within the retail segment, gross margin increased to 80.1% in thethree months ended March 30, 2008 from 78.8% in the three months ended April 1,2007, primarily due to a change in channel sales mix as our boutiques channelconsisted of a greater percentage of total retail segment sales relative toinfomercial sales as well as a change in product mix. Within the wholesalesegment, gross margin increased to 67.4% in the three months ended March 30,2008 from 64.9% in the three months ended April 1, 2007, primarily as aresult of a change in product mix and sales mix between channels and customers.

 

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**Selling, general and administrative expenses**

 

Selling, general and administrative expensesincreased 28.8% to $50.5 million in the three months ended March 30, 2008from $39.2 million in the three months ended April 1, 2007. The increasewas primarily due to a significant increase in investment in our corporateinfrastructure of $8.2 million, including increased headcount costs, headquartersfacilities costs, distribution center costs, costs associated with complyingwith the regulations applicable to a public company and other general corporatecosts, corporate costs and infrastructure costs relating to our UK acquisition,as well as increased expenses to support sales growth, including $2.9 millionin increased store operating costs, primarily as a result of the addition of 20boutiques since the end of the first quarter of fiscal year 2007. As apercentage of net sales, selling, general and administrative expenses increased2.0% to 35.9% from 33.9%, primarily due to corporate expenses increasing at agreater rate than net sales.

 

**Depreciation and amortization**

 

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

 

**Stock-based compensation**

 

Stock-based compensation expense increased18.7% to $1.9 million in the three months ended March 30, 2008 from $1.6million in the three months ended April 1, 2007. This increase resultedprimarily from the granting of additional stock options.

 

**Operating income**

 

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

 

Our retail segment operating income increased12.6% to $20.4 million in the three months ended March 30, 2008 from $18.1million in the three months ended April 1, 2007, which was largely drivenby sales growth in our boutiques sales channel. Our increased sales in theretail segment contributed to an increase in gross profit of $4.7 million whichwas offset by an increase in operating expenses of $2.4 million. The increasein operating expenses was largely due to increased store operating costs of$2.9 million primarily due to the opening of 20 boutiques since the end of thefirst quarter of fiscal year 2007.

 

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

 

Our corporate segment operating lossincreased 61.2% to $26.2 million in the three months ended March 30, 2008from $16.3 million in the three months ended April 1, 2007. This increasewas largely due to an increase in corporate segment selling, general andadministrative expense of $8.2 million, an increase in depreciation andamortization of $1.4 million and stock-based compensation of $0.3 million. Theincrease in corporate selling, general and administrative expense was as aresult of the increase in the investment in our corporate infrastructure tosupport sales growth and additional expenses associated with being a publiccompany.

 

**Interest expense**

 

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

 

21

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**Other income, net**

 

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

 

**Provision for income taxes**

 

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

 

# **Seasonality**

#  

Because our products arelargely purchased for individual use and are consumable in nature, we are notgenerally subject to significant seasonal variances in sales. However,fluctuations in sales and operating income in any fiscal quarter may beaffected by the timing of wholesale shipments, home shopping televisionappearances and other promotional events. While we believe our overall businessis not currently subject to significant seasonal fluctuations, we haveexperienced limited seasonality in our premium wholesale and company-ownedboutique channels as a result of increased demand for our products inanticipation of, and during, the holiday season. To the extent our sales tospecialty beauty retailers and through our boutiques increase as a percentageof our net sales, we may experience increased seasonality.

 

## **Liquidity and Capital Resources**

##  

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

 

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

 

Net cash used ininvesting activities was $4.2 million in the three months ended March 30,2008, which consisted of $5.5 million primarily attributable to the opening oftwo company-owned boutiques and our continued investment in our corporateinfrastructure, partially offset by proceeds of $1.3 million from the sale ofproperty and equipment. Our future capital expenditures will depend on thetiming and rate of expansion of our business, information technologyinvestments, new store openings, store renovations and international expansionopportunities.

 

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

 

Our revolving creditfacility of $25.0 million, of which approximately $0.1 million was utilized foroutstanding letters of credit as of March 30, 2008, and our first-lienterm loan of $251.4 million, bear interest at a rate equal to, at our option,either LIBOR or the lender’s base rate, plus an applicable variable marginbased on our consolidated total leverage ratio. The current applicable interestmargin for the revolving credit facility and first-lien term loan is 2.25% forLIBOR loans and 1.25% for base rate loans based on our current Moody’s rating.As of March 30, 2008, interest on the first-lien term loan was accruing at5.12% (without giving effect to the interest rate swap transaction discussedbelow).

 

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Borrowings under ourrevolving credit facility and the first-lien term loan are secured bysubstantially all of our assets, including, but not limited to, all accountsreceivable, inventory, property and equipment, and intangibles. The terms ofthe senior secured credit facilities require us to comply with financialcovenants, including maintaining a leverage ratio, entering into interest rateswap or similar agreements with respect to 40% of the principal amountsoutstanding under our senior secured credit facilities as of October 2,2007.

 

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

 

The terms of our seniorsecured credit facilities, require us to comply with financial covenants,including a maximum leverage ratio covenant. We are required to maintain amaximum leverage ratio (consolidated total debt to Adjusted EBITDA) of notgreater than 4.5 to 1.0. As of March 30, 2008, our leverage ratio was 1.12to 1.0. If we fail to comply with any of the financial covenants, the lendersmay declare an event of default under the secured credit facility. An event ofdefault resulting from a breach of a financial covenant may result, at theoption of lenders holding a majority of the loans, in an acceleration ofrepayment of the principal and interest outstanding and a termination of therevolving credit facility. The secured credit facility also containsnon-financial covenants that restrict some of our activities, including ourability to dispose of assets, incur additional debt, pay dividends, createliens, make investments and engage in specified transactions with affiliates.The secured credit facility also contains customary events of default,including defaults based on events of bankruptcy and insolvency, nonpayment ofprincipal, interest or fees when due, subject to specified grace periods,breach of specified covenants, change in control and material inaccuracy ofrepresentations and warranties. We have been in compliance with all financialratio and other covenants under our credit facilities during all reportedperiods and we were in compliance with these covenants as March 30, 2008.

 

Subject to specifiedexceptions, including for investment of proceeds in the case of asset saleproceeds and for permitted equity contributions for capital expenditures, weare required to prepay outstanding loans under our amended senior securedcredit facilities with the net proceeds of certain asset dispositions,condemnation settlements and insurance settlements from casualty losses,issuances of certain debt and, if our consolidated leverage ratio is 2.25 to1.0 or greater, a portion of excess cash flow.

 

# **Liquiditysources, requirements and contractual cash requirement and commitments**

#  

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

 

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# **Contractualcommitments**

#  

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

 
| ** **                                                             | ** ** | **Remainder of  the year  ending  December 28,  2008** | ** ** | **1 - 3  Years** | ** ** | **4 - 5  Years** | ** ** | **After 5  Years** | ** ** | **Total** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|-------------------------|------------|-----------|------------|
| ** **                                                             | ** ** | **(amounts in millions)**                                   | ** ** |
| Operating leases, net of sublease income                               |       | $                                                                     | 6.2        |                       | $          | 31.0                       |       | $                       | 20.7       |      | $          | 31.4 |   | $ | 89.3 |   |
| Principal payments on long-term debt,  including the current portion   |       | 13.8                                                                  |       | 186.0                      |       | 51.6                       |       | —                  |       | 251.4     |       |
| Interest payments on long-term debt,  including the current portion(1) |       | 11.7                                                                  |       | 32.2                       |       | 0.4                        |       | —                  |       | 44.3      |       |
| Minimum royalties under licensing  arrangements                        |       | 1.3                                                                   |       | —                     |       | —                     |       | —                  |       | 1.3       |       |
| Total                                                                  |       | $                                                                     | 33.0       |                       | $          | 249.2                      |       | $                       | 72.7       |      | $          | 31.4 |   | $ | 386.3 |   |

 

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(1)         Forpurposes of the table, interest expense is calculated after giving effect toour interest rate swap as follows: (i) during the first year of thetwo-year term of the swap agreement, interest expense is based on $200 millionof our first-lien term loan and based on the fixed rate of theswap of 5.03% plus a margin of 2.25% and interest expense on theremaining amount of the loan is estimated based on the rate in effect as of March 30,2008, and (ii) during the second year of the two-year term of the swapagreement, interest expense is based on $100 million of our first-lien termloan and based on the fixed rate of the swap of 5.03% plus a margin of2.25% and interest expense on the remaining amount of the loan is estimatedbased on the rate in effect as of March 30, 2008 and (iii) after thetwo-year term of the swap agreement, interest expense on the loan is estimatedfor all periods based on the rate in effect as of March 30, 2008. A 1%change in interest rates on our variable rate debt, including the effect of theinterest rate swap, would result in a change of $6.3 million in our totalinterest payments, of which $0.7 million would be in the remainder of the yearended December 28, 2008, $5.5 million would be in years 1-3 and$0.1 million would be in years 4-5.

 

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

 

**Off-balance-sheet arrangements**

 

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

 

**Effects of inflation**

 

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

 

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**Critical Accounting Policies and Estimates**

 

The preparation of financial statements inconformity with U.S. generally accepted accounting principles requiresmanagement to make estimates and assumptions. Predicting future events isinherently an imprecise activity and, as such, requires the use of judgment.Actual results may vary from estimates in amounts that may be material to thefinancial statements. An accounting policy is deemed to be critical if itrequires an accounting estimate to be made based on assumptions about mattersthat are highly uncertain at the time the estimate is made, and if differentestimates that reasonably could have been used, or changes in the accountingestimates that are reasonably likely to occur periodically, could materiallyimpact our consolidated financial statements. Our critical accounting policiesand estimates are discussed in our recently filed Annual Report on Form 10-Kfor the fiscal year ended December 30, 2007, which was filed with the SECon February 28, 2008. We believe that there have been no other significantchanges during the three months ended March 30, 2008 to the items that wedisclosed in our critical accounting policies and estimates with the exceptionof the adoption of Statement 157, Statement 159 and SAB 110 as noted below.

 

***Fair Value Measurements***

 

On December 31, 2007, we adopted SFAS No. 157,*Fair Value Measurements*(Note 12*).*Statement 157 defines fair value, establishes a frameworkfor measuring fair value under generally accepted accounting principles, andexpands disclosures about fair value measurements. Statement 157 does notrequire any new fair value measurements, but provides guidance on how tomeasure fair value by providing a fair value hierarchy used to classify thesource of the information.

 

**New Accounting Standards**

 

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

 

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

 

In December 2007,the SEC issued Staff Accounting Bulletin No. 110 (“SAB 110”).SAB 110 amends and replaces Question 6 of Section D.2 of Topic 14, “Share-BasedPayment,” of the Staff Accounting Bulletin series. Question 6 of Section D.2of Topic 14 expresses the views of the staff regarding the use of the “simplified”method in developing an estimate of the expected term of “plain vanilla” shareoptions and allows usage of the “simplified” method for share option grantsprior to December 31, 2007. SAB 110 allows public companies which donot have historically sufficient experience to provide a reasonable estimate tocontinue to use the “simplified” method for estimating the expected term of “plainvanilla” share option grants after December 31, 2007. We adoptedSAB 110 on December 31, 2007. We are continuing to use the “simplified”method until we have enough historical experience to provide a reasonableestimate of expected term in accordance with SAB 110.

 

In December 2007,the FASB issued SFAS No. 141 (Revised 2007), *Business Combinations.* Statement 141-R will significantlychange the accounting for future business combinations after adoption.Statement 141-R establishes principles and requirements for how the acquirer ofa business recognizes and measures in its financial statements the identifiableassets acquired, the liabilities assumed, and any non-controlling interest inthe acquired business. Statement 141-R also provides guidance for recognizingand measuring the goodwill acquired in the business combination and determineswhat information to disclose to enable users of the financial statements toevaluate the nature and financial effects of the business combination.Statement 141-R is effective for fiscal years, and interim periods within thosefiscal years, beginning on or after December 15, 2008. Earlier adoption isprohibited. We will adopt Statement 141-R beginning in our fiscal year ending 

 

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

 

In March 2008, the FASB issued SFAS No. 161,*Disclosures about Derivative Instruments andHedging Activities*, an amendment of FASB Statement No. 133. Statement161 amends and expands the disclosure requirements of Statement 133 with theintent to provide users of financial statements with an enhanced understandingof: 1) How and why an entity uses derivative instruments; 2) How derivativeinstruments and related hedged items are accounted for under Statement 133 andits related interpretations and 3) How derivative instruments and relatedhedged items affect an entity’s financial position, financial performance andcash flows. This statement is effective for financial statements issued forfiscal years and interim periods beginning after November 15, 2008, withearly application encouraged. We will adopt Statement 161 in our fiscal yearending January 3, 2010, as required. The Company has not completed itsevaluation of  Statement 161 but it willnot impact its financial position or results of operations as it isdisclosure-only in nature.

 

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**ITEM 3.****   QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

***Interest ratesensitivity***

 

We are exposed to interest rate risks primarilythrough borrowings under our credit facilities. We have reduced our exposure tointerest rate fluctuations by entering into an interest rate swap agreementcovering a portion of our variable rate debt. In August 2007, we enteredinto a two-year interest rate swap transaction under the Company’s seniorsecured credit facilities. The interest rate swap has an initial notionalamount of $200 million declining to $100 million after one year under which, ona net settlement basis, we will make monthly fixed rate payments at the rate of5.03% and the counterparty makes monthly floating rate payments basedupon one-month U.S.D. LIBOR. Our weighted average borrowings outstanding duringthe three months ended March 30, 2008 were $258.0 million and the annualeffective interest rate for the period was 7.1%, after giving effect to theinterest swap agreement. A hypothetical 1% increase or decrease in interestrates would have resulted in a $0.6 million change to our interest expense inthe three months ended March 30, 2008 and $2.6 million on anannualized basis.

 

***Foreign currencyrisk***

 

Most of our sales, expenses, assets,liabilities and cash holdings are currently denominated in U.S. dollars but aportion of the net revenues we receive from sales is denominated in currenciesother than the U.S. dollar. Additionally, portions of our costs of goodssold and other operating expenses are incurred by our foreign operations anddenominated in local currencies. While fluctuations in the value of these netrevenues, costs and expenses as measured in U.S. dollars have notmaterially affected our results of operations historically, we cannot assureyou that adverse currency exchange rate fluctuations will not have a materialimpact in the future. In addition, our balance sheet reflectsnon-U.S. dollar denominated assets and liabilities which can be adverselyaffected by fluctuations in currency exchange rates. We do not hedge againstforeign currency risks and we currently believe that our foreign currencyexchange risk is immaterial.

 

**ITEM 4.****   CONTROLSAND PROCEDURES**

 

The Company maintains disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in its reports pursuant to the Securities Exchange Act of 1934, asamended, is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules, and that such information is accumulatedand communicated to the Company’s management, including its Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure. Management is responsible for establishing andmaintaining adequate internal control over financial reporting. In designingand evaluating the disclosure controls and procedures, management recognizedthat any controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives,and management necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.

 

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

 

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

 

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**PART II—OTHERINFORMATION**

 

**ITEM 1.****   LEGALPROCEEDINGS**

 

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

 

**ITEM 1A.****   RISKFACTORS**

 

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

 

***If we are unable to retain keyexecutives and other personnel, particularly Leslie Blodgett, our ChiefExecutive Officer and primary spokesperson, and recruit additional executivesand personnel, we may not be able to execute our business strategy and ourgrowth may be hindered.***

 

Our success largely depends on the performance ofour management team and other key personnel and our ability to continue torecruit qualified senior executives and other key personnel. Our futureoperations could be harmed if any of our senior executives or other keypersonnel ceased working for us. Competition for senior management personnel isintense and there can be no assurance that we will be able to retain ourpersonnel or attract additional qualified personnel. The loss of a member ofsenior management may require the remaining executive officers to divertimmediate and substantial attention to fulfilling his or her duties and toseeking a replacement. We are currently recruiting for a Senior Vice Presidentof Retail Merchandising, Head of Sales and Head of Retail positions. We may notbe able to continue to attract or retain such personnel in the future. Anyinability to fill vacancies in our senior executive positions on a timely basiscould harm our ability to implement our business strategy, which would harm ourbusiness and results of operations.

 

We are particularly dependent on Leslie Blodgett,our Chief Executive Officer and primary spokesperson, as her talents, efforts,personality and leadership have been, and continue to be, critical to oursuccess. Many of our customers identify our products by their association with Ms. Blodgett,and she greatly enhances the success of our sales and marketing. There can beno assurance that we will be successful in retaining her services. We maintainkey executive life insurance policies with respect to Ms. Blodgetttotaling approximately $34 million, which is payable to the lenders underour senior secured credit facility in the event we collect payments on thepolicy. A diminution or loss of the services of Ms. Blodgett wouldsignificantly harm our net sales, and as a result, our business, prospects, financialcondition and results of operations.

 

***Our senior management team haslimited experience working together as a group, and may not be able to manageour business effectively.***

 

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

 

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**ITEM 2.****   UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM 3.****   DEFAULTSUPON SENIOR SECURITIES**

 

None.

 

**ITEM 4.****   SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

**ITEM 5.****   OTHERINFORMATION**

 

None.

 

**ITEM 6.****   EXHIBITS**

 

Exhibits

 

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

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                     |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                |
| 3.2 (1)             |       | Amended and Restated  Certificate of Incorporation.                                                                                                                 |
|                |       |                                                                                                                                                                |
| 3.4 (1)             |       | Amended and Restated  Bylaws.                                                                                                                                       |
|                |       |                                                                                                                                                                |
| 10.51 (2)           |       | Employment Offer Letter to James Taschetta  dated August 23, 2007.                                                                                             |
|                |       |                                                                                                                                                                |
| 10.52 (2)           |       | Amendment to Employment Offer Letter to  James Taschetta dated August 28, 2007.                                                                                |
|                |       |                                                                                                                                                                |
| 10.53               |       | Master Services Agreement between  Registrant and DataPak Services Corporation dated January 1, 2008.                                                               |
|                |       |                                                                                                                                                                |
| 10.54               |       | Amended and Restated  Deferred Compensation Plan.                                                                                                                   |
|                |       |                                                                                                                                                                |
| 21.1                |       | List of Subsidiaries.                                                                                                                                               |
|                |       |                                                                                                                                                                |
| 31.1                |       | Certification of the  Chief Executive Officer, as required by Section 302 of the  Sarbanes-Oxley Act of 2002.                                                  |
|                |       |                                                                                                                                                                |
| 31.2                |       | Certification of the  Chief Financial Officer, as required by Section 302 of the  Sarbanes-Oxley Act of 2002.                                                  |
|                |       |                                                                                                                                                                |
| 32.1                |       | Certification of the  Chief Executive Officer and the Chief Financial Officer as required by  Section 906 of the Sarbanes-   Oxley Act of 2002. |

 

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

 

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

 

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, as amended, the registrant has duly causedthis report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                        | BARE ESCENTUALS, INC. |
|------------------------|-----------------------|
| Date: May 9, 2008 | By:                   | /s/ LESLIE A. BLODGETT |
|                   |                  | Leslie A. Blodgett |
|                   |                  | Chief Executive Officer  and Director |
|                   | By:                   | /s/ MYLES B. MCCORMICK |
|                   |                  | Myles B. McCormick |
|                   |                  | Executive Vice  President, Chief Financial Officer   and Chief Operating Officer |

 

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