Attached files
file | filename |
---|---|
EX-2.1 - EXHIBIT 2.1 - GSI COMMERCE INC | c04090exv2w1.htm |
EX-10.4 - EXHIBIT 10.4 - GSI COMMERCE INC | c04090exv10w4.htm |
EX-10.6 - EXHIBIT 10.6 - GSI COMMERCE INC | c04090exv10w6.htm |
EX-32.1 - EXHIBIT 32.1 - GSI COMMERCE INC | c04090exv32w1.htm |
EX-10.3 - EXHIBIT 10.3 - GSI COMMERCE INC | c04090exv10w3.htm |
EX-31.1 - EXHIBIT 31.1 - GSI COMMERCE INC | c04090exv31w1.htm |
EX-10.5 - EXHIBIT 10.5 - GSI COMMERCE INC | c04090exv10w5.htm |
EX-10.7 - EXHIBIT 10.7 - GSI COMMERCE INC | c04090exv10w7.htm |
EX-31.2 - EXHIBIT 31.2 - GSI COMMERCE INC | c04090exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 3, 2010
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 0-16611
GSI COMMERCE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE (State or other jurisdiction of incorporation or organization) |
04-2958132 (I.R.S. employer identification no.) |
|
935 FIRST AVENUE, KING OF PRUSSIA, PA | 19406 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code (610) 491-7000
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of large accelerated filer, accelerated filer
and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer þ | 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 (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
There were 66,333,845 shares of the registrants Common Stock outstanding as of the close
of business on July 28, 2010.
GSI COMMERCE, INC.
FORM 10-Q
FOR THE QUARTER ENDED JULY 3, 2010
FORM 10-Q
FOR THE QUARTER ENDED JULY 3, 2010
INDEX
Page | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
20 | ||||||||
27 | ||||||||
27 | ||||||||
28 | ||||||||
28 | ||||||||
29 | ||||||||
30 | ||||||||
30 | ||||||||
30 | ||||||||
30 | ||||||||
31 | ||||||||
Exhibit 2.1 | ||||||||
Exhibit 10.3 | ||||||||
Exhibit 10.4 | ||||||||
Exhibit 10.5 | ||||||||
Exhibit 10.6 | ||||||||
Exhibit 10.7 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
The Companys fiscal year ends on the Saturday nearest the last day of December. The
Companys fiscal year ends are as follows:
References To | Refer to the Years Ended/Ending | |
Fiscal 2009
|
January 2, 2010 | |
Fiscal 2010
|
January 1, 2011 | |
Fiscal 2011
|
December 31, 2011 | |
Fiscal 2012
|
December 29, 2012 | |
Fiscal 2013
|
December 28, 2013 | |
Fiscal 2014
|
January 3, 2015 |
2
Table of Contents
PART I
ITEM 1: | FINANCIAL STATEMENTS |
GSI COMMERCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
January 2, | July 3, | |||||||
2010 | 2010 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 228,430 | $ | 63,660 | ||||
Accounts receivable, net |
70,582 | 61,078 | ||||||
Inventory |
55,678 | 61,945 | ||||||
Deferred tax assets |
12,347 | 15,484 | ||||||
Prepaid expenses and other current assets |
13,187 | 15,155 | ||||||
Total current assets |
380,224 | 217,322 | ||||||
Property and equipment, net |
163,329 | 172,981 | ||||||
Goodwill |
373,003 | 395,541 | ||||||
Intangible assets, net |
132,875 | 154,614 | ||||||
Long-term deferred tax assets |
| 10,925 | ||||||
Other assets, net |
12,417 | 30,667 | ||||||
Total assets |
$ | 1,061,848 | $ | 982,050 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 126,914 | $ | 70,107 | ||||
Accrued expenses |
150,173 | 114,194 | ||||||
Deferred revenue |
20,645 | 21,026 | ||||||
Convertible notes |
55,443 | | ||||||
Current portion long-term debt |
5,260 | 7,529 | ||||||
Total current liabilities |
358,435 | 212,856 | ||||||
Convertible notes |
116,948 | 120,102 | ||||||
Long-term debt |
28,142 | 27,138 | ||||||
Deferred acquisition payments |
63,763 | 67,161 | ||||||
Deferred tax liabilities |
8,534 | | ||||||
Deferred revenue and other long-term liabilities |
9,686 | 9,447 | ||||||
Total liabilities |
585,508 | 436,704 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $0.01 par value: |
||||||||
Authorized shares 5,000 |
||||||||
Issued and outstanding shares none |
| | ||||||
Common stock, $0.01 par value: |
||||||||
Authorized shares 90,000 and 180,000 |
||||||||
Issued and outstanding shares 60,033 and 66,327 |
600 | 663 | ||||||
Additional paid in capital |
642,852 | 747,160 | ||||||
Accumulated other comprehensive loss |
(1,498 | ) | (3,007 | ) | ||||
Accumulated deficit |
(165,614 | ) | (199,470 | ) | ||||
Total stockholders equity |
476,340 | 545,346 | ||||||
Total liabilities and stockholders equity |
$ | 1,061,848 | $ | 982,050 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Table of Contents
GSI COMMERCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
July 4, | July 3, | July 4, | July 3, | |||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
Revenues: |
||||||||||||||||
Net revenues from product sales |
$ | 91,192 | $ | 146,154 | $ | 197,383 | $ | 305,429 | ||||||||
Service fee revenues |
95,989 | 118,075 | 186,273 | 231,391 | ||||||||||||
Net revenues |
187,181 | 264,229 | 383,656 | 536,820 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Cost of revenues from product sales |
70,442 | 107,452 | 149,797 | 224,926 | ||||||||||||
Marketing |
7,054 | 7,702 | 17,915 | 18,509 | ||||||||||||
Account management and operations |
59,055 | 79,295 | 116,796 | 156,989 | ||||||||||||
Product development |
28,101 | 42,062 | 56,475 | 76,379 | ||||||||||||
General and administrative |
19,527 | 27,689 | 38,804 | 52,087 | ||||||||||||
Depreciation and amortization |
15,279 | 20,575 | 30,680 | 39,335 | ||||||||||||
Changes in fair value of deferred acquisition payments |
| 2,074 | | 4,148 | ||||||||||||
Total costs and expenses |
199,458 | 286,849 | 410,467 | 572,373 | ||||||||||||
Loss from operations |
(12,277 | ) | (22,620 | ) | (26,811 | ) | (35,553 | ) | ||||||||
Other (income) expense: |
||||||||||||||||
Interest expense |
4,759 | 4,739 | 9,555 | 9,947 | ||||||||||||
Interest income |
(54 | ) | (71 | ) | (205 | ) | (305 | ) | ||||||||
Other (income) expense |
(394 | ) | 938 | (165 | ) | 1,412 | ||||||||||
Total other expense |
4,311 | 5,606 | 9,185 | 11,054 | ||||||||||||
Loss before income taxes |
(16,588 | ) | (28,226 | ) | (35,996 | ) | (46,607 | ) | ||||||||
Benefit for income taxes |
(3,475 | ) | (2,495 | ) | (10,773 | ) | (12,751 | ) | ||||||||
Net loss |
$ | (13,113 | ) | $ | (25,731 | ) | $ | (25,223 | ) | $ | (33,856 | ) | ||||
Basic and diluted loss per share |
$ | (0.27 | ) | $ | (0.41 | ) | $ | (0.52 | ) | $ | (0.55 | ) | ||||
Weighted average shares outstanding basic and diluted |
48,681 | 63,286 | 48,304 | 61,866 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Table of Contents
GSI COMMERCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended | ||||||||
July 4, | July 3, | |||||||
2009 | 2010 | |||||||
Cash Flows from Operating Activities: |
||||||||
Net loss |
$ | (25,223 | ) | $ | (33,856 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation |
25,821 | 30,252 | ||||||
Amortization |
4,859 | 9,083 | ||||||
Amortization of discount on convertible notes |
5,092 | 5,180 | ||||||
Changes in fair value of deferred acquisition payments |
| 4,148 | ||||||
Stock-based compensation |
13,046 | 14,670 | ||||||
Foreign currency transaction losses |
(153 | ) | 1,414 | |||||
Deferred income taxes |
(10,737 | ) | (13,812 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable, net |
28,156 | 12,701 | ||||||
Inventory |
5,721 | (6,267 | ) | |||||
Prepaid expenses and other current assets |
(923 | ) | (1,263 | ) | ||||
Other assets, net |
1,824 | 352 | ||||||
Accounts payable and accrued expenses |
(97,290 | ) | (95,832 | ) | ||||
Deferred revenue |
155 | (1,817 | ) | |||||
Net cash used in operating activities |
(49,652 | ) | (75,047 | ) | ||||
Cash Flows from Investing Activities: |
||||||||
Payments for acquisitions of businesses, net of cash acquired |
(2,273 | ) | (47,355 | ) | ||||
Cash paid for property and equipment, including internal use software |
(17,929 | ) | (34,298 | ) | ||||
Purchase of investments |
| (18,391 | ) | |||||
Release from restricted cash escrow funds |
1,052 | | ||||||
Net cash used in investing activities |
(19,150 | ) | (100,044 | ) | ||||
Cash Flows from Financing Activities: |
||||||||
Debt issuance costs paid |
(42 | ) | (887 | ) | ||||
Repayments of capital lease obligations |
(2,353 | ) | (2,912 | ) | ||||
Repayments of mortgage note |
(91 | ) | (97 | ) | ||||
Excess tax benefit in connection with exercise of stock options and awards |
| 978 | ||||||
Proceeds from exercise of common stock options |
522 | 14,675 | ||||||
Net cash provided by (used in) financing activities |
(1,964 | ) | 11,757 | |||||
Effect of exchange rate changes on cash and cash equivalents |
284 | (1,436 | ) | |||||
Net decrease in cash and cash equivalents |
(70,482 | ) | (164,770 | ) | ||||
Cash and cash equivalents, beginning of period |
130,315 | 228,430 | ||||||
Cash and cash equivalents, end of period |
$ | 59,833 | $ | 63,660 | ||||
Supplemental Cash Flow Information |
||||||||
Cash paid during the period for interest |
$ | 4,080 | $ | 4,428 | ||||
Cash paid during the period for income taxes |
2,352 | 603 | ||||||
Noncash Investing and Financing Activities: |
||||||||
Accrual for purchases of property and equipment |
4,494 | 2,964 | ||||||
Equipment financed under capital lease |
| 4,136 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Table of Contents
GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
NOTE 1BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of GSI Commerce, Inc. and
Subsidiaries (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 note disclosures required by accounting principles generally accepted in the
United States of America (GAAP) for complete financial statements.
The accompanying financial information is unaudited; however, in the opinion of the Companys
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.
The financial statements presented include the accounts of the Company and all wholly-owned
subsidiaries. All inter-company balances and transactions among consolidated entities have been
eliminated.
This quarterly report should be read in conjunction with the financial statements and notes
thereto included in the Companys audited financial statements presented in the Companys Annual
Report on Form 10-K for the fiscal year ended January 2, 2010, filed with the Securities and
Exchange Commission (SEC) on March 5, 2010.
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates and assumptions.
Accrued Expenses: Accrued expenses include $38,804 of amounts payable to the Companys
clients and accrued payroll of $20,953 as of July 3, 2010. No other item included in accrued
expenses was greater than 5% of total current liabilities as of July 3, 2010.
Accrued expenses include $62,705 of amounts payable to the Companys clients and accrued
payroll of $25,617 as of January 2, 2010. No other item included in accrued expenses was greater
than 5% of total current liabilities as of January 2, 2010.
Client Revenue Share: Client revenue share charges are payments made to the Companys
clients in exchange for the use of their brand names, logos, the promotion of its clients URLs,
Web stores and toll-free telephone numbers in clients marketing and communications materials, the
implementation of programs to provide incentives to consumers to shop through the e-commerce
businesses that the Company operates for its clients and other programs and services provided to
the consumers of the e-commerce businesses that the Company operates for its clients, net of
amounts reimbursed to the Company by its clients. Client revenue share is calculated as either a
percentage of product sales, a guaranteed annual amount, or both. Client revenue share charges were
$4,288 and $10,466 for the three- and six-month periods ended July 3, 2010 and $5,013 and $12,287
for the three- and six-month periods ended July 4, 2009, and are included in marketing expenses in
the Condensed Consolidated Statements of Operations.
Fulfillment Costs: The Company defines fulfillment costs as personnel, occupancy and other
costs associated with its fulfillment centers, personnel and other costs associated with its
logistical support and vendor operations departments and third-party warehouse and fulfillment
services costs. Fulfillment costs were $24,330 and $49,415 for the three- and six-month periods
ended July 3, 2010 and $19,462 and $39,810 for the three- and six-month periods ended July 4, 2009,
and are included in account management and operations expenses in the Condensed Consolidated
Statements of Operations.
6
Table of Contents
GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
Recent Accounting Pronouncements:
The following is a summary of recent accounting standards issued by the Financial Accounting
Standards Board (FASB):
Effective Date for The | ||||||||
Subject | Date Issued | Summary | Effect of Adoption | Company | ||||
Multiple Element Arrangements |
October 2009 | Removes the objective-and-reliable-evidence-of-fair-value criterion from the separation criteria used to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. Replaces references to fair value with selling price to distinguish from the fair value measurements required under accounting standards for Fair Value Measurements. Provides a hierarchy that entities must use to estimate the selling price, eliminates the use of the residual method for allocation, and expands the ongoing disclosure requirements. | No material impact. | January 2, 2011, with early adoption permitted. The Company chose to prospectively adopt this standard on January 3, 2010 |
NOTE 3FAIR VALUE OF FINANCIAL AND NONFINANCIAL INSTRUMENTS
The Companys financial assets and liabilities subject to fair value measurements on a
recurring basis are as follows (in thousands):
Fair Value Measurements on January 2, 2010 | ||||||||||||
Quoted Prices in | Significant | |||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||
Identical Assets | Observable Inputs | Inputs | ||||||||||
(Level 1) | (Level 2) | (Level 3) | ||||||||||
Assets |
||||||||||||
Cash and cash equivalents:(1) |
||||||||||||
Money market mutual funds |
$ | 13,606 | $ | | $ | | ||||||
Liabilities |
||||||||||||
Deferred acquisition
payments(2) |
$ | | $ | | $ | 60,963 |
Fair Value Measurements on July 3, 2010 | ||||||||||||
Quoted Prices in | Significant | |||||||||||
Active Markets for | Significant Other | Unobservable | ||||||||||
Identical Assets | Observable Inputs | Inputs | ||||||||||
(Level 1) | (Level 2) | (Level 3) | ||||||||||
Assets |
||||||||||||
Cash and cash equivalents:(1) |
||||||||||||
Money market mutual funds |
$ | 3,577 | $ | | $ | | ||||||
Liabilities |
||||||||||||
Deferred acquisition
payments(2) |
$ | | $ | | $ | 65,111 |
(1) | Cash and cash equivalents totaled $63,660 as of July 3, 2010, and were comprised of $3,577 of money market mutual funds and $60,083 of bank deposits. Cash and cash equivalents totaled $228,430 as of January 2, 2010, and were comprised of $13,606 of money market mutual funds and $214,824 of bank deposits. | |
(2) | Deferred acquisition payments represent the fair value of estimated acquisition payments that are contingent upon Retail Convergence, Inc. (Rue La La) achieving specified minimum earnings thresholds over one or more years. The Company utilized a discounted cash flow model and a discount rate of 13.6% to determine fair value. The Company accreted $2,074 and $4,148 of its deferred acquisition payments from the acquisition date of Rue La La during the three- and six-month periods ended July 3, 2010 and $0 during the three- and six-month periods ended July 4, 2009, and the corresponding charge was recorded to changes in fair value of deferred acquisition payments on the Condensed Consolidated Statements of Operations. |
7
Table of Contents
GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
The following table provides a reconciliation between the beginning and ending balances of
items measured at fair value on a recurring basis in the table above that used significant
unobservable inputs (Level 3):
Three Months Ended | Six Months Ended | |||||||
July 3, 2010 | July 3, 2010 | |||||||
Balance, beginning of period |
$ | 63,037 | $ | 60,963 | ||||
Changes in fair value of deferred acquisition payments included
in the Companys Condensed Consolidated Statements of
Operations |
2,074 | 4,148 | ||||||
Balance, end of period |
$ | 65,111 | $ | 65,111 | ||||
NOTE 4PROPERTY AND EQUIPMENT
The major classes of property and equipment, at cost, as of January 2, 2010 and July 3,
2010 are as follows:
January 2, | July 3, | |||||||
2010 | 2010 | |||||||
Computer hardware and software |
$ | 231,954 | $ | 264,284 | ||||
Building and building improvements |
44,822 | 44,923 | ||||||
Furniture, warehouse and office equipment, and other |
45,722 | 46,556 | ||||||
Land |
7,889 | 7,889 | ||||||
Leasehold improvements |
8,847 | 10,279 | ||||||
Capitalized leases |
29,132 | 33,315 | ||||||
368,366 | 407,246 | |||||||
Less: Accumulated depreciation |
(205,037 | ) | (234,265 | ) | ||||
Property and equipment, net |
$ | 163,329 | $ | 172,981 | ||||
The Companys net book value in capital leases was $19,729 as of July 3, 2010 and $18,500 as
of January 2, 2010. The Companys capital leases primarily relate to warehouse equipment, computer
hardware, and computer software. The depreciation of capital leases is included within depreciation
and amortization expense on the Condensed Consolidated Statements of Operations. Interest expense
recorded on capital leases was $322 and $643 for the three- and six-month periods ended July 3,
2010 and $373 and $769 for the three- and six-month periods ended July 4, 2009.
8
Table of Contents
GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
NOTE 5GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the changes in the carrying amount of goodwill for each of the
Companys reportable segments:
E-Commerce | Marketing | Consumer | ||||||||||||||
Services | Services | Engagement | Consolidated | |||||||||||||
January 2, 2010 |
$ | 83,090 | $ | 117,025 | $ | 172,888 | $ | 373,003 | ||||||||
Acquisitions |
2,556 | 20,708 | | 23,264 | ||||||||||||
Foreign currency
translation |
(726 | ) | | | (726 | ) | ||||||||||
July 3, 2010 |
$ | 84,920 | $ | 137,733 | $ | 172,888 | $ | 395,541 | ||||||||
The Companys intangible assets are as follows:
Weighted- | ||||||||||||
January 2, | July 3, | Average | ||||||||||
2010 | 2010 | Life | ||||||||||
(in years) | ||||||||||||
Gross carrying value of intangible assets
subject to amortization: |
||||||||||||
Customer contracts |
$ | 41,190 | $ | 56,148 | 2.5 | |||||||
Member relationships |
22,200 | 22,200 | 2.6 | |||||||||
Supplier relationships |
11,186 | 11,186 | 3.4 | |||||||||
Non-compete agreements |
4,079 | 4,481 | 3.0 | |||||||||
Purchased technology |
4,805 | 13,723 | 3.6 | |||||||||
Trade names |
840 | 840 | 1.5 | |||||||||
Foreign currency translation |
(482 | ) | (606 | ) | ||||||||
83,818 | 107,972 | 2.7 | ||||||||||
Accumulated amortization: |
||||||||||||
Customer contracts |
(22,907 | ) | (26,721 | ) | ||||||||
Member relationships |
(489 | ) | (3,569 | ) | ||||||||
Supplier relationships |
| (472 | ) | |||||||||
Non-compete agreements |
(2,888 | ) | (3,590 | ) | ||||||||
Purchased technology |
(2,428 | ) | (3,332 | ) | ||||||||
Trade names |
(532 | ) | (624 | ) | ||||||||
Foreign currency translation |
72 | 146 | ||||||||||
(29,172 | ) | (38,162 | ) | |||||||||
Net carrying value: |
||||||||||||
Customer contracts |
18,283 | 29,427 | ||||||||||
Member relationships |
21,711 | 18,631 | ||||||||||
Supplier relationships |
11,186 | 10,714 | ||||||||||
Non-compete agreements |
1,191 | 891 | ||||||||||
Purchased technology |
2,377 | 10,391 | ||||||||||
Trade names |
308 | 216 | ||||||||||
Foreign currency translation |
(410 | ) | (460 | ) | ||||||||
Total intangible assets subject to
amortization, net |
54,646 | 69,810 | ||||||||||
Indefinite life intangible assets: |
||||||||||||
Trade names |
78,229 | 84,804 | ||||||||||
Total intangible assets |
$ | 132,875 | $ | 154,614 | ||||||||
9
Table of Contents
GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
Amortization expense of intangible assets was $4,959 and $9,064 for the three- and
six-month periods ended July 3, 2010 and $2,514 and $4,962 for the three- and six-month periods
ended July 4, 2009. Estimated future amortization expense related to intangible assets as of July
3, 2010, is as follows:
Fiscal 2010 |
$ | 11,027 | ||
Fiscal 2011 |
20,922 | |||
Fiscal 2012 |
16,122 | |||
Fiscal 2013 |
12,452 | |||
Fiscal 2014 |
8,044 | |||
Thereafter |
1,243 | |||
$ | 69,810 | |||
NOTE 6ACQUISITIONS AND INVESTMENT
The Company accounts for acquisitions using the acquisition method of accounting. Under the
acquisition method, assets acquired and liabilities assumed from acquisitions are recorded at their
fair values as of the acquisition date. Any excess of the purchase price over the fair values of
the net assets acquired are recorded as goodwill. The Companys purchased intangible assets and
goodwill are not deductible for tax purposes. However, acquisition method accounting allows for the
establishment of deferred tax liabilities on purchased intangible assets, other than goodwill.
MBS
On April 30, 2010, the Company acquired 100% of the issued and outstanding capital stock of
MBS Insight, Inc. (MBS), a wholly owned subsidiary of World Marketing, Inc. for $22,200. MBS is a
database marketing solutions provider that offers a knowledge-based marketing services and
solutions that help marketers innovate, advance, and automate their marketing efforts for greater
return on their investment. The acquisition strengthens e-Dialogs suite of products providing
marketers with an operational, multichannel view of customers in order to understand customer
behavior and preferences in real time.
The table below summarizes the fair values of the MBSs assets and acquired liabilities
assumed, including cash acquired, as of acquisition date:
Total current assets |
$ | 2,472 | ||
Property, plant, and equipment |
949 | |||
Goodwill |
11,563 | |||
Indentifiable intangible assets: |
||||
Customer relationships |
8,611 | |||
Technology |
2,551 | |||
Trade name |
1,710 | |||
Total assets acquired |
27,856 | |||
Total current liabilities |
(1,476 | ) | ||
Long-term deferred tax liabilities |
(4,180 | ) | ||
Total liabilities assumed |
(5,656 | ) | ||
Net Assets Acquired |
$ | 22,200 | ||
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GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
Rue La La
In November 2009, the Company completed the acquisition of substantially all of the
outstanding common stock of Rue La La pursuant to the terms of an Agreement and Plan of Merger
dated October 27, 2009. In December 2009, the Company acquired the remaining outstanding common
stock of Rue La La.
Other Acquisitions
During the six months ended July 3, 2010, the Company made three other acquisitions. The results of operations for these acquisitions have been
included in the Companys Condensed Consolidated Statements of Operations since their respective
acquisition dates and were not material to its consolidated financial statements.
Unaudited Pro Forma Financial Information
The financial information in the table below summarizes the combined results of operations of
the Company, MBS, and Rue La La on a pro forma basis, as though the companies had been combined as
of the beginning of each of the periods presented. The pro forma financial information is presented
for informational purposes only and is not indicative of the results of operations that would have
been achieved if the acquisition had actually taken place at the beginning of each of the periods
presented and is not intended to be a projection of future results or trends.
Three Months Ended | Six Months Ended | |||||||||||||||
July 4, | July 3, | July 4, | July 3, | |||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
Net revenues |
$ | 223,258 | $ | 265,611 | $ | 449,593 | $ | 542,483 | ||||||||
Net loss |
$ | (15,631 | ) | $ | (25,791 | ) | $ | (33,263 | ) | $ | (34,174 | ) |
Equity Method Investment
During the second quarter of fiscal 2010 the Company purchased 27% of the common stock of
Intershop Communications AG (Intershop), a provider of e-commerce software based in Germany and
publicly traded on the Frankfurt Stock Exchange, for $18,391. The Company accounts for this
investment using the equity method of accounting, and monitors its investment periodically to
evaluate whether any changes in fair value below its cost basis become other-than-temporary. The
Company has elected to record its share of earnings/losses for Intershop on a one quarter lag due
to timeliness considerations. The Companys investment in Intershop is included in other assets,
net on the Companys Condensed Consolidated Balance Sheets.
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GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
NOTE 7LONG-TERM DEBT AND CREDIT FACILITY
The following table summarizes the Companys long-term debt as of:
January 2, | July 3, | |||||||
2010 | 2010 | |||||||
Convertible notes |
$ | 172,391 | $ | 120,102 | ||||
Notes payable (1) |
12,479 | 12,382 | ||||||
Capital lease obligations |
20,923 | 22,285 | ||||||
Line of credit |
| | ||||||
Total debt |
205,793 | 154,769 | ||||||
Less: Current portion of convertible notes |
(55,443 | ) | | |||||
Less: Current portion of notes payable |
(195 | ) | (202 | ) | ||||
Less: Current portion of capital lease
obligations |
(5,065 | ) | (7,327 | ) | ||||
Total long-term debt |
$ | 145,090 | $ | 147,240 | ||||
(1) | The estimated fair market value of the notes payable approximated their carrying value as of July 3, 2010 and January 2, 2010. |
3% Convertible Notes due 2025
In 2005, the Company completed a public offering of $57,500 aggregate principal amount of 3%
subordinated convertible notes due June 1, 2025.
In April 2010, the Company called the notes for redemption and in June 2010, the Company
issued 3,227 shares of common stock upon the conversion of $57,469 of the 3% convertible notes at
the election of the holders of the notes, which was recorded as an increase to additional paid in
capital on the Condensed Consolidated Balance Sheets. The Company paid $31 for the remaining 3%
convertible notes that were not converted by the holders of the notes.
The following table provides additional information about the Companys 3% convertible notes:
As of | As of | |||||||
January 2, 2010 | July 3, 2010 | |||||||
Carrying amount of the equity component |
$ | 18,187 | $ | | ||||
Principal amount of the liability
component |
$ | 57,500 | $ | | ||||
Unamortized discount of liability
component |
$ | 2,057 | $ | | ||||
Net carrying amount of liability component |
$ | 55,443 | $ | |
The following table provides the components of interest expense for the Companys 3%
convertible notes:
Three Months Ended | Six Months Ended | |||||||||||||||
July 4, | July 3, | July 4, | July 3, | |||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
Amortization of the
discount on the
liability component |
$ | 1,097 | $ | 821 | $ | 2,193 | $ | 2,053 | ||||||||
Contract interest coupon |
432 | 288 | 863 | 719 | ||||||||||||
Amortization of the
liability component of
the issue costs |
94 | 69 | 191 | 173 | ||||||||||||
Interest expense |
$ | 1,623 | $ | 1,178 | $ | 3,247 | $ | 2,945 | ||||||||
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GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
2.5% Convertible Notes due 2027
In 2007, the Company completed a private placement of $150,000 of aggregate principal amount
of 2.5% subordinated convertible notes due June 1, 2027, raising net proceeds of approximately
$145,000, after deducting initial purchasers discount and issuance costs. The notes bear interest
at 2.5%, payable semi-annually on June 1 and December 1.
Holders may convert the notes into shares of the Companys common stock (or cash or a
combination of the Companys common stock and cash, if the Company so elects) at a conversion rate
of 33.3333 shares per $1,000 principal amount of notes (representing a conversion price of
approximately $30.00 per share) beginning on March 1, 2014. Holders can require the Company to
repurchase the notes for 100% of principal amount of the notes on June 1, 2014. At any time on or
after June 8, 2014, the Company may redeem any of the notes for cash at a redemption price of 100%
of their principal amount, plus accrued and unpaid interest, if any, up to but excluding, the
redemption date. Based on the Companys closing stock price of $27.67 on July 3, 2010, the
if-converted value of the notes does not exceed the aggregate principal amount of the notes.
The following table provides additional information about the Companys 2.5% convertible
notes:
As of | As of | |||||||
January 2, 2010 | July 3, 2010 | |||||||
Carrying amount of the equity component |
$ | 26,783 | $ | 26,783 | ||||
Principal amount of the liability
component |
$ | 150,000 | $ | 150,000 | ||||
Unamortized discount of liability
component |
$ | 33,052 | $ | 29,898 | ||||
Net carrying amount of liability component |
$ | 116,948 | $ | 120,102 | ||||
Remaining amortization period of discount |
47 months | |||||||
Effective interest rate on liability
component |
8.60 | % |
The following table provides the components of interest expense for the Companys 2.5%
convertible notes:
Three Months Ended | Six Months Ended | |||||||||||||||
July 4, | July 3, | July 4, | July 3, | |||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
Amortization of the
discount on the
liability component |
$ | 1,449 | $ | 1,577 | $ | 2,899 | $ | 3,154 | ||||||||
Contract interest coupon |
937 | 937 | 1,875 | 1,875 | ||||||||||||
Amortization of the
liability component of
the issue costs |
114 | 119 | 226 | 238 | ||||||||||||
Interest expense |
$ | 2,500 | $ | 2,633 | $ | 5,000 | $ | 5,267 | ||||||||
The estimated fair market value of the 2.5% subordinated convertible notes was $164,520
as of July 3, 2010 and $157,125 as of January 2, 2010 based on quoted market prices.
Credit Facility
In March 2010, the Company amended and expanded its existing secured revolving credit
facility. By exercising the accordion feature in its existing credit facility, the Company expanded
the credit facility by $60,000 to $150,000. The credit
facility is available for letters of credit, working capital, and general corporate purposes,
including possible acquisitions. The $150,000 secured revolving credit facility provides for the
issuance of up to $30,000 of letters of credit, which is included in the $150,000 available under
the secured revolving credit facility. The secured revolving credit facility is collateralized by
substantially all of the Companys assets. The Company may elect to have amounts outstanding under
the credit facilities bear interest at either a LIBOR rate plus an applicable margin of 2.0% to
3.25%, the prime rate plus an applicable margin of 2.0% to 3.25%, Daily LIBOR plus 1.0% plus an
applicable margin of 2.0% to 3.25%, or at the Federal Funds Open Rate plus 0.5% plus an applicable
margin of 2.0% to 3.25%. The applicable margin is determined by the leverage ratio of funded debt
to EBITDA, as defined in the credit facility. The Company had no outstanding borrowings and $8,262
of outstanding letters of credit under the secured revolving credit facility as of July 3, 2010.
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GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
NOTE 8COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is involved in various litigation incidental to its business, including
alleged contractual claims, claims relating to infringement of intellectual property rights of
third parties, claims relating to the manner in which goods are sold through its
integrated-commerce platform and claims relating to the Companys collection of sales taxes in
certain states. The Company collects sales taxes for goods owned and sold by it and shipped into
certain states. As a result, the Company is subject from time to time to claims from other states
alleging that the Company failed to collect and remit sales taxes for sales and shipments of
products to customers in such other states.
Based on the merits of the cases and/or the amounts claimed, the Company
does not believe that any claims are likely to have a material adverse effect on its business,
financial position or results of operations. The Company may, however incur substantial expenses
and devote substantial time to defend these claims whether or not such claims are meritorious. In
addition, litigation is inherently unpredictable. In the event of a determination adverse to the
Company, the Company may incur substantial monetary liability and may be required to implement
expensive changes in its business practices, enter into costly royalty or licensing agreements, or
begin to collect sales taxes in states in which it previously did not. An adverse determination
could have a material adverse effect on the Companys business, financial position or results of
operations. Expenditures for legal costs are expensed as incurred.
Operating and Capital Commitments
The following summarizes the Companys principal operating and capital commitments as of July
3, 2010:
Payments due by fiscal year | ||||||||||||||||||||||||||||
2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Total | ||||||||||||||||||||||
Operating lease obligations(1) |
$ | 10,684 | $ | 20,715 | $ | 20,870 | $ | 16,678 | $ | 13,212 | $ | 21,216 | $ | 103,375 | ||||||||||||||
Purchase obligations and marketing
commitments(1) |
76,468 | 12,386 | 13,403 | 6,875 | 5,570 | 45,000 | 159,702 | |||||||||||||||||||||
Client revenue share payments(1) |
8,824 | 21,400 | 22,158 | 23,368 | 15,991 | 33,269 | 125,010 | |||||||||||||||||||||
Debt interest(1) |
2,802 | 4,509 | 4,498 | 4,481 | 2,277 | 8,784 | 27,351 | |||||||||||||||||||||
Debt obligations |
99 | 209 | 563 | 237 | 150,253 | 11,022 | 162,383 | |||||||||||||||||||||
Capital lease obligations, including interest(2) |
3,872 | 8,168 | 7,085 | 3,819 | 1,800 | | 24,744 | |||||||||||||||||||||
Deferred acquisition payments(3) |
500 | 1,500 | 750 | 1,000 | | | 3,750 | |||||||||||||||||||||
Total |
$ | 103,249 | $ | 68,887 | $ | 69,327 | $ | 56,458 | $ | 189,103 | $ | 119,291 | $ | 606,315 | ||||||||||||||
(1) | Not required to be recorded in the Condensed Consolidated Balance Sheet as of July 3, 2010 in accordance with accounting principles generally accepted in the United States of America. | |
(2) | Capital lease obligations, excluding interest, are recorded in the Condensed Consolidated Balance Sheets. | |
(3) | The $3,750 of deferred acquisition payments in the table above represent fixed contractual future payments. The Company is also obligated to pay up to an additional $208,400 from fiscal 2011 through fiscal 2016 based on the achievement of certain financial targets by some of our acquired companies, of which the Company has the ability to pay up to $45,800 with shares of the Companys common stock. The Company is uncertain as to if or when such amounts may be settled; as a result, these obligations are not included in the table above. |
14
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GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
Approximately $3,005 of unrecognized tax benefits have been recorded as liabilities as of July
3, 2010, and the Company is uncertain as to if or when such amounts may be settled; as a result,
these obligations are not included in the table above. Changes to these tax contingencies that are
reasonably possible in the next 12 months are not expected to be material.
NOTE 9STOCK AWARDS
In May 2010, the Companys stockholders approved the 2010 Equity Incentive Plan (2010
Plan). The 2010 Plan authorizes the award of 3,500 shares of the Companys common stock. In
addition, any outstanding stock awards previously granted under the Companys 2005 Equity Incentive
Plan (the 2005 Plan) or the Companys Amended and Restated 1996 Equity Incentive Plan that
expire, are terminated, cancelled or forfeited, or are withheld in satisfaction of payment of
withholding taxes after May 28, 2010 will become available for grant under the 2010 Plan. The 2010
Plan will terminate on March 2, 2020, after which no further awards may be granted under the 2010
Plan.
In May 2010, the Companys stockholders also approved an increase to the total number of
authorized shares of common stock from 90,000 shares to 180,000 shares.
As of July 3, 2010, 3,594 shares of common stock were available for future grants under the
2010 Plan. The equity awards granted under the Plan generally vest at various times over periods
ranging up to five years and have terms of up to ten years after the date of grant, unless the
optionees service to the Company is interrupted or terminated.
Stock Options and Warrants
The following table summarizes the stock option and warrant activity for the six-month period
ended July 3, 2010:
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Number of | Average | Remaining | Aggregate | |||||||||||||
Shares | Exercise | Contractual | Intrinsic | |||||||||||||
(in thousands) | Price | Life (in years) | Value | |||||||||||||
Outstanding at January 2, 2010 |
3,252 | $ | 9.88 | |||||||||||||
Granted |
| $ | | |||||||||||||
Exercised |
(1,649 | ) | $ | 8.90 | ||||||||||||
Forfeited/Cancelled |
(1 | ) | $ | 14.21 | ||||||||||||
Outstanding at July 3, 2010 |
1,602 | $ | 10.88 | 3.07 | $ | 26,891 | ||||||||||
Vested and expected to vest at July 3, 2010 |
1,602 | $ | 10.88 | 3.07 | $ | 26,891 | ||||||||||
Exercisable at July 3, 2010 |
1,602 | $ | 10.88 | 3.07 | $ | 26,891 | ||||||||||
Restricted Stock Units and Awards
The following table summarizes the restricted stock unit and restricted stock award activity
for the six-month period ended July 3, 2010:
Weighted | ||||||||
Number of | Average | |||||||
Shares | Grant Date | |||||||
(in thousands) | Fair Value | |||||||
Nonvested shares at January 2, 2010 |
4,294 | $ | 16.64 | |||||
Granted |
1,323 | $ | 27.42 | |||||
Vested |
(1,537 | ) | $ | 14.16 | ||||
Forfeited/Cancelled |
(216 | ) | $ | 16.26 | ||||
Nonvested shares at July 3, 2010 |
3,864 | $ | 21.34 | |||||
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GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
Stock-based Compensation Expense
The following table summarizes stock-based compensation expense included on the Companys
Condensed Consolidated Statements of Operations:
Three Months Ended | Six Months Ended | |||||||||||||||
July 4, | July 3, | July 4, | July 3, | |||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
Includes stock-based compensation
as follows: |
||||||||||||||||
Account management and operations |
$ | 2,394 | $ | 3,422 | $ | 4,650 | $ | 5,868 | ||||||||
Product development |
$ | 1,185 | $ | 1,759 | $ | 2,636 | $ | 3,628 | ||||||||
General and administrative |
$ | 2,513 | $ | 2,558 | $ | 5,760 | $ | 5,174 |
NOTE 10INCOME TAXES
In the first quarter of fiscal 2010, the Companys tax provision was determined using an
estimate of its annual effective rate of 65.3% plus any discrete items that occurred during the
quarter. In the second quarter of fiscal 2010, due to the Companys fiscal 2010 projected pre-tax
income/loss being close to breakeven as well as the impact of the Companys acquisitions made
during the second quarter and other factors, small variations to the full-year projection would result in material variability in the Companys estimated annual effective rate. Therefore, the
Company has calculated the second quarter tax provision using a calculation of the actual tax rate
on the actual results for the six months ended July 3, 2010, which is the best estimate of the
Companys estimated annual effective tax rate. Using this approach, the Companys year-to-date
effective tax rate is 23.4% for the six months ended July 3, 2010, while the reported effective tax
rate for the six months ended July 3, 2010 is 27.4%. The difference between the year-to-date
effective and the reported effective tax rate is due to discrete items. Both rates are lower than
the 35% federal statutory tax rate primarily due to non-deductible permanent items and certain
losses in foreign operations that generate no tax benefit. The Company does not provide for U.S.
taxes on its undistributed earnings of foreign subsidiaries, if any, since it intends to invest
such undistributed earnings indefinitely outside of the U.S.
The reported effective tax rate for the six months ended July 4, 2009 was 29.9%. The estimated
annual effective tax rate of 31.5% was different from the actual tax rate of 29.9% primarily due to
the benefit from certain discrete state items partially offset by losses in foreign operations that
generate no tax benefit and therefore they are not included in the pre-tax book income calculation
for the annual effective tax rate.
The total amount of liabilities, interest and penalties related to uncertain tax positions and
recognized in the Condensed Consolidated Balance Sheets were $3,005 as of July 3, 2010, and $2,052
as of January 2, 2010. The Company recorded an increase in liabilities, including interest and
penalties, for uncertain tax positions that were recorded as income tax expense of $845 and $954
for the three- and six-month periods ended July 3, 2010 and an income tax expense of $86 and $171
for the three- and six-month periods ended July 4, 2009.
NOTE 11LOSS PER SHARE
Basic and diluted net loss per share is computed by dividing net loss by the weighted average
number of shares of common stock outstanding during the fiscal year.
16
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GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
The following is a summary of the securities outstanding during the respective periods that
have been excluded from the calculations because the effect on net loss per share would have been
anti-dilutive for the three- and six-month periods ended:
July 4, | July 3, | |||||||
2009 | 2010 | |||||||
Stock units and awards |
4,465 | 3,864 | ||||||
Stock options and warrants |
4,047 | 1,602 | ||||||
Convertible notes |
8,229 | 5,000 | ||||||
16,741 | 10,466 | |||||||
NOTE 12COMPREHENSIVE LOSS
Comprehensive loss is computed as net loss plus certain other items that are recorded directly
to shareholders equity in accordance with standards of accounting for Reporting Comprehensive
Income. Comprehensive loss is calculated as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
July 4, | July 3, | July 4, | July 3, | |||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
Net loss |
$ | (13,113 | ) | $ | (25,731 | ) | $ | (25,223 | ) | $ | (33,856 | ) | ||||
Other comprehensive loss: |
||||||||||||||||
Cumulative
translation
adjustment |
845 | (806 | ) | 782 | (1,509 | ) | ||||||||||
Comprehensive loss |
$ | (12,268 | ) | $ | (26,537 | ) | $ | (24,441 | ) | $ | (35,365 | ) | ||||
NOTE 13SEGMENT INFORMATION
The Company operates three reportable segments: e-commerce services, marketing services
and consumer engagement. For e-commerce services, the Company delivers customized solutions through
an integrated platform which is comprised of technology, fulfillment and customer care and is
available on a modular basis or as part of an integrated, end-to-end solution. For marketing
services, the Company offers a full suite of interactive marketing services. For consumer
engagement, the Company provides brands and retailers a platform for online private sales through
RueLaLa.com. In addition, the consumer engagement segment includes expenses for the start up of a
new business called ShopRunner.
The Company manages its segments and makes financial decisions and allocates resources based
on an internal management reporting process that provides segment revenue and segment profit (loss)
before depreciation, amortization, changes in fair value of deferred acquisition payments and
stock-based compensation expense. Beginning in the second quarter of fiscal 2010, the Company also
excludes the following expenses from its segment profit (loss): acquisition related integration,
transaction, due diligence expenses, non-cash inventory valuation adjustments, and the cash portion
of deferred acquisition payments recorded as compensation expense. The Company has conformed its
prior period segment results
disclosed in this footnote to reflect this change. The Company believes this metric is an
appropriate measure of evaluating the operational performance of the Companys segments. The
Company also uses this metric for planning, forecasting and analyzing future periods. However, this
measure should be considered in addition to, not as a substitute for, or superior to, income from
operations or other measures of financial performance prepared in accordance with GAAP.
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GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
The Company manages its working capital on a consolidated basis and does not allocate
long-lived assets to segments. Pursuant to accounting standards for Disclosures about Segments of
an Enterprise and Related Information, total segment assets have not been disclosed.
The following tables present summarized information by segment:
Three Months Ended July 4, 2009 | ||||||||||||||||||||
E-Commerce | Marketing | Consumer | Intersegment | |||||||||||||||||
Services | Services | Engagement | Eliminations | Consolidated | ||||||||||||||||
Net revenues |
$ | 163,770 | $ | 28,486 | $ | | $ | (5,075 | ) | $ | 187,181 | |||||||||
Segment costs and expenses |
160,843 | 22,154 | | (5,075 | ) | 177,922 | ||||||||||||||
Segment profit |
2,927 | 6,332 | | | 9,259 | |||||||||||||||
Acquisition related integration, transaction, due
diligence
expenses, non-cash inventory valuation adjustments,
and
the cash portion of deferred acquisition payments
recorded as compensation expense |
165 | |||||||||||||||||||
Depreciation and amortization |
15,279 | |||||||||||||||||||
Changes in fair value of deferred acquisition payments |
| |||||||||||||||||||
Stock-based compensation expense |
6,092 | |||||||||||||||||||
Loss from operations |
(12,277 | ) | ||||||||||||||||||
Interest expense |
4,759 | |||||||||||||||||||
Interest income |
(54 | ) | ||||||||||||||||||
Other expense, net |
(394 | ) | ||||||||||||||||||
Loss before income taxes |
$ | (16,588 | ) | |||||||||||||||||
Three Months Ended July 3, 2010 | ||||||||||||||||||||
E-Commerce | Marketing | Consumer | Intersegment | |||||||||||||||||
Services | Services | Engagement | Eliminations | Consolidated | ||||||||||||||||
Net revenues |
$ | 187,872 | $ | 44,040 | $ | 51,686 | $ | (19,369 | ) | $ | 264,229 | |||||||||
Segment costs and expenses |
181,959 | 35,735 | 54,091 | (19,369 | ) | 252,416 | ||||||||||||||
Segment profit (loss) |
5,913 | 8,305 | (2,405 | ) | | 11,813 | ||||||||||||||
Acquisition related integration, transaction, due
diligence
expenses, non-cash inventory valuation adjustments,
and
the cash portion of deferred acquisition payments
recorded as compensation expense |
4,045 | |||||||||||||||||||
Depreciation and amortization |
20,575 | |||||||||||||||||||
Changes in fair value of deferred acquisition payments |
2,074 | |||||||||||||||||||
Stock-based compensation expense |
7,739 | |||||||||||||||||||
Loss from operations |
(22,620 | ) | ||||||||||||||||||
Interest expense |
4,739 | |||||||||||||||||||
Interest income |
(71 | ) | ||||||||||||||||||
Other expense, net |
938 | |||||||||||||||||||
Loss before income taxes |
$ | (28,226 | ) | |||||||||||||||||
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GSI COMMERCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)
Six Months Ended July 4, 2009 | ||||||||||||||||||||
E-Commerce | Marketing | Consumer | Intersegment | |||||||||||||||||
Services | Services | Engagement | Eliminations | Consolidated | ||||||||||||||||
Net revenues |
$ | 342,280 | $ | 53,608 | $ | | $ | (12,232 | ) | $ | 383,656 | |||||||||
Segment costs and expenses |
334,242 | 43,107 | | (12,232 | ) | 365,117 | ||||||||||||||
Segment profit |
8,038 | 10,501 | | | 18,539 | |||||||||||||||
Acquisition related integration, transaction, due
diligence
expenses, non-cash inventory valuation adjustments,
and
the cash portion of deferred acquisition payments
recorded as compensation expense |
1,624 | |||||||||||||||||||
Depreciation and amortization |
30,680 | |||||||||||||||||||
Changes in fair value of deferred acquisition payments |
| |||||||||||||||||||
Stock-based compensation expense |
13,046 | |||||||||||||||||||
Loss from operations |
(26,811 | ) | ||||||||||||||||||
Interest expense |
9,555 | |||||||||||||||||||
Interest income |
(205 | ) | ||||||||||||||||||
Other expense, net |
(165 | ) | ||||||||||||||||||
Loss before income taxes |
$ | (35,996 | ) | |||||||||||||||||
Six Months Ended July 3, 2010 | ||||||||||||||||||||
E-Commerce | Marketing | Consumer | Intersegment | |||||||||||||||||
Services | Services | Engagement | Eliminations | Consolidated | ||||||||||||||||
Net revenues |
$ | 389,244 | $ | 82,411 | $ | 96,139 | $ | (30,974 | ) | $ | 536,820 | |||||||||
Segment costs and expenses |
374,123 | 64,775 | 99,703 | (30,974 | ) | 507,627 | ||||||||||||||
Segment profit (loss) |
15,121 | 17,636 | (3,564 | ) | | 29,193 | ||||||||||||||
Acquisition related integration, transaction, due
diligence
expenses, non-cash inventory valuation adjustments,
and
the cash portion of deferred acquisition payments
recorded as compensation expense |
6,593 | |||||||||||||||||||
Depreciation and amortization |
39,335 | |||||||||||||||||||
Changes in fair value of deferred acquisition payments |
4,148 | |||||||||||||||||||
Stock-based compensation expense |
14,670 | |||||||||||||||||||
Loss from operations |
(35,553 | ) | ||||||||||||||||||
Interest expense |
9,947 | |||||||||||||||||||
Interest income |
(305 | ) | ||||||||||||||||||
Other expense, net |
1,412 | |||||||||||||||||||
Loss before income taxes |
$ | (46,607 | ) | |||||||||||||||||
The Companys operations are substantially within the United States.
19
Table of Contents
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION.
All statements made in this Quarterly Report on Form 10-Q, other than statements of
historical fact, are forward-looking statements, as defined under federal securities law. The words
look forward to, anticipate, believe, estimate, expect, intend, may, plan, will,
would, should, could, guidance, potential, opportunity, continue, project,
forecast, confident, prospects, schedule, designed, future discussions, if and
similar expressions typically are used to identify forward-looking statements. Forward-looking
statements are based on the then-current expectations, beliefs, assumptions, estimates and
forecasts about our business. These statements are not guarantees of future performance and involve
risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and
results may differ materially from what is expressed or implied by these forward-looking
statements. Factors which may affect our business, financial condition and operating results
include the effects of changes in the economy, consumer spending, the financial markets and the
industries in which we and our clients operate; changes affecting the Internet e-commerce and
marketing service, our ability to develop and maintain relationships with clients and suppliers
and the timing of our establishment, extension or termination of our relationships with clients;
our ability to timely and successfully develop, maintain and protect our technology, confidential
and proprietary information, and to timely and successfully enhance, develop and maintain its
product and service offerings; our ability to execute operationally to attract and retain qualified
personnel, to successfully integrate our recent acquisitions of other businesses; and the
performance of acquired businesses. More information about potential factors that could affect us
are described in Part I, Item 1A in our Form 10-K for the fiscal year ended January 2, 2010, filed
with the SEC on March 5, 2010, and in Part II, Item 1A of this Quarterly Report. We expressly
disclaim any intent or obligation to update these forward-looking statements.
Executive Overview
Second Quarter of Fiscal 2010 Financial Results and Significant Events:
| Net revenues increased by $77.0 million, or 41%, compared to the second quarter of fiscal 2009. Net revenues from product sales increased by $54.9 million and service fee revenues increased $22.1 million. |
| Net loss was $25.7 million in the second quarter of fiscal 2010, including a benefit for income taxes of $2.5 million, compared to a net loss of $13.1 million in the second quarter of fiscal 2009, including a benefit for income taxes of $3.5 million. Loss from operations was $22.6 million in the second quarter of fiscal 2010 compared to a loss of $12.3 million in the second quarter of fiscal 2009. | ||
| We made the following acquisitions: |
| MBS Insight, Inc. (MBS), a database solutions provider; | ||
| FetchBack, a provider of comprehensive retargeting solutions; | ||
| VendorNet, a provider of supply chain management services; and | ||
| M3 Mobile, a mobile marketing agency. |
| In June 2010, our 3% convertible notes were converted into 3.2 million shares of our common stock. |
2010 Outlook:
| We continue to expect an increase in net revenue in fiscal 2010, with the majority of the increase to be generated by our consumer engagement segment. We also expect increased revenues in fiscal 2010 from e-commerce services and marketing services. We expect to have a loss from operations in fiscal 2010. We expect our capital expenditures to increase in fiscal 2010 as we increase investments in technology and infrastructure. We believe we will have a net loss in fiscal 2010. |
Results of Operations (amounts in tables in millions)
Net Revenues
We derive our net revenues from product sales and service fees.
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Table of Contents
Net Revenues from Product Sales. Net revenues from product sales are derived from the sale
of products owned by us through our clients e-commerce Web stores as well as through the Web
stores in our consumer engagement segment. Net
revenues from product sales include outbound shipping charges for all of our Web stores for which
we provide fulfillment services. Net revenues from product sales are net of allowances for returns
and discounts and exclude sales tax. We recognize revenue from product sales and shipping when
title and risk of ownership passes to the consumer either upon shipment of products to customers or
upon receipt of products by customers dependent upon the terms and conditions of the Web store. Our
revenue recognition accounting estimates contain uncertainties because they require management to
make assumptions and to apply judgment to estimate future sales returns.
Service Fee Revenues. Service fee revenues include revenues from the provision of
e-commerce services, marketing services, and commissions earned from sales of certain product
categories through our consumer engagement segment. E-commerce service fee revenues are generated
from a clients use of one or more of our e-commerce platform components, which include technology,
fulfillment and customer care, as well as from the sales of professional services, gift card
breakage and the sale of software licenses and related services. E-commerce service fee revenues
can be fixed or variable and are based on the activity performed, the value of merchandise sold, or
the gross profit from a transaction. All of the revenues in our marketing services segment are
service fee revenues and are derived from selling a broad suite of interactive marketing services.
Second Qtr Fiscal 2010 | ||||||||||||||||||||||||
vs. | ||||||||||||||||||||||||
Second Qtr Fiscal 2009 | ||||||||||||||||||||||||
Second Qtr Fiscal 2009 | Second Qtr Fiscal 2010 | Increase/(Decrease) | % Change | |||||||||||||||||||||
Net Revenues by Type: |
||||||||||||||||||||||||
Net revenues from
product sales |
$ | 91.2 | 49 | % | $ | 146.1 | 55 | % | $ | 54.9 | 60 | % | ||||||||||||
Service fee revenues |
96.0 | 51 | % | 118.1 | 45 | % | 22.1 | 23 | % | |||||||||||||||
Total net revenues |
$ | 187.2 | 100 | % | $ | 264.2 | 100 | % | $ | 77.0 | 41 | % | ||||||||||||
First Six Months of Fiscal 2010 | ||||||||||||||||||||||||
vs. | ||||||||||||||||||||||||
First Six Months | First Six Months | First Six Months of Fiscal 2009 | ||||||||||||||||||||||
of Fiscal 2009 | of Fiscal 2010 | Increase/(Decrease) | % Change | |||||||||||||||||||||
Net Revenues by Type: |
||||||||||||||||||||||||
Net revenues from
product sales |
$ | 197.4 | 51 | % | $ | 305.4 | 57 | % | $ | 108.0 | 55 | % | ||||||||||||
Service fee revenues |
186.3 | 49 | % | 231.4 | 43 | % | 45.1 | 24 | % | |||||||||||||||
Total net revenues |
$ | 383.7 | 100 | % | $ | 536.8 | 100 | % | $ | 153.1 | 40 | % | ||||||||||||
Net Revenues by Type
Net Revenues from Product Sales. The product sales growth rate was 60% and 55% for the second
quarter and first six months of fiscal 2010, respectively. This sales growth rate in both periods
primarily reflects the impact of Retail Convergence (Rue La La) which we acquired in Q4 2009 and
higher shipping revenue offset by a slight decline in other e-commerce product revenue. The
increase in shipping revenue is due to increased unit shipments and higher adoption of our
QuickShip freight program. The decline in other e-commerce product revenue is primarily due to the
continuing transition by one large client from a product sales model to a service fee model. This
transition began in the first quarter of fiscal 2009, has steadily progressed, and is expected to
be completed by the end of fiscal 2010.
Service Fee Revenues. The service fee growth rate was 23% and 24% for the second quarter and
first six months of fiscal 2010, respectively. This growth rate primarily reflects higher
e-commerce fees from clients operated during the entirety of both periods, organic growth of
marketing services, and the impact of companies acquired over the last twelve months. Higher
e-commerce service fees from clients operated during the entirety of both periods were driven by
increased consumer purchases offset by lower average fee rates due to volume pricing breaks.
Organic marketing services growth was driven by increased spend from existing clients and the
addition of new clients. Service fees from companies acquired in the last twelve months consisted
of revenues from six companies, including four that were acquired in the second fiscal quarter of
2010.
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Supplemental Information
Supplemental information about segment net revenues is as follows:
Second Qtr Fiscal 2010 | ||||||||||||||||||||||||
vs. | ||||||||||||||||||||||||
Second Qtr Fiscal 2009 | ||||||||||||||||||||||||
Second Qtr Fiscal 2009 | Second Qtr Fiscal 2010 | Increase/(Decrease) | % Change | |||||||||||||||||||||
Net Revenues by Segment: |
||||||||||||||||||||||||
E-Commerce services |
$ | 163.8 | 88 | % | $ | 187.9 | 71 | % | $ | 24.1 | 15 | % | ||||||||||||
Marketing services |
28.5 | 15 | % | 44.0 | 17 | % | 15.5 | 54 | % | |||||||||||||||
Consumer engagement |
| 0 | % | 51.7 | 19 | % | 51.7 | 100 | % | |||||||||||||||
Intersegment
eliminations |
(5.1 | ) | (3 | %) | (19.4 | ) | (7 | %) | (14.3 | ) | 280 | % | ||||||||||||
Total net revenues |
$ | 187.2 | 100 | % | $ | 264.2 | 100 | % | $ | 77.0 | 41 | % | ||||||||||||
First Six Months of Fiscal 2010 | ||||||||||||||||||||||||
vs. | ||||||||||||||||||||||||
First Six Months | First Six Months | First Six Months of Fiscal 2009 | ||||||||||||||||||||||
of Fiscal 2009 | of Fiscal 2010 | Increase/(Decrease) | % Change | |||||||||||||||||||||
Net Revenues by Segment: |
||||||||||||||||||||||||
E-Commerce services |
$ | 342.3 | 89 | % | $ | 389.3 | 73 | % | $ | 47.0 | 14 | % | ||||||||||||
Marketing services |
53.6 | 14 | % | 82.4 | 15 | % | 28.8 | 54 | % | |||||||||||||||
Consumer engagement |
| 0 | % | 96.1 | 18 | % | 96.1 | 100 | % | |||||||||||||||
Intersegment
eliminations |
(12.2 | ) | (3 | %) | (31.0 | ) | (6 | %) | (18.8 | ) | 154 | % | ||||||||||||
Total net revenues |
$ | 383.7 | 100 | % | $ | 536.8 | 100 | % | $ | 153.1 | 40 | % | ||||||||||||
Costs and Expenses
Cost of Revenues from Product Sales. Costs of revenues from product sales consist primarily
of direct costs associated with (i) products we own that we sell through our clients Web stores,
(ii) products we own that we sell through the Web stores in our consumer engagement segment, and
(iii) shipping expenses for all Web stores for which we provide fulfillment services in our
e-commerce segment and all shipping expenses from the Web stores in our consumer engagement
segment. Costs of revenues from product sales were attributable to our e-commerce services and
consumer engagement segments.
Marketing. Marketing expenses consist primarily of net client revenue share charges,
promotional free shipping and subsidized shipping and handling costs, catalog costs, and net
advertising and promotional expenses. Marketing expenses support our net revenues from product
sales.
Account Management and Operations. Account management and operations expenses consist
primarily of costs to operate our fulfillment centers and customer care centers, credit card fees,
and payroll related to our buying, business management, operations and sales and marketing
functions.
Product Development. Product development expenses consist primarily of expenses associated
with planning, maintaining and operating our technology platforms and related systems, and payroll
and related expenses for engineering, production, creative and management information systems.
General and Administrative. General and administrative expenses consist primarily of
payroll and related expenses for executive, finance, human resources, legal, business development
and administrative personnel, as well as bad debt expense and occupancy costs for our headquarters
and other offices.
Depreciation and Amortization. Depreciation and amortization expenses relate primarily to the
depreciation or amortization of the capitalized costs for our purchased and internally-developed
technology, including a portion of the cost related to the employees that developed such
technology, hardware and software; furniture and equipment at our corporate offices, fulfillment
centers and customer care centers; the office buildings and other facilities owned by us; and
acquisition-related intangible assets.
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Changes in Fair Value of Deferred Acquisition Payments. Changes in fair value of deferred
acquisition payments expenses consist of the change in the fair value of future estimated
acquisition payments.
Second Quarter of Fiscal 2010 | ||||||||||||||||||||||||
Second Quarter | Second Quarter | vs. | ||||||||||||||||||||||
of Fiscal 2009 | of Fiscal 2010 | Second Quarter of Fiscal 2009 | ||||||||||||||||||||||
% of | % of | |||||||||||||||||||||||
Net | Net | Increase/ | ||||||||||||||||||||||
$ | Revenues | $ | Revenues | (Decrease) | % Change | |||||||||||||||||||
Cost of revenues from product sales |
$ | 70.4 | 38 | % | $ | 107.4 | 41 | % | $ | 37.0 | 53 | % | ||||||||||||
Marketing |
7.1 | 4 | % | 7.7 | 3 | % | 0.6 | 8 | % | |||||||||||||||
Account management and operations |
59.1 | 32 | % | 79.3 | 30 | % | 20.2 | 34 | % | |||||||||||||||
Product development |
28.1 | 15 | % | 42.0 | 16 | % | 13.9 | 49 | % | |||||||||||||||
General and administrative |
19.5 | 10 | % | 27.7 | 10 | % | 8.2 | 42 | % | |||||||||||||||
Depreciation and amortization |
15.3 | 8 | % | 20.6 | 8 | % | 5.3 | 35 | % | |||||||||||||||
Changes in fair value of deferred
acquisition payments |
| 0 | % | 2.1 | 1 | % | 2.1 | 100 | % | |||||||||||||||
Total costs and expenses |
$ | 199.5 | 107 | % | $ | 286.8 | 109 | % | $ | 87.3 | 44 | % | ||||||||||||
First Six Months of Fiscal 2010 | ||||||||||||||||||||||||
First Six Months | First Six Months | vs. | ||||||||||||||||||||||
of Fiscal 2009 | of Fiscal 2010 | First Six Months of Fiscal 2009 | ||||||||||||||||||||||
% of | % of | |||||||||||||||||||||||
Net | Net | Increase / | ||||||||||||||||||||||
$ | Revenues | $ | Revenues | (Decrease) | % Change | |||||||||||||||||||
Cost of revenues from product sales |
$ | 149.8 | 39 | % | $ | 224.9 | 42 | % | $ | 75.1 | 50 | % | ||||||||||||
Marketing |
17.9 | 5 | % | 18.5 | 4 | % | 0.6 | 3 | % | |||||||||||||||
Account management and operations |
116.8 | 30 | % | 157.0 | 29 | % | 40.2 | 34 | % | |||||||||||||||
Product development |
56.5 | 15 | % | 76.4 | 14 | % | 19.9 | 35 | % | |||||||||||||||
General and administrative |
38.8 | 10 | % | 52.1 | 10 | % | 13.3 | 34 | % | |||||||||||||||
Depreciation and amortization |
30.7 | 8 | % | 39.3 | 7 | % | 8.6 | 28 | % | |||||||||||||||
Changes in fair value of deferred
acquisition payments |
| 0 | % | 4.2 | 1 | % | 4.2 | 100 | % | |||||||||||||||
Total costs and expenses |
$ | 410.5 | 107 | % | $ | 572.4 | 107 | % | $ | 161.9 | 39 | % | ||||||||||||
Cost of Revenues from Product Sales:
Second Qtr | Second Qtr | First Six Months | First Six Months | |||||||||||||
Fiscal 2009 | Fiscal 2010 | of Fiscal 2009 | of Fiscal 2010 | |||||||||||||
Cost of revenues from product sales |
$ | 70.4 | $ | 107.4 | $ | 149.8 | $ | 224.9 | ||||||||
As a percentage of net revenues
from product sales |
77 | % | 74 | % | 76 | % | 74 | % |
Cost of revenues from product sales increased by $37.0 million in the second quarter of
fiscal 2010 and $75.1 million in the first six months of fiscal 2010. Almost all of the increase
was from Rue La La, acquired in November 2009. The decrease in cost of revenues as a percentage of
product sales was primarily due to the inclusion of Rue La La whose gross margins are typically
higher than in our e-commerce segment. Gross margins in the e-commerce segment were relatively
unchanged.
Marketing:
Second Qtr | Second Qtr | First Six Months | First Six Months | |||||||||||||
Fiscal 2009 | Fiscal 2010 | of Fiscal 2009 | of Fiscal 2010 | |||||||||||||
Marketing |
$ | 7.1 | $ | 7.7 | $ | 17.9 | $ | 18.5 | ||||||||
As a percentage of
net revenues from
product sales |
8 | % | 5 | % | 9 | % | 6 | % |
Marketing expenses increased by $0.6 million in both the second quarter of fiscal 2010
and in the first six months of fiscal 2010. As a percentage of net revenues from product sales,
marketing expenses decreased from 8% to 5% in the second quarter of fiscal 2010 and from 9% to 6%
in the first six months of fiscal 2010 due to the increase in product sales from the consumer
engagement segment which have lower marketing expenses as a percentage of net revenues from product
sales than the e-commerce segment. The absolute dollar increase was primarily driven by marketing
expenses in the consumer engagement segment, which did not have expenses in the prior year,
partially offset by decreased revenue share expenses in the e-commerce segment.
23
Table of Contents
Account Management and Operations. Account management and operations expenses increased by
$20.2 million in the second quarter of fiscal 2010 and $40.2 million in the first six months of
fiscal 2010. The increase was due to companies acquired in the last year as well as increased fulfillment expenses and credit
card fees driven by increased order and shipment volume.
Product Development. Product development expenses increased by $13.9 million in the second
quarter of fiscal 2010 and $19.9 million in the first six months of fiscal 2010. The increase was primarily driven by payroll and professional fees for enhancements to our
technology platforms, the expansion and upgrading of our technology operations infrastructure and
costs associated with launching new webstores on our platforms. The increase is also related to
companies acquired in the last year.
General and Administrative. General and administrative expenses increased by $8.2 million in
the second quarter of fiscal 2010 and $13.3 million in the first six months of fiscal 2010. The
increase was primarily due to
increased payroll and related expenses and professional fees including expenses from the
companies acquired in the last year. General and administrative expenses included $3.0 million and
$4.3 million of transaction expenses related to the acquisitions made in the second quarter of
fiscal 2010 and the first six months of fiscal 2010, respectively.
Depreciation and Amortization. Depreciation and amortization expenses increased by $5.3
million in the second quarter of fiscal 2010 and $8.6 million in the first six months of fiscal
2010. Depreciation expenses increased by $2.7 million and $4.4 million primarily due to an increase
in capital expenditures in fiscal 2010 compared to fiscal 2009 as well as depreciation on assets
acquired from companies acquired in the past year. Amortization expenses increased by $2.6 million
and $4.2 million due to the intangible asset amortization related to the companies acquired in the
past year.
Changes in Fair Value of Deferred Acquisition Payments. Changes in fair value of deferred
acquisition payments expenses increased from $0 to $2.1 million in the second quarter of fiscal
2010 and $0 to $4.2 million in the first six months of fiscal 2010 due to the acquisition of Rue La
La. Assuming our estimate of the value of the Rue La La earnout does not change, we expect changes
in fair value of deferred acquisition payments to continue to increase in fiscal 2010 as we accrete
our deferred acquisition payments liability up to the estimated payment amount. Any change in our
assumptions about the value of future earnout payments may result in a significant change to our
change in fair value of deferred acquisition payments.
24
Table of Contents
Other (Income) Expense
Second Quarter of Fiscal 2010 | ||||||||||||||||||||||||
Second Quarter | Second Quarter | vs. | ||||||||||||||||||||||
of Fiscal 2009 | of Fiscal 2010 | Second Quarter of Fiscal 2009 | ||||||||||||||||||||||
% of | % of | |||||||||||||||||||||||
Net | Net | Increase / | ||||||||||||||||||||||
$ | Revenues | $ | Revenues | (Decrease) | % Change | |||||||||||||||||||
Interest expense |
$ | 4.8 | 2 | % | $ | 4.8 | 2 | % | | $ | 0 | % | ||||||||||||
Interest income |
(0.1 | ) | 0 | % | (0.1 | ) | 0 | % | | 0 | % | |||||||||||||
Other (income) expense |
(0.4 | ) | 0 | % | 0.9 | 0 | % | 1.3 | (325 | %) | ||||||||||||||
Total other expense |
$ | 4.3 | 2 | % | $ | 5.6 | 2 | % | $ | 1.3 | 30 | % | ||||||||||||
First Six Months of Fiscal 2010 | ||||||||||||||||||||||||
First Six Months | First Six Months | vs. | ||||||||||||||||||||||
of Fiscal 2009 | of Fiscal 2010 | First Six Months of Fiscal 2009 | ||||||||||||||||||||||
% of | % of | |||||||||||||||||||||||
Net | Net | Increase / | ||||||||||||||||||||||
$ | Revenues | $ | Revenues | (Decrease) | % Change | |||||||||||||||||||
Interest expense |
$ | 9.6 | 2 | % | $ | 10.0 | 2 | % | $ | 0.4 | 4 | % | ||||||||||||
Interest income |
(0.2 | ) | 0 | % | (0.3 | ) | 0 | % | (0.1 | ) | 50 | % | ||||||||||||
Other (income) expense |
(0.2 | ) | 0 | % | 1.4 | 0 | % | 1.6 | (800 | %) | ||||||||||||||
Total other expense |
$ | 9.2 | 2 | % | $ | 11.1 | 2 | % | $ | 1.9 | 21 | % | ||||||||||||
Total other expense increased by $1.3 million in the second quarter of fiscal 2010 and $1.9
million in the first six months of fiscal 2010. The increases in other (income) expense were
primarily due to increases in foreign currency exchange losses on transactions denominated in
currencies other than the functional currency. In the second quarter of fiscal 2010 interest
expense remained constant and we expect interest expense to decrease through the remainder of
fiscal 2010 due to the conversion of our $57.5 million 3% convertible notes into common shares in
June 2010. For the first six months of fiscal 2010 interest expense increased by $0.4 million due
to the amortization of the debt discount on our convertible notes in accordance with the FASBs
accounting standard for Convertible Debt Instruments that May Be Settled in Cash Upon Conversion,
(Including Partial Cash Settlement).
Income Taxes
In the first quarter of 2010, our tax provision was determined using an estimate of our annual
effective rate of 65.3% plus any discrete items that occurred during the quarter. In the second
quarter of 2010, due to our fiscal 2010 projected pre-tax income/loss being close to breakeven as
well as the impact of our acquisitions made during the second quarter and other factors, small
variations to the full-year projection can result in material variability in our estimated annual
effective rate. Therefore, we have calculated the second quarter tax provision using a calculation
of the actual tax rate on the actual results for the six months ended July 3, 2010, which is the
best estimate of the our estimated annual effective tax rate. Using this approach, we recorded a
benefit of $12.8 million in the first six months of fiscal 2010. Our tax provision for this interim
period resulted in a tax rate of 27.4% based on the actual result for the first six months of
fiscal 2010. The actual tax rate is lower than the 35% federal statutory tax rate primarily due to
non- deductible permanent items and certain losses in foreign operations that generate no tax
benefit. We do not provide for U.S. taxes on our undistributed earnings of foreign subsidiaries, if
any, since we intend to invest such undistributed earnings indefinitely outside of the U.S.
As of January 2, 2010, we had available federal net operating loss carryforwards of
approximately $507.3 million which expire in the years 2010 through 2029. Approximately $308.6
million, out of the total $507.3 million, will expire as a result of the Internal Revenue Code
Section 382 limitation regardless of the amount of future taxable income, and thus has a full
valuation allowance recorded against this deferred tax asset. As such, we expect a majority of our
2010 net tax provision to be non-cash. As of January 2, 2010, we had available state net operating
loss carryforwards of approximately $268.6 million which expire in the years 2010 through 2029 and
foreign net operating loss carryforwards of approximately $18.7 million that either begin expiring
in 2023 or have no expiration date. A portion of these net operating loss carryforwards are offset
by a valuation allowance. Management monitors all available positive and negative evidence related
to our ability to utilize our deferred tax assets. Should management determine that it is more
likely than not that these deferred tax assets will be utilized, we will release a portion of the
remaining valuation allowance. Should management determine that it is more likely than not that
these deferred tax assets will not be utilized, we will increase the valuation allowance.
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Table of Contents
Guidance
We provided the following guidance for fiscal 2010 on July 28, 2010, in our earnings released
furnished on Form 8-K:
| Net revenues are expected to be $1.3 billion. |
| Loss from operations is expected to be $0.9 million. |
These projections are subject to substantial uncertainty. More information about potential
factors that could affect us are described in Part I, Item 1A in our Form 10-K for the fiscal year
ended January 2, 2010, filed with the SEC on March 5, 2010, and in Part II, Item 1A of this
Quarterly Report.
Seasonality
We have experienced and expect to continue to experience seasonal fluctuations in our revenues
from e-commerce services. These seasonal patterns will cause quarterly fluctuations in our
operating results. We also expect to experience seasonal fluctuations from our consumer engagement
segment, but to a lesser degree than with our e-commerce services segment. We experience less
seasonality in our revenues from marketing services. The fourth fiscal quarter has accounted for
and is expected to continue to account for a disproportionate percentage of our total annual
revenues. We believe that results of operations for any quarterly period may not be indicative of
the results for any other quarter or for the full year.
Liquidity and Capital Resources
As of | ||||||||
January 2, | July 3, | |||||||
2010 | 2010 | |||||||
(in millions) | ||||||||
Cash and cash equivalents |
$ | 228.4 | $ | 63.7 | ||||
Percentage of total assets |
21 | % | 6 | % |
In June 2010 we called all of our $57.5 million 3% convertible notes for redemption and
substantially all of the notes were converted into 3.2 million shares of our common stock. Also in
June 2010, we paid $0.03 million to redeem the convertible notes that were not converted by the
holders of the notes.
Sources of Cash
Our principal sources of liquidity in the first six months of fiscal 2010 were our cash and
cash equivalents balances. As of July 3, 2010, we had cash and cash equivalents totaling $63.7
million, compared to $228.4 million of cash and cash equivalents as of January 2, 2010. Our cash
equivalents are comprised of money market mutual funds.
We have experienced and expect to continue to experience seasonal fluctuations in our cash
flows. We generate the substantial majority of cash from our operating activities in our fourth
fiscal quarter. In our first fiscal quarter, we typically use cash generated from operating
activities in the fourth quarter of the prior fiscal year to satisfy accounts payable and accrued
expenses incurred in the fourth fiscal quarter of our prior fiscal year. During our second and
third fiscal quarters, we generally fund our operating expenses and capital expenditures from
either cash generated from operating activities, cash and cash equivalents, or financing
activities.
We generated $11.8 million of cash from financing activities primarily from the proceeds from
exercise of common stock options in the first six months of fiscal 2010, compared to using $2.0
million of cash for financing activities in the first six months of fiscal 2009.
As of July 3, 2010 and January 2, 2010, we had no outstanding borrowings and $8.3 million of
letters of credit outstanding under our $150 million secured revolving bank credit facility. The
credit facility contains financial and restrictive covenants that limit our ability to engage in
activities that may be in our long term best interests. We do not believe the financial covenants
will limit our ability to utilize the entire borrowing availability in fiscal 2010, if necessary.
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Uses of Cash
We used $75.0 million and $49.7 million of cash to fund operating activities in the first
six months of fiscal 2010 and fiscal 2009, respectively.
We utilized $47.4 million in cash for acquisitions in the first six months of fiscal 2010. We
acquired MBS for $22.5 million and made other smaller acquisitions that totaled $24.9 million. In
addition, we may be obligated to pay earnout payments of up to $208.4 million through 2016 based on
the achievement of certain performance targets by some of our acquired companies, of which we have
the ability to pay up to $45.8 million with shares of our common stock. We invested $18.4 million
for a noncontrolling interest in a company.
Our capital expenditures totaled $34.3 million and $17.9 million in the first six months of
fiscal 2010 and fiscal 2009, respectively. Our capital expenditures have generally comprised
purchases of computer hardware and software, internally developed software, and furniture and
fixtures. We continue to expect an increase in capital expenditures in fiscal 2010.
Outlook
We expect to generate positive cash flow from operations in fiscal 2010, the majority of which
will be generated in our fourth fiscal quarter. We believe that our cash flow from operating
activities, cash and cash equivalents balances, and borrowing availability under our secured
revolving credit facility will be sufficient to meet our anticipated operating cash needs for at
least the next 12 months, which includes any deferred acquisition payments. However, any
projections of future cash needs and cash flows are subject to substantial uncertainty.
We continually evaluate opportunities to sell additional equity or debt securities, obtain
credit facilities, or repurchase, refinance, or otherwise restructure our long-term debt for
strategic reasons or to further strengthen our financial position. Our secured revolving bank
credit facility contains negative covenants including prohibitions on our ability to incur
additional indebtedness. The sale of additional equity or convertible debt securities would likely
be dilutive to our stockholders. In addition, we will, from time to time, consider the acquisition
of, or investment in, complementary businesses, products, services, and technologies, which might
affect our liquidity requirements or cause us to issue additional equity or debt securities. There
can be no assurance that additional lines-of-credit or financing instruments will be available in
amounts or on terms acceptable to us, if at all.
Critical Accounting Policies
The preparation of our consolidated financial statements requires us to make estimates,
assumptions and judgments that affect our assets, liabilities, revenues and expenses and disclosure
of contingent assets and liabilities. We base these estimates and assumptions on historical data
and trends, current fact patterns, expectations and other sources of information we believe are
reasonable. Actual results may differ from these estimates under different conditions. For a full
description of our critical accounting policies, see Item 7 Managements Discussion and Analysis
of Financial Condition and Results of Operations in the 2009 Annual Report on Form 10-K for the
fiscal year ended January 2, 2010, filed with the SEC on March 5, 2010.
Recent Accounting Pronouncements
See Item 1 of Part I, Financial Statements Note 2, Summary of Significant Accounting
Policies for recent accounting pronouncements that could have an effect on us.
ITEM 3: | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
There have been no significant changes in market risks for the fiscal quarter
ended July 3, 2010. See the information set forth in Part II, Item 7A of the Companys Annual
Report on Form 10-K for the fiscal year ended January 2, 2010 filed with the Securities and
Exchange Commissions (SEC) on March 5, 2010.
ITEM 4: CONTROLS AND PROCEDURES.
Evaluation of disclosure controls and procedures. Our management, with the
participation of our chief executive officer and our chief financial officer, conducted an
evaluation, as of July 3, 2010, of the effectiveness of our disclosure controls and procedures, as
such term is defined in Exchange Act Rule 13a-15(e).
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Based on this evaluation, our chief executive officer and our chief financial officer
have concluded that, as of July 3, 2010, our disclosure controls and procedures, as defined in Rule
13a-15(e), were effective at the reasonable assurance level, to ensure that (i) information
required to be disclosed by the issuer in the reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms and (ii) information required to be disclosed
by an issuer in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the issuers management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure.
Changes in internal control over financial reporting. We monitor and evaluate on an
ongoing basis our internal control over financial reporting in order to improve its overall
effectiveness. In the course of these evaluations, we modify and refine our internal processes and
controls as conditions warrant. As required by Rule 13a-15(d), our management, including our chief
executive officer and our chief financial officer, also conducted an evaluation of our internal
control over financial reporting to determine whether any changes occurred during the fiscal
quarter ended July 3, 2010 that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting. Based on that evaluation, there has been no such change during the fiscal
quarter ended July 3, 2010.
PART II OTHER INFORMATION
ITEM 1: | LEGAL PROCEEDINGS. |
See Item 1 of Part I, Financial Statements Note 7, Commitments and Contingencies.
ITEM 1A: | RISK FACTORS. |
Our Annual Report on Form 10-K for the fiscal year ended January 2, 2010, filed with the
Securities and Exchange Commission on March 5, 2010, includes a detailed discussion of our risk
factors. The information presented below updates and should be read in conjunction with the risk
factors and information disclosed in our Form 10-K for the fiscal year ended January 2, 2010.
Our substantial leverage and significant debt service obligations could adversely affect our
financial condition and our ability to fulfill our obligations and operate our business.
We currently have and expect to continue to have a significant amount of indebtedness. As of
July 3, 2010, including our outstanding convertible notes, borrowings under our secured revolving
bank credit facility and capital leases, we had approximately $154.8 million of indebtedness
outstanding with an aggregate principal amount of $184.7 million and we had $150 million of
borrowing capacity under the revolving portion of our secured revolving bank credit facility. We
may also incur additional indebtedness in the future. In the event of a default under the notes or
the secured revolving bank credit facility, our indebtedness could become immediately due and
payable and could adversely affect our financial condition.
Our indebtedness could have significant negative consequences on us, including:
| our debt level increases our vulnerability to general adverse economic and industry conditions; | ||
| we may have difficulty obtaining financing in the future for working capital, capital expenditures, acquisitions or other purposes; | ||
| we may need to use a substantial portion of our cash flow from operations to pay interest and principal on our debt, which would reduce the amount of money available to finance our operations and other business activities; | ||
| our debt level could limit our flexibility in planning for, or reacting to, changes in our business and in our industry in general; and | ||
| our substantial amount of debt and the amount we must pay to service our debt obligations could place us at a competitive disadvantage compared to our competitors that have less debt. |
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The terms of our secured revolving bank credit facility impose financial and operating restrictions
on us.
We have a secured revolving bank credit facility with a borrowing capacity of $150 million.
Our secured revolving bank credit facility contains restrictive covenants that limit our ability to
engage in activities that may be in our long-term best interests. These covenants limit or
restrict, among other things, our ability to:
| incur additional indebtedness or pre-pay existing indebtedness; | |
| pay dividends or make other distributions in respect of our equity securities; | |
| sell assets, including the capital stock of us and our subsidiaries; | |
| enter into certain transactions with our affiliates; | |
| transfer any capital stock of any subsidiary or permit any subsidiary to issue capital stock; | |
| create liens; | |
| make certain loans or investments; and | |
| effect a consolidation or merger or transfer of all or substantially all of our assets. |
These limitations and restrictions may adversely affect our ability to finance our future
operations or capital needs or engage in other business activities that may be in our best
interests. In addition, our ability to borrow under the secured revolving bank credit facility is
subject to compliance with covenants. If we breach any of the covenants in our secured revolving
bank credit facility, we may be in default under our secured revolving bank credit facility. If we
default, the lenders under our secured revolving bank credit facility could declare all borrowings owed to them,
including accrued interest and other fees, to be immediately due and payable.
Our ability to use net operating loss carryforwards to reduce future tax payments may be limited.
As of January 2, 2010, we had approximately $507.3 million of U.S. Federal net operating loss
carryforwards, referred to as NOLs, potentially available to reduce taxable income in future
years. Of this amount, approximately $308.6 million will expire as a result of the Section 382
Limitation (described below in more detail) regardless of the amount of future taxable income and
thus has a full valuation allowance recorded against this deferred tax asset.
Utilization of the NOLs may be subject to a substantial annual limitation due to ownership
change limitations that may have occurred or that could occur in the future, as required by Section
382 of the Internal Revenue Code of 1986, as amended, referred to as the Code. These ownership
changes may limit the amount of NOLs that can be utilized annually to offset future taxable income
and tax. In general, an ownership change, as defined by Section 382 of the Code results from a
transaction or series of transactions over a three-year period resulting in an ownership change of
more than 50 percentage points of the outstanding stock of a company by certain stockholders or
public groups. The issuance of securities in connection with our acquisition of Rue La La, the
disposition of our stock by certain selling stockholders, and the issuance of shares of our common
stock upon the conversion of the 3% convertible notes may have resulted in an ownership change, or
could result in an ownership change in the future upon subsequent dispositions of our stock. In the
event of an ownership change, Section 382 imposes an annual limitation on the amount of
post-ownership change taxable income a corporation may offset with pre-ownership change NOLs. The
limitation imposed by Section 382 for any post-change year would be determined by multiplying the
value of our stock immediately before the ownership change (subject to certain adjustments) by the
applicable long-term tax-exempt rate. Any unused annual limitation may be carried over to later
years, and the limitation may under certain circumstances be increased by built-in gains which may
be present with respect to assets held by us at the time of the ownership change that are
recognized in the five-year period after the ownership change. Our use of NOLs arising after the
date of an ownership change would not be affected.
In addition, the ability to use NOLs will be dependent on our ability to generate future
taxable income. The NOLs may expire before we generate sufficient taxable income. There were no
NOLs that expired in the fiscal years ended December 29, 2007 and January 3, 2009. The maximum NOLs
that could expire if not utilized for the year ended January 2, 2010 is approximately $2.0 million.
ITEM 2: | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Pursuant to the terms of a Consulting Agreement dated April 22, 2009 between Arimor, LLC
(Arimor) and GSI Commerce Solutions, Inc., the Company agreed to issue to Arimor shares of the
Companys common stock as a fee for consulting services provided by Arimor. In the fiscal quarter
ended July 3, 2010, the Company issued an aggregate of 7,087 shares of common stock to Arimor
(Arimor Shares) pursuant to such agreement.
On May 10, 2010, in connection with the acquisition of DirectNet Solutions LLC (d/b/a
VendorNet) (VendorNet), the Company issued an aggregate of 87,465 shares of common stock to
certain members of VendorNet (the VendorNet Shares).
The issuance of the Arimor Shares and VendorNet Shares were completed in accordance with
Section 4(2) of the Securities Act of 1933, as amended, in offerings without any public offering or
distribution. The Arimor Shares and the VendorNet Shares are restricted securities and include
appropriate restrictive legends.
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ITEM 3: | DEFAULTS UPON SENIOR SECURITIES. |
None
ITEM 4: | [Reserved] |
None
ITEM 5: | OTHER INFORMATION. |
None
ITEM 6: | EXHIBITS. |
2.1 | Stock Purchase Agreement by and among e-Dialog, Inc. (a
wholly-owned subsidiary of GSI Commerce, Inc.), MBS Insight,
Inc., and World Marketing, Inc., dated April 30, 2010. The schedules
and exhibits to the merger agreement are omitted
pursuant to Item 601(b)(2) of Regulation S-K. GSI agrees to furnish
supplementally to the SEC, upon request, a copy of any
omitted schedule or exhibit.+ |
|||
10.1 | GSI Commerce, Inc. 2010 Equity Incentive Plan (filed as Appendix A to
GSI Commerce, Inc.s Definitive Proxy Statement
on Schedule 14A filed with the Securities and Exchange Commission on
April 13, 2010 and incorporated herein by
reference). |
|||
10.2 | Separation Agreement, dated May 28, 2010, between GSI Commerce, Inc.
and Stephen J. Gold (filed with GSI Commerce,
Inc.s Current Report on Form 8-K filed with the Securities and
Exchange Commission on June 3, 2010 and incorporated
herein by reference). |
|||
10.3 | Form of Restricted Stock Unit Grant Notice Issued to Directors Under
the GSI Commerce, Inc. 2010 Equity Incentive Plan
(Initial Award). |
|||
10.4 | Form of Restricted Stock Unit Grant Notice Issued to Directors Under
the GSI Commerce, Inc. 2010 Equity Incentive Plan
(Annual Award). |
|||
10.5 | Form of Restricted Stock Unit Grant Notice Under the GSI Commerce,
Inc. 2010 Equity Incentive Plan. |
|||
10.6 | Form of Performance Restricted Stock Unit Award Under the GSI
Commerce, Inc. 2010 Equity Incentive Plan. |
|||
10.7 | Employment Agreement, between GSI Commerce, Inc. and Christopher
Saridakis, dated March 23, 2010. |
|||
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934 |
|||
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934 |
|||
32.1 | Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 |
+ | Confidential treatment has been requested for certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 3, 2010
GSI COMMERCE, INC. |
||||
By: | /s/ MICHAEL G. RUBIN | |||
Michael G. Rubin | ||||
Chairman, President and Chief Executive Officer | ||||
By: | /s/ MICHAEL R. CONN | |||
Michael R. Conn | ||||
Executive Vice President,
Finance and Chief Financial Officer (principal financial officer & principal accounting officer) |
31