UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. |
FOR THE QUARTERLY PERIOD ENDED APRIL 3, 2004.
or
| ¨ | 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 0-16611
GSI COMMERCE, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 04-2958132 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) | |
| 1075 First Avenue, King of Prussia, PA | 19406 | |
| (Address of principal executive offices) | (Zip Code) | |
610-265-3229
(Registrant’s telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No ¨
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of May 3, 2004:
| Common Stock, $.01 par value | 40,981,671 | |
| (Title of each class) | (Number of Shares) |
FOR THE QUARTER ENDED APRIL 3, 2004
TABLE OF CONTENTS
| Page | ||
| PART I— FINANCIAL INFORMATION |
||
| Item 1. Financial Statements: |
||
| Condensed Consolidated Balance Sheets as of January 3, 2004 and April 3, 2004 (Unaudited) |
1 | |
| 2 | ||
| 3 | ||
| Notes to Condensed Consolidated Financial Statements (Unaudited) |
4 | |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
13 | |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk |
29 | |
| Item 4. Controls and Procedures |
29 | |
| PART II— OTHER INFORMATION |
||
| Item 1. Legal Proceedings |
30 | |
| Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities |
30 | |
| Item 3. Defaults Upon Senior Securities |
30 | |
| 30 | ||
| Item 5. Other Information |
31 | |
| Item 6. Exhibits and Reports on Form 8-K |
31 | |
| 32 | ||
For all years prior to 1999, our fiscal year ended on December 31. Effective for 1999, we changed our fiscal year from the last day of December to the Saturday nearest the last day of December. Accordingly, references to fiscal 1999, fiscal 2000, fiscal 2001, fiscal 2002, fiscal 2003 and fiscal 2004 refer to the years ended January 1, 2000, December 30, 2000, December 29, 2001, December 28, 2002, January 3, 2004 and the year ending January 1, 2005.
Although we refer to the retailers, branded manufacturers, entertainment companies and professional sports organizations for which we develop and operate e-commerce businesses as our “partners,” we do not act as an agent or legal representative for any of our partners. We do not have the power or authority to legally bind any of our partners. Similarly, our partners do not have the power or authority to legally bind us. In addition, we do not have the types of liabilities for our partners that a general partner of a partnership would have.
i
GSI COMMERCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
| January 3, 2004 |
April 3, 2004 |
|||||||
| ASSETS | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 57,558 | $ | 35,813 | ||||
| Marketable securities |
11,912 | 16,096 | ||||||
| Accounts receivable, net of allowance of $709 and $666, respectively |
4,898 | 7,768 | ||||||
| Inventory |
22,910 | 21,063 | ||||||
| Current portion – notes receivable |
1,377 | 1,385 | ||||||
| Prepaid expenses and other current assets |
1,848 | 1,927 | ||||||
| Total current assets |
100,503 | 84,052 | ||||||
| Property and equipment, net |
44,840 | 44,643 | ||||||
| Goodwill, net |
13,453 | 13,453 | ||||||
| Notes receivable |
2,356 | 2,168 | ||||||
| Other equity investments |
2,159 | 2,159 | ||||||
| Other assets, net of accumulated amortization of $2,644 and $3,012, respectively |
12,272 | 11,868 | ||||||
| Total assets |
$ | 175,583 | $ | 158,343 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 27,677 | $ | 17,995 | ||||
| Accrued expenses and other |
22,538 | 19,636 | ||||||
| Deferred revenue |
14,998 | 13,225 | ||||||
| Total current liabilities |
65,213 | 50,856 | ||||||
| Mandatorily redeemable preferred stock, Series A, $0.01 par value, 10,000 shares authorized; 0 shares issued and outstanding as of January 3, 2004 and April 3, 2004, respectively |
— | — | ||||||
| Commitments and contingencies |
||||||||
| Stockholders’ equity: |
||||||||
| Preferred stock, $0.01 par value, 4,990,000 shares authorized; 0 shares issued and outstanding as of January 3, 2004 and April 3, 2004, respectively |
— | — | ||||||
| Common stock, $0.01 par value, 90,000,000 shares authorized; 40,781,036 and 40,974,462 shares issued as of January 3, 2004 and April 3, 2004, respectively; 40,779,826 and 40,973,252 shares outstanding as of January 3, 2004 and April 3, 2004, respectively |
408 | 410 | ||||||
| Additional paid in capital |
287,571 | 288,739 | ||||||
| Accumulated other comprehensive loss |
— | (25 | ) | |||||
| Accumulated deficit |
(177,609 | ) | (181,637 | ) | ||||
| 110,370 | 107,487 | |||||||
| Less: Treasury stock, at par |
— | — | ||||||
| Total stockholders’ equity |
110,370 | 107,487 | ||||||
| Total liabilities and stockholders’ equity |
$ | 175,583 | $ | 158,343 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
GSI COMMERCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
| Three Months Ended |
||||||||
| March 29, 2003 |
April 3, 2004 |
|||||||
| Revenues: |
||||||||
| Net revenues from product sales |
$ | 44,173 | $ | 56,878 | ||||
| Service fee revenues |
4,706 | 9,390 | ||||||
| Net revenues |
48,879 | 66,268 | ||||||
| Cost of revenues from product sales |
31,853 | 41,508 | ||||||
| Gross profit |
17,026 | 24,760 | ||||||
| Operating expenses: |
||||||||
| Sales and marketing, exclusive of $229 and $494 reported below as stock-based compensation, respectively |
13,124 | 17,449 | ||||||
| Product development, exclusive of $0 and $49 reported below as stock-based compensation, respectively |
3,699 | 4,483 | ||||||
| General and administrative, exclusive of $59 and $84 reported below as stock-based compensation, respectively |
3,081 | 3,920 | ||||||
| Stock-based compensation |
288 | 627 | ||||||
| Depreciation and amortization |
2,698 | 2,599 | ||||||
| Total operating expenses |
22,890 | 29,078 | ||||||
| Other (income) expense: |
||||||||
| Interest income |
(381 | ) | (290 | ) | ||||
| Total other (income) expense |
(381 | ) | (290 | ) | ||||
| Net loss |
$ | (5,483 | ) | $ | (4,028 | ) | ||
| Losses per share—basic and diluted: |
||||||||
| Net loss |
$ | (0.14 | ) | $ | (0.10 | ) | ||
| Weighted average shares outstanding—basic and diluted |
38,784 | 40,868 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
GSI COMMERCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Three Months Ended |
||||||||
| March 29, 2003 |
April 3, 2004 |
|||||||
| Cash Flows from Operating Activities: |
||||||||
| Net loss |
$ | (5,483 | ) | $ | (4,028 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Depreciation and amortization |
2,698 | 2,599 | ||||||
| Stock-based compensation |
288 | 627 | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable, net |
410 | (2,870 | ) | |||||
| Inventory |
(744 | ) | 1,847 | |||||
| Prepaid expenses and other current assets |
(150 | ) | (79 | ) | ||||
| Notes receivable |
(63 | ) | 180 | |||||
| Other assets, net |
— | 35 | ||||||
| Accounts payable and accrued expenses and other |
(21,823 | ) | (12,584 | ) | ||||
| Deferred revenue |
2,712 | (1,773 | ) | |||||
| Net cash used in operating activities |
(22,155 | ) | (16,046 | ) | ||||
| Cash Flows from Investing Activities: |
||||||||
| Acquisition of property and equipment, net |
(1,366 | ) | (2,393 | ) | ||||
| Purchases of marketable securities |
(5,315 | ) | (5,314 | ) | ||||
| Sales of marketable securities |
3,000 | 1,105 | ||||||
| Sales of short-term investments |
895 | — | ||||||
| Net cash used in investing activities |
(2,786 | ) | (6,602 | ) | ||||
| Cash Flows from Financing Activities: |
||||||||
| Repayments of capital lease obligations |
(14 | ) | — | |||||
| Proceeds from exercises of common stock options |
2 | 903 | ||||||
| Net cash provided by (used in) financing activities |
(12 | ) | 903 | |||||
| Net decrease in cash and cash equivalents |
(24,953 | ) | (21,745 | ) | ||||
| Cash and cash equivalents, beginning of period |
61,004 | 57,558 | ||||||
| Cash and cash equivalents, end of period |
$ | 36,051 | $ | 35,813 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1—BASIS OF PRESENTATION
GSI Commerce, Inc. (“GSI” or the “Company”), a Delaware corporation, provides an e-commerce platform that enables retailers, branded manufacturers, entertainment companies and professional sports organizations to operate e-commerce businesses. The Company’s e-commerce platform includes Web site design, e-commerce technology, managed hosting, order fulfillment, customer service, merchandising and order management, online merchandising, customer relationship management, content development and online marketing. The Company currently derives virtually all of its revenues from the sale of goods through its partners’ e-commerce businesses, toll-free telephone number sales, business-to-business and group sales and related outbound shipping charges, net of allowances for returns and discounts. The Company also derives revenue from fixed and variable fees earned in connection with the development and operation of partners’ e-commerce businesses and the provision of marketing and other services.
The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.
The accompanying financial information is unaudited; however, in the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the financial position, results of operations and cash flows for the periods reported have been included. The results of operations for the periods reported are not necessarily indicative of those that may be expected for a full year.
This quarterly report should be read in conjunction with the financial statements and notes thereto included in the Company’s audited financial statements presented in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 18, 2004.
Certain reclassifications have been made to the prior year condensed consolidated financial statements to conform to those used in the current period.
NOTE 2—ACCOUNTING POLICIES
Marketable Securities: Marketable securities, which consist of investments in debt securities, are classified as available-for-sale and are reported at fair value, with unrealized gains and losses recorded as a component of stockholders’ equity. The Company does not intend to hold its marketable securities for more than one year from the most recent balance sheet date and has therefore classified them as a current asset. Realized gains or losses and declines in value judged to be other than temporary, if any, on available-for-sale securities are reported in other income or loss. As of January 3, 2004, the aggregate amortized cost of the Company’s marketable securities approximated their aggregate fair value. As of April 3, 2004, the Company recorded net unrealized losses on its marketable securities of $25,000.
Other Assets, Net: Other assets, net consists primarily of deferred partner revenue share charges, resulting from the exercise of a right to receive 1,600,000 shares of the Company’s common stock in lieu of future cash partner revenue share payments. The 1,600,000 shares of the Company’s common stock issued are subject to restrictions, including the prohibition of the transfer of such shares. These restrictions lapsed as to 60% of such shares as of March 31, 2004 and will lapse as to 10% of such shares on the last day of each quarter thereafter, becoming free of all such transfer restrictions on March 31, 2005. Deferred partner revenue share charges were $11.8 million and $11.5 million as of January 3, 2004 and April 3, 2004, respectively, and are being amortized as stock-based compensation expense as the partner revenue share expense is incurred. The partner revenue share expense incurred is based on actual revenues recognized in a given period and the imputed partner revenue share percentage, which is based on the value of the Company’s common stock that was issued upon exercise of the right. Stock-based compensation expense related to the amortization of deferred partner revenue share charges was $222,000 and $360,000 for the three-month periods ended March 29, 2003 and April 3, 2004, respectively.
4
GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Shipping and Handling Costs: The Company defines shipping and handling costs as only those costs incurred for a third-party shipper to transport products to the customer and these costs are included in cost of revenues from product sales. In some instances, shipping and handling costs exceed shipping charges to the customer and are subsidized by the Company. Additionally, the Company selectively offers promotional free shipping whereby it ships merchandise to customers free of all shipping and handling charges. The cost of promotional free shipping and subsidized shipping and handling was $506,000 and $579,000 for the three-month periods ended March 29, 2003 and April 3, 2004, respectively, and was charged to sales and marketing expense.
Fulfillment Costs: The Company defines fulfillment costs as personnel, occupancy and other costs associated with its Kentucky fulfillment center and Ashford.com’s Texas fulfillment center that it formerly maintained, personnel and other costs associated with its logistical support and vendor operations departments and third-party warehouse and fulfillment services costs. Fulfillment costs were $3.2 million and $4.9 million for the three-month periods ended March 29, 2003 and April 3, 2004, respectively, and are included in sales and marketing expense.
Stock-Based Compensation: Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, compensation expense for stock options issued to employees is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock. The Company accounts for stock-based compensation for stock options and warrants issued to non-employees in accordance with SFAS No. 123 and Emerging Issues Task Force (“EITF”) No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” and EITF No. 00-18, “Accounting Recognition for Certain Transactions involving Equity Instruments Granted to Other Than Employees.” Accordingly, compensation expense for stock options and warrants issued to non-employees is measured using a Black-Scholes multiple option pricing model that takes into account significant assumptions as to the expected life of the option or warrant, the expected volatility of the Company’s common stock and the risk-free interest rate over the expected life of the option or warrant.
The following table illustrates the pro forma net loss and losses per share for the three-month periods ended March 29, 2003 and April 3, 2004 as if compensation expense for stock options issued to employees had been determined consistent with SFAS No. 123:
| Three Months Ended |
||||||||
| March 29, 2003 |
April 3, 2004 |
|||||||
| (in thousands) | ||||||||
| Net loss, as reported |
$ | (5,483 | ) | $ | (4,028 | ) | ||
| Add: Stock-based compensation expense included in reported net loss |
80 | 261 | ||||||
| Deduct: Total stock-based compensation determined under fair value based method for all awards |
(462 | ) | (1,352 | ) | ||||
| Pro forma net loss |
$ | (5,865 | ) | $ | (5,119 | ) | ||
| Losses per share—basic and diluted: |
||||||||
| Net loss per share, as reported |
$ | (0.14 | ) | $ | (0.10 | ) | ||
| Pro forma net loss per share |
$ | (0.15 | ) | $ | (0.13 | ) | ||
The Company also records stock-based compensation as deferred partner revenue share charges are amortized. Stock-based compensation expense related to the amortization of deferred partner revenue share charges was $222,000 and $360,000 for the three-month periods ended March 29, 2003 and April 3, 2004, respectively.
5
GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
NOTE 3—CESSATION OF ASHFORD.COM OPERATIONS
In December 2002, the Company announced and implemented its plan to cease the operations of Ashford.com, which accounted for approximately $735,000 and $8,000 of the Company’s net revenues for the three-month periods ended March 29, 2003 and April 3, 2004, respectively. This plan involved the liquidation of Ashford.com’s remaining inventory, the closure of its Houston, Texas fulfillment center and offices and the termination of 71 employees. This plan was substantially completed in January 2003. As of April 3, 2004, 71 employees had been terminated and actual termination benefits paid were $417,000.
At April 3, 2004, the accrued liability associated with the cessation of Ashford.com operations was $370,000 and consisted of the following (in thousands):