Attached files
file | filename |
---|---|
EXCEL - IDEA: XBRL DOCUMENT - CIMPRESS plc | Financial_Report.xls |
EX-10.5 - EX-10.5 - CIMPRESS plc | b83125exv10w5.htm |
EX-10.8 - EX-10.8 - CIMPRESS plc | b83125exv10w8.htm |
EX-10.6 - EX-10.6 - CIMPRESS plc | b83125exv10w6.htm |
EX-10.7 - EX-10.7 - CIMPRESS plc | b83125exv10w7.htm |
EX-32.1 - EX-32.1 - CIMPRESS plc | b83125exv32w1.htm |
EX-10.2 - EX-10.2 - CIMPRESS plc | b83125exv10w2.htm |
EX-10.1 - EX-10.1 - CIMPRESS plc | b83125exv10w1.htm |
EX-31.1 - EX-31.1 - CIMPRESS plc | b83125exv31w1.htm |
EX-10.4 - EX-10.4 - CIMPRESS plc | b83125exv10w4.htm |
EX-31.2 - EX-31.2 - CIMPRESS plc | b83125exv31w2.htm |
EX-10.3 - EX-10.3 - CIMPRESS plc | b83125exv10w3.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
þ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended September 30, 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: 000-51539
VISTAPRINT N.V.
(Exact Name of Registrant as Specified in its Charter)
The Netherlands (State or Other Jurisdiction of Incorporation or Organization) |
98-0417483 (I.R.S. Employer Identification No.) |
Hudsonweg 8
5928 LW Venlo
The Netherlands
(Address of Principal Executive Offices, Including Zip Code)
5928 LW Venlo
The Netherlands
(Address of Principal Executive Offices, Including Zip Code)
31-77-850-7700
(Registrants Telephone Number, Including Area Code)
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes 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 (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a small reporting company. See definitions of large accelerated
filer, accelerated filer, non-accelerated filer and smaller reporting company in Rule 12b-2
of the Exchange Act. (check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller Reporting Company o |
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
As of October 22, 2010, there were outstanding 43,983,025 ordinary shares of the registrant,
par value .01 per share.
FORM 10-Q
INDEX
2
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VISTAPRINT N.V.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited in thousands, except share and per share data)
(Unaudited in thousands, except share and per share data)
September 30, | June 30, | |||||||
2010 | 2010 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 168,982 | $ | 162,727 | ||||
Marketable securities |
7,646 | 9,604 | ||||||
Accounts receivable, net of allowances of $56 and $53, respectively |
11,186 | 9,389 | ||||||
Inventory |
7,102 | 6,223 | ||||||
Prepaid expenses and other current assets |
19,107 | 15,059 | ||||||
Total current assets |
214,023 | 203,002 | ||||||
Property, plant and equipment, net |
260,657 | 249,961 | ||||||
Software and web site development costs, net |
6,518 | 6,426 | ||||||
Deferred tax assets |
7,355 | 7,277 | ||||||
Other assets |
11,195 | 11,223 | ||||||
Total assets |
$ | 499,748 | $ | 477,889 | ||||
Liabilities and shareholders equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 12,020 | $ | 16,664 | ||||
Accrued expenses |
62,037 | 65,609 | ||||||
Deferred revenue |
5,685 | 4,138 | ||||||
Current portion of long-term debt |
4,889 | 5,222 | ||||||
Total current liabilities |
84,631 | 91,633 | ||||||
Deferred tax liabilities |
3,081 | 3,151 | ||||||
Other liabilities |
7,294 | 6,991 | ||||||
Total Liabilities |
95,006 | 101,775 | ||||||
Commitments and contingencies (Note 8) |
||||||||
Shareholders equity : |
||||||||
Ordinary shares, par value 0.01 per share, 120,000,000 shares
authorized; 49,927,885 and 49,891,244 shares issued and 43,968,286
and 43,855,164 shares outstanding, respectively |
699 | 698 | ||||||
Treasury shares, at cost, 5,959,599 and 6,036,080 shares, respectively |
(30,370 | ) | (29,637 | ) | ||||
Additional paid-in capital |
254,721 | 249,153 | ||||||
Retained earnings |
177,306 | 166,525 | ||||||
Accumulated other comprehensive income (loss) |
2,386 | (10,625 | ) | |||||
Total shareholders equity |
404,742 | 376,114 | ||||||
Total liabilities and shareholders equity |
$ | 499,748 | $ | 477,889 | ||||
See accompanying notes.
3
Table of Contents
VISTAPRINT N.V.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited in thousands, except share and per share data)
(Unaudited in thousands, except share and per share data)
Three Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Revenue |
$ | 170,487 | $ | 145,091 | ||||
Cost of revenue (1) |
62,833 | 52,865 | ||||||
Technology and development expense (1) |
23,207 | 17,672 | ||||||
Marketing and selling expense (1) |
57,533 | 46,533 | ||||||
General and administrative expense (1) |
14,581 | 13,615 | ||||||
Income from operations |
12,333 | 14,406 | ||||||
Interest income |
99 | 130 | ||||||
Other (expense) income, net |
(252 | ) | 188 | |||||
Interest expense |
107 | 383 | ||||||
Income before income taxes |
12,073 | 14,341 | ||||||
Income tax provision |
1,292 | 1,365 | ||||||
Net income |
$ | 10,781 | $ | 12,976 | ||||
Basic net income per share |
$ | 0.25 | $ | 0.30 | ||||
Diluted net income per share |
$ | 0.24 | $ | 0.29 | ||||
Weighted average shares outstandingbasic |
43,895,913 | 42,924,751 | ||||||
Weighted average shares outstandingdiluted |
45,231,388 | 44,797,724 | ||||||
(1) | Share-based compensation is allocated as follows: |
Three Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Cost of revenue |
$ | 203 | $ | 197 | ||||
Technology and development expense |
1,132 | 1,470 | ||||||
Marketing and selling expense |
1,049 | 1,123 | ||||||
General and administrative expense |
2,987 | 2,520 |
See accompanying notes.
4
Table of Contents
VISTAPRINT N.V.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited in thousands)
(Unaudited in thousands)
Three Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Operating activities |
||||||||
Net income |
$ | 10,781 | $ | 12,976 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
12,128 | 10,314 | ||||||
Loss on sale, disposal, or impairment of long-lived assets |
11 | 140 | ||||||
Amortization of premiums and discounts on short-term investments |
83 | | ||||||
Share-based compensation expense |
5,371 | 5,310 | ||||||
Tax benefits derived from share-based compensation awards |
(149 | ) | (704 | ) | ||||
Deferred taxes |
(70 | ) | | |||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(1,376 | ) | (2,781 | ) | ||||
Inventory |
(498 | ) | (941 | ) | ||||
Prepaid expenses and other assets |
(894 | ) | (8,634 | ) | ||||
Accounts payable |
(5,106 | ) | 5,180 | |||||
Accrued expenses and other liabilities |
(1,479 | ) | 11,589 | |||||
Net cash provided by operating activities |
18,802 | 32,449 | ||||||
Investing activities |
||||||||
Purchases of property, plant and equipment |
(14,147 | ) | (20,070 | ) | ||||
Sales and maturities of marketable securities |
1,900 | 100 | ||||||
Capitalization of software and website development costs |
(1,791 | ) | (1,675 | ) | ||||
Net cash used in investing activities |
(14,038 | ) | (21,645 | ) | ||||
Financing activities |
||||||||
Repayments of long-term debt |
(333 | ) | (6,729 | ) | ||||
Payment of withholding taxes in connection with vesting of restricted share units |
(1,287 | ) | (1,243 | ) | ||||
Tax benefits derived from share-based compensation awards |
149 | 704 | ||||||
Proceeds from issuance of shares |
661 | 3,371 | ||||||
Net cash used in financing activities |
(810 | ) | (3,897 | ) | ||||
Effect of exchange rate changes on cash |
2,301 | 550 | ||||||
Net increase in cash and cash equivalents |
6,255 | 7,457 | ||||||
Cash and cash equivalents at beginning of period |
162,727 | 133,988 | ||||||
Cash and cash equivalents at end of period |
$ | 168,982 | $ | 141,445 | ||||
See accompanying notes.
5
Table of Contents
VISTAPRINT N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited in thousands, except share and per share data)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited in thousands, except share and per share data)
1. Description of Business
The Vistaprint group of companies (the Company) offers micro businesses the ability to
market their businesses with a broad range of brand identity and promotional products, marketing
services and digital solutions. Through the use of proprietary Internet-based graphic design
software, localized websites, proprietary order receiving and processing technologies and advanced
computer integrated production facilities, the Company offers a broad spectrum of products ranging
from business cards, website hosting, brochures and invitations to marketing and creative services.
The Company focuses on serving the marketing, graphic design and printing needs of the micro
business market, generally businesses or organizations with fewer than 10 employees, often 2 or
fewer. The Company also provides personalized products and services to the consumer market.
Change of Domicile
On August 31, 2009, the Company moved the place of incorporation of the publicly traded parent
entity of the Vistaprint group of companies from Bermuda to the Netherlands. Vistaprint N.V. was
formed as a limited liability company (naamloze vennootschap) under the laws of the Netherlands.
Pursuant to a scheme of arrangement under Bermuda law approved by the common shareholders of
Vistaprint Limited, among other things, each common share of Vistaprint Limited was exchanged for
one ordinary share of Vistaprint N.V. This change of domicile (the Change of Domicile) was
accounted for as a merger between entities under common control and as a result all historical
share information has been restated to reflect its impact. The historical financial statements of
Vistaprint Limited for periods prior to this transaction are considered to be the historical
financial statements of Vistaprint N.V. The Change of Domicile has not had and is not expected to
have a material impact on how Vistaprint conducts its day-to-day operations, its financial
position, consolidated effective tax rate, results of operations or cash flows.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Vistaprint N.V., its wholly
owned subsidiaries, and those entities in which the Company has a variable interest and is the
primary beneficiary. Intercompany balances and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles (GAAP) for interim financial
information and, accordingly, do not include all of the information and footnotes required by GAAP
for complete financial statements. In the opinion of management, all adjustments, consisting
primarily of normal recurring accruals, considered necessary for a fair presentation of the results
of operations for the interim periods reported and of the Companys financial condition as of the
date of the interim balance sheet have been included. Operating results for the three months ended
September 30, 2010 are not necessarily indicative of the results that may be expected for the year
ending June 30, 2011 or for any other period. The condensed consolidated balance sheet at June 30,
2010 has been derived from the Companys audited consolidated financial statements at that date but
does not include all of the information and footnotes required by GAAP for complete financial
statements. These unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements for the year ended June 30, 2010
included in the Companys Annual Report on Form 10-K filed with the United States Securities and
Exchange Commission (the SEC).
Inventories
Inventories consist primarily of raw materials, and are recorded at the lower of cost or
market value using a first-in, first-out method.
6
Table of Contents
Treasury Shares
Treasury shares are accounted for under the cost method and included as a component of
shareholders equity.
Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted-average number
of ordinary shares outstanding for the fiscal period. Diluted net income per share gives effect to
all potentially dilutive securities, including share options and restricted share units (RSUs)
using the treasury stock method. Ordinary share equivalents of 1,138,603 and 806,687 were excluded
from the determination of potentially dilutive shares for the three months ended September 30, 2010
and 2009, respectively, due to their anti-dilutive effect.
The following table sets forth the reconciliation of the weighted-average number of ordinary
shares:
Three Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Weighted average shares outstanding, basic |
43,895,913 | 42,924,751 | ||||||
Weighted average shares issuable upon exercise/vesting of
outstanding share options/RSUs |
1,335,475 | 1,872,973 | ||||||
Shares used in computing diluted net income per share |
45,231,388 | 44,797,724 | ||||||
Share-Based Compensation
During the three months ended September 30, 2010 and 2009, the Company recorded share-based
compensation costs of $5,371 and $5,310, respectively. Share-based compensation costs capitalized
as part of software and website development costs were $124 and $144 for the three months ended
September 30, 2010 and 2009, respectively.
At September 30, 2010, there was $35,673 of total unrecognized compensation cost related to
non-vested, share-based compensation arrangements. This cost is expected to be recognized over a
weighted average period of 2.4 years.
Income Taxes
The Company is subject to income taxes in certain jurisdictions, including but not limited to
the Netherlands, Canada, Australia, Spain, and the United States. Significant judgments, estimates
and assumptions regarding future events, such as the amount, timing and character of income,
deductions and tax credits, are required in the determination of the Companys provision for income
taxes. These judgments, estimates and assumptions involve interpreting the tax laws in various
international jurisdictions, analyzing changes in tax laws and regulations, and estimating the
Companys levels of revenues, expenses and profits in each jurisdiction and the potential impact of
each on the tax liability in any given year.
The Company operates in many jurisdictions where the tax laws relating to the pricing of
transactions between related parties and the determination of permanent establishments and
attribution of effectively connected income are open to interpretation, which could potentially
result in tax authorities asserting additional tax liabilities with no offsetting tax recovery in
other countries.
As of June 30, 2010, the Company had unrecognized tax benefits, including interest, of
approximately $2,327, which will reduce the effective tax rate when recognized. The Company
recognizes interest and penalties related to unrecognized tax benefits in the provision for income
taxes. There have been no significant changes to these amounts during the three months ended
September 30, 2010.
One of the Companys U.S. subsidiaries and one of its Bermuda subsidiaries are under audit by
the Internal Revenue Service. Also, the same U.S. subsidiary is under audit by the Commonwealth of
Massachusetts. In addition, the Canada Revenue Agency is auditing one of the Companys Canadian
subsidiaries.
7
Table of Contents
Cash, Cash Equivalents and Marketable Securities
The Company considers all highly liquid investments purchased with an original maturity of
three months or less to be the equivalent of cash for the purpose of balance sheet and statement of
cash flows presentation. Marketable securities, when held, consist primarily of investment-grade
corporate bonds, U.S. government agency issues, and certificates of deposit. At both September 30,
2010 and June 30, 2010, the Company held one auction rate security, included in other assets, for
which the recovery period is expected to be greater than twelve months as a result of failed
auctions. The Companys marketable securities are classified as available-for-sale securities and
carried at fair value, with the unrealized gains and losses reported in a separate component of
accumulated other comprehensive income (loss). The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as available-for-sale are
included in interest income.
The Company reviews its investments for other-than-temporary impairment whenever the fair
value of an investment is less than amortized cost and evidence indicates that an investments
carrying amount is not recoverable within a reasonable period of time. There were no
other-than-temporary impairments during the three months ended September 30, 2010 and 2009.
Cash, cash equivalents and marketable securities as of September 30, 2010 consisted of the
following:
Gross | ||||||||||||
Amortized | Unrealized | |||||||||||
Cost | Losses | Fair Value | ||||||||||
Cash and cash equivalents |
$ | 168,982 | $ | | $ | 168,982 | ||||||
Marketable securities: |
||||||||||||
Corporate debt securities |
6,690 | (4 | ) | 6,686 | ||||||||
Certificates of Deposit |
960 | | 960 | |||||||||
Total current marketable securities |
7,650 | (4 | ) | 7,646 | ||||||||
Municipal auction rate security |
700 | (40 | ) | 660 | ||||||||
Total long-term marketable securities |
700 | (40 | ) | 660 | ||||||||
Total cash and cash equivalents and marketable securities |
$ | 177,332 | $ | (44 | ) | $ | 177,288 | |||||
Cash, cash equivalents and marketable securities as of June 30, 2010 consisted of the
following:
Gross | ||||||||||||
Amortized | Unrealized | |||||||||||
Cost | Losses | Fair Value | ||||||||||
Cash and cash equivalents |
$ | 162,727 | $ | | $ | 162,727 | ||||||
Marketable securities: |
||||||||||||
Corporate debt securities |
6,772 | (27 | ) | 6,745 | ||||||||
U.S government and agency securities |
1,900 | | 1,900 | |||||||||
Certificates of Deposit |
960 | (1 | ) | 959 | ||||||||
Total current marketable securities |
9,632 | (28 | ) | 9,604 | ||||||||
Municipal auction rate security |
700 | (40 | ) | 660 | ||||||||
Total long-term marketable securities |
700 | (40 | ) | 660 | ||||||||
Total cash and cash equivalents and marketable securities |
$ | 173,059 | $ | (68 | ) | $ | 172,991 | |||||
Derivative Instruments and Hedging Activities
The Company records all derivatives on the balance sheet at fair value. The accounting for
changes in the fair value of derivatives depends on the intended use of the derivative, whether the
Company has elected to designate a derivative in a hedging relationship and apply hedge accounting
and whether the hedging relationship has satisfied the criteria necessary to
apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to
changes in the fair value of an asset, liability, or firm commitment attributable to a particular
risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and
qualifying as a hedge of the exposure to variability in expected future cash flows, or other types
8
Table of Contents
of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as
hedges of the currency exchange rate exposure of a net investment in an operation that is not
denominated in U.S. dollars. Hedge accounting generally provides for the matching of the timing of
gain or loss recognition on the hedging instrument with the recognition of the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk in a fair value
hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The
Company may enter into derivative contracts that are intended to economically hedge certain of its
risks, even though hedge accounting does not apply or the Company elects not to apply hedge
accounting.
The effective portion of changes in the fair value of derivatives designated and qualifying as
cash flow hedges of forecasted purchases is recorded in Accumulated Other Comprehensive Income .
The gains and losses will be reclassified into earnings in the same period that the hedged item
affects earnings. The ineffective portion of the change in fair value of derivatives, as well as
amounts excluded from the assessment of hedge effectiveness, if any, are recognized directly in
earnings.
Business Combinations
The Company assigns the value of the consideration transferred to acquire a business to the
tangible assets and identifiable intangible assets acquired and liabilities assumed on the basis of
their fair values at the date of acquisition. The Company assesses the fair value of assets,
including intangible assets, using a variety of methods and each asset is measured at fair value
from the perspective of a market participant. The method used to estimate the fair values of
intangible assets incorporates significant assumptions regarding the estimates a market participant
would make in order to evaluate an asset, including a market participants use of the asset and the
appropriate discount rates for a market participant. Assets recorded from the perspective of a
market participant that are determined to not have economic use for the Company are expensed
immediately. Any excess purchase price over the fair value of the net tangible and intangible
assets acquired is allocated to goodwill. Transaction costs and restructuring costs associated with
a transaction to acquire a business are expensed as incurred.
Intangible Assets
The Company records acquired intangible assets at fair value on the date of acquisition and
amortizes such assets using the straight-line method over the expected useful life of the asset,
unless another amortization method was deemed to be more appropriate.
Long-Lived Assets
The Company continually evaluates whether events or circumstances have occurred that indicate
that the estimated remaining useful life of its long-lived assets, excluding goodwill, may warrant
revision or that the carrying value of these assets may not be recoverable. The Company evaluates
the realizability of its long-lived assets based on profitability and cash flow expectations for
the related asset. Any write-downs are treated as permanent reductions in the carrying amount of
the assets.
Goodwill
The difference between the purchase price and the fair value of assets acquired and
liabilities assumed in a business combination is allocated to goodwill. Goodwill is evaluated for
impairment on an annual basis during the Companys fiscal third quarter, or earlier if impairment
indicators are present.
Recently Adopted Accounting Pronouncements
Effective July 1, 2010, the Company adopted ASU 2009-13 Multiple-Deliverable Revenue
Arrangements, which amends ASC Subtopic 650-25 Revenue RecognitionMultiple-Element Arrangements
to eliminate the requirement that all undelivered elements have vendor-specific objective evidence
(VSOE) or third-party evidence (TPE) before an entity can recognize the portion of an overall
arrangement fee that is attributable to items that already have been delivered. In the absence of
VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a
multiple-element arrangement, entities will be required to estimate the selling prices of those
elements. The overall arrangement fee
will be allocated to each element (both delivered and undelivered items) based on their
relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or
are based on the entitys estimated selling price. Additionally,
9
Table of Contents
the new guidance will require
entities to disclose more information about their multiple-element revenue arrangements. The
adoption of this ASU did not have a material impact on the Companys consolidated financial
statements.
Effective July 1, 2010, the Company adopted ASU 2009-14 Certain Revenue Arrangements that
Include Software Elements, which amends ASC Subtopic 985-605 Software-Revenue Recognition, and
addresses the accounting for revenue transactions involving software, to exclude from its scope
tangible products that contain both software and non-software components that function together to
deliver a products essential functionality. The adoption of this ASU did not have a material
impact on the Companys consolidated financial statements.
3. Fair Value Measurements
Carrying amounts of financial instruments held by the Company, which includes cash
equivalents, marketable securities, accounts receivable, accounts payable, debt and accrued
expenses approximate fair value due to the short period of time to maturity of those instruments.
The Company uses a three-level valuation hierarchy for measuring fair value and expands
financial statement disclosures about fair value measurements. The valuation hierarchy is based
upon the transparency of inputs to the valuation of an asset or liability as of the measurement
date. The three levels are defined as follows:
| Level 1: Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. | ||
| Level 2: Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. | ||
| Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
A financial instruments categorization within the valuation hierarchy is based upon the
lowest level of input that is significant to the fair value measurement. The Company measures the
following financial assets at fair value on a recurring basis.
The fair value of these financial assets was determined using the following inputs at
September 30, 2010:
Quoted Prices in | ||||||||||||||||
Active | Significant | |||||||||||||||
Markets for | Significant Other | Unobservable | ||||||||||||||
Identical Assets | Observable Inputs | Inputs | ||||||||||||||
Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Cash and cash equivalents |
$ | 168,982 | $ | 168,982 | $ | | $ | | ||||||||
Corporate debt securities |
6,686 | 6,686 | | | ||||||||||||
Certificates of deposits |
960 | 960 | | | ||||||||||||
Long-term investments (1) |
660 | | | 660 | ||||||||||||
Total assets recorded at fair value |
$ | 177,288 | $ | 176,628 | $ | | $ | 660 | ||||||||
(1) | Long-term investments consist of an auction rate security. |
The Company has the intent and the ability to hold the Level 3 asset until the
anticipated recovery period which it believes will be more than twelve months. There has been no
change in the carrying value of assets measured at fair value using significant unobservable inputs
(Level 3) during the three months ended September 30, 2010.
4. Comprehensive Income
Comprehensive income is composed of net income, unrealized gains and losses on marketable
securities and derivatives, and cumulative foreign currency translation adjustments. The following
table displays the computation of comprehensive income:
10
Table of Contents
Three Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Net income |
$ | 10,781 | $ | 12,976 | ||||
Unrealized gain on marketable securities |
24 | | ||||||
Reclassification of gain on cash flow hedge to net income |
(49 | ) | | |||||
Unrealized gain on cash flow hedge, net of tax of $9 |
| 19 | ||||||
Change in cumulative foreign currency translation adjustments |
13,036 | 3,138 | ||||||
Comprehensive income |
$ | 23,792 | $ | 16,133 | ||||
5. Segment Information
During the quarter ended September 30, 2010, the Company changed its reportable segments to
align with how operating results are reported internally to the Chief Executive Officer, who
constitutes the Companys Chief Operating Decision Maker (CODM) for purposes of making decisions
about how to allocate resources and assess performance. Beginning July 1, 2010, the CODM reviews
revenue and income or loss from operations based on three geographic operating segments: North
America, Europe and Asia-Pacific.
The costs associated with shared central functions are not allocated to the reporting segments
and instead are reported and disclosed under the caption Corporate and global functions, which
includes the general and administrative expenses of the corporate support functions, technology and
development, IT operations, and the global component of the Companys customer service, sales and
design support. The Company does not allocate non-operating income to its segment results. There
are no internal revenue transactions between the Companys reporting segments and all intersegment
transfers are recorded at cost for presentation to the CODM; therefore, there is no intercompany
profit or loss recognized on these transactions. At this time, the Company does not allocate
various support costs across operating segments, which may limit the comparability of income from
operations by segment. For example, North America customer service, sales and design support does
provide some customer service, sales and design support to other operating segments; however, these
costs are reported in North America.
Revenue by segment is based on the country-specific website through which the customers order
was transacted. The following tables set forth revenue and income from operations by operating
segment:
Three Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Revenue: |
||||||||
North America (1) |
$ | 101,312 | $ | 87,703 | ||||
Europe |
60,989 | 51,861 | ||||||
Asia-Pacific |
8,186 | 5,527 | ||||||
Total revenue |
$ | 170,487 | $ | 145,091 | ||||
Three Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Income from operations: |
||||||||
North America |
$ | 27,482 | $ | 21,304 | ||||
Europe |
14,631 | 13,208 | ||||||
Asia-Pacific |
982 | 1,887 | ||||||
Corporate and global functions |
(30,762 | ) | (21,993 | ) | ||||
Total income from operations |
$ | 12,333 | $ | 14,406 | ||||
(1) | Includes referral fee revenue from membership discount programs of $0 and $3,326 for the three months ended September 30, 2010 and 2009, respectively. |
11
Table of Contents
Geographic Data
Revenue by geography is based on the country-specific website through which the customers
order was transacted. The following table sets forth revenue and long-lived assets by geographic
area:
Three Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Revenue: |
||||||||
United States |
$ | 97,013 | $ | 85,311 | ||||
Non-United States |
73,474 | 59,780 | ||||||
Total revenue |
$ | 170,487 | $ | 145,091 | ||||
September 30, | June 30, | |||||||
2010 | 2010 | |||||||
Long-lived assets (1): |
||||||||
Canada |
$ | 109,766 | $ | 110,780 | ||||
Netherlands |
80,436 | 73,992 | ||||||
Australia |
40,330 | 36,485 | ||||||
Bermuda |
16,626 | 17,152 | ||||||
United States |
13,074 | 12,879 | ||||||
Jamaica |
7,050 | 6,191 | ||||||
Spain |
2,316 | 2,180 | ||||||
Switzerland |
2,251 | 1,771 | ||||||
Other |
2,353 | 2,012 | ||||||
$ | 274,202 | $ | 263,442 | |||||
(1) | Excludes goodwill of $4,168 for both periods presented, and deferred tax assets of $7,355 and $7,277 as of September 30, 2010 and June 30, 2010, respectively. |
6. Acquisition of Soft Sight, Inc.
On December 30, 2009, the Company acquired 100% of the outstanding equity of Soft Sight, Inc.
(Soft Sight), a privately held developer of embroidery digitization software based in the United
States, for $6,500 in cash. Soft Sights proprietary software enables a customers uploaded
graphic artwork to be automatically converted into embroidery stitch patterns for subsequent
manufacturing.
The transaction was accounted for under the acquisition method of accounting. All of the
assets acquired and liabilities assumed in the transaction were recognized at their
acquisition-date fair values, while transaction costs and restructuring costs associated with the
transaction were expensed as incurred. The transaction and restructuring costs did not have a
material impact on the Companys consolidated results of operations or cash flows. The Company
plans to launch a line of embroidered products to customers in fiscal 2011. Pro forma information
has not been presented because the results of Soft Sight were not material to the Companys results
of operations for fiscal 2010.
Allocations of Assets and Liabilities
The Company allocated the purchase price for Soft Sight to net tangible assets of $52,
deferred tax assets of $691, intangible assets of $2,647, goodwill of $4,168 and a deferred tax
liability of $1,059. The fair values of the acquired intangible assets were measured from the
perspective of a market participant. Of the $2,647 of acquired intangible assets, $920 was
immediately expensed as there was no economic value to the Company. The carrying value of the
remaining
intangible assets relate to developed embroidery technology and customer lists, which are
being amortized over a weighted average life of approximately 3.8 years.
The deferred tax assets primarily relate to net operating loss carryforwards that will be able
to be utilized to reduce future tax liabilities. The deferred tax liability primarily relates to
the tax impact of future amortization or impairments associated with the identified intangible
assets acquired, which are not deductible for tax purposes.
12
Table of Contents
The difference between the consideration transferred to acquire the business and the fair
value of assets acquired and liabilities assumed was allocated to goodwill. This goodwill relates
to the potential synergies from the integration of the Soft Sight embroidery software capabilities
into the existing Vistaprint product offering. The goodwill will not be deductible for income tax
purposes.
7. Long-Term Debt
The Companys current portion of long-term debt was $4,889 and $5,222 as of September 30, 2010
and June 30, 2010, respectively. There was no non-current long-term debt outstanding at either
date.
In December 2005, the Company amended its original Canadian credit agreement to include
an additional $10,000 equipment term loan. The borrowings were used to finance printing equipment
purchases for the Windsor production facility. The remaining obligation under the Companys amended
Canadian credit agreement is payable in monthly installments of $111 with the remaining balance of
$4,667 to be paid during December 2010.
8. Commitments and Contingencies
Purchase Commitments
At September 30, 2010, the Company had unrecorded commitments under contract for site
development and construction of its Jamaican customer support and design center of approximately
$1,850, and to purchase production equipment for our Dutch and Canadian production facilities of
approximately $4,045 and $2,025, respectively.
Legal Proceedings
On July 27, 2006, Vistaprint Technologies Limited, an indirect wholly owned subsidiary of
Vistaprint N.V., filed a patent infringement lawsuit against print24 GmbH, unitedprint.com AG and
their two managing directors in the District Court in Düsseldorf Germany, alleging infringement by
the defendants in Germany of one of Vistaprint Technologies Limiteds European patents related to
computer-implemented methods and apparatus for generating pre-press graphic files. On June 7, 2007,
unitedprint.com AG filed a patent nullification action in the German Patent Court in relation to
the same European patent at issue in Vistaprint Technologies Limiteds infringement lawsuit against
print24 and its co-defendants. On July 31, 2007, the District Court in Düsseldorf ruled in
Vistaprint Technologies Limiteds favor on the underlying infringement claim against print24 and
its co-defendants, granting all elements of the requested injunction and ordering the defendants to
pay damages for past infringement. The Düsseldorf District Courts ruling went into effect in early
September 2007 and was not appealed by the defendants. On November 13, 2008, the German Patent
Court held an oral hearing on the patent nullification action brought by unitedprint.com and
revoked the patent at issue. The Patent Court issued a written opinion stating the basis for its
ruling on March 24, 2009, and on April 22, 2009, Vistaprint Technologies Limited filed a notice of
appeal of the Patent Courts ruling with the German Federal Supreme Court. The Company is unable to
express an opinion as to the likely outcome of such appeal.
On May 14, 2007, Vistaprint Technologies Limited filed a patent infringement lawsuit against
123Print, Inc. and Drawing Board (US), Inc., subsidiaries of Taylor Corporation, in the United
States District Court for the District of Minnesota. The complaint in the lawsuit asserts that the
defendants have infringed and continue to infringe three U.S. patents owned by Vistaprint
Technologies Limited related to browser-based tools for online product design. The complaint seeks
an injunction against the defendants and the recovery of damages. The defendants filed their Answer
and Counterclaims to the complaint on June 7, 2007, in which they denied the infringement
allegations and asserted counterclaims for declaratory judgment of invalidity, unenforceability and
non-infringement of the patents-in-suit. In August 2007, another Taylor Corporation subsidiary,
Taylor Strategic Accounts, Inc., was added as an additional defendant in the case. The exchange of
relevant documents and records and the depositions of fact witnesses in connection with the
allegations of the parties have been substantially completed. In early June 2008, newly discovered
third party prior art documents were introduced into the
litigation. These documents had not been reviewed and considered by the U.S. Patent Office
prior to issuance of the patents-in-suit. For that reason, on June 30, 2008, Vistaprint
Technologies Limited requested the United States District Court to stay the litigation to provide
the U.S. Patent Office an opportunity to reexamine the patents-in-suit in light of these newly
discovered documents, and the Court granted Vistaprint Technologies Limiteds request for a stay on
September 2, 2008. Vistaprint Technologies Limited then submitted a request for reexamination of
each of the patents-in-suit to the U.S. Patent Office, which granted the reexamination requests in
February 2009. Pursuant to the Courts order, the stay will remain in place pending the resolution
of the requests for reexamination. On October 28, 2008, a St. Paul, Minnesota law firm representing
Taylor Corporation also filed requests with the U.S. Patent Office seeking reexamination of the
three patents-in-
13
Table of Contents
suit. These reexamination requests were granted in May and June 2009 and were
merged in September 2009 with the reexaminations earlier filed by Vistaprint Technologies Limited.
The Company is unable to express an opinion as to the likely outcome of any such reexamination or
of the underlying lawsuit.
On June 26, 2009, Vistaprint Limited, the Companys wholly owned subsidiary, and Vistaprint
USA, Incorporated, a wholly owned subsidiary of Vistaprint Limited, together with sixteen other
companies unaffiliated with Vistaprint Limited or Vistaprint USA, Incorporated, were named as
defendants in a complaint for patent infringement by Soverain Software LLC (Soverain) in the
United States District Court for the Eastern District of Texas. The complaint alleged that the
named defendants were infringing U.S. Patents 5,715,314, 5,909,492 and 7,272,639. Two of the
asserted patents relate generally to network-based sales systems employing a customer computer, a
shopping cart computer and a shopping cart database. The third patent relates generally to the use
of session identifiers in connection with requests transmitted through a network between a client
and a server. The plaintiff sought declarations that the patents at issue are valid and enforceable
and that the defendants infringe the patents, as well as the entry of a preliminary and permanent
injunction and damages.
In October 2010, the Company entered into a settlement agreement with Soverain, under which
Soverain agreed to dismiss its lawsuit. The settlement has been accounted for as a recognized
subsequent event for purposes of our financial statements as of and for the period ended September
30, 2010. Accordingly, the amount of the settlement has been recorded as an accrued expense in the
consolidated balance sheet as of September 30, 2010 and recognized as part of our technology and
development expense in the consolidated statement of income for the period ended September 30,
2010.
On July 21, 2009, Vistaprint Limited and OfficeMax Incorporated were named as defendants in a
complaint for patent infringement filed by ColorQuick LLC in the United States District Court for
the Eastern District of Texas. The complaint alleges that Vistaprint Limited and OfficeMax
Incorporated are infringing U.S. patent 6,839,149, relating generally to systems and methods for
processing electronic files stored in a page description language format, such as PDF. The
plaintiff is seeking a declaration that the patent at issue is valid and enforceable, a declaration
that Vistaprint Limited infringes, the entry of a preliminary and permanent injunction, and
damages. The Company is unable to express an opinion as to its likely outcome.
The Company is not currently party to any other material legal proceedings. The Company is
involved, from time to time, in various legal proceedings arising from the normal course of
business activities. Although the results of litigation and claims cannot be predicted with
certainty, the Company does not expect resolution of these matters to have a material adverse
impact on its consolidated results of operations, cash flows or financial position. However, an
unfavorable resolution of such a proceeding could, depending on its amount and timing, materially
affect the Companys results of operations, cash flows or financial position in a future period.
Regardless of the outcome, litigation can have an adverse impact on the Company because of defense
costs, diversion of management resources and other factors.
14
Table of Contents
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Report contains forward-looking statements that involve risks and uncertainties. The
statements contained in this Report that are not purely historical are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 (the Exchange Act). Without limiting the foregoing, the words may, will,
should, could, expects, plans, intends, anticipates, believes, estimates,
predicts, potential, continue, target, seek and similar expressions are intended to
identify forward-looking statements. All forward-looking statements included in this Report are
based on information available to us up to, and including the date of this document, and we
disclaim any obligation to update any such forward-looking statements. Our actual results could
differ materially from those anticipated in these forward-looking statements as a result of certain
important factors, including those set forth in this Managements Discussion and Analysis of
Financial Condition and Results of Operations and Risk Factors and elsewhere in this Report. You
should carefully review those factors and also carefully review the risks outlined in other
documents that we file from time to time with the United States Securities and Exchange Commission.
Executive Overview
For the three months ended September 30, 2010, we reported revenue of $170.5 million and
diluted earnings per share (EPS) of $0.24, representing 18% revenue growth and 17% EPS reduction
from the same period in 2009. Our EPS declined despite revenue growth as a result of planned
investments in our business, including increased advertising spend, headcount growth, the opening
of our production facility in Australia and our design, sales and service centers in Tunisia and
Germany, as well as a legal settlement related to a patent dispute.
Although our revenue has continued to grow year over year, our revenue growth rate has
declined recently. In the three months ended September 30, 2010, this decline was primarily a
result of unfavorable currency fluctuations, operational issues, and the elimination of third party
membership discount program revenue. In addition, our operating income may grow at a slower rate
than revenue, or decline, during periods in which we make significant investments for our long-term
growth, such as facility expansions, new product launches, or customer acquisition strategies.
Despite our current challenges, our long-term goal is to continue to grow profitably and
become the leading online provider of micro business marketing solutions. We believe that the
strength of our solution gives us the opportunity not only to capture an increasing share of the
existing printing needs in our targeted markets, but also to address marketing services demand by
making available to our customers cost-effective solutions to grow their businesses. In order to
accomplish this objective, we intend to execute on the following:
Provide All Things Marketing for Micro Businesses
We believe our customers currently spend only a small portion of their annual budget for
marketing products and services with us. By expanding the scope of our services and by improving
the quality and selection of our products and services along with the customer experience, we
intend to increase the amount of money our customers spend with us each year. During fiscal year
2010, we added personalized notebooks, mugs, on-line search profiles, new business card options,
ladies t-shirts, stickers, mailing labels and other offerings. We also acquired Soft Sight to
support future entry into the custom embroidered product market. During the three months ended
September 30, 2010, we launched engraved pens, extra-large banners and several electronic services
products or enhancements, including blogs, a search engine optimization tool for website customers,
and personalized email domain names. We plan to continue to expand and enhance our product and
service offerings in order to provide a greater selection to our existing customers and to attract
customers seeking a variety of products and services. Additionally, by continuing to improve our
customer acquisition and retention marketing programs, our customer service, sales and design
support, and our value proposition, we seek to increase the number of products purchased by each
customer.
Expand Geographic Reach
For the three months ended September 30, 2010, revenue generated from non-United States
websites accounted for approximately 43% of our total revenue. We believe that we have significant
opportunity to expand our revenue both in the countries we currently service and in additional
countries worldwide. We have a European marketing office in Barcelona, Spain that focuses on our
European growth initiatives. We completed construction of a production facility near Melbourne,
Australia and launched a marketing office in Sydney, Australia in June 2010 to support our
customers in Australia, New Zealand, Japan and Singapore. In addition, in fiscal 2010 we opened two
new design, sales and services centers that support
15
Table of Contents
European customers (one in Tunis, Tunisia, and the other in Berlin, Germany). We intend to
further extend our geographic reach by continuing to introduce localized websites in different
countries and languages, expanding our marketing efforts and customer service capabilities, and by
offering graphic design content and products specific to local markets.
Home & Family
Although we expect to maintain our primary focus on the micro business market, we believe that
our customer support, sales and design services, and low production costs are differentiating
factors that make purchasing from us an attractive alternative for individual consumers. We intend
to add new products and services targeted at the consumer market, and we believe that the economies
of scale provided by cross selling these products to our extensive micro business customer base,
our large production order volumes and integrated design and production facilities will support our
effort to profitably grow our consumer business.
Results of Operations
The following table presents our historical operating results for the periods indicated as a
percentage of revenue:
Three Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Revenue |
100.0 | % | 100.0 | % | ||||
Cost of revenue |
36.9 | % | 36.4 | % | ||||
Technology and development expense |
13.6 | % | 12.2 | % | ||||
Marketing and selling expense |
33.7 | % | 32.1 | % | ||||
General and administrative expense |
8.6 | % | 9.4 | % | ||||
Income from operations |
7.2 | % | 9.9 | % | ||||
Interest income |
0.1 | % | 0.1 | % | ||||
Other (expense) income, net |
(0.1 | )% | 0.1 | % | ||||
Interest expense |
0.1 | % | 0.3 | % | ||||
Income before income taxes |
7.1 | % | 9.8 | % | ||||
Income tax provision |
0.8 | % | 0.9 | % | ||||
Net income |
6.3 | % | 8.9 | % | ||||
Comparison of the Three Month Periods Ended September 30, 2010 and 2009
Three Months Ended September 30, | ||||||||||||
2010-2009 | ||||||||||||
2010 | 2009 | % Change | ||||||||||
Revenue |
$ | 170,487 | $ | 145,091 | 18 | % | ||||||
Cost of revenue |
$ | 62,833 | $ | 52,865 | 19 | % | ||||||
% of revenue |
36.9 | % | 36.4 | % |
Revenue
We generate revenue primarily from the sale and shipment of customized manufactured products,
as well as certain electronic services, such as website design and hosting and email marketing
services. We also generate revenue from order referral fees, revenue share and other fees paid to
us by merchants for customer click-throughs, distribution of third-party promotional materials and
referrals arising from products and services of the merchants we offer to our customers on our
website. Unlike the tangible products that we offer, these third party referral offerings do not
require physical production and have minimal corresponding direct cost of revenue. During the
second quarter of fiscal 2010, we eliminated the third party membership discount program previously
offered on our websites and terminated our relationship with our partner for these programs.
To understand our revenue trends, we monitor several key metrics including:
| Website sessions. A session is measured each time a computer user visits a Vistaprint website from his or her Internet browser. We measure this data to understand the volume and source of traffic to our websites. Typically, |
16
Table of Contents
we use various advertising campaigns to increase the number and quality of shoppers entering our websites. The number of website sessions varies from month to month depending on variables such as product campaigns and advertising channels used. |
| Conversion rates. The conversion rate is the number of customer orders divided by the total number of sessions during a specific period of time. Typically, we strive to increase conversion rates of customers entering our websites in order to increase the number of customer orders generated. Conversion rates have fluctuated in the past and we anticipate that they will fluctuate in the future due to, among other factors, the type of advertising campaigns and marketing channels used. | ||
| Average order value. Average order value is total bookings, which represents the value of total customer orders received on our websites, for a given period of time divided by the total number of customer orders recorded during that same period of time. We seek to increase average order value as a means of increasing revenue. Average order values have fluctuated in the past and we anticipate that they will fluctuate in the future depending upon the type of products promoted during a period and promotional discounts offered. For example, among other things, seasonal product offerings, such as holiday cards, can cause changes in average order values. |
We believe the analysis of these metrics provides us with important information on customer
buying behavior, advertising campaign effectiveness and the resulting impact on overall revenue
trends and profitability. While we continually seek and test ways to increase revenue, we also
attempt to increase the number of customer acquisitions and to grow profits. As a result,
fluctuations in these metrics are usual and expected. Because changes in any one of these metrics
may be offset by changes in another metric, no single factor is determinative of our revenue and
profitability trends and we assess them together to understand their overall impact on revenue and
profitability.
Total revenue for the three months ended September 30, 2010 increased 18% to $170.5 million
from the three months ended September 30, 2009, due to increases in sales across our product and
service offerings, as well as across all geographies. The overall growth during this period was
driven by increases in website sessions, which grew by 5.8% to 68.9 million, conversion rates,
which grew by 90 basis points to 7.3%, and increases in average order value, which grew by 1.3% to
$34.69. These increases were partially offset by a decrease in revenue from third-party referral
fees which declined from approximately $5.1 million to $1.8 million over the same prior year
period. Referral fee revenue from membership discount programs was approximately 2.3% of total
revenues in the same prior year period, but zero for the three months ended September 30, 2010 as a
result of the termination in the second quarter of fiscal 2010 of the third-party membership
discount programs previously offered on our websites. In addition, the stronger U.S. dollar
negatively impacted our revenue growth by an estimated 290 basis points as compared to the three
months ended September 30, 2009.
As our total customer base has grown, we also have continued to experience growth in purchases
from existing customers. Bookings from repeat customers accounted for 68% of total bookings for the
three months ended September 30, 2010 as compared to 67% of total bookings for the three months
ended September 30, 2009.
Total revenue by geographic segment is shown in the following table:
Constant | ||||||||||||||||||||
Three Months Ended | Currency | |||||||||||||||||||
September 30, | 2010-2009 | Currency | Revenue | |||||||||||||||||
2010 | 2009 | % Change | Impact | Growth(1) | ||||||||||||||||
North America (2) |
$ | 101,312 | $ | 87,703 | 16 | % | (1) | % | 15 | % | ||||||||||
Europe |
60,989 | 51,861 | 18 | % | 9 | % | 27 | % | ||||||||||||
Asia-Pacific |
8,186 | 5,527 | 48 | % | (12) | % | 36 | % | ||||||||||||
$ | 170,487 | $ | 145,091 | 18 | % | 2 | % | 20 | % | |||||||||||
(1) | Constant currency revenue growth, a non-GAAP financial measure, measures the change in total revenue between current and prior year periods at constant currency exchange rates by translating all non-U.S. dollar denominated revenue generated in the current period using the prior year periods average exchange rate for each currency to the U.S. dollar. We have provided this non-GAAP financial measure because we believe it provides meaningful information regarding our results on a consistent and comparable basis for the periods presented. Management uses this non-GAAP financial measure, in addition to GAAP financial measures, to evaluate our operating results. This non-GAAP financial measure should be considered supplemental to and not a substitute for our reported financial results prepared in accordance with GAAP. | |
(2) | Includes referral fee revenue from membership discount programs of $0 and $3,326 for the three months ended September 30, 2010 and 2009, respectively. |
17
Table of Contents
Cost of revenue
Cost of revenue includes materials used to manufacture our products, payroll and related
expenses for production personnel, depreciation of assets used in the production process and in
support of electronic service offerings, shipping and postage costs, and other miscellaneous
related costs of products sold by us.
The increase in cost of revenue for the three months ended September 30, 2010 compared to the
three months ended September 30, 2009 was primarily attributable to the production costs associated
with the increased volume of shipments of products during this period. The increase in the cost of
revenue as a percentage of total revenue for three months ended September 30, 2010 compared to the
three months ended September 30, 2009 was primarily driven by lower overhead absorption and higher
production labor costs resulting from the opening of our new production facility in Deer Park,
Australia in June 2010. The increase in cost of revenue as a percentage of revenues in the first
quarter of 2011 was also driven by a decrease in referral revenue. These increases in costs of
revenue as a percentage of total revenue were partially offset by improved pricing agreements in
relation to shipping costs.
Three Months Ended September 30, | ||||||||||||
2010-2009 | ||||||||||||
2010 | 2009 | % Change | ||||||||||
Technology and development expense |
$ | 23,207 | $ | 17,672 | 31 | % | ||||||
% of revenue |
13.6 | % | 12.2 | % | ||||||||
Marketing and selling expense |
$ | 57,533 | $ | 46,533 | 24 | % | ||||||
% of revenue |
33.7 | % | 32.1 | % | ||||||||
General and administrative expense |
$ | 14,581 | $ | 13,615 | 7 | % | ||||||
% of revenue |
8.6 | % | 9.4 | % |
Technology and development expense
Technology and development expense consists primarily of payroll and related expenses for
software and manufacturing engineering, content development, amortization of capitalized software
and website development costs, information technology operations, hosting of our websites, asset
depreciation, patent amortization, legal settlements in connection with patent-related claims, and
miscellaneous technology infrastructure-related costs. Depreciation expense for information
technology equipment that directly supports the delivery of our electronic services products is
included in cost of revenue.
The increase in our technology and development expenses of $5.5 million for the three months
ended September 30, 2010 as compared to the same period in 2009 was primarily due to increased
payroll and benefit costs of $2.0 million associated with increased headcount in our technology
development and information technology support organizations. At September 30, 2010, we employed
383 employees in these organizations compared to 314 employees at September 30, 2009. In addition,
to support our continued revenue growth during this period, we continued to invest in our website
infrastructure, which resulted in increased depreciation and hosting services expense of $0.6
million and increased other website related expenses of $2.9 million, including the impact of
a legal settlement of a patent claim recognized during the three months ended September 30, 2010.
Marketing and selling expense
Marketing and selling expense consists primarily of advertising and promotional costs; payroll
and related expenses for our employees engaged in marketing, sales, customer support and public
relations activities; and third party payment processor and credit card fees.
The increase in our marketing and selling expenses of $11.0 million for the three months ended
September 30, 2010 as compared to the same period in 2009 was driven primarily by increases of $7.0
million in advertising costs and commissions related to new customer acquisition and costs of
promotions targeted at our existing customer base, and increases in payroll, benefits and facility
related costs of $3.2 million. During this period, we continued to expand our marketing
organization and our design, sales and services centers. At September 30, 2010, we employed 838
employees in these organizations compared to 695 employees at September 30, 2009. In addition,
payment processing fees paid to third-parties increased by $0.5 million during the current quarter
as compared to the prior year quarter due to increased order volumes.
18
Table of Contents
General and administrative expense
General and administrative expense consists primarily of general corporate costs, including
third party professional fees and payroll and related expenses of employees involved in finance,
legal, human resource and general executive management. Third party professional fees include
finance, legal, human resources, and insurance.
The increase in our general and administrative expenses of $1.0 million for the three months
ended September 30, 2010 as compared to the same period in 2009 was primarily due to increased
payroll, benefit and facility related costs of $2.3 million resulting from the continued growth of
our executive management, finance, legal and human resource organizations to support our expansion
and growth. At September 30, 2010, we employed 207 employees in these organizations compared to 156
employees at September 30, 2009. These increases were offset by decreased third-party professional
fees of $1.2 million for the three months ended September 30, 2010, as the three month period ended
September 30, 2009 included one-time expenses associated with the execution of our change of
domicile to the Netherlands.
Interest income
Interest income, earned on cash, cash equivalents, and marketable securities remained
consistent at approximately $0.1 million for the three months ended September 30, 2010 and 2009.
Other (expense) income, net
Other (expense) income, net, which primarily consists of gains and losses from currency
transactions or revaluation, was $0.3 million of expense and $0.2 million of income for the three
months ended September 30, 2010 and 2009, respectively. Increases and decreases in other (expense)
income, net are due to changes in currency exchange rates on transactions or balances denominated
in currencies other than the functional currency of our subsidiaries.
Interest expense
Interest expense, which consists of interest and penalties paid to financial institutions on
outstanding balances on our credit facilities, was $0.1 million and $0.4 million for the three
months ended September 30, 2010 and 2009, respectively. The decrease from the prior year period was
due to a decrease in the outstanding principal on our bank loans. In addition, we incurred $0.1
million in prepayment penalties during the three months ended September 30, 2009 as a result of the
early repayment of $5.9 million of our euro revolving credit agreement.
Income tax provision
Three Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Income taxes: |
||||||||
Income tax provision |
$ | 1,292 | $ | 1,365 | ||||
Effective tax rate |
10.7 | % | 9.5 | % |
Income tax expense decreased to $1.3 million for the three months ended September 30,
2010 as compared to $1.4 million for the same period in 2009. The increase in the effective tax
rate for the three months ended September 30, 2010 as compared to the same period in 2009 is
primarily attributable to the expiration of the U.S. federal research and development tax credit
and changes in our geographic earnings mix.
Liquidity and Capital Resources
Consolidated Statements of Cash Flows Data:
Three Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Purchases of property, plant and equipment |
$ | (14,147 | ) | $ | (20,070 | ) | ||
Capitalization of software and website development costs |
(1,791 | ) | (1,675 | ) | ||||
Depreciation and amortization |
12,128 | 10,314 | ||||||
Cash flows provided by operating activities |
18,802 | 32,449 | ||||||
Cash flows used in investing activities |
(14,038 | ) | (21,645 | ) | ||||
Cash flows used in financing activities |
(810 | ) | (3,897 | ) |
19
Table of Contents
At September 30, 2010, we had $169.0 million of cash and cash equivalents primarily
consisting of money market funds. During the quarter ended September 30, 2010, we financed our
operations through internally generated cash flows from operations. We believe that our available
cash and cash flows generated from operations will be sufficient to satisfy our working capital,
long-term debt and capital expenditure requirements for the foreseeable future.
Operating Activities. Cash provided by operating activities in the three months ended
September 30, 2010 was $18.8 million and consisted of net income of $10.8 million, positive
adjustments for non-cash items of $17.4 million and $9.4 million used by working capital and other
activities. Adjustments for non-cash items included $12.1 million of depreciation and amortization
expense on property and equipment and software and website development costs, $5.4 million of
share-based compensation expense, and $0.1 million of amortization of premiums and discounts on
short-term investments, offset in part by $0.1 million of tax benefits derived from share-based
compensation awards. The change in working capital and other activities primarily consisted of a
decrease of $5.1 million in accounts payable, a decrease of $1.5 million in accrued expenses and
other liabilities, an increase of $1.4 million in accounts receivable, an increase of $0.9 million
in prepaid expenses and other assets, and an increase in inventory of $0.5 million.
Cash provided by operating activities in the three months ended September 30, 2009 was $32.4
million and consisted of net income of $13.0 million, positive adjustments for non-cash items of
$15.1 million and $4.4 million provided by working capital and other activities. Adjustments for
non-cash items included $10.3 million of depreciation and amortization expense on property and
equipment and software and website development costs, $5.3 million of share-based compensation
expense, and $0.1 million of long-lived assets disposals or impairment, offset in part by $0.7
million of tax benefits derived from share-based compensation awards. The change in working capital
and other activities primarily consisted of an increase of $11.6 million in accrued expenses and
other liabilities and an increase of $5.2 million in accounts payable, offset by an increase of
$8.6 million in prepaid expenses and other assets, an increase in accounts receivable of $2.8
million and an increase in inventory of $0.9 million.
Investing Activities. Cash used in investing activities in the three months ended September
30, 2010 of $14.0 million consisted primarily of capital expenditures of $14.1 million and
capitalized software and website development costs of $1.8 million, partially offset by $1.9
million of investment maturities. Capital expenditures of $5.8 million were related to the purchase
of manufacturing and automation equipment for our production facilities, $5.2 million were related
to the purchase
of land and facilities, and $3.1 million were related to purchases of other assets including
information technology infrastructure and office equipment.
Cash used in investing activities in the three months ended September 30, 2009 of $21.6
million consisted primarily of capital expenditures of $20.1 million and capitalized software and
website development costs of $1.7 million, partially offset by $0.1 million of investment
maturities. Capital expenditures of $8.4 million were related to the purchase of manufacturing and
automation equipment for our production facilities, $7.2 million were related to the purchase of
land and facilities and $4.5 million were related to purchases of other assets including
information technology infrastructure and office equipment.
Financing Activities. Cash used in financing activities in the three months ended September
30, 2010 of $0.8 million was primarily attributable to the use of $1.3 million to pay minimum
withholding taxes related to the vesting of RSUs granted and net payments in connection with our
loan facilities of $0.3 million, partially offset by the issuance of ordinary shares pursuant to
share option exercises of $0.7 million and tax benefits derived from share-based compensation
awards of $0.1 million.
Cash used in financing activities in the three months ended September 30, 2009 of $3.9 million was
primarily attributable to net payments in connection with our loan facilities of $6.7 million,
including payment of the remaining principal balance of the euro revolving credit agreement in our
Dutch subsidiary in the amount of $5.9 million and the use of $1.2 million to pay minimum
withholding taxes related to the vesting of RSUs granted and ordinary shares withheld under our
equity incentive plans, partially offset by the issuance of ordinary shares pursuant to share
option exercises of $3.4 million and tax benefits derived from share-based compensation awards of
$0.7 million.
20
Table of Contents
Contractual Obligations
Contractual obligations at September 30, 2010 were as follows:
Payments Due by Period | ||||||||||||||||||||
Less | More | |||||||||||||||||||
than 1 | than 5 | |||||||||||||||||||
Total | year | 1-3 years | 3-5 years | years | ||||||||||||||||
Debt obligations (excluding interest) |
$ | 4,889 | $ | 4,889 | $ | | $ | | $ | | ||||||||||
Operating lease obligations |
45,329 | 7,630 | 13,658 | 13,390 | 10,651 | |||||||||||||||
Total |
$ | 50,218 | $ | 12,519 | $ | 13,658 | $ | 13,390 | $ | 10,651 | ||||||||||
Long-Term Debt. In December 2005, we amended our original Canadian credit agreement to
include an additional $10.0 million equipment term loan. The borrowings were used to finance
printing equipment purchases for the Windsor production facility. The remaining obligation under
the amended Canadian credit agreement is payable in monthly installments of $0.1 million with the
remaining balance of $4.7 million to be paid during December 2010. As of September 30, 2010, the
interest rates on the various borrowings remaining under the term loan have been fixed over the
remaining term of the loan at rates ranging from 7.82% to 8.50% and there was $4.9 million
outstanding under this term loan.
Operating Leases. We rent office space under operating leases expiring on various dates
through 2018. We recognize rent expense on our operating leases that include free rent periods and
scheduled rent payments on a straight-line basis from the commencement of the lease.
Purchase Commitments. At September 30, 2010, we had unrecorded commitments under contract for
site development and construction of our Jamaican customer support and design center of
approximately $1.8 million, and to purchase production equipment for our Dutch and Canadian
production facilities of approximately $4.0 million and $2.0 million, respectively.
Recently Issued and Adopted Accounting Pronouncements
For a discussion of recently issued and adopted accounting pronouncements refer to Note 2
Summary of Significant Accounting Policies in the accompanying notes to the condensed
consolidated financial statements included in Item 1 of Part I of this Report.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with accounting principles generally
accepted in the United States (GAAP). To apply these principles, we must make estimates and
judgments that affect our reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. In some instances, we reasonably could
have used different accounting estimates and, in other instances, changes in the accounting
estimates are reasonably likely to occur from period to period. Accordingly, actual results could
differ significantly from our estimates. To the extent that there are material differences between
these estimates and actual results, our financial condition or results of operations will be
affected. We base our estimates and judgments on historical experience and other assumptions that
we believe to be reasonable at the time under the circumstances, and we evaluate these estimates
and judgments on an ongoing basis. We refer to accounting estimates and judgments of this type as
critical accounting policies and estimates, which we discuss further below. Management believes
there has been no material changes during the three months ended September 30, 2010 to the critical
accounting policies reported in the Managements Discussion and Analysis of Financial Condition and
Results of Operations section of our Annual Report on Form 10-K filed with the Securities and
Exchange Commission on August 27, 2010.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. Our exposure to interest rate risk relates primarily to our cash, cash
equivalents and marketable securities that at September 30, 2010 consisted of money market funds,
certificates of deposit, corporate debt securities, U.S government and agency securities, and a
long-term investment in a municipal auction rate security. These cash equivalents and marketable
securities are held for working capital purposes and we do not enter into investments for trading
or
speculative purposes. Our fixed rate interest bearing securities could decline in value if
interest rates rise. Due to the nature of our investments, we do not believe we have a material
exposure to interest rate risk.
21
Table of Contents
Currency Exchange Rate Risk. As we conduct business in multiple currencies through our
worldwide operations but report our financial results in U.S. dollars, we are affected by
fluctuations in exchange rates of such currencies versus the U.S. dollar as follows:
| Translation of our non-U.S. dollar revenues and expenses: Revenue and related expenses generated in currencies other than the U.S. dollar could result in higher or lower net income when, upon consolidation, those transactions are translated to U.S. dollars. When the value or timing of revenue and expenses in a given currency are materially different, we may be exposed to significant impacts on our net income. | |
| Remeasurement of monetary assets and liabilities: Transaction gains and losses generated from remeasurement of monetary assets and liabilities denominated in currencies other than the functional currency of a subsidiary are included in other (expense) income, net on the consolidated statements of income. Our subsidiaries have intercompany accounts that are eliminated in consolidation, and cash and cash equivalents denominated in various currencies that expose us to fluctuations in currency exchange rates. We considered the historical trends in currency exchange rates. A hypothetical 10% change in currency exchange rates was applied to total net monetary assets denominated in currencies other than the functional currencies at the balance sheet dates to compute the impact these changes would have had on our income before taxes in the near term. A hypothetical decrease in exchange rates of 10% against the functional currency of our subsidiaries would have resulted in an increase of $0.6 million and $1.0 million on our income before income taxes for the three months ended September 30, 2010 and 2009, respectively. | |
| Translation of our non-U.S. dollar assets and liabilities: Each of our subsidiaries translates their assets and liabilities to U.S. dollars at current rates of exchange in effect at the balance sheet date. The resulting gains and losses from translation are included as a component of accumulated other comprehensive income (loss) on the balance sheet. Fluctuations in exchange rates can materially impact the carrying value of our assets and liabilities. |
Foreign currency transaction (losses) gains included in other (expense) income, net for the
three months ended September 30, 2010 and 2009, were $0.3 million of losses and $0.2 million of
gains, respectively.
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of our chief executive officer and our chief financial
officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30,
2010. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act, means controls and other procedures of a company that are designed to
ensure that information required to be disclosed by a company 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 SECs rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by
a company in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the companys management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required disclosure. Management
recognizes that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives and management necessarily applies its
judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on
the evaluation of our disclosure controls and procedures as of September 30, 2010, our chief
executive officer and chief financial officer concluded that, as of such date, our disclosure
controls and procedures were effective at the reasonable assurance level.
There were no changes in our internal control over financial reporting (as defined in the
SECs rules) during the fiscal quarter ended September 30, 2010 that materially affect, or are
reasonably likely to materially affect, our internal control over financial reporting.
22
Table of Contents
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by this item is incorporated by reference to the information set
forth in Note 8 Commitments and Contingencies in the accompanying notes to the condensed
consolidated financial statements included in Item 1 of Part I of this Report.
ITEM 1A. RISK FACTORS
We caution you that our actual future results may vary materially from those contained in
forward looking statements that we make in this Report and other filings with the Securities and
Exchange Commission, press releases, communications with investors and oral statements due to the
following important factors, among others. Our forward-looking statements in this Report and in any
other public statements we make may turn out to be wrong. These statements can be affected by,
among other things, inaccurate assumptions we might make or by known or unknown risks and
uncertainties or risks we currently deem immaterial. Many factors mentioned in the discussion below
will be important in determining future results. Consequently, no forward-looking statement can be
guaranteed. We undertake no obligation to update any forward-looking statements, whether as a
result of new information, future events or otherwise.
Risks Related to Our Business
If we are unable to attract customers in a cost-effective manner, our business and results of
operations could be harmed.
Our success depends on our ability to attract customers in a cost-effective manner. We rely on
a variety of methods to draw visitors to our websites and promote our products and services, such
as purchased search results from online search engines, e-mail, telesales, and direct mail. We pay
providers of online services, search engines, directories and other websites and e-commerce
businesses to provide content, advertising banners and other links that direct customers to our
websites. We also promote our products and special offers through e-mail, telesales and direct
mail, targeted to repeat and potential customers. In addition, we rely heavily upon word of mouth
customer referrals. If we are unable to develop or maintain an effective means of reaching micro
businesses and consumers, the costs of attracting customers using these methods significantly
increase, or we are unable to develop new cost-effective means to obtain customers, then our
ability to attract new and repeat customers would be harmed, traffic to our websites would be
reduced, and our business and results of operations would be harmed.
Purchasers of micro business marketing products and services, including graphic design and
customized printing, may not choose to shop online, which would prevent us from acquiring new
customers that are necessary to the success of our business.
The online market for micro business marketing products and services is less developed than
the online market for other business and consumer products. If this market does not gain or
maintain widespread acceptance, our business may suffer. Our success will depend in part on our
ability to attract customers who have historically purchased printed products and graphic design
services through traditional printing operations and graphic design businesses or who have produced
graphic design and printed products using self-service alternatives. Furthermore, we may have to
incur significantly higher and more sustained advertising and promotional expenditures or price our
services and products more competitively than we currently anticipate in order to attract
additional online consumers to our websites and convert them into purchasing customers. Specific
factors that could prevent prospective customers from purchasing from us include:
| concerns about buying graphic design services and marketing products without face-to-face interaction with sales personnel; | ||
| the inability to physically handle and examine product samples; | ||
| delivery time associated with Internet orders; | ||
| concerns about the security of online transactions and the privacy of personal information; | ||
| delayed shipments or shipments of incorrect or damaged products; and |
23
Table of Contents
| the inconvenience associated with returning or exchanging purchased items. |
We may not succeed in promoting, strengthening and continuing to establish the Vistaprint brand,
which would prevent us from acquiring new customers and increasing revenues.
Since our products and services are sold primarily through our websites, the success of our
business depends upon our ability to attract new and repeat customers to our websites in order to
increase business and grow our revenues. For this reason, a primary component of our business
strategy is the continued promotion and strengthening of the Vistaprint brand. In addition to the
challenges posed by establishing and promoting our brand among the many businesses that promote
products and services on the Internet, we face significant competition from graphic design and
printing companies marketing to micro businesses who also seek to establish strong brands. If we
are unable to successfully promote the Vistaprint brand, we may fail to increase our revenues.
Customer awareness of, and the perceived value of, our brand will depend largely on the success of
our marketing efforts and our ability to provide a consistent, high-quality customer experience. To
promote our brand, we have incurred and will continue to incur substantial expense related to
advertising and other marketing efforts. We may choose to increase our branding expense materially,
but we cannot be sure that this investment will be profitable. Underperformance of significant
future branding efforts could materially damage our financial results.
A component of our brand promotion strategy is establishing a relationship of trust with our
customers, which we believe can be achieved by providing a high-quality customer experience. In
order to provide a high-quality customer experience, we have invested and will continue to invest
substantial amounts of resources in our website development and technology, graphic design
operations, production operations, and customer service operations. We also redesign our websites
from time to time to attract customers. Our ability to provide a high-quality customer experience
is also dependent, in large part, on external factors over which we may have little or no control,
including the reliability and performance of our suppliers, third-party carriers and communication
infrastructure providers. If we are unable to provide customers with a high-quality customer
experience for any reason, our reputation would be harmed, and our efforts to develop Vistaprint as
a trusted brand would be adversely impacted. The failure of our brand promotion activities could
adversely affect our ability to attract new customers and maintain customer relationships, and, as
a result, substantially harm our business and results of operations.
Our quarterly financial results will often fluctuate, which may lead to volatility in our share
price.
Our revenues and operating results often vary significantly from quarter-to-quarter due to a
number of factors, many of which are outside of our control. Factors that could cause our quarterly
revenue and operating results to fluctuate include, among others:
| seasonality-driven or other variations in the demand for our services and products; | ||
| currency fluctuations, which affect our revenues and our costs; | ||
| our ability to attract visitors to our websites and convert those visitors into customers; | ||
| our ability to retain customers and encourage repeat purchases; | ||
| business and consumer preferences for our products and services; | ||
| shifts in product mix toward lower gross margin products; | ||
| our ability to manage our production and fulfillment operations; | ||
| costs to produce our products and to provide our services; | ||
| our pricing and marketing strategies and those of our competitors; | ||
| improvements to the quality, cost and convenience of desktop printing; | ||
| costs of expanding or enhancing our technology or websites; |
24
Table of Contents
| compensation expense and charges related to our awarding of share-based compensation; | ||
| costs and charges resulting from litigation; and | ||
| a significant increase in credits, beyond our estimated allowances, for customers who are not satisfied with our products. |
In addition, management investment decisions may lead to fluctuations in our quarterly
financial results. For instance, since we seek to deliver on annual earnings per share objectives,
and not quarterly, we may choose to make discretionary, above planned investments that result in
lower than anticipated quarterly earnings and/or quarterly earnings that are lower than provided in
prior quarterly guidance.
We base our operating expense budgets in part on expected revenue trends. A portion of our
expenses, such as office leases and personnel costs, are relatively fixed. We may be unable to
adjust spending quickly enough to offset any revenue shortfall. Accordingly, any shortfall in
revenue may cause significant variation in operating results in any quarter. Based on the factors
cited above, among others, we believe that quarter-to-quarter comparisons of our operating results
may not be a good indication of our future performance. It is possible that in one or more future
quarters, our operating results may be below the expectations of public market analysts and
investors. In that event, the price of our ordinary shares will likely fall.
Seasonal fluctuations in our business place a strain on our operations and resources.
Our business has become increasingly seasonal in recent years due to increased sales of
products targeted to the consumer marketplace, such as holiday cards, calendars and personalized
gifts. Our second fiscal quarter, ending December 31, includes the majority of the holiday shopping
season and has become our strongest quarter for sales of our consumer-oriented products. In the
fiscal year ended June 30, 2010, sales during our second fiscal quarter accounted for more of our
revenue and earnings than any other quarter, and we believe our second fiscal quarter is likely to
continue to account for a disproportionate amount of our revenue and earnings for the foreseeable
future. In anticipation of increased sales activity during our second fiscal quarter holiday
season, we expect to incur significant additional capacity related expenses each year to meet our
seasonal needs including facility expansions, equipment purchases and increases in the number of
temporary and permanent employees. If we experience lower than expected sales during the second
quarter, it would likely have a disproportionately large impact on our operating results and
financial condition for the full fiscal year. In the future, our seasonal sales patterns may become
more pronounced or may change to the extent we introduce additional products and services targeted
to the consumer marketplace, including products and services that may be unrelated to the second
quarter holiday period. If we are unable to accurately forecast and respond to seasonality in our
business caused by demand for our consumer-oriented products, our business and results of
operations may be materially harmed.
A significant portion of our revenues and operations are transacted in currencies other than the
U.S. dollar, our reporting currency. We therefore have currency exchange risk.
We have substantial revenues and operations transacted in currencies other than our reporting
currency. As a result, we are exposed to fluctuations in currency exchange rates that may impact
the translation of our revenues and expenses, remeasurement of our intercompany balances, and the
value of our cash and cash equivalents denominated in currencies other than the U.S. dollar. For
example, when currency exchange rates are unfavorable with respect to the U.S. dollar, the U.S.
dollar equivalent of our revenue and operating income recorded in other currencies is diminished.
As we have expanded our international revenues and operations, our exposure to currency exchange
rate fluctuations has increased. Our revenue and results of operations may differ materially from
expectations as a result of currency exchange rate fluctuations.
If we are unable to market and sell products and services beyond our existing target markets and
develop new products and services to attract new customers, our results of operations may suffer.
We have developed products and services and implemented marketing strategies designed to
attract micro business owners and consumers to our websites and encourage them to purchase our
products and services. We believe we will need to address additional markets and attract new
customers to further grow our business. To access new markets and customers we expect that we will
need to develop, market and sell new products and services. We also intend to continue the
geographic expansion of our marketing efforts and customer service operations and the introduction
of localized websites in different countries and languages. In addition, we intend to develop new
strategic relationships to expand our marketing and sales channels, such as co-branded or strategic
partner-branded websites and retail in-store offerings. Any failure to develop new
25
Table of Contents
products and services, expand our business beyond our existing target markets and customers,
and address additional market opportunities could harm our business, financial condition and
results of operations.
If we are unable to manage our expected growth and expand our operations successfully, our
reputation would be damaged and our business and results of operations would be harmed.
In recent years, our number of employees has grown rapidly, and within the last year we have
added new production facilities and offices in diverse geographies, including Australia, Germany,
India and Tunisia. Our growth, combined with the geographical separation of our operations, has
placed, and will continue to place, a strain on our management, administrative and operational
infrastructure. Our ability to manage our operations and anticipated growth will require us to
continue to refine our operational, financial and management controls, human resource policies,
reporting systems and procedures in the locations in which we operate. We expect the number of
countries and facilities from which we operate to continue to increase in the future.
We may not be able to implement improvements to our management information and control systems
in an efficient or timely manner and may discover deficiencies in existing systems and controls. If
we are unable to manage expected future expansion, our ability to provide a high-quality customer
experience could be harmed, which would damage our reputation and brand and substantially harm our
business and results of operations.
If we are unable to manage the challenges associated with our international operations, the growth
of our business could be negatively impacted.
We operate production facilities or offices in Australia, Bermuda, Canada, France, Germany,
India, Jamaica, the Netherlands, Spain, Switzerland, Tunisia and the United States. We have
localized websites to serve many markets internationally. For the fiscal quarter ended September
30, 2010, we derived 43% of our revenue from our non-United States websites. We are subject to a
number of risks and challenges that specifically relate to our international operations. These
risks and challenges include, among others:
| difficulty managing operations in, and communications among, multiple locations and time zones; | ||
| local regulations that may restrict or impair our ability to conduct our business as planned; | ||
| protectionist laws and business practices that favor local producers and service providers; | ||
| interpretation of complex tax laws, treaties and regulations that could expose us to unanticipated taxes on our income and increase our effective tax rate; | ||
| failure to properly understand and develop graphic design content and product formats appropriate for local tastes; | ||
| restrictions imposed by local labor practices and laws on our business and operations; and | ||
| failure of local laws to provide a sufficient degree of protection against infringement of our intellectual property. |
Our international operations may not be successful if we are unable to meet and overcome these
challenges, which could limit the growth of our business and may have an adverse effect on our
business and operating results.
We are dependent upon our own facilities for the production of our products, and any significant
interruption in the operations of these facilities or any inability to increase capacity at these
facilities would have an adverse impact on our business.
We produce the vast majority of our products internally. We seek to ensure that we can satisfy
all of our production demand from our facilities, including at periods of peak demand, while
maintaining the level of product quality and timeliness of delivery that customers require. We have
not identified alternatives to these facilities to serve us in the event of a labor strike, work
stoppage or other issue with our workforce in one or more of our facilities or the loss or
substantial damage to one or more of our facilities due to fire, natural disaster or other events.
If we are unable to meet demand from our own facilities or to successfully expand those facilities
on a timely basis to meet customer demand, we would likely turn to an alternative supplier in an
effort to supplement our production capacity. However, an alternative supplier may not be able to
26
Table of Contents
meet our production requirements on a timely basis or on commercially acceptable terms, or at
all. If we are unable to fulfill orders in a timely fashion at a high level of product quality
through our facilities and are unable to find a satisfactory supply replacement, our business and
results of operations would be substantially harmed.
Interruptions to our website operations, information technology systems, production processes or
customer service operations for any reason could damage our reputation and brand and substantially
harm our business and results of operations.
The satisfactory performance, reliability, security and availability of our websites,
transaction processing systems, network infrastructure, production facilities and customer service
operations are critical to our reputation and to our ability to attract and retain customers and to
maintain adequate customer service levels. Expanding our systems and infrastructure may require us
to commit substantial financial, operational and technical resources before the volume of our
business increases, with no assurance that our revenues will increase. Any interruptions that cause
any of our websites to be unavailable, reduce our order fulfillment performance or interfere with
customer service operations could result in lost revenue and negative publicity, damage our
reputation and brand, and cause our business and results of operations to suffer. A number of
factors or events could cause interruptions or interference in our websites or operations,
including:
| human error, software errors, power loss, telecommunication failures, fire, flood, extreme weather, political instability, acts of terrorism, war, break-ins and security breaches, contract disputes, and other similar events. In particular, both Bermuda, where substantially all of the computer hardware necessary to operate our websites is located in a single facility, and Jamaica, the location of most of our customer service and design service operations, are subject to a high degree of hurricane risk and extreme weather conditions. | ||
| undetected errors or design faults in our technology, infrastructure and processes that may cause our websites to fail. In the past, we have experienced delays in website releases and customer dissatisfaction during the period required to correct errors and design faults in our websites that caused us to lose revenue. In the future, we may encounter additional issues, such as scalability limitations, in current or future technology releases. | ||
| our failure to maintain adequate capacity in our computer systems to cope with the high volume of visits to our websites, particularly during promotional campaign periods and in the seasonal peak in demand that we experience in our second fiscal quarter. |
We do not presently have redundant systems operational in multiple locations. In addition, we
are dependent in part on third parties for the implementation and maintenance of certain aspects of
our communications and production systems, and because many of the causes of system interruptions
or interruptions of the production process may be outside of our control, we may not be able to
remedy such interruptions in a timely manner, or at all. We do carry business interruption
insurance to compensate us for losses that may occur if operations at our facilities are
interrupted, but these policies do not address all potential causes of business interruptions we
may experience, and any proceeds we may receive may not fully compensate us for all of the revenue
we may lose.
We face intense competition.
The markets for small business marketing products and services and consumer custom products,
including the printing and graphic design market, are intensely competitive, highly fragmented and
geographically dispersed, with many existing and potential competitors. We expect competition for
online small business marketing and consumer custom products and services to increase in the
future. The increased use of the Internet for commerce and other technical advances have allowed
traditional providers of these products and services to improve the quality of their offerings,
produce and deliver those products and services more efficiently and reach a broader purchasing
public. Competition may result in price pressure, reduced profit margins and loss of market share,
any of which could substantially harm our business and results of operations. Current and potential
competitors include:
| traditional storefront printing and graphic design companies; | ||
| office superstores, drug store chains, food retailers and other major retailers targeting small business and consumer markets, such as Staples, UPS Stores, Office Depot, Costco, CVS, Schleker, Walgreens, Carrefour and Wal-Mart; | ||
| wholesale printers such as Taylor Corporation and Business Cards Tomorrow; |
27
Table of Contents
| other online printing and graphic design companies, many of which provide printed products and services similar to ours, such as Overnight Prints, 123Print, Moo.com and UPrinting for small business marketing products and services; TinyPrints, Invitation Consultants and Fine Stationery for invitations and announcements; | ||
| self-service desktop design and publishing using personal computer software with a laser or inkjet printer and specialty paper; | ||
| other email marketing services companies such as Constant Contact and iContact; | ||
| other website design and hosting companies such as United Internet, Web.com and Network Solutions; | ||
| other suppliers of custom apparel, promotional products and customized gifts, such as Zazzle, Café Press and Customization Mall; | ||
| online photo product companies, such as Kodak Gallery, Snapfish by HP, Shutterfly and Photobox; and | ||
| other internet firms, such as Google (Picasa), Yahoo (Flickr), Amazon, Facebook, MySpace, the Knot and many smaller firms. |
Many of our current and potential competitors have advantages over us, including longer
operating histories, greater brand recognition, existing customer and supplier relationships, and
significantly greater financial, marketing and other resources. Many of our competitors work
together. For example, Taylor Corporation sells printed products through office superstores such as
Staples and Office Depot.
Some of our competitors that either already have an online presence or are seeking to
establish an online presence may be able to devote substantially more resources to website and
systems development than we can. In addition, larger, more established and better capitalized
entities may acquire, invest or partner with online competitors as use of the Internet and other
online services increases. Competitors may also seek to develop new products, technologies or
capabilities that could render many of the products, services and content we offer obsolete or less
competitive, which could harm our business and results of operations.
In addition, we have in the past and may in the future choose to collaborate with certain of
our existing and potential competitors in strategic partnerships that we believe will improve our
competitive position and results of operations, such as through a retail in-store or web-based
collaborative offering. It is possible, however, that such ventures will be unsuccessful and that
our competitive position and results of operations will be adversely affected as a result of such
collaboration.
Our failure to meet our customers price expectations would adversely affect our business and
results of operations.
Demand for our products and services is sensitive to price. Changes in our pricing strategies
have had, and are likely to continue to have, a significant impact on our revenues and results of
operations. We offer certain free products and services as a means of attracting customers, and we
offer substantial pricing discounts as a means of encouraging repeat purchases. These free offers
and discounts may not result in an increase in our revenues or the optimization of our profits. In
addition, many factors, including our production and personnel costs and our competitors pricing
and marketing strategies, can significantly impact our pricing strategies. If we fail to meet our
customers price expectations in any given period, our business and results of operations will
suffer.
Our failure to protect our network and the confidential information of our customers against
security breaches and to address risks associated with credit card fraud could damage our
reputation and brand and substantially harm our business and results of operations.
A significant prerequisite to online commerce and communications is the secure transmission of
confidential information over public networks. Our failure to prevent security breaches of our
network could damage our reputation and brand and substantially harm our business and results of
operations. Currently, a majority of our sales are billed to our customers credit card accounts
directly. We retain the credit card information of all of our customers for a limited period of
time for the purpose of issuing refunds and of our subscription customers for a longer period of
time for the purpose of recurring billing. We rely on encryption and authentication technology
licensed from third parties to effect secure transmission of confidential information, including
credit card numbers. Advances in computer capabilities, new discoveries
28
Table of Contents
in the field of cryptography or other related developments, among other factors, may result in
a compromise or breach of our network or the technology that we use to protect our network and our
customer transaction data including credit card information. Any such compromise of our network or
our security could damage our reputation and brand and expose us to a risk of loss or litigation
and possible liability, which would substantially harm our business and results of operations. In
addition, anyone who is able to circumvent our security measures could misappropriate proprietary
information or cause interruptions in our operations. We may need to expend significant resources
to protect against security breaches or to address problems caused by breaches.
In addition, under current credit card practices, we may be liable for fraudulent credit card
transactions conducted on our websites, such as through the use of stolen credit card numbers,
because we do not obtain a cardholders signature. To date, quarterly losses from credit card fraud
have not exceeded 1% of total revenues in any quarter, but we continue to face the risk of
significant losses from this type of fraud. Although we seek to maintain insurance to cover us
against this risk, we cannot be certain that our coverage will be adequate to cover liabilities
actually incurred as a result of such fraud or that insurance will continue to be available to us
on economically reasonable terms, or at all. Our failure to limit fraudulent credit card
transactions could damage our reputation and brand and substantially harm our business and results
of operations.
We depend on search engines to attract a substantial portion of the customers who visit our
websites, and losing these customers would adversely affect our business and results of operations.
Many customers access our websites by clicking through on search results displayed by search
engines such as Google, Bing and Yahoo!. These search engines typically provide two types of search
results, algorithmic and purchased listings. Algorithmic listings cannot be purchased, and instead
are determined and displayed solely by a set of formulas designed by the search engine. Purchased
listings can be purchased by companies and other entities in order to attract users to their
websites. We rely on both algorithmic and purchased listings to attract and direct a substantial
portion of the customers we serve.
Search engines revise their algorithms from time to time in an attempt to optimize their
search result listings and to maximize the advertising revenue generated by those listings. If the
search engines on which we rely for algorithmic listings modify their algorithms, this could result
in fewer customers clicking through to our websites, requiring us to resort to other more costly
resources to replace this traffic. This could reduce our operating and net income or our revenues,
prevent us from maintaining or increasing profitability and harm our business. If one or more
search engines on which we rely for purchased listings modifies or terminates its relationship with
us, our expenses could rise, our revenues could decline, and our business may suffer. The cost of
purchased search listing advertising could increase as demand for these channels continues to grow
quickly, and further increases could have negative effects on our ability to maintain or increase
profitability. In addition, some of our competitors purchase the term Vistaprint and other terms
incorporating our proprietary trademarks from Google and other search engines as part of their
search listing advertising. Courts do not always side with the trademark owners in cases involving
search engines, and Google has refused to prevent companies from purchasing the trademark
Vistaprint. As a result, we may not be able to prevent our competitors from advertising to, and
directly competing for, customers who search on the term Vistaprint on search engines.
Various private spam blacklisting and similar entities have in the past, and may in the
future, interfere with our e-mail solicitation, the operation of our websites and our ability to
conduct business.
We depend primarily on e-mail to market to and communicate with our customers. Various private
entities attempt to regulate the use of e-mail for commercial solicitation. These entities often
advocate standards of conduct or practice that significantly exceed current legal requirements and
classify certain e-mail solicitations that comply with current legal requirements as unsolicited
bulk e-mails, or spam. Some of these entities maintain blacklists of companies and individuals,
as well as the websites, Internet service providers and Internet protocol addresses associated with
those companies and individuals, that do not adhere to what the blacklisting entity believes are
appropriate standards of conduct or practices for commercial e-mail solicitations. If a companys
Internet protocol addresses are listed by a blacklisting entity, e-mails sent from those addresses
may be blocked if they are sent to any Internet domain or Internet address that subscribes to the
blacklisting entitys service or purchases its blacklist.
Some of our Internet protocol addresses are currently listed with one or more blacklisting
entities despite our belief that our commercial e-mail solicitations comply with all applicable
laws. In the future, our other Internet protocol addresses may also be listed with one or more
blacklisting entities. We may not be successful in convincing the blacklisting entities to remove
us from their lists. Although the blacklisting we have experienced in the past has not had a
significant impact on our ability to operate our websites, send commercial e-mail solicitations, or
manage or operate our corporate email accounts, it
29
Table of Contents
has, from time to time, interfered with our ability to send operational e-mailssuch as
password reminders, invoices and electronically delivered productsto customers and others, and to
send and receive emails to and from our corporate email accounts. In addition, as a result of being
blacklisted, we have had disputes with, or concerns raised by, various service providers who
perform services for us, including co-location and hosting services, Internet service providers and
electronic mail distribution services. We are currently on certain blacklists and there can be no
guarantee that we will not be put on additional blacklists in the future or that we will succeed in
removing ourselves from blacklists. Blacklisting of this type could interfere with our ability to
market our products and services, communicate with our customers and otherwise operate our
websites, and operate and manage our corporate email accounts, all of which could have a material
negative impact on our business and results of operations.
We may not succeed in cross selling additional products and services to our customers.
We seek to acquire customers based on their interest in one or more of our products and then
offer additional related products to those customers. If our customers are not interested in our
additional products or have an adverse experience with the products they were initially interested
in, the sale of additional products and services to those customers and our ability to increase our
revenue and to improve our results of operations could be adversely affected.
Our customers create products that incorporate images, illustrations and fonts that we license from
third parties, and any loss of the right to use these licensed materials may substantially harm our
business and results of operations.
Many of the images, illustrations, and fonts incorporated in the design products and services
we offer are the copyrighted property of other parties that we use under license agreements. If one
or more of these licenses were terminated, the amount and variety of content available on our
websites would be significantly reduced. In such an event, we could experience delays in obtaining
and introducing substitute materials, and substitute materials might be available only under less
favorable terms or at a higher cost, or may not be available at all. The termination of one or more
of these licenses covering a significant amount of content could have an adverse effect on our
business and results of operations.
The loss of key personnel or an inability to attract and retain additional personnel could affect
our ability to successfully grow our business.
We are highly dependent upon the continued service and performance of our senior management
team and key technical, marketing and production personnel including, in particular, Robert S.
Keane, our President and Chief Executive Officer, Wendy Cebula, our President of Vistaprint North
America, Michael Giannetto, our Chief Financial Officer and Janet Holian, our President of
Vistaprint Europe. Any of these executives may cease their employment with us at any time with
minimal advance notice. The loss of one or more of these or other key employees may significantly
delay or prevent the achievement of our business objectives. We face intense competition for
qualified individuals from numerous technology, marketing, financial services, manufacturing and
e-commerce companies. We may be unable to attract and retain suitably qualified individuals, and
our failure to do so could have an adverse effect on our ability to implement our business plan.
Acquisitions may be disruptive to our business.
Our business and our customer base have been built primarily through organic growth. However,
from time to time we may selectively pursue acquisitions of businesses, technologies or services in
order to expand our capabilities, enter new markets, or increase our market share, such as our
acquisition of Soft Sight, Inc., or Soft Sight, in December 2009. We have very limited experience
making acquisitions. Integrating any newly acquired businesses, technologies or services may be
expensive and time consuming. To finance any acquisitions, it may be necessary for us to raise
additional funds through public or private financings. Additional funds may not be available on
terms that are favorable to us, or at all. If we were to raise funds through an equity financing,
such a financing would result in dilution to our shareholders. If we were to raise funds through a
debt financing, such a financing may subject us to covenants restricting the activities we may
undertake in the future. We may be unable to operate any acquired businesses profitably or
otherwise implement our strategy successfully. If we are unable to integrate newly acquired
businesses, technologies or services effectively, our business and results of operations could
suffer. The time and expense associated with finding suitable and compatible businesses,
technologies or services to acquire could also disrupt our ongoing business and divert our
managements attention. Acquisitions could also result in large and immediate write-offs or
assumptions of debt and contingent liabilities, any of which could substantially harm our business
and results of operations.
30
Table of Contents
Our business and results of operations may be negatively impacted by general economic and
financial market conditions, and such conditions may increase the other risks that affect our
business.
Despite recent signs of economic recovery in some markets, many of the markets in which we
operate are still in an economic downturn that we believe has had and will continue to have a
negative impact on our business. Turmoil in the worlds financial markets materially and adversely
impacted the availability of financing to a wide variety of businesses, including micro businesses,
and the resulting uncertainty led to reductions in capital investments, marketing expenditures,
overall spending levels, future product plans, and sales projections across industries and markets.
These trends could have a material and adverse impact on the demand for our products and services
and our financial results from operations.
The United States government may substantially increase border controls and impose duties or
restrictions on cross-border commerce that may substantially harm our business.
For the fiscal quarter ended September 30, 2010, we derived 57% of our revenue from sales to
customers made through Vistaprint.com, our United States-focused website. We produce all physical
products for our United States customers at our facility in Windsor, Ontario. Restrictions on
shipping goods into the United States from Canada pose a substantial risk to our business. We have
from time to time experienced significant delays in shipping our manufactured products into the
United States as a result of these restrictions, which has, in some instances, resulted in delayed
delivery of orders.
The United States also imposes protectionist measures, such as customs duties and tariffs,
that limit free trade. Some of these measures may apply directly to product categories that
comprise a material portion of our revenues. The customs laws, rules and regulations that we are
required to comply with are complex and subject to unpredictable enforcement and modification. If
the United States were to impose further border controls and restrictions, interpret or apply
regulations in a manner unfavorable to the importation of products from outside of the U.S., impose
quotas, tariffs or import duties, increase the documentation requirements applicable to cross
border shipments or take other actions that have the effect of restricting the flow of goods from
Canada and other countries to the United States, we may have greater difficulty shipping products
into the United States or be foreclosed from doing so, experience shipping delays, or incur
increased costs and expenses, all of which would substantially impair our ability to serve the
United States market and harm our business and results of operations.
We may not be able to protect our intellectual property rights, which may impede our ability to
build brand identity, cause confusion among our customers, damage our reputation and permit others
to practice our patented technology, which could substantially harm our business and results of
operations.
We rely on a combination of patent, trademark, trade secret and copyright law and contractual
restrictions to protect our intellectual property. These protective measures afford only limited
protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt
to copy aspects of our trademarks, our websites features and functionalities or to obtain and use
information that we consider proprietary, such as the technology used to operate our websites and
our production operations.
As of June 30, 2010, we had 47 issued patents and more than 50 patent applications pending in
the United States and other countries. We intend to continue to pursue patent coverage in the
United States and other countries to the extent we believe such coverage is justified, appropriate,
and cost efficient. There can be no guarantee that any of our pending applications or continuation
patent applications will be granted. In addition, we have in the past and may in the future face
infringement, invalidity, co-inventorship or similar claims brought by third parties with respect
to any of our current or future patents. Any such claims, whether or not successful, could be
extremely costly, damage our reputation and brand and substantially harm our business and results
of operations.
Our primary brand is Vistaprint. We hold trademark registrations for the Vistaprint
trademark in 21 jurisdictions, including registrations in our major markets of the United States,
the European Union, Canada, Australia and Japan.
Our competitors or other entities may adopt names or marks similar to ours, thereby impeding
our ability to build brand identity and possibly leading to customer confusion. There are several
companies that currently incorporate or may incorporate in the future Vista into their company,
product or service names. There could be potential trade name or trademark infringement claims
brought by owners of other registered trademarks or trademarks that incorporate variations of the
term Vistaprint or our other trademarks, and we may institute such claims against other parties.
Any claims or customer confusion related to our trademarks could damage our reputation and brand
and substantially harm our business and results of operations.
31
Table of Contents
Intellectual property disputes and litigation are costly and could cause us to lose our exclusive
rights or be subject to liability or require us to stop some of our business activities.
From time to time, we are involved in lawsuits or disputes in which third parties claim that
we infringe their intellectual property rights or improperly obtained or used their confidential or
proprietary information. In addition, from time to time we receive letters from third parties that
state that these third parties have patent rights that cover aspects of the technology that we use
in our business and that the third parties believe we are obligated to license in order to continue
to use such technology. Similarly, companies or individuals with whom we currently have a business
relationship, or have had a past business relationship, may commence an action seeking rights in
one or more of our patents or pending patent applications.
The cost to us of any litigation or other proceeding relating to intellectual property rights,
even if resolved in our favor, could be substantial, and litigation diverts our managements
efforts from growing our business. Potential adversaries may be able to sustain the costs of
complex intellectual property litigation more effectively than we can because they have
substantially greater resources. Uncertainties resulting from the initiation and continuation of
any litigation could limit our ability to continue our operations. If any parties successfully
claim that our sale, use, manufacturing or importation of technologies infringes upon their
intellectual property rights, we might be forced to pay significant damages and attorneys fees,
and a court could enjoin us from performing the infringing activity. Thus, the situation could
arise in which our ability to use certain technologies important to the operation of our business
would be restricted by a court order.
Alternatively, we may be required to, or decide to, enter into a license with a third party
that claims infringement by us. Any license required under any patent may not be made available on
commercially acceptable terms, if at all. In addition, such licenses are likely to be non-exclusive
and, therefore, our competitors may have access to the same technology licensed to us. If we fail
to obtain a required license and are unable to design around a third partys patent, we may be
unable to effectively conduct certain of our business activities, which could limit our ability to
generate revenues or maintain profitability and possibly prevent us from generating revenue
sufficient to sustain our operations.
In addition, we may need to resort to litigation to enforce a patent issued to us or to
determine the scope and validity of third-party proprietary rights. Our ability to enforce our
patents, copyrights, trademarks, and other intellectual property is subject to general litigation
risks, as well as uncertainty as to the enforceability of our intellectual property rights in
various countries. When we seek to enforce our rights, we may be subject to claims that the
intellectual property right is invalid, is otherwise not enforceable, or is licensed to the party
against whom we are asserting a claim. In addition, our assertion of intellectual property rights
could result in the other party seeking to assert alleged intellectual property rights of its own
against us, which may adversely impact our business in the manner discussed above. Our inability to
enforce our intellectual property rights under these circumstances may negatively impact our
competitive position and our business.
You can find information about certain lawsuits that we have filed to enforce or protect our
intellectual property rights and that have been filed against us for alleged infringement of other
parties intellectual property rights set forth in Note 8 Commitments and Contingencies in the
accompanying notes to the condensed consolidated financial statements included in Item 1 of Part 1
of this Report.
We sell our products and services primarily through our websites. If we are unable to acquire or
maintain domain names for our websites, then we could lose customers, which would substantially
harm our business and results of operations.
We sell our products and services primarily through our websites. We currently own or control
a number of Internet domain names used in connection with our various websites, including
Vistaprint.com and similar names with alternate URL names, such as .net, .de and .co.uk. Domain
names are generally regulated by Internet regulatory bodies. If we are unable to use a domain name
in a particular country, then we would be forced to purchase the domain name from the entity that
owns or controls it, which we may not be able to do on commercially acceptable terms or at all;
incur significant additional expenses to market our products within that country, including the
development of a new brand and the creation of new promotional materials and packaging; or elect
not to sell products in that country. Any of these results could substantially harm our business
and results of operations. Furthermore, the relationship between regulations governing domain names
and laws protecting trademarks and similar proprietary rights is unclear and subject to change. We
might not be able to prevent third parties from acquiring domain names that infringe or otherwise
decrease the value of our trademarks and other proprietary rights. Regulatory bodies could
establish additional top-level domains, appoint additional domain name registrars or modify the
requirements for holding domain names. As a result, we may not be able to acquire or maintain the
domain names that utilize the name Vistaprint in all of the countries in which we currently or
intend to conduct business.
32
Table of Contents
Our revenues may be negatively affected if we are required to charge sales, value added or other
taxes on internet sales.
In many jurisdictions where we sell products and services, we do not collect or have imposed
upon us sales, value added or other consumption taxes, which we refer to as indirect taxes. The
application of indirect taxes to ecommerce businesses such as Vistaprint is a complex and evolving
issue. Many of the fundamental statutes and regulations that impose these taxes were established
before the growth of the Internet and ecommerce. In many cases, it is not clear how existing
statutes apply to the Internet or ecommerce. Bills have been introduced in the U.S. Congress that
could affect the ability of state governments to require out of state internet retailers to collect
and remit sales taxes on goods and certain services. The imposition by national, state or local
governments, whether within or outside the United States, of various taxes upon internet commerce
could create administrative burdens for us and could decrease our future revenue. Additionally, a
successful assertion by one or more governments in jurisdictions where we are not currently
collecting sales or value added taxes that we should be, or should have been, collecting indirect
taxes on the sale of our products could result in substantial tax liabilities for past sales,
discourage customers from purchasing products from us, decrease our ability to compete with
traditional retailers or otherwise negatively impact our results of operations.
Our business is dependent on the Internet, and unfavorable changes in government regulation of the
Internet, e-commerce and email marketing could substantially harm our business and results of
operations.
Due to our dependence on the Internet for our sales, regulations and laws specifically
governing the Internet, e-commerce and email marketing may have a greater impact on our operations
than other more traditional businesses. Existing and future laws and regulations may impede the
growth of e-commerce and our ability to compete with traditional graphic designers, printers and
small business marketing companies, as well as desktop printing products. These regulations and
laws may cover taxation, restrictions on imports and exports, customs, tariffs, user privacy, data
protection, commercial email, pricing, content, copyrights, distribution, electronic contracts and
other communications, consumer protection, the provision of online payment services, broadband
residential Internet access and the characteristics and quality of products and services. It is not
clear how existing laws governing many of these issues apply to the Internet and e-commerce, as the
vast majority of applicable laws were adopted before the advent of the Internet and do not
contemplate or address the unique issues raised by the Internet or e-commerce. Those laws that do
reference the Internet, such as the Bermuda Electronic Transactions Act 1999, the U.S. Digital
Millennium Copyright Act and the U.S. CAN-SPAM Act of 2003, are only beginning to be interpreted by
the courts, and their applicability and reach are therefore uncertain. Those current and future
laws and regulations or unfavorable resolution of these issues may substantially harm our business
and results of operations.
If we were required to review the content that our customers incorporate into our products and
interdict the shipment of products that violate copyright protections or other laws, our costs
would significantly increase, which would harm our results of operations.
Because of our focus on automation and high volumes, our operations do not involve any
human-based review of content for the vast majority of our sales. Although our websites terms of
use specifically require customers to represent that they have the right and authority to reproduce
a given content and that the content is in full compliance with all relevant laws and regulations,
we do not have the ability to determine the accuracy of these representations on a case-by-case
basis. There is a risk that a customer may supply an image or other content that is the property of
another party used without permission, that infringes the copyright or trademark of another party,
or that would be considered to be defamatory, hateful, racist, scandalous, obscene, or otherwise
objectionable or illegal under the laws of the jurisdiction(s) where that customer lives or where
we operate. There is, therefore, a risk that customers may intentionally or inadvertently order and
receive products from us that are in violation of the law or the rights of another party. If we
should become legally obligated in the future to perform manual screening and review for all orders
destined for a jurisdiction, we will encounter increased production costs or may cease accepting
orders for shipment to that jurisdiction, which could substantially harm our business and results
of operations. In addition, if we were held liable for actions of our customers, we could be
required to pay substantial penalties, fines or monetary damages.
The third party membership programs previously offered on our web site may continue to draw
customer complaints, litigation and governmental inquiries, which can be costly and could hurt our
reputation.
During each of the last three fiscal years, we generated a small portion of our revenue from
order referral fees, revenue share and other fees paid to us by third party merchants for customer
click-throughs, distribution of third party promotional materials, and referrals arising from
products and services of the third party merchants we offer to our customers on our
33
Table of Contents
website, which we collectively refer to as referral fees. Some of these third party
referral-based offers were for memberships in discount programs or similar promotions made to
customers who have purchased products from us, in which we received a payment from a third party
merchant for every customer that accepted the promotion. Some of these third party membership
discount programs have been, and may continue to be, the subject of consumer complaints,
litigation, and governmental regulatory actions alleging that the enrollment and billing practices
involved in the programs violate various consumer protection laws or are otherwise deceptive. For
example, various state attorneys general have brought consumer fraud lawsuits against certain of
the third party merchants asserting that they have not adequately disclosed the terms of their
offers and have not obtained proper approval from consumers before debiting the consumers bank
account or billing the consumers credit card. Similarly, in May 2009, Senator John D. Rockefeller
IV, Chairman of the United States Senate Committee on Commerce, Science and Transportation,
announced that the Commerce Committee was investigating membership discount programs marketed by
third party merchants Vertrue, Inc., Webloyalty.com, Inc. and Affinion Group, Inc. through
e-commerce retailers, and in June 2010 the Commerce Committee approved proposed legislation that
seeks to regulate certain aspects of the membership programs. From time to time we have received
complaints from our customers and inquiries by state attorneys general and government agencies
regarding the membership discount programs previously offered on our websites. Although we removed
all such membership discount program offerings from our websites as of November 2009 and terminated
our relationship with the third party merchant responsible for these programs, we have continued to
receive complaints and inquiries about these programs.
Any private or governmental claims or actions that may be brought against us relating to these
third party membership programs could result in our being obligated to pay substantial damages or
incurring substantial legal fees in defending claims. These damages and fees could be
disproportionate to the revenues we generated through these relationships, which would have an
adverse affect on our results of operations. Even if we are successful in defending against these
claims, such a defense may result in distraction of management and significant costs. In addition,
customer dissatisfaction or damage to our reputation as a result of these claims could have a
negative impact on our brand, revenues and profitability.
Our practice of offering free products and services could be subject to judicial or regulatory
challenge, which, if successful, would hinder our ability to attract customers and generate
revenue.
We regularly offer free products and services as an inducement for customers to try our
products and services. Although we believe that we conspicuously and clearly communicate all
details and conditions of these offersfor example, that customers are required to pay shipping
and processing charges to take advantage of a free product offerwe have in the past, and may in
the future, be subject to claims by individuals or governmental regulators in Europe, the United
States and other countries that our free offers are misleading or do not comply with applicable
legislation or regulation. In addition, customers and competitors have filed complaints with
governmental and standards bodies claiming that customers were misled by the terms of our free
offers. If our free product offers are subject to further challenges or actions in the future, or
if we are compelled or determine to curtail or eliminate our use of free offers as the result of
any such actions, our business prospects and results of operations could be materially harmed.
We are subject to customer payment-related risks.
We accept payments for our products and services on our websites by a variety of methods,
including credit card, debit card and bank check. In many geographic regions, we rely on one or two
third party companies to provide payment processing services, including the processing of credit
cards, debit cards and electronic checks. If either of these companies became unwilling or unable
to provide these services to us, then we would need to find and engage replacement providers, which
we may not be able to do on terms that are acceptable to us or at all, or to process the payments
ourselves, which could be costly and time consuming, either of which scenarios could disrupt our
business.
As we offer new payment options to our customers, we may be subject to additional regulations,
compliance requirements and fraud risk. For certain payment methods, including credit and debit
cards, we pay interchange and other fees, which may increase over time and raise our operating
costs and lower our profit margins or require that we charge our customers more for our products.
We are also subject to payment card association and similar operating rules and requirements, which
could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to
comply with these rules and requirements, we may be subject to fines and higher transaction fees
and lose our ability to accept credit and debit card payments from our customers or facilitate
other types of online payments, and our business and operating results could be materially
adversely affected.
34
Table of Contents
We may be subject to product liability claims if people or property are harmed by the products we
sell.
Some of the products we sell may expose us to product liability claims relating to personal
injury, death, or property damage, and may require product recalls or other actions. Although we
maintain product liability insurance, we cannot be certain that our coverage will be adequate for
liabilities actually incurred or that insurance will continue to be available to us on reasonable
terms, or at all.
If we are unable to retain security authentication certificates, which are supplied by third party
providers over which we exercise little or no control, our business could be harmed.
We are dependent on a limited number of third party providers of website security
authentication certificates that may be necessary for some of our customers web browsers to
properly access our websites and upon which many of our customers otherwise rely in deciding
whether to purchase products and services from us. Despite any contractual protections we may have,
these third party providers can disable or revoke, and in the past have disabled or revoked, our
security certificates without our consent, which would render our websites inaccessible to some of
our customers and could discourage other customers from accessing our sites, unless we are able to
procure a replacement certificate from one of a limited number of alternative third party
providers. Any interruption in our customers ability or willingness to access our websites if our
security certificates are disabled or otherwise unavailable for an extended period of time could
result in a material loss of revenue and profits and damage to our brand.
Risks Related to Our Corporate Structure
Challenges by various tax authorities to our complex international structure could, if successful,
increase our effective tax rate and adversely affect our earnings.
We are a Dutch limited liability company that operates through various subsidiaries in a
number of countries throughout the world. Consequently, we are subject to tax laws, treaties and
regulations in the countries in which we operate. Our income taxes are based upon the applicable
tax laws and tax rates in the countries in which we operate and earn income as well as upon our
operating structures in these countries. Many countries tax laws and international treaties
impose taxation upon entities that conduct a trade or business or operate through a permanent
establishment in those countries. However, these applicable laws or treaties are subject to
interpretation. The tax authorities in these countries could contend that a greater portion of the
income of the Vistaprint N.V. group should be subject to income or other tax in their respective
jurisdictions. This could result in an increase to our effective tax rate and adversely affect our
results of operations.
A change in tax laws, treaties or regulations, or their interpretation, of any country in
which we operate could result in a higher tax rate on our earnings, which could result in a
significant negative impact on our earnings and cash flow from operations. We continue to assess
the impact of various international tax proposals and modifications to existing tax treaties
between the Netherlands and other countries that could result in a material impact on our income
taxes. We cannot predict whether any specific legislation will be enacted or the terms of any such
legislation. However, if such proposals were enacted, or if modifications were to be made to
certain existing treaties, the consequences could have a materially adverse impact on us, including
increasing our tax burden, increasing costs of our tax compliance or otherwise adversely affecting
our financial condition, results of operations and cash flows.
Our intercompany arrangements may be challenged, resulting in higher taxes or penalties and an
adverse effect on our earnings.
We operate pursuant to written intercompany service and related agreements, which we also
refer to as transfer pricing agreements, among Vistaprint N.V. and its subsidiaries. These
agreements establish transfer prices for production, marketing, management, technology development
and other services performed by these subsidiaries for other group companies. Transfer prices are
prices that one company in a group of related companies charges to another member of the group for
goods, services or the use of property. If two or more affiliated companies are located in
different countries, the tax laws or regulations of each country generally will require that
transfer prices be consistent with those between unrelated companies dealing at arms length. With
the exception of the transfer pricing arrangements applicable to our Dutch and French operations,
our transfer pricing arrangements are not binding on applicable tax authorities and no official
authority in any other country has made a determination as to whether or not we are operating in
compliance with its transfer pricing laws. If tax authorities in any country were to successfully
challenge our transfer prices as not reflecting arms length transactions, they could require us to
adjust our transfer prices and thereby reallocate our income to reflect these revised transfer
prices. A
35
Table of Contents
reallocation of taxable income from a lower tax jurisdiction to a higher tax jurisdiction
would result in a higher tax liability to us. In addition, if the country from which the income is
reallocated does not agree with the reallocation, both countries could tax the same income,
resulting in double taxation.
Provisions of our Articles of Association, the Articles of Association of the independent
foundation, Stichting Continuïteit Vistaprint, Dutch law and the call option we granted to the
independent foundation may make it difficult to replace or remove management and may inhibit or
delay a change of control, including a takeover attempt that might result in a premium over the
market price for our ordinary shares, and dilute your voting power.
Our Articles of Association, or Articles, limit our shareholders ability to suspend or
dismiss the members of our management board and supervisory board or to overrule our supervisory
boards nominees to our management board and supervisory board by requiring a vote of two-thirds of
the votes cast representing more than 50% of the outstanding ordinary shares to do so under most
circumstances. As a result, there may be circumstances in which shareholders may not be able to
remove members of our management board or supervisory board even if holders of a majority of our
ordinary shares favor doing so.
Our Articles also allow us to issue preferred shares. We have established an independent
foundation, Stichting Continuïteit Vistaprint, or the Foundation, and granted the Foundation a
call option pursuant to which the Foundation may acquire a number of preferred shares equal to the
same number of ordinary shares then outstanding. The objective of the Foundation is to serve the
interests of Vistaprint N.V. and its stakeholders, which includes but is not limited to
shareholders. In carrying out this objective, the Foundation may acquire, own and vote our
preferred shares in order to maintain the independence, continuity or identity of Vistaprint N.V.
If the Foundation were to exercise the call option, it may prevent a change of control or delay or
prevent a takeover attempt, including a takeover attempt that might result in a premium over the
market price for our ordinary shares. Exercise of the preferred share option would also effectively
dilute the voting power of our outstanding ordinary shares by one-half.
In addition, our management board may issue preferred shares up to an amount equal to the
number of ordinary shares under our authorized share capital. We must seek authorization from our
shareholders at least once every five years for our management board to issue preferred shares.
We have limited flexibility with respect to certain aspects of capital management.
Dutch law requires shareholder approval for the issuance of ordinary shares and for our
management board to limit or exclude shareholders preemptive rights under Dutch law. In August
2009, our shareholders granted our supervisory board and management board the authority to issue
ordinary shares as the boards determine appropriate without obtaining specific shareholder approval
for each issuance, but this authorization is limited to the number of ordinary shares under our
authorized share capital and expires in August 2014. We intend to seek re-approval from our
shareholders before the 2014 expiration date. Additionally, subject to specified exceptions, Dutch
law grants preemptive rights to existing shareholders to subscribe for new issuances of shares and
reserves for approval by shareholders many corporate actions, such as the approval of dividends and
authorization to repurchase outstanding shares. Situations may arise where the flexibility to issue
shares, pay dividends, repurchase shares or take other corporate actions without a shareholder vote
would be beneficial to us, but is not available under Dutch law.
Because of our Articles of Association and our organization under Dutch law, you may find it
difficult to pursue legal remedies against the members of our supervisory board or management
board.
Our Articles and our internal corporate affairs are governed by Dutch law. The rights of our
shareholders and the responsibilities of the supervisory board and management board that direct our
affairs are different from those established under United States laws. For example, class action
lawsuits and derivative lawsuits are generally not available under Dutch law. You may find it more
difficult to protect your interests against actions by members of our supervisory board or
management board than you would if we were a U.S. corporation. Under Dutch law, the supervisory
board and the management board are responsible for acting in the best interests of the company, its
business and all of its stakeholders generally, which includes employees, customers and creditors,
not just shareholders. Furthermore, under our Articles, we are obligated to indemnify the members
of our supervisory board and our management board against liabilities resulting from proceedings
against such members in connection with their membership on either board, if such member acted in
good faith and in a manner he believed to be in our best interests and such member has not been
adjudged in a final and non-appealable judgment by a Dutch judge to be liable for gross negligence
or willful misconduct, subject to various exceptions.
36
Table of Contents
We are incorporated under the laws of the Netherlands, and the vast majority of our assets are
located outside the United States, which may make it difficult for shareholders to enforce civil
liability provisions of the federal or state securities laws of the United States.
We are incorporated under the laws of the Netherlands, and the vast majority of our assets are
located outside of the United States. In addition, certain members of our management board and some
of our officers reside outside the United States. As a result, it may be difficult for investors to
effect service of process within the United States upon us or such other persons, to enforce
outside the U.S. judgments obtained against such persons in U.S. courts, or to enforce rights
predicated upon the U.S. securities laws. There is no treaty between the United States and the
Netherlands for the mutual recognition and enforcement of judgments (other than arbitration awards)
in civil and commercial matters. Therefore, a final judgment for the payment of money rendered by
any federal or state court in the United States based on civil liability, whether or not predicated
solely upon the federal securities laws, would not be directly enforceable in the Netherlands; the
party in whose favor such final judgment is rendered would need to bring a new suit in a competent
court in the Netherlands and petition the Dutch court to enforce the final judgment rendered in the
United States. Therefore, there can be no assurance that U.S. shareholders will be able to enforce
against us, members of our management board or supervisory board or officers who are residents of
the Netherlands or countries other than the United States any judgments obtained in U.S. courts in
civil and commercial matters, including judgments under the federal securities laws. In addition,
it is possible that a Dutch court would not impose civil liability on us, the members of our
management board or supervisory board or our officers in an original action predicated solely upon
the federal securities laws of the United States brought in a court of competent jurisdiction in
the Netherlands against us or such members or officers.
We may not be able to make distributions or repurchase shares without subjecting our shareholders
to Dutch withholding tax.
A Dutch withholding tax may be levied on dividends and similar distributions made by
Vistaprint N.V. to its shareholders at the statutory rate of 15% if we cannot structure such
distributions as being made to shareholders in relation to a reduction of par value, which would be
non-taxable for Dutch withholding tax purposes. We have in the past, and may in the future,
repurchase outstanding ordinary shares. Under our Dutch Advanced Tax Ruling, a repurchase of shares
should not result in any Dutch withholding tax if we hold the repurchased shares in treasury for
the purpose of issuing shares upon the exercise of certain stock awards and other potential uses.
However, if the shares cannot be used for these purposes, or the Dutch tax authorities challenge
the use of the shares for these purposes, such a repurchase of shares for the purposes of capital
reduction may be treated as a partial liquidation subject to the 15% Dutch withholding tax to be
levied on the difference between our recognized paid in capital for Dutch tax purposes and the
redemption price.
We may be treated as a passive foreign investment company for United States tax purposes, which may
subject United States shareholders to adverse tax consequences.
If our passive income, or our assets that produce passive income, exceed levels provided by
law for any taxable year, we may be characterized as a passive foreign investment company, or a
PFIC, for United States federal income tax purposes. If we are treated as a PFIC, U.S. holders of
our ordinary shares would be subject to a disadvantageous United States federal income tax regime
with respect to the distributions they receive and the gain, if any, they derive from the sale or
other disposition of their ordinary shares.
We believe that we were not a PFIC for the tax year ended June 30, 2010 and we expect that we
will not become a PFIC in the foreseeable future. However, whether we are treated as a PFIC depends
on questions of fact as to our assets and revenues that can only be determined at the end of each
tax year. Accordingly, we cannot be certain that we will not be treated as a PFIC for our current
tax year or for any subsequent year.
If a United States shareholder acquires 10% or more of our ordinary shares, it may be subject to
increased United States taxation under the controlled foreign corporation rules.
Each 10% U.S. Shareholder of a non-U.S. corporation that is a controlled foreign
corporation, or CFC, for an uninterrupted period of 30 days or more during a taxable year, and
that owns shares in the CFC directly or indirectly through non-U.S. entities on the last day of the
CFCs taxable year, must include in its gross income for United States federal income tax purposes
its pro rata share of the CFCs subpart F income, even if the subpart F income is not
distributed. A non-U.S. corporation is considered a CFC if one or more 10% U.S. Shareholders
together own more than 50% of the total combined voting power of all classes of voting shares of
the non-U.S. corporation or more than 50% of the total value of all shares of the corporation on
any day during the taxable year of the corporation. The rules defining ownership for these purposes
are
37
Table of Contents
complicated and depend on the particular facts relating to each investor. For taxable years in
which we are a CFC for an uninterrupted period of 30 days or more, each of our 10% U.S.
Shareholders will be required to include in its gross income for United States federal income tax
purposes its pro rata share of our subpart F income, even if the subpart F income is not
distributed to enable such taxpayer to satisfy this tax liability. Based upon our existing share
ownership, we do not believe we are a CFC. However, whether we are treated as a CFC depends on
questions of fact as to our share ownership that can only be determined at the end of each tax
year. Accordingly, we cannot be certain that we will not be treated as a CFC for our current tax
year or for any subsequent year.
We will pay taxes even if we are not profitable on a consolidated basis, which would cause
increased losses and further harm to our results of operations.
The intercompany service and related agreements among Vistaprint N.V. and our direct and
indirect subsidiaries in general guarantee that the subsidiaries realize profits. As a result, even
if the Vistaprint group is not profitable on a consolidated basis, the majority of our subsidiaries
will be profitable and incur income taxes in their respective jurisdictions. If we are unprofitable
on a consolidated basis this structure will increase our consolidated losses and further harm our
results of operations.
ITEM 6. EXHIBITS
We are filing the exhibits listed on the Exhibit Index following the signature page to this
Report.
38
Table of Contents
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: October 29, 2010
VISTAPRINT N.V. |
||||
By: | /s/ Michael Giannetto | |||
Michael Giannetto | ||||
Chief Financial Officer (Principal Financial and Accounting Officer) |
39
Table of Contents
EXHIBIT INDEX
Exhibit | ||
No. | Description | |
10.1*
|
Form of Restricted Share Unit Agreement granted under our Amended and Restated 2005 Equity Incentive Plan | |
10.2*
|
Form of Restricted Share Unit Agreement granted to Supervisory Board members under our Amended and Restated 2005 Equity Incentive Plan | |
10.3*
|
2005 Non-Employee Directors Share Option Plan, as amended | |
10.4*
|
Amended and Restated 2000-2002 Share Incentive Plan, as amended | |
10.5*
|
Amended and Restated 2005 Equity Incentive Plan, as amended | |
10.6*
|
Amendment No. 1 dated October 20, 2010 to Barcelona Expatriate Agreement dated March 11, 2010 between Vistaprint USA, Incorporated and Janet Holian | |
10.7*
|
Form of Annual Award Agreement under our Performance Incentive Plan for Covered Employees | |
10.8*
|
Form of Four-Year Award Agreement under our Performance Incentive Plan for Covered Employees | |
31.1
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Rule 13a-14(a)/15d-14(a), by Chief Executive Officer | |
31.2
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Rule 13a-14(a)/15(d)-14(a), by Chief Financial Officer | |
32.1
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer and Chief Financial Officer | |
101
|
The following materials from this Quarterly Report on Form 10-Q , formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements. |
* | Management contract or compensatory plan or arrangement. |
40