UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
January 1, 2011
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 0-16611
GSI COMMERCE, INC.
(Exact name of registrant as
specified in its charter)
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DELAWARE
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04-2958132
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(State or other jurisdiction
of
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(I.R.S. Employer
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incorporation or
organization)
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Identification No.
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)
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935 FIRST AVENUE, KING OF PRUSSIA, PA
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19406
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(Address of principal executive
offices)
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(Zip Code
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Registrants telephone number, including area code
(610) 491-7000
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $.01 per share
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NASDAQ Global Select Market
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Preferred Stock Purchase Rights
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NASDAQ Global Select Market
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the registrants voting stock
held by non-affiliates of the registrant as of the close of
business on July 2, 2010, was approximately $1,724,494,759
based on a per share price of $27.67, the closing price of the
registrants common stock on the trading day prior to the
end of the registrants second fiscal quarter, as reported
on the NASDAQ Global Select
Market.(1)
There were 67,126,057 shares of the registrants
Common Stock outstanding as of the close of business on
February 18, 2011.
DOCUMENTS
INCORPORATED BY REFERENCE
(Specific
sections incorporated are identified under applicable items
herein)
Certain information required for Parts II and III of
this
Form 10-K,
to the extent not set forth herein, is incorporated herein by
reference to the Proxy Statement for the 2011 Annual Meeting of
Stockholders.
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(1) |
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This amount equals the number of
outstanding shares of the registrants common stock reduced
by the number of shares that may be deemed held by the
registrants executive officers, directors and stockholders
owning in excess of 10% of the registrants common stock,
multiplied by the last reported sale price for the
registrants common stock on July 2, 2010 the last
trading day prior to the last day of registrants second
fiscal quarter. This information is provided solely for record
keeping purposes of the Securities and Exchange Commission and
shall not be construed as an admission that any executive
officer, director or 10% stockholder of the registrant is an
affiliate of the registrant or is the beneficial owner of any
such shares. Any such inference is hereby disclaimed.
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GSI
COMMERCE, INC.
ANNUAL REPORT ON
FORM 10-K
FOR THE YEAR ENDED JANUARY 1, 2011
TABLE OF
CONTENTS
The Companys fiscal year ends on the Saturday nearest the
last day of December. The Companys fiscal year ends are as
follows:
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References To
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Refer to The Years Ended/Ending
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Fiscal 2006
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December 30, 2006
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Fiscal 2007
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December 29, 2007
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Fiscal 2008
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January 3, 2009
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Fiscal 2009
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January 2, 2010
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Fiscal 2010
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January 1, 2011
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Fiscal 2011
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December 31, 2011
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Fiscal 2012
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December 29, 2012
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Fiscal 2013
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December 28, 2013
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Fiscal 2014
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January 3, 2015
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Fiscal 2015
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January 2, 2016
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PART I
Company
Overview
GSI Commerce operates a network of businesses to enable
enterprise clients to maximize their opportunities in the
digital channel. GSI Commerce operates three business segments:
Global
e-Commerce
Services, Global Marketing Services and Consumer Engagement.
Each business segment offers products and services that either
are, or aim to be, market leaders in their respective areas on a
stand-alone basis, but that also complement each other, which
allows for cross-selling within and between businesses. The
combination of these segments provides a unique view into the
digital channel and gives GSI Commerce insight into customer and
transaction lifecycles, as well as multi-channel activities. The
Company provides products and services to over 2,000 brands
globally, including Toys R
Us®,
the National Football
League®,
Aeropostale®,
Polo Ralph
Lauren®,
Dicks Sporting
Goods®,
Dell®
and Estee
Lauder®.
While the Company operates on a global basis, the vast majority
of its revenues are derived from its North American operations.
At this time, international revenues are not material. Below is
a summary of revenues by segment from
2008-2010.
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2008
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2009
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2010
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Revenues
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% of
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Revenues
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% of
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Revenues
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% of
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Revenue By Segment
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(MM)
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Total
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(MM)
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Total
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(MM)
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Total
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Global
e-Commerce
Services
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$
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900.0
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93
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%
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$
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879.6
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87
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%
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$
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1,024.4
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75
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%
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Global Marketing Services
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$
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84.5
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9
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%
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$
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127.6
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13
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%
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$
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189.9
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14
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%
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Consumer Engagement
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$
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26.3
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3
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%
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$
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216.7
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16
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%
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Inter-Company Elimination
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$
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(17.6
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−2
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$
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(29.3
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−3
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%
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$
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(73.0
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−5
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%
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TOTAL
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$
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966.9
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$
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1,004.2
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$
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1,358.0
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Global
e-Commerce
Services
The Global
e-Commerce
Services (GeC) segment offers a comprehensive suite
of
e-Commerce
services that enables companies to operate
e-commerce
businesses and to integrate their
e-commerce
businesses with their multi-channel retail offerings. GSI
Commerce sells its products and services on an individual basis
and also as bundled solutions. The GeC segment serves over 180
enterprise clients that operate in general merchandise
categories, including apparel, sporting goods, toys &
baby, health & beauty and home. The Company refers to
its clients as enterprise clients because the Company generally
serves large nationally recognized brand name companies. The GeC
segment is comprised of three principal business units:
Technology & Payments, Operations and Licensed Sports
Merchandise.
Technology &
Payments
The technology & payments business unit provides
e-commerce
technology products and services on a global basis. The business
unit shares common sales, service, operations and administration
teams for three business units: 1) webstore &
mobile, 2) commerce exchange & multi-channel, and
3) payments.
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Webstore & Mobile: GSI
Commerces webstore & mobile store offering is a
global platform that includes secure shopping cart and checkout
offerings, analytical tools, site management tools, including
catalog, content and promotions management, and guided product
discovery. Additionally, GSIs front-end solution will
offer full mobile store capabilities in its new version planned
to launch in 2011.
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Commerce Exchange &
Multi-Channel: Commerce exchange is a global
platform with transactional capabilities, including order
management, inventory management and fulfillment integration.
Multi-channel is a suite of software products that enables
in-store pickup, ship-from-store,
ship-to-store,
and drop ship capabilities. The foundation of the multi-channel
offering utilizes the CommerceSuite product from VendorNet, a
company acquired in May 2010.
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Payments: GSI Commerce provides a robust
online payment processing engine with capabilities including
price, tax and shipping calculations, address verification,
order review and fraud prevention, credit card authorization and
settlement, and alternative payment processing.
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In 2010, GSI Commerce purchased a 27% interest in Intershop
Communications AG. Intershop is publicly traded and listed on
the Frankfurt stock exchange in Germany and sells a licensed
e-commerce
software product to large enterprise companies. In conjunction
with the equity purchase, GSI Commerce and Intershop entered
into a strategic commercial relationship. Through this strategic
relationship, GSI Commerce is using Intershop software and
services as a foundation for its next generation webstore
product. In addition, GSI Commerce became the exclusive reseller
of Intershop licenses in the Americas and a non-exclusive
reseller on a global basis.
In May 2010 GSI Commerce acquired VendorNet, a multichannel
e-commerce
supply chain solutions provider to more than 100 retailers and
brand marketers. The acquisition expanded the Companys
breadth of offerings, including software to facilitate the use
of local-store inventory for cost-effective same- and
next-day
delivery direct to consumers. VendorNet became part of the
Commerce Exchange and Multi-Channel business unit in the second
quarter of 2010.
Operations
The operations business unit is separated into three business
units that provide the following
e-commerce
operations services to companies in North America and Europe:
1) Fulfillment & Freight Services,
2) Customer Care and 3) Direct Response.
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Fulfillment & Freight Services: GSI
Commerce operates five
e-commerce
fulfillment centers in the United States and one in Canada,
encompassing over 2.7 million square feet as well as two
facilities in the United Kingdom. Within these facilities, GSI
Commerce utilizes a multi-level pick mezzanine infrastructure
and world-class warehouse management systems to provide
customized
direct-to-consumer
fulfillment solutions, including order management, real-time
order status updates, and reverse logistics services. Through
scale and partnership with leading freight providers, the
Company offers clients favorable shipping rates and innovative
freight programs, including its ShipQuick shipping program.
Under this program, packages are presorted by customer zip code
shortening time in transit.
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Customer Care: Through three call centers in
the United States and a network of at-home agents, plus one call
center in the United Kingdom, GSI Commerce provides customer
care capabilities for
e-commerce
via telephone and email. The Company combines proprietary and
third-party technologies, including automatic call distribution,
computer telephony integration, interactive voice response
(IVR),
e-mail,
workforce management, voice recording/monitoring and customer
relationship management systems in the customer care platform.
The U.K. call center offers customer care in 11 languages.
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Direct Response: Direct response provides
fulfillment, call center and related value added services to the
direct response television industry. The Company operates
fulfillment and call center facilities that are located near the
port of Los Angeles, which enables it to quickly turnaround
inbound containers from Asia. Direct response utilizes a
proprietary technology system that supports the unique needs of
the direct response industry, including multi-pay, upsells and
backorder management.
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Licensed
Sports Merchandise (LSM)
LSM is GSIs licensed sports merchandise business, which
includes the
e-commerce
operations for all of the major U.S. professional sports
leagues (MLB, NFL, NBA, NHL, NASCAR). Given both the lack of
physical stores as well as the large numbers of displaced fans,
who are people who support teams which are outside the local
area, the professional sports leagues rely on GSI Commerce to
provide full
end-to-end
e-commerce
capabilities, including front-end webstore capabilities, order
management and payments technology, fulfillment, freight and
customer care. Additionally, GSI supports this business through
its own in-house buying, operations and business management
teams. LSM also provides licensed products to several sporting
goods retailers and some online-only retailers where the Company
leverages its licensed inventory. With the exception of one
professional league, LSM is the seller of record for sales
through the professional sports league web-sites. Because LSM is
the seller of record
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and has complete discretion as to the selection and purchasing
of inventories as well as the setting of prices and
marketing & promotional events, this part of the
business is referred to as an owned-inventory model.
In return for the right to operate the
e-commerce
businesses of these brands and retailers, the Company pays a
revenue share or royalty to the brand owner.
In September, 2010, LSM opened a new facility located in
Louisville, KY dedicated to the customization of licensed team
garments. The 87,000 square foot center customizes apparel
such as jersey, t-shirts and fleece garments for clients
including the NFL, NASCAR, NHL and NBA.
In February 2011, GSI Commerce entered into a definitive
agreement to acquire Fanatics, Inc. (Fanatics), an
online retailer of licensed sports merchandise. The acquisition
is expected to close in the second quarter of fiscal 2011 and is
subject to the satisfaction of customary closing conditions and
expiration or termination of the waiting period under the
Hart-Scott-Rodino
Antitrust Improvements Act. Upon closing of the acquisition, we
expect Fanatics to become part of the LSM business.
Global
Marketing Services
GSI Commerces Global Marketing Services (GMS)
segment offers a broad suite of services to help clients exploit
digital marketing channels. In 2010, as the segment grew in size
and scope of services offered, GSI Commerce added a dedicated
executive management team to oversee the segment and manage
future growth. The segment is comprised of eight business units
and has offices in the United States, Europe and Asia.
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ClearSaleing: ClearSaleing provides a
marketing attribution and analytics platform that assists
clients in determining which online marketing expenditures along
the purchase chain are driving conversion and helps clients
craft optimized online marketing spending plans.
ClearSaleings platform is a leader in the interactive
attribution analysis category due to its ease of use, custom
analytics and appeal to a wide array of marketers. ClearSaleing
was acquired in January 2011.
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e-Dialog: e-Dialog
is a leading provider of advanced
e-mail
marketing and database technologies, products, strategies and
services for permission based
e-mail
marketers.
e-Dialog
operates globally with locations in Boston, Seattle, London, and
Singapore.
e-Dialog
opened its Singapore office in June 2010.
e-Dialog was
acquired in February 2008.
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Fetchback: Fetchback is a leading service
provider in the retargeting display ad space. Fetchback utilizes
an advanced proprietary technology to deliver targeted display
ads to consumers after they leave a clients site and
convert these lost prospects into customers. Fetchback was
acquired in June 2010.
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M3 Mobile: M3 Mobile provides SMS-based mobile
messaging and marketing solutions, including text-based online
and in-store offers as well as mobile gift cards. Through its
proprietary content management web interface tool, M3 builds and
tracks sophisticated and flexible mobile programs. M3 Mobile was
acquired in April 2010.
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MBS Insight: MBS provides sophisticated
customized database and analytics solutions that help clients
optimize marketing programs by integrating online and offline
customer data. MBS offers a range of outsourced direct marketing
services, including: strategic services for goal setting,
measurement, and meaningful data identification and patterning;
analytical solutions that help clients optimize marketing
program response, revenue, and efficiency; customized database
solutions enabling marketers to access a holistic view of a
customers multichannel activity; and customer data
integration services, including merge/purge, address hygiene,
and proprietary processes. MBS was acquired in May 2010.
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PepperJam: PepperJam is a dynamic,
pay-for-performance
retail and lead-generation affiliate network platform.
PepperJams proprietary technology provides enhanced levels
of reporting, tracking and communication between merchants and
affiliates that drives improved marketing efficiency. Pepperjam
was acquired in September 2009.
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Silverlign: Silverlign is a digital agency,
whose competencies include research and strategy, integrated
design and digital solutions. The agency provides integrated
brand and marketing strategy, Web strategy and design, brand
communications and advertising, online marketing, search engine
optimization, user experience and usability, and emerging media
services. Silverlign was acquired in May 2009.
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TrueAction: TrueAction is a full service
digital marketing agency offering website and graphics design,
online media campaign buying and management, affiliate program
management, full-service digital photo services in its
~10,000 sq. ft.
of studios, search engine marketing (SEM) and search engine
optimization (SEO) services, video and content marketing and
online brand management services.
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Consumer
Engagement
The consumer engagement segment operates consumer facing
e-commerce
businesses that are complimentary to the clients of GeC and GMS
segments. Consumer engagement consists of two business units,
Rue La La and ShopRunner.
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Rue La La: Rue La La operates a
members-only online shopping site that gives its members access
to limited duration sales of discounted merchandise from well
known brands and manufacturers. Membership is by invitation-only
and is primarily attained through existing member referrals. Rue
La La focuses its offerings on a broad array of
premium brands and categories and curates an assortment of
brands for womens & mens apparel,
shoes & accessories, watches & jewelry,
home, and beauty, as well as travel and experience offerings.
Rue La La also offers daily local deals in select
cities in the United States for products and services. Since
launching in 2008, Rue La La has grown its member base
to over 3.0 million members. Rue La La provides
manufacturers and vendors an effective liquidation channel
designed to protect brand integrity. Rue La La also
operates a website called SmartBargains that predominantly
functions as a final liquidation vehicle for unsold merchandise
from Rue La La. Rue La La was acquired in
November 2009.
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ShopRunner: ShopRunner is a consumer
membership program that offers members free
2-day
shipping and free return shipping from online retailers for an
annual membership fee. Members are also offered select
promotional deals from participating merchants. Merchants
participate in ShopRunner for the opportunity to gain increased
purchases from members based on the ShopRunner value
proposition. ShopRunner was launched in the fourth quarter of
2010 and currently has approximately 70 participating merchants.
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Competition
Given the broad set of services GSI Commerce provides, it faces
different competitors for each segment in which it competes. The
Company aims to be a leader in each of its industries and
strives to compete on the basis of offering premium capabilities
with a cost advantage. GSIs fees are often tied to the
success of its clients businesses with GSI, further
differentiating GSIs service. In addition, while each of
GSIs businesses competes on a stand- alone basis, GSI
Commerce also differentiates by cross selling and bundling
services within and across its segments enabling it to offer
more attractive pricing and integrated implementations. The
table below represents an example of competitors by segment.
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Global e-Commerce Services
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Global Marketing Services
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Consumer Engagement
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IBM
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PFSWeb
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Convergys
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Omnicomm Group
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ValueClick
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Experian
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Gilt Groupe
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Amazon.com
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UPS
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Innotrac
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Sykes Enterprises
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WPP Group
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TradeDoubler
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Harte-Hanks
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Hautelook
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Overstock.com
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Art Technology Group
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West Communications
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Publicis
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LinkShare
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Axicom
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Ideeli
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IPG
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Google
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Employees
As of January 17, 2011, the Company employed
5,304 people worldwide. It had 4,890 full-time
employees and 92 part-time employees in the U.S. and
309 full-time and 13 part-time employees
internationally. Globally, 3,957 employees work in GeC,
1,103 in GMS and 334 in Consumer Engagement. Employment levels
fluctuate due to the seasonal nature of
e-commerce
and consumer engagement businesses. In addition, the Company
uses independent contractors and temporary personnel. None of
the employees are covered by a collective bargaining agreement
and the Company considers its relationship with employees to be
good. Competition for qualified personnel in the industry is
intense. The Companys future success will depend, in part,
on its continued ability to attract, hire and retain qualified
personnel.
Intellectual
Property
Our technology platforms and the services we provide include
proprietary technologies. To protect our proprietary rights in
services and technology, we rely on various intellectual
property laws and contractual
4
restrictions and protections. These include confidentiality,
trade secret law, invention assignment and nondisclosure
agreements with our clients, employees, contractors and
suppliers.
We also rely on technologies that we license from third parties.
These licenses may not continue to be available to us on
commercially reasonable terms in the future.
We use our clients names, URLs, logos and other marks in
connection with the operation and promotion of their
e-commerce
businesses. Our agreements with our clients provide us with
licenses generally to use this intellectual property in
connection with the operation of their
e-commerce
businesses. These licenses typically are coterminous with the
respective agreements.
Our consumer-facing businesses also rely on patents, trademarks,
service marks, domain names and copyrights, and we have
registered, or applied for the registration of, a number of
U.S. and international trademarks, service marks, domain
names, and copyrights, and have filed U.S. patent
applications covering certain of our proprietary technology.
Executive
Officers
The following table sets forth certain information regarding
each of our executive officers as of February 18, 2011,
who, with the exception of Mr. Rubin, are not also
directors:
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Name
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Age
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Title
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Michael G. Rubin
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38
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Chairman, President and Chief Executive Officer
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Michael R. Conn
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40
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Executive Vice President, Finance and Chief Financial Officer
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J. Scott Hardy
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49
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Executive Vice President, Business Management
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Damon Mintzer
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45
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Executive Vice President, Strategic Business Development
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Christopher D. Saridakis
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42
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Chief Executive Officer, Global Marketing Services
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Set forth below are brief descriptions of the business
experience for at least the past five years of these executive
officers.
Michael G. Rubin has served as our chairman of the board
and chief executive officer since July 1995, as
co-president
from May 2004 through October 2006 and president from July 1995
to May 2004 and since October 2006.
Michael R. Conn has served as our executive vice
president, finance and chief financial officer since March 2007
and our senior vice president, finance and chief financial
officer from January 2006 through March 2007. He served as our
senior vice president of corporate development from July 2004
until January 2006. Mr. Conn held various other positions
with the company since joining in February 1999.
J. Scott Hardy has served as our executive vice
president, business management since May 2007. From March 2004
to May 2007 Mr. Hardy was vice president at BearingPoint,
Inc., a consulting and systems integration firm, responsible for
the Americas Consumer Markets Practice.
Damon Mintzer served as our executive vice president,
sales from July 2004 to February 2011. In February 2011,
Mr. Mintzer was promoted to executive vice president,
strategic business development. Mr. Mintzer held various
other positions with the company since joining in June 2001.
Christopher D. Saridakis has served as chief executive
officer of Global Marketing Service segment since May 2010. From
December 2007 to May 2010 Mr. Saridakis served as senior
vice president and chief digital officer of Gannett Co., Inc.
Prior to joining Gannett, Mr. Saridakis served as chief
executive officer of PointRoll, Inc. from June 2003 to December
2007.
Investor
Information
We are subject to the informational requirements of the
Securities Exchange Act of 1934. Therefore, we file reports,
proxy and information statements and other information with the
Securities and Exchange Commission. Such reports, proxy and
information statements and other information may be obtained by
visiting the Public Reference Room of the SEC at
100 F Street, NW, Washington, DC 20549 or by calling
the SEC at
1-800-SEC-0330.
5
In addition, the SEC maintains an Internet site
(http://www.sec.gov)
that contains reports, proxy and information statements and
other information regarding issuers that file electronically.
You can access financial and other information at our Investor
Relations website. The address is www.gsicommerce.com/investors.
We make available through our website, free of charge, copies of
our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after filing such material electronically
or otherwise furnishing it to the SEC. In addition, we will
provide, at no cost, paper or electronic copies of our reports
and other filings made with the SEC. Requests should be directed
to Investor Relations, 935 First Avenue, King of Prussia,
Pennsylvania, 19406. The information on the website listed above
is not and should not be considered part of this Annual Report
on
Form 10-K
and is not incorporated by reference in this document. This
website is and is only intended to be an inactive textual
reference.
We are a Delaware corporation organized in 1986. Our executive
offices are located at 935 First Avenue, King of Prussia,
Pennsylvania, 19406. Our telephone number is
(610) 491-7000.
We
operate in rapidly changing industries which makes our operating
results difficult to predict.
The industries in which we operate are rapidly changing and
evolving making our risks, capital needs and operating results
difficult to predict. Any failure to adapt our business in
response to market changes could adversely affect our operating
results.
We
have recently entered new lines of business which may not be
successful.
We have recently entered into new lines of business both through
acquisitions and through internal initiatives. We have limited
experience in these new lines of business, and we will be
required to devote substantial resources to them. We cannot
assure you that these new lines of business will be successful.
Lack of success in these new lines of business could adversely
impact our ability to meet our growth and financial projections,
and our financial results.
We may
not achieve the expected benefits of acquisitions.
We have acquired a number of companies and we may acquire
additional companies. These acquisitions are accompanied by a
number of risks, including:
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failure of acquired companies to achieve planned results;
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unanticipated problems and liabilities of acquired companies,
including patent and trademark infringement claims, violations
of laws, commercial disputes and tax liabilities;
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difficulties resolving indemnification disputes with previous
owners;
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difficulties in retention and assimilation of the employees of
the acquired business;
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difficulties in integration of acquired operations, technology,
products
and/or
services to accomplish planned revenue and expense synergies and
permit effective management;
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diversion of management and employee time and focus;
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potential disputes with sellers about the achievement of
milestones requiring the payment of contingent
consideration; and
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adverse impact on morale of employees of acquired companies
entitled to contingent consideration if such contingent
consideration is not earned.
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Future acquisitions may also result in dilutive issuances of our
equity securities, use of our cash resources, and incurrence of
debt and amortization expenses related to intangible assets. Our
failure to be successful in addressing these risks or other
problems encountered in connection with our past or future
acquisitions could cause us to fail to realize the anticipated
benefits of such acquisitions.
6
In addition, valuation of an acquired company could change. We
could determine to have declines in fair value of an acquired
company that could cause impairments which could adversely
impact our financial results.
We may
not achieve the expected benefits of minority
investments.
We have purchased minority interests in a number of companies,
and we may acquire additional minority interests. Ordinarily,
these minority interests are purchased in connection with our
entry into a commercial transaction with the investment target.
These transactions are accompanied by a number of risks which
could adversely impact our financial results, including:
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failure of the commercial agreements to achieve planned results;
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disputes with shareholders of investment targets, which could
interfere with our commercial agreements with the investment
targets;
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our minority interest in Intershop Communications AG, is
governed by German law, which could subject us to liability for
certain disadvantages to Intershop if we were deemed to be in
control of Intershop; and
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valuations supporting our acquisitions and investments could
change. We could determine that such valuations have experienced
impairments or
other-than-temporary
declines in fair value which could adversely impact our
financial results.
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Our
failure to manage growth and diversification of our business
could harm us.
We are continuing our efforts to grow and diversify our business
both in the United States and internationally. This has placed,
and will continue to place, demands on our personnel, as well as
on our operational and financial infrastructure. To effectively
manage our growth initiatives, we will need to continue to
expand, improve and adapt our personnel, operations,
infrastructure and our financial and information management
systems and continue to implement adequate controls. These
enhancements and improvements are likely to be complex and could
require significant operating expenses, capital expenditures and
allocation of valuable management resources. We may also have to
expand our management team by recruiting and employing
additional experienced executives and employees. If we are
unable to adapt our systems and business, put adequate controls
in place and expand our management team in a timely manner to
accommodate our growth, our business may be adversely affected.
We
plan to continue to expand our business internationally which
may cause our business to become increasingly susceptible to
numerous international business risks and challenges that could
adversely affect our business. We have limited experience in
international operations.
To date, substantially all of our net revenues, income from
operations and assets have been generated from and located in
the United States. Our growth strategy involves expanding our
business internationally, and since 2006, we have completed
acquisitions of companies in Spain and the United Kingdom,
purchased a minority interest in a company in Germany, opened a
fulfillment center in Canada and opened offices in Japan and
Singapore in support of our GeC and GMS segments. However, we
have limited experience in international business, and we cannot
assure you that our international expansion strategy will be
successful. Our experience in the United States may not be
relevant to our ability to expand internationally. In addition,
our lack of a track record outside the United States increases
our execution risks and the risks described below.
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substantial competition with local companies;
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compliance with international legal and regulatory requirements
and tariffs (see also Existing or future laws
or regulations could harm our business or marketing
efforts, below);
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managing fluctuations in currency exchange rates;
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difficulties in staffing and managing foreign operations;
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greater difficulty in accounts receivable collection;
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potential adverse tax consequences;
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uncertain political and economic climates;
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potentially higher incidence of fraud;
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different employer/employee relationships;
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cultural ambivalence toward, or non-acceptance of,
e-commerce
businesses;
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language barriers;
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price controls or other restrictions on foreign
currency; and
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difficulties in obtaining export and import licenses and
compliance with applicable export controls.
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Some of these factors may cause our international costs of doing
business to exceed our comparable domestic costs. Any negative
impact from our international business efforts could negatively
impact our business, results of operations and financial
condition as a whole.
We may
not be able to compete successfully against current and future
competitors.
Our business is rapidly evolving and intensely competitive.
In our GeC segment, we face competition from technology and
service providers which supply one or more components of an
e-commerce
solution and other providers of integrated
e-commerce
solutions. Low barriers to entry into the
e-commerce
solutions market may increase the number of competitors our
e-commerce
business may face. Our GeC segment has competitors with longer
operating histories, larger customer bases, greater brand
recognition
and/or
greater financial, marketing and other resources. Those
competitors may be able to devote more resources to technology
development and marketing.
In our GMS segment, we face competition from other providers of
interactive marketing services, and in-house marketing
departments. Low barriers to entry in the interactive marketing
industry may increase the number of competitors our GMS business
may face. Our GMS segment has competitors with longer operating
histories, larger customer bases, greater brand recognition
and/or
greater financial, marketing and other resources who are able to
devote more resources to technology development and marketing.
In our consumer engagement segment, we face competition from
private sale websites with similar formats to ours, other
e-commerce
websites and the offline businesses of retailers and
manufacturers. New private sale websites may be created and
other companies may develop services that compete with our
online private sale channel. If our competitors are able to
secure merchandise on more favorable terms, our consumer
engagement business could be harmed.
We cannot assure you that we will be able to compete
successfully against current and future competitors. In
addition, competition may intensify as our competitors enter
into business combinations or alliances or raise additional
capital and established companies in other market segments or
geographic markets expand into our market segments or geographic
markets. If we cannot compete successfully against our
competitors, our business, results of operations and financial
condition could be negatively impacted.
Our
business is highly seasonal; a weak fourth quarter could have a
material adverse effect on our operating results for the
year.
Our fourth fiscal quarter has accounted for and is expected to
continue to account for a disproportionate amount of our total
annual revenues because consumers increase their purchases and
businesses increase their advertising to consumers during the
fourth quarter holiday season. For fiscal 2010, 40% of our
annual net revenues were generated in our fourth fiscal quarter.
For fiscal years 2009 and 2008, 43% and 41% of our annual net
revenues were generated in our fourth fiscal quarter,
respectively. Since fiscal 1999, we have not generated net
income in any fiscal quarter other than a fourth fiscal quarter.
Because our fourth quarter accounts for a larger percentage of
our annual revenue, any negative impact on our business during
the fourth quarter will have a disproportionate adverse affect
on our results of operations for the full year.
8
General
economic conditions may adversely affect our results of
operations and financial condition.
General economic conditions may adversely affect our results of
operations and financial condition. The direction and relative
strength of the global economy as well as the local economies in
which we compete continue to be uncertain and any weakness in
consumer spending may have an adverse effect on our results of
operations and financial condition. Recent softness in the real
estate and mortgage markets, volatility in fuel and other energy
costs, deteriorating economic conditions in different countries,
difficulties in the financial services sector and credit
markets, high levels of unemployment and other macro-economic
factors have created consumer uncertainty about current economic
conditions which could adversely affect consumer confidence and
behavior in ways that adversely affect our results of operations
and financial condition.
We
have an accumulated deficit and may incur additional
losses.
Since 2001, we have recorded net losses in all but two of our
fiscal years. As of the end of fiscal 2010, we had an
accumulated deficit of $202.1 million. If we fail to
generate sufficient revenue
and/or
adequately control our expenses, we may not be able to return to
profitability. We will continue to incur significant operating
expenses and capital expenditures as we seek to expand our
operations and enhance our capabilities.
We may
not be able to access on satisfactory terms, or at all, the
credit and capital markets as needed to finance our growth
plans, working capital requirements and liquidity
needs.
We rely upon access to the credit and capital markets to fund
our growth plans and working capital requirements. We may in the
future need to seek additional equity or debt financing. We may
not be able to obtain financing on satisfactory terms or at all
and the terms of these securities could impose restrictions on
our operations.
Market disruptions such as those recently experienced in the
United States and abroad may increase our cost of borrowing or
adversely affect our ability to access sources of liquidity. If
the lenders in our secured revolving bank credit facility are
unable to meet their obligations to provide loans to us under
the terms of the credit facility, if we are unable to access
credit at competitive rates, or at all, if our short-term or
long-term borrowing costs dramatically increase, or if we are
not able to obtain financing on satisfactory terms or at all,
our ability to finance our operations, meet our short-term
obligations and implement our operating strategy could be
adversely affected which may limit our growth potential and our
ability to execute our business strategy.
The
terms of our secured revolving bank credit facility impose
financial and operating restrictions on us.
We have a secured revolving bank credit facility with a
borrowing capacity of $150 million (the Existing
Credit Facility). We have entered into a new credit
agreement providing for a $285 million revolving credit
facility and a $115 million term loan facility, with the
option to increase the commitments under these facilities by up
to an additional $50 million to a total of
$450 million (the New Credit Facility). The New
Credit Facility becomes effective if our acquisition of
Fanatics, Inc. closes on or before May 10, 2011. The
Existing Credit Facility and the New Credit Facility contain
restrictive covenants that limit our ability to engage in
activities that may be in our long-term best interests. These
covenants limit or restrict, among other things, our ability to:
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incur additional indebtedness or pre-pay or repurchase existing
indebtedness;
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pay dividends or make other distributions in respect of,
including repurchases of, our equity securities;
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sell assets, including the capital stock of us and our
subsidiaries;
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enter into certain transactions with our affiliates;
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transfer any capital stock of any subsidiary or permit any
subsidiary to issue capital stock;
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create liens;
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make certain loans or investments; and
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effect a consolidation or merger or transfer of all or
substantially all of our assets.
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9
These limitations and restrictions may adversely affect our
ability to finance our future operations or capital needs or
engage in other business activities that may be in our best
interests. In addition, our ability to borrow under the secured
revolving bank credit facility is subject to compliance with
covenants. If we breach any of the covenants in our secured
revolving bank credit facility, we may be in default under our
secured revolving bank credit facility. If we default, the
lenders under our secured revolving bank credit facility could
declare all borrowings owed to them, including accrued interest
and other fees, to be immediately due and payable.
Our
leverage and debt service obligations could adversely affect our
financial condition and our ability to fulfill our obligations
and operate our business.
We currently have and expect to continue to have a significant
amount of indebtedness. As of January 1, 2011, including
our outstanding convertible notes, borrowings under our Existing
Credit Facility, capital leases, and the mortgage on our
headquarters building we had approximately $166.8 million
of outstanding indebtedness reflected on our balance sheet with
an aggregate principal amount of $193.4 million, and we had
$148.2 million of borrowing capacity under the revolving
portion of our Existing Credit Facility. If the New Credit
Facility becomes effective, we will have substantially greater
borrowing capacity under the New Credit Facility. We may also
incur additional indebtedness in the future. In the event of a
default under any of our indebtedness, our indebtedness could
become immediately due and payable and could adversely affect
our financial condition.
Our indebtedness could have significant negative consequences,
including:
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our debt level increases our vulnerability to general adverse
economic and industry conditions;
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we may have difficulty obtaining financing in the future for
working capital, capital expenditures, acquisitions or other
purposes;
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we may need to use a substantial portion of our cash flow from
operations to pay interest and principal on our debt, which
would reduce the amount of money available to finance our
operations and other business activities;
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our debt level could limit our flexibility in planning for, or
reacting to, changes in our business and in our industry in
general; and
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our substantial amount of debt and the amount we must pay to
service our debt obligations could place us at a competitive
disadvantage compared to our competitors that have less debt.
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We may
become obligated to make earnout payments to the former
stockholders and employees of companies we have acquired, which
may limit our available cash or affect our ability to engage in
other business activities that may be in our best
interests.
As of January 1, 2011, in connection with several recent
acquisitions, former stockholders and employees of companies we
have acquired will be eligible to receive earnout payments,
based on the performance of the acquired companies, payable in
cash and/or
common stock in fiscal years 2011 - 2016 with an aggregate value
of up to $208.4 million if certain financial performance
targets are achieved. These earnout obligations may limit our
cash available for other purposes, limit our ability to engage
in other business activities that may be in our best interests,
limit our ability to make future acquisitions, cause dilution to
existing stockholders and may affect our ability to obtain
financing.
We
have entered into long-term incentive plans with certain of our
employees and executives which obligate us to make payments to
these employees and executives in future years.
We have entered into long-term incentive plans with certain of
our employees and executives which obligate us to make payments
to certain employees based on the performance of the business
for which the employee is responsible. Amounts due under these
incentive plans are payable in cash
and/or
common stock in fiscal years 2012 2015 if certain
financial performance targets are achieved. These incentive plan
obligations may limit our cash available for other purposes,
limit our ability to engage in other business activities that
may be in our best interests, limit our ability to make future
acquisitions, cause dilution to existing stockholders and may
affect our
10
ability to obtain financing. Payments under these incentive
plans are based on the performance of our segments or business
units and may result in substantial payments based on the
performance of these segments or business units even if the
financial performance of our company as a whole does not meet
our publically announced guidance or market expectations.
If we
fail to protect our cash and cash equivalents, manage our
exposure to global financial and securities market risk
successfully, our operating results and financial condition
could be materially impacted.
The primary objective of our cash management strategy is to
conservatively invest excess cash. To achieve this objective, a
majority of our cash and cash equivalents are held in bank
deposit accounts and institutional money market mutual funds. If
the carrying value of our cash investments exceeds fair value,
and the decline in fair value is deemed to be
other-than-temporary,
we will be required to write down the value of our investments,
which could materially harm our results of operations and
financial condition. We maintain cash and cash equivalents in
various institutions at levels exceeding the insurance limits of
the Federal Deposit Insurance Corporation, or FDIC, and we
purchase investments not guaranteed by the FDIC. Accordingly, if
any of these institutions fail, there may be a risk that we will
not recover the full principal of our investments or that their
liquidity may be diminished. These investments are subject to
general credit, liquidity, market, and interest rate risks,
which may be directly or indirectly impacted by uncertainty
about current economic conditions. We could incur significant
realized, unrealized or impairment losses associated with these
investments.
Our
growth and success depend, in part, on our ability to add new
clients, our ability to maintain and expand our relationships
with existing clients, and the financial condition of our
clients.
Key elements of our growth strategy include adding new clients
and extending the term of existing client agreements.
Competition for clients is intense, and we may not be able to
add new clients or keep existing clients on favorable terms, or
at all. If we are unable to add new clients within the time
frames projected by us, we may not be able to achieve our
targeted results in the expected periods. A change in the
management of our clients could adversely affect our
relationship with those clients, including our ability to renew
agreements with those clients or enter into amendments to those
agreements on favorable terms. Many of our client contracts
contain service level commitments. If we are unable to meet
these commitments, our relationships with our clients could be
damaged, client rights to terminate their contracts with us may
be triggered, and financial penalty provisions of the contracts
may be triggered. If any of our existing clients were to exit
the business we provide services to, declare bankruptcy, suffer
other financial difficulties, fail to pay amounts owed to us,
and/or
terminate or modify their relationships with us, our business,
results of operations and financial condition could be adversely
affected. If our agreements with existing clients expire or are
terminated, we may be unable to renew or replace these
agreements on comparable terms, or at all.
Our
GeC segment is tied to the online growth of our clients and
impacted by the offline businesses of our clients.
A portion our revenues is derived from the value of
e-commerce
transactions that flow through our businesses and depend upon
the continued growth of the online businesses of our clients. In
addition, our GeC business is substantially impacted by the
offline businesses of our clients. The impairment of the offline
business of a client, whether due to financial difficulties,
impairment of their brands, reduction in marketing efforts or
reduction in the number of their retail stores, could adversely
affect our GeC business. If any of these occurred, consumer
traffic and sales through our clients websites could be
negatively affected and clients could choose not to continue to
utilize our
e-commerce
services. Our results of operations could also be negatively
impacted if certain of our clients fail to accurately forecast
product demand. Under certain of our client agreements, the
clients select and buy the inventory for their corresponding
webstores. Under such arrangements, the client establishes
product prices and pays us service fees based either on a fixed
or variable percentage of revenues, or on the activity
performed. As a result, if any of these clients fail to forecast
product demand or optimize or maintain access to inventory, our
service fees could be adversely affected.
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A
large percentage of our revenue is derived from our
relationships with a small number of our clients.
For fiscal 2008, 2009 and 2010, we did not make sales to any
client or customer in an amount equal to 10% or more of our
consolidated revenues. However, in fiscal 2009 and 2008, sales
to one client and to customers through that clients
business accounted for 11% and 12% of our revenue, respectively,
and sales to another client and to customers through that
clients business accounted for 10% and 12% of our revenue,
respectively. In fiscal 2010 there were no clients for which
sales to such client and to customers through such clients
business accounted for 10% or more of our revenue.
In fiscal 2010, sales through our top five clients
businesses accounted for 31% of our revenues. For fiscal years
2009 and 2008, sales through our top five clients
businesses accounted for 37% and 38% of our revenue,
respectively.
The loss of any of our major clients could adversely affect our
business, results of operations and financial condition.
We are
subject to significant inventory risks.
We are exposed to significant inventory risks that may adversely
affect our operating results. These inventory risks are a result
of seasonality, changes in consumer tastes, changes in consumer
demand and spending habits, and other factors. In order to be
successful in our owned inventory
e-commerce
and consumer engagements businesses, we must accurately predict
consumer demand and avoid overstocking or understocking
products. If we fail to identify and respond to changes in
merchandising and consumer preferences, sales on our owned
inventory
e-commerce
and consumer engagement businesses could suffer and we could be
required to mark down unsold inventory, which would depress our
profit margins. In addition, any failure to keep pace with
changes in consumers tastes could result in lost
opportunities and reduced sales through our owned inventory
e-commerce
and consumer engagement businesses. If we are unable to
liquidate our inventory through our primary channels, then we
may need to liquidate merchandise below cost through third party
channels.
Inventory loss and theft, or shrinkage, and
merchandise returns could also increase in the future. If
merchandise returns are significant, or our shrinkage rate
increases, our revenues and costs of operations could be
adversely affected.
Our
business could suffer if we are unsuccessful in making,
integrating, and maintaining commercial agreements and other
business relationships.
Relationships
with Manufacturers, Retailers and Other Suppliers
In our GeC and Consumer Engagement businesses, we own inventory
and primarily purchase products from the manufacturers and
distributors of the products. If we are unable to develop and
maintain relationships with these manufacturers, distributors or
sources, we may be unable to obtain or continue to carry a
sufficient assortment and quantity of quality merchandise on
acceptable commercial terms and our
e-commerce
businesses could be adversely impacted. We purchased 15% and 18%
of the total amount of inventory we purchased from the same
manufacturer during fiscal years 2010 and 2009, respectively.
During fiscal year 2008, we purchased 17% and 13% of the total
amount of inventory we purchased from two manufacturers. While
we have contracts with these manufacturers, these manufacturers
and other manufacturers, some of which do not have contracts
with us, could stop selling products to us and may ask us to
remove their products or logos from our or our clients
webstores. If we are unable to obtain products directly from
manufacturers, retailers or other suppliers, especially popular
brand merchandise, we may not be able to obtain the same or
comparable merchandise in a timely manner or on acceptable
commercial terms.
We purchase licensed sports merchandise from suppliers with
licensing agreements with professional sports leagues and other
licensors. Some of these suppliers have exclusive rights to
manufacture this merchandise. We are dependent on these
exclusive suppliers for the availability of this merchandise. If
for any reason these suppliers do not, are unwilling to, or are
unable to, sell and deliver quality merchandise to us in a
timely fashion, our sales of licensed sports merchandise could
be adversely affected.
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Our consumer engagement business depends on purchasing
increasing volumes of inventory from brands, retailers and other
suppliers. These brands, retailers and other suppliers may not
continue to sell their inventory to us on current terms or at
all. For example, our suppliers may sell their inventory to
other traditional or online retailers or they may not have
inventory to sell. Our failure to obtain inventory on current
terms or at all may limit the growth of our consumer engagement
business.
Marketing
and Promotional Arrangements
We have relationships with search engines, comparison shopping
sites, affiliate marketers, online advertising networks, and
other websites to provide content, advertising banners and other
links to our clients
e-commerce
businesses. Our GeC business relies on these relationships as
significant sources of traffic to our clients
e-commerce
businesses. If we are unable to maintain these relationships or
enter into new relationships on acceptable terms, our ability to
attract new customers could be harmed.
Shipping
Vendors
We rely upon multiple third parties to ship the products sold in
our GeC and consumer engagement businesses. We also rely upon
certain drop-ship vendors to ship products directly to
consumers. As a result, we are subject to the risks associated
with the ability of these vendors and other third parties to
successfully and in a timely manner fulfill and ship customer
orders and any price increases, including as a result of fuel
surcharges, instituted by these vendors. The failure of these
vendors and other third parties to provide these services, or
the termination or interruption of these services, could
adversely affect the satisfaction of consumers, which could
result in reduced sales by our GeC and consumer engagement
businesses.
Payment
Processors
Consumers typically pay for purchases through webstores in our
GeC businesses and through our consumer engagement business by
credit card or similar payment method. We must rely on banks or
payment processors to process these transactions and must pay a
fee for this service. From time to time, credit card
associations may increase the interchange fees that they charge
for each transaction using one of their cards. Our credit card
processors have the right to pass any increases in interchange
fees on to us as well as increase their own fees for processing.
These increased fees would increase our operating costs and
reduce our profit margins. We are also required by our
processors to comply with credit card association operating
rules, and we may be required to reimburse our processors for
any fines they are assessed by credit card associations as a
result of any rule violations by us. The credit card
associations and their member banks set and interpret operating
rules related to their credit cards. The credit card
associations
and/or
member banks could adopt new operating rules or re-interpret
existing rules that we might find difficult or even impossible
to follow. As a result, we could lose our ability to give
customers the option of using credit cards to make their
payments, which would seriously damage our business.
We also accept alternative payments, including Paypal, Bill Me
Later, Google checkout, gift cards and gift certificates, and
open invoices. If we were to lose our ability to give customers
the option to use these payment methods our business and
financial results could be could be adversely affected.
Telecommunications
and Data Providers
We rely on third parties to provide telecommunications and data
links upon which our businesses are dependant. Any disruption in
these services could cause substantial harm to our business and
our financial results.
Our
licensed sports business depends on continued customer interest
in professional sports leagues and could be adversely affected
by any decrease in fan interest in the professional sports
leagues, their teams or their players.
Our business derives substantial revenues from the sale of
sports products branded with the names and logos of professional
sports leagues, their teams
and/or their
players. Any decrease in fan interest in professional sports
leagues, their teams or their players, including as a result of
labor conflicts (and resulting lock-outs, strikes, or
13
cancelled games or seasons), player trades, player injuries, the
lack of success of popular players or teams, or logo changes,
could adversely affect our revenues and financial results.
A
disruption at any of our facilities could materially and
adversely affect our business, results of operations and
financial condition.
Any disruption at any of our facilities, including system,
network, telecommunications, software or hardware failures, any
damage to our physical locations or off-site data centers, or
our ability to access our locations for any reason, could
materially and adversely affect our business, results of
operations and financial condition.
Our operations are subject to the risk of damage or interruption
from:
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fire, flood, hurricane, tornado, earthquake or other natural
disasters;
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power losses and interruptions;
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Internet, telecommunications or data network failures;
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physical and electronic break-ins or security breaches;
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computer viruses;
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acts of terrorism;
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outbreak of disease; and
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other similar events.
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If any of these events occur, it could result in interruptions,
delays or cessations in our businesses. Our clients might seek
significant compensation from us for their losses. Even if
unsuccessful, this type of claim likely would be time consuming
and costly for us to address and damaging to our reputation.
Our
success is tied to the adequacy of the Internet
infrastructure.
The success of our GeC, GMS and consumer engagement businesses
depends on the continued development and maintenance of the
Internet infrastructure. As currently configured, the Internet
may not support changes in technology or continued increases in
the number or requirements of users, or there may be delays in
the development of necessary modifications to the Internet
infrastructure, either of which could result in Internet outages
and delays. In addition, problems caused by viruses,
worms, malware and similar programs
and/or cyber
terrorism may harm the performance of the Internet or our
systems. The amount of traffic on our and our clients
e-commerce
businesses could decline materially if there are Internet
outages or delays in the future.
We are
dependent upon consumers willingness to use the Internet
for commerce.
Our success depends upon the general publics continued
willingness to use the Internet as a means to purchase goods,
communicate, and conduct and research commercial transactions.
If consumers became unwilling or less willing to use the
Internet for communications or commerce for any reason,
including lack of access to high-speed communications equipment,
congestion of traffic on the Internet, Internet outages or
delays, disruptions or other damage to users computers,
increases in the cost of accessing the Internet and security and
privacy risks or the perception of such risks our businesses
would suffer, such decreased use of the internet for
communications and commerce would have an adverse impact on our
businesses.
We may
be liable if third parties misappropriate our or our
clients customers personal information from our
network.
We cannot be assured that our security measures will prevent
security breaches. A compromise of our security systems that
results in customers personal information being obtained
by an unauthorized person could result in litigation against us
and fines imposed on us, and could adversely affect
customers willingness to utilize our and our clients
businesses, our reputation, operations, results of operations,
financial condition and liquidity.
14
Additionally, any security breach could require that we expend
significant resources to strengthen the security of our
information systems and result in a disruption of our online
operations.
If we
do not respond to rapid technological changes, our services and
proprietary technology and systems may become
obsolete.
The industries in which we participate are characterized by
rapid technological change. To remain competitive, we must
continue to develop new services and technologies and respond to
technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
We are in the process of enhancing and unbundling the components
of our
e-commerce
and payments platform. If this technology project requires
higher than expected expenses, the success of client migrations
to the enhanced platform are not accomplished as planned, the
enhanced platform is not accepted by the market
and/or we
fail to meet client commitments and services level agreements,
we could be subject to substantial penalties under our
agreements with our clients
and/or our
relationships with our clients, our business and our results of
operations and financial condition could be substantially harmed.
In addition, the number of individuals who access the Internet
through devices other than a personal computer, such as mobile
telephones, personal digital assistants, smart phones, hand held
computers, televisions and set-top box devices, has increased
dramatically and is likely to increase in the future. As a
result, we must continue to adapt our existing technologies for
use with these alternative devices.
Substantial costs and management time can be required to
introduce new services and enhancements, and we may be unable to
respond to rapid technological changes in a timely enough manner
to avoid our services becoming uncompetitive. Our failure to
respond to technological changes could substantially harm our
business, results of operations and financial condition.
Our
business is dependent on the use of
e-mail, and
any decrease in the use of
e-mail or
our ability to use
e-mail may
harm our business, results of operations and financial
condition.
In our
e-mail
marketing solutions business, we derive revenue from selling our
e-mail
marketing solutions. We and our clients also rely on
e-mail
marketing to drive consumer traffic to the webstores in our GeC
businesses.
E-mail could
become a less effective means of communicating with and
marketing to consumers for a variety of reasons, including:
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problems with technology that make our
e-mail
communications more difficult for us to deliver and for
consumers to read, such as the ability of smart phones or
similar communications devices to adequately display our
e-mail;
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consumers may disregard marketing
e-mails due
to the large volume of such
e-mails they
receive;
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the inability of filters to effectively screen for unwanted
e-mails,
resulting in increased levels of junk mail, or SPAM,
which may overwhelm consumers
e-mail
accounts;
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increased use of social networking sites may result in decreased
use of
e-mail as a
primary means of communication;
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continued security concerns regarding Internet usage in general
from viruses, worms or similar problems; and
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increased governmental regulation or restrictive policies
adopted by Internet service providers, or ISPs, that
make it more difficult or costly to utilize
e-mail for
marketing communications.
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Our ability to contact customers through
e-mail could
also be harmed and our business may be adversely affected if we
end up on SPAM lists, or lists of entities that have been
involved in sending unwanted, unsolicited
e-mails. If
any of these were to occur, the traffic to our and our
clients
e-commerce
businesses and the demand for our
e-mail
marketing solutions may decrease, which could adversely affect
our business, results of operations and financial condition.
15
We may
be unable to protect our proprietary technology and intellectual
property rights.
Our success depends to a significant degree upon the protection
of our intellectual property rights. We may be unable to deter
infringement or misappropriation of our software, trademarks,
business processes and other proprietary information and
material, detect unauthorized use or take appropriate steps to
enforce our intellectual property rights. The steps we have
taken to protect our proprietary rights may be inadequate and
third parties may infringe or misappropriate our proprietary
rights. Any significant failure on our part to protect our
intellectual property could make it easier for our competitors
to offer similar services and thereby adversely affect our
market opportunities. In addition, litigation may be necessary
in the future to enforce our intellectual property rights.
Litigation could result in substantial costs and diversion of
management and technical resources.
We
have been, and may in the future be subject to intellectual
property claims or competition or trade practices claims that
could be costly and could disrupt our business.
Third parties may assert that our businesses or technologies
infringe or misappropriate their intellectual property rights,
or that we are engaging in unfair competition or other illegal
trade practices. We have been sued for infringing other
parties patents and have been notified of other potential
patent disputes. We could increasingly be subject to patent
infringement claims as our services expand in scope and
complexity. Patent infringement and other intellectual property
claims, whether meritorious or not, are time consuming and
costly to resolve, and could require expensive changes in our
methods of doing business, could require us to enter into costly
royalty or licensing agreements, or could require us to cease
conducting certain operations. We may be unsuccessful in
defending against these claims, which could result in
substantial damages, fines or other penalties. Even unsuccessful
claims could result in significant legal fees and other
expenses, diversion of managements time and disruptions in
our business. Any of these claims could also harm our reputation.
We may
be subject to product liability claims that could be costly and
time-consuming.
We sell products sourced by us and products manufactured by
third parties which could expose us to product liability claims
if any of these products are alleged to be defective. If any
product that we sell were to cause physical injury or injury to
property, the injured party or parties could bring claims
against us. We could also be subject to claims that customers of
our GeC or consumer engagement businesses were harmed due to
their reliance on our product information, product selection
guides, advice or instructions. If a successful claim were
brought against us in excess of our insurance coverage, it could
adversely affect our business, results of operations and
financial condition. Even unsuccessful claims could result in
the expenditure of funds and management time and adverse
publicity and could have a negative impact on our business.
Credit
card and payment fraud could adversely affect our
business.
The failure to adequately control fraudulent transactions on our
GeC, consumer engagement and GMS platforms could increase our
expenses. Under current credit card practices, we are liable for
fraudulent credit card transactions because we do not obtain a
cardholders signature. We may in the future suffer losses
as a result of orders placed with fraudulent credit card data.
If one
or more states successfully assert that we should collect or
should have collected sales or other taxes on the sale of our
merchandise, our business could be harmed.
The application of sales tax or other similar taxes to
interstate and international sales over the Internet is complex
and evolving. We currently collect sales or other similar taxes
only for goods we own, sell and ship into certain states. One or
more local, state or foreign jurisdictions may seek to impose
past and future sales tax obligations on us or other
out-of-state
companies that engage in
e-commerce.
If one or more states or any foreign country successfully
asserts that we should collect sales or other taxes on the sale
of merchandise for which we are not currently collecting taxes,
it could result in substantial tax liability for past sales,
decrease future sales and otherwise harm our business.
16
We may
have exposure in excess of our recorded tax
liabilities.
We are subject to income, payroll and other taxes in both the
United States and foreign jurisdictions. In the ordinary course
of our business, there are many transactions and calculations
where the ultimate tax determination is uncertain. Moreover,
significant judgment is required in evaluating our worldwide
provision for income taxes. Our determination of our tax
liability is always subject to review by applicable tax
authorities. Any adverse outcome of such a review could have a
negative effect on our operating results and financial
condition. Any change in existing taxation rules or practices
could result in increased tax liabilities and adversely affect
our financial results.
Our
ability to use net operating loss carryforwards to reduce future
tax payments may be limited.
As of January 1, 2011, we had estimated available net
operating loss carry-forwards (NOLs) of
$216.2 million for federal income tax purposes that expire
between 2011 and 2030. Our ability to use these NOLs will be
dependent on our ability to generate future taxable income and
may expire before we generate sufficient taxable income. Through
2010, approximately $3.1 million of these NOLs has expired
unutilized.
Section 382 of the Internal Revenue Code
(Section 382) imposes limitations on a
corporations ability to utilize NOLs if it experiences an
ownership change. In general terms, an ownership
change may result from transactions increasing the ownership of
certain stockholders in the stock of a corporation by more than
50 percentage points over a three-year period. In the event
of an ownership change, utilization of our NOLs would be subject
to an annual limitation under Section 382. Any unused NOLs
in excess of the annual limitation may be carried over to later
years.
We
rely on insurance to mitigate some risks facing our business,
and to the extent our insurance does not mitigate the risks
facing our business or our insurers are unable to meet their
obligations, our operating results may be negatively
impacted.
We contract for insurance to cover certain potential risks and
liabilities. It is possible that we may not be able to get
enough insurance to meet our needs, may have to pay very high
prices for the coverage we do get, have very high deductibles or
may not be able to, or may choose not to, acquire any insurance
for certain types of business risk. This could leave us exposed
to potential claims. If we were found liable for a significant
claim in the future, our operating results could be negatively
impacted. Also, to the extent the cost of maintaining insurance
increases, our operating results could be negatively affected.
Additionally, we are subject to the risk that one or more of our
insurers may become insolvent and would be unable to pay a claim
that may be made in the future. There can be no assurance that
our insurance will be adequate to protect us from pending and
future claims. In addition, we are required to maintain
insurance coverage under some of our agreements with our
clients. If we are not able to or do not maintain the required
insurance coverage, we could breach those agreements.
Variability
in self-insurance liability estimates could significantly impact
our financial results.
In the fourth quarter of fiscal 2008, we began to self-insure
for employee medical coverage for certain of our businesses up
to a set retention level, beyond which we maintain excess
insurance coverage. We may decide to self-insure for employee
medical coverage for other businesses or for other risks for
which we currently purchase insurance. Liabilities are
determined using actuarial estimates of the aggregate liability
for claims incurred and an estimate of incurred but not reported
claims, on an undiscounted basis. Our accruals for insurance
reserves reflect certain actuarial assumptions and management
judgments, which are subject to a high degree of variability.
The variability is caused by factors external to us such as:
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historical claims experience;
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medical inflation;
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legislative changes to benefit levels;
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jury verdicts; and
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claim settlement patterns.
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17
Any significant variation in these factors could cause a
material change to our reserves for self-insurance liabilities
as well as earnings. Our results could be materially impacted by
claims and other expenses related to our self-insured plans if
future occurrences and claims differ from our assumptions and
historical trends.
Existing
or future laws or regulations could harm our
business.
We are subject to international, federal, state and local laws
applicable to businesses in general and applicable to
e-commerce
and marketing services specifically.
Existing and proposed laws and regulations covering issues such
as taxation, pricing, content, distribution, access, quality and
delivery of products and services, electronic contracts,
intellectual property rights, user privacy and information
security may impede the growth of our businesses. Our
international operations are also subject to import and export
requirements, U.S. laws such as the Foreign Corrupt
Practices Act, and local laws prohibiting corrupt payments to
governmental officials.
It is not clear how some existing laws apply to the Internet and
e-commerce,
and some laws that are specific to the Internet and
e-commerce,
such as the Digital Millennium Copyright Act and The Controlling
the Assault of Non-Solicited Pornography and Marketing Act of
2003, or the CAN-SPAM Act, are only beginning to be
interpreted by the courts and their applicability and reach are
therefore uncertain. In addition, the potential scope of
operation and enforcement of the new Consumer Financial
Protection Bureau with respect to those handling consumer credit
card transactions also is unclear at present. Unfavorable
regulations and laws, or interpretations thereof, could diminish
the demand for our services, limit the services we can provide,
increase our cost of doing business and subject us to penalties.
In addition, our businesses utilize behavioral
marketing (generally, the tracking of a users online
activities) to deliver relevant content to web users. The
Federal Trade Commission, or FTC, has released a Staff Report
with principles to address consumer privacy issues that may
arise from behavioral marketing and to encourage industry
self-regulation. The FTC also has issued a Staff Report in
December 2010 on consumer privacy policy, proposing a set of
self-regulatory best practices and several policy
recommendations for consideration by Congress, including
institution of do not track mechanisms. In the
future, regulations or legislation could, if enacted, prohibit
the use of certain technologies that track individuals
activities on the internet. Such laws and regulations could
restrict our ability to collect and use page viewing data, and
personal information, which may reduce demand for our GMS
and/or
reduce demand for the webstores using our GeC business. If our
interactive marketing products are perceived to cause or are
otherwise unfavorably associated with invasions of privacy,
whether or not illegal, we or our clients may be subject to
public criticism. Existing and potential future privacy laws and
increasing public concerns regarding data collection, privacy
and security may cause some internet users to be less likely to
visit our clients websites or otherwise interact with
them. If enough consumers choose not to visit our
customers websites or otherwise interact with them, our
customers could stop using our interactive marketing products
and the growth of these businesses could be harmed or it may not
be possible to continue the current business models for these
products.
Future
changes in financial accounting standards or practices may
adversely affect our reported financial results.
A change in accounting standards or practices could have a
significant effect on our reported results and may even require
retroactive or retrospective application. Changes to existing
rules or the questioning of current practices may cause adverse
unexpected revenue
and/or
expense fluctuations and could adversely affect our reported
financial results or the way we conduct our business.
Our
success is dependent upon our executive officers and other key
personnel.
Our success depends to a significant degree upon the
contribution of our executive officers and other key personnel,
particularly Michael G. Rubin, our chairman of the board,
president and chief executive officer. Our executive officers
and key personnel could terminate their employment with us at
any time despite any employment agreements we may have with
these employees. Due to the competition for highly qualified
personnel, we cannot be sure that we will be able to retain or
attract executive, managerial or other key personnel. In
addition, key personnel
18
of an acquired company may decide not to work for us. We do not
maintain and do not intend to obtain key person life insurance
for any of our executive officers or key personnel. The loss of
any of our key personnel could harm our business if we are
unable to effectively replace that person, if we incur
significant operating expenses and direct management time to
search for a replacement, or if that person should join one of
our competitors or otherwise compete with us.
We may
be unable to hire and retain skilled personnel which could limit
our growth.
Our success depends on our ability to continue to identify,
attract, retain and motivate skilled personnel. Due to intense
competition for these individuals from our competitors and other
employers, we may not be able to attract or retain highly
qualified personnel in the future. Our failure to attract and
retain the experienced and highly trained personnel that are
integral to our businesses may limit our growth. Additionally,
we have experienced recent growth in personnel numbers and
expect to continue to hire additional personnel in selected
areas. Managing this growth requires significant time and
resource commitments from our senior management. If we are
unable to effectively manage a large and geographically
dispersed group of employees or to anticipate our future growth
and personnel needs, we may not be able to retain skilled
personnel and our business may be adversely affected.
There
are limitations on the liabilities of our directors and
executive officers. Under certain circumstances, we are
obligated to indemnify our directors and executive officers
against liability and expenses incurred by them in their service
to us.
Pursuant to our amended and restated certificate of
incorporation and under Delaware law, our directors are not
liable to us or our stockholders for monetary damages for breach
of fiduciary duty, except for liability for breach of a
directors duty of loyalty, acts or omissions by a director
not in good faith or which involve intentional misconduct or a
knowing violation of law, dividend payments or stock repurchases
that are unlawful under Delaware law or any transaction in which
a director has derived an improper personal benefit. In
addition, we have entered into indemnification agreements with
each of our directors and executive officers. These agreements,
among other things, require us to indemnify each director and
executive officer for certain expenses, including
attorneys fees, judgments, fines and settlement amounts,
incurred by any such person in any action or proceeding,
including any action by us or in our right, arising out of the
persons services as one of our directors or executive
officers. The costs associated with providing indemnification
under these agreements could be harmful to our business.
If we
fail to maintain an effective system of internal controls, we
may not be able to accurately report our financial results or
prevent fraud.
Section 404 of the Sarbanes-Oxley Act of 2002 requires our
management to report on the effectiveness of our internal
control over financial reporting. We have expended significant
resources to comply with our obligations under Section 404.
If we fail to correct any issues in the design or operating
effectiveness of our internal controls and update our controls
based on changes to our business over financial reporting or
fail to prevent fraud, current and potential stockholders and
clients could lose confidence in our financial reporting, which
could harm our business, the trading price of our common stock
and our ability to retain our current clients and obtain new
clients.
The
price of our common stock has and may continue to fluctuate
significantly.
Our stock price has been and may continue to be volatile.
Fluctuations in our stock price have been and may be as a result
of a variety of factors, many of which are beyond our control.
These factors include, among others: our performance and
prospects; fluctuations in our operating results; changes in our
publicly available guidance of future results of operations;
investor perception of us and the industries in which we
operate; and general financial, economic and other market
conditions. In addition, broad market and industry fluctuations
may adversely affect the price of our stock, regardless of our
operating performance. Declines in our stock price could have a
material adverse impact on investor confidence and employee
retention.
19
Future
sales of our common stock in the public market or the issuance
of our common stock or securities senior to our common stock
could adversely affect the trading price of our common
stock.
We may issue common stock or equity securities senior to our
common stock in the future for a number of reasons, including to
attract and retain key personnel or outside consultants, to
finance our operations and growth strategy, including possible
acquisitions, to adjust our ratio of debt to equity, to satisfy
outstanding obligations, including obligations under earnout
agreements and long term incentive plans, or for other reasons.
If we issue securities, our existing stockholders may experience
dilution or the new securities may have rights senior to those
of our common stock. In addition, the terms of these securities
could impose restrictions on our operations. Future sales of our
common stock, the perception that such sales could occur or the
availability for future sale of shares of our common stock or
securities convertible into or exercisable for our common stock
could adversely affect the market prices of our common stock
prevailing from time to time. No prediction can be made as to
the effect, if any, that the sale, or the availability for sale,
of substantial amounts of common stock could have on the market
price of our common stock.
We
have never paid dividends on our common stock and do not
anticipate paying dividends in the foreseeable
future.
We have never paid cash dividends on our common stock and do not
anticipate that any cash dividends will be declared or paid in
the foreseeable future. In addition, the terms of our Existing
Credit Facility and New Credit Facility restrict our ability to
declare or pay dividends on our common stock.
It may
be difficult for a third party to acquire us and this could
depress our stock price.
Certain provisions of our amended and restated certificate of
incorporation, bylaws, stockholder rights agreement and Delaware
law may have the effect of discouraging, delaying or preventing
transactions that involve any actual or threatened change in
control. The rights issued under our stockholder rights
agreement may be a substantial deterrent to a person acquiring
beneficial ownership of 20% or more of our common stock without
the approval of our board of directors. The stockholder rights
agreement would cause extreme dilution to such person.
In addition, we are subject to Section 203 of the Delaware
General Corporation Law which, subject to certain exceptions,
restricts certain transactions and business combinations between
a corporation and a stockholder owning 15% or more of the
corporations outstanding voting stock for a period of
three years from the date the stockholder becomes a 15%
stockholder. In addition to discouraging a third party from
seeking to acquire control of us, the foregoing provisions could
impair the ability of existing stockholders to remove and
replace our management
and/or our
board of directors.
Because many investors consider a change of control a desirable
path to liquidity, delaying or preventing a change in control of
our company may reduce the number of investors interested in our
common stock, which could depress our stock price.
Holders
of our common stock will be subordinated to our Existing Credit
Facility and New Credit Facility, convertible notes and other
indebtedness.
In the event of our liquidation or insolvency, holders of common
stock would receive a distribution only after payment in full of
all principal and interest due (i) under our Existing
Credit Facility and New Credit Facility, (ii) to holders of
our convertible notes and (iii) to other creditors. After
these payments are made, there may be little or no proceeds to
distribute to holders of our common stock.
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ITEM 1B:
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UNRESOLVED
STAFF COMMENTS.
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We, like other issuers, from time to time receive written
comments from the staff of the SEC regarding our periodic or
current reports under the Exchange Act. There are no comments
that remain unresolved that we received not less than
180 days before the end of fiscal 2010.
20
The following table provides information about owned and leased
facilities that we occupy as of February 1, 2011:
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Square
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Use
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Footage
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Locations
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Segment
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(In thousands)
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Principal Office
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104
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King of Prussia, PA
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Offices
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181
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Los Angeles, CA;
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Global e-Commerce Services
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Pacoima, CA;
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San Jose, CA;
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Boynton Beach, FL;
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Winter Park, FL;
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King of Prussia, PA;
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Chattanooga, TN;
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Roanoke, VA;
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Tokyo, Japan;
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Barcelona, Spain; and
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Chadderton, United Kingdom
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Offices
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237
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Tempe, AZ;
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Global Marketing Services
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Campbell, CA;
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Burlington, MA;
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Central Islip, NY;
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New York, NY;
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Columbus, OH;
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King of Prussia, PA;
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Wilkes-Barre, PA;
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Bellevue, WA;
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London, England; and
Singapore
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Offices
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78
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Boston, MA; and
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Consumer Engagement
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New York, NY
|
|
|
|
|
Fulfillment Centers
|
|
|
3,000
|
|
|
Pacoima, CA;
|
|
|
Global e-Commerce Services
|
|
|
|
|
|
|
|
Louisville, KY;
|
|
|
|
|
|
|
|
|
|
|
Richwood, KY;
|
|
|
|
|
|
|
|
|
|
|
Shepherdsville, KY;
|
|
|
|
|
|
|
|
|
|
|
Martinsville, VA;
|
|
|
|
|
|
|
|
|
|
|
Mississauga, Ontario, Canada; and
|
|
|
|
|
|
|
|
|
|
|
Chadderton, United Kingdom
|
|
|
|
|
Call Centers
|
|
|
212
|
|
|
Pacoima, CA;
|
|
|
Global e-Commerce Services
|
|
|
|
|
|
|
|
Melbourne, FL;
|
|
|
|
|
|
|
|
|
|
|
Brunswick, GA;
|
|
|
|
|
|
|
|
|
|
|
Eau Claire, WI; and
|
|
|
|
|
|
|
|
|
|
|
Chadderton, United Kingdom
|
|
|
|
|
We also lease additional space to fill short term needs on an as
needed basis. We believe that our properties are adequate for
our present needs and that suitable additional or replacement
space will be available as required.
We own our principal executive office in King of Prussia, PA,
which was subject to an $11.9 million mortgage as of the
end of fiscal 2010. We also have an option through March 2012 to
purchase an additional building lot adjacent to our principal
executive office in King of Prussia, PA. We own another office
in King of Prussia, PA, a fulfillment center in Louisville, KY,
and a call center in Eau Claire, WI none of which is subject to
a mortgage. All other properties listed above are leased.
|
|
ITEM 3:
|
LEGAL
PROCEEDINGS.
|
We are involved in various litigation incidental to our
business, including alleged contractual claims, claims relating
to infringement of intellectual property rights of third
parties, claims relating to the manner in which goods are sold
through our integrated-commerce platform and claims relating to
our collection of sales taxes in certain states. We currently
collect sales taxes for goods owned and sold by us and shipped
into certain states. As a result,
21
we are subject from time to time to claims from other states
alleging that we failed to collect and remit sales taxes for
sales and shipments of products to customers in those states.
Based on the merits of the cases
and/or the
amounts claimed, we do not believe that any claims are likely to
have a material adverse effect on our business, financial
position or results of operations. We may, however, incur
substantial expenses and devote substantial time to defend these
claims whether or not such claims are meritorious. In addition,
litigation is inherently unpredictable. In the event of a
determination adverse to us, we may incur substantial monetary
liability and may be required to implement expensive changes in
our business practices, enter into costly royalty or licensing
agreements, or begin to collect sales taxes in states in which
we previously did not. An adverse determination could have a
material adverse effect on our business, financial position or
results of operations. Expenditures for legal costs are expensed
as incurred.
|
|
ITEM 4:
|
(REMOVED
AND RESERVED).
|
PART II
|
|
ITEM 5:
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
|
The following table sets forth the high and low sales prices per
share of our common stock as reported on the NASDAQ Global
Select Market under the symbol GSIC.
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
Price
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal 2009
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
13.77
|
|
|
$
|
7.35
|
|
Second Quarter
|
|
$
|
15.59
|
|
|
$
|
12.29
|
|
Third Quarter
|
|
$
|
19.75
|
|
|
$
|
14.09
|
|
Fourth Quarter
|
|
$
|
26.00
|
|
|
$
|
18.09
|
|
Fiscal 2010
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
28.49
|
|
|
$
|
22.53
|
|
Second Quarter
|
|
$
|
31.35
|
|
|
$
|
24.26
|
|
Third Quarter
|
|
$
|
29.99
|
|
|
$
|
20.87
|
|
Fourth Quarter
|
|
$
|
26.45
|
|
|
$
|
21.74
|
|
As of February 18, 2011, we had approximately 1,770
stockholders of record. The last reported sales price per share
for our common stock on February 18, 2011, as reported on
the NASDAQ Global Select Market, was $22.05.
We have never declared or paid a cash dividend on our common
stock. We currently intend to retain any future earnings to fund
our growth and, therefore, do not anticipate declaring or paying
any cash dividends on our common stock for the foreseeable
future. In addition, the terms of our existing and new secured
bank credit facilities restrict our ability to declare or pay
dividends on our common stock.
We made no repurchases of our common stock during the fourth
quarter of fiscal 2010.
Pursuant to the terms of a Consulting Agreement dated
April 22, 2009 between Arimor, LLC (Arimor) and
GSI Commerce Solutions, Inc., the Company agreed to issue to
Arimor shares of the Companys common stock as a fee for
consulting services provided by Arimor. For the fourth quarter
of fiscal 2010, the Company issued an aggregate of
12,583 shares of common stock to Arimor (Arimor
Shares) pursuant to such agreement.
The issuances of the Arimor Shares were completed in accordance
with Section 4(2) of the Securities Act of 1933, as
amended, in offerings without any public offering or
distribution. The Arimor Shares are restricted securities and
include appropriate restrictive legends.
22
STOCK
PERFORMANCE GRAPH
The following graph shows a comparison of the cumulative total
return for our common stock, the Morgan Stanley Internet Index
and the NASDAQ Composite, assuming an investment of $100 in each
on December 31, 2005, and the reinvestment of all
dividends. The data points used for the performance graph are
listed below.
COMPARISON
OF CUMULATIVE TOTAL RETURN
ASSUMES
$100 INVESTED ON JAN 01, 2006
ASSUMES DIVIDEND
REINVESTED
Total
Return Analysis
Period
Ending
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company/Market/Peer Group
|
|
|
12/31/2005
|
|
|
12/30/2006
|
|
|
12/29/2007
|
|
|
1/3/2009
|
|
|
1/2/2010
|
|
|
1/1/2011
|
GSI Commerce, Inc.
|
|
|
$
|
100.00
|
|
|
|
$
|
124.25
|
|
|
|
$
|
129.49
|
|
|
|
$
|
71.50
|
|
|
|
$
|
168.26
|
|
|
|
$
|
153.94
|
|
NASDAQ Composite
|
|
|
$
|
100.00
|
|
|
|
$
|
110.39
|
|
|
|
$
|
123.05
|
|
|
|
$
|
75.75
|
|
|
|
$
|
106.35
|
|
|
|
$
|
125.52
|
|
Morgan Stanley Internet
|
|
|
$
|
100.00
|
|
|
|
$
|
109.49
|
|
|
|
$
|
148.26
|
|
|
|
$
|
82.14
|
|
|
|
$
|
155.30
|
|
|
|
$
|
205.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: Stock price performance shown in this Performance Graph
for our common stock is historical and not necessarily
indicative of future price performance. The information
contained in this Performance Graph is not soliciting
material and has not been filed with the
Securities and Exchange Commission. This Performance Graph will
not be incorporated by reference into any of our future filings
under the Securities Act of 1933 or the Securities Exchange Act
of 1934.
EQUITY
COMPENSATION PLAN INFORMATION
Information about securities authorized for issuance under our
equity compensation plan appears in Part III, Item 12
of this Annual Report on
Form 10-K.
23
|
|
ITEM 6:
|
SELECTED
FINANCIAL DATA.
|
The following tables present portions of our financial
statements and are not complete. You should read the following
selected consolidated financial data together with our
consolidated financial statements and related notes to our
financial statements, Managements Discussion and
Analysis of Financial Condition and Results of Operations
and Risk Factors. The selected statement of
operations data for fiscal 2008, fiscal 2009 and fiscal 2010 and
the balance sheet data as of the end of fiscal 2009 and fiscal
2010 are derived from our audited consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K.
The selected statement of operations data for fiscal 2006 and
fiscal 2007 and the balance sheet data as of the end of fiscal
2006, fiscal 2007 and fiscal 2008 are derived from our audited
consolidated financial statements that are not included in this
Annual Report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
December 30,
|
|
|
December 29,
|
|
|
January 3,
|
|
|
January 2,
|
|
|
January 1,
|
|
|
|
2006
|
|
|
2007
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from product sales
|
|
$
|
461,183
|
|
|
$
|
512,194
|
|
|
$
|
577,073
|
|
|
$
|
542,249
|
|
|
$
|
777,348
|
|
Service fee revenues
|
|
|
148,370
|
|
|
|
237,763
|
|
|
|
389,853
|
|
|
|
461,966
|
|
|
|
580,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
609,553
|
|
|
|
749,957
|
|
|
|
966,926
|
|
|
|
1,004,215
|
|
|
|
1,357,994
|
|
Total costs and expenses(1)
|
|
|
600,116
|
|
|
|
745,638
|
|
|
|
977,186
|
|
|
|
993,949
|
|
|
|
1,375,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
9,437
|
|
|
|
4,319
|
|
|
|
(10,260
|
)
|
|
|
10,266
|
|
|
|
(17,318
|
)
|
Total other expense, net
|
|
|
2,916
|
|
|
|
8,165
|
|
|
|
20,296
|
|
|
|
18,950
|
|
|
|
18,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
6,521
|
|
|
|
(3,846
|
)
|
|
|
(30,556
|
)
|
|
|
(8,684
|
)
|
|
|
(36,220
|
)
|
Provision (benefit) for income taxes(2)
|
|
|
(38,140
|
)
|
|
|
(2,887
|
)
|
|
|
(7,585
|
)
|
|
|
2,344
|
|
|
|
660
|
|
Equity-method investment earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before cumulative effect of change in
accounting principle
|
|
|
44,661
|
|
|
|
(959
|
)
|
|
|
(22,971
|
)
|
|
|
(11,028
|
)
|
|
|
(36,502
|
)
|
Cumulative effect of change in accounting principle
|
|
|
268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
44,929
|
|
|
$
|
(959
|
)
|
|
$
|
(22,971
|
)
|
|
$
|
(11,028
|
)
|
|
$
|
(36,502
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to cumulative effect of change in accounting principle
|
|
$
|
0.98
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
0.99
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to cumulative effect of change in accounting principle
|
|
$
|
0.93
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share(3)
|
|
$
|
0.94
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
457,456
|
|
|
$
|
670,104
|
|
|
$
|
716,025
|
|
|
$
|
1,061,848
|
|
|
$
|
1,107,162
|
|
Total long-tem liabilities(4)
|
|
|
60,083
|
|
|
|
185,364
|
|
|
|
201,398
|
|
|
|
227,073
|
|
|
|
167,445
|
|
Working capital(5)
|
|
|
125,172
|
|
|
|
165,822
|
|
|
|
40,938
|
|
|
|
21,789
|
|
|
|
57,679
|
|
Stockholders equity(5)(6)
|
|
|
235,778
|
|
|
|
280,900
|
|
|
|
274,496
|
|
|
|
476,340
|
|
|
|
563,033
|
|
24
|
|
|
(1) |
|
In fiscal 2010, we recorded an $88.3 million impairment of
goodwill and intangible assets. For additional information, see
Note 5, Goodwill and Other Intangible Assets, to our
consolidated financial statements included in Item 15,
Exhibits and Financial Statement Schedules, of this
Annual Report on
Form 10-K. |
|
|
|
In fiscal 2010, we recorded income of $61.0 million from
changes in fair value of deferred acquisition payments. For
additional information, see Note 3, Fair Value of
Financial and Nonfinancial Instruments, to our consolidated
financial statements included in Item 15, Exhibits and
Financial Statement Schedules, of this Annual Report on
Form 10-K. |
|
(2) |
|
Included in fiscal 2006 was a $38.1 million non-cash income
tax benefit resulting from the reversal of valuation allowance. |
|
(3) |
|
For additional information on the diluted earnings (loss) per
share calculation, see Note 12, Loss Per Share, to
our consolidated financial statements included in Item 15,
Exhibits and Financial Statement Schedules, of this
Annual Report on
Form 10-K. |
|
(4) |
|
In fiscal 2007, we completed a subordinated convertible note
offering of $150 million. For additional information, see
Note 7, Long-Term Debt and Credit Facility, to our
consolidated financial statements included in Item 15,
Exhibits, Financial Statement Schedules, of this Annual
Report on
Form 10-K.
In fiscal 2010 we converted our $57.5 million
3% subordinated convertible notes into 3.2 million
shares of our common stock. |
|
(5) |
|
In fiscal 2008, we acquired
e-Dialog,
Inc. for approximately $150 million in cash, including
acquisition costs. In fiscal 2009, we acquired Retail
Convergence, Inc. (Rue La La) for
(i) $186 million at closing consisting of cash of
$92 million and shares of our common stock valued at
$94 million, and (ii) the obligation to make earnout
payments of up to $170 million over a three year period
beginning with fiscal year 2010 depending on Rue
La Las achievement of certain financial performance
targets. In fiscal 2010, we acquired MBS Insight, Inc. for
$22 million in cash. For additional information, see
Note 6, Acquisition and Investments, to our
consolidated financial statements included in Item 15,
Exhibits and Financial Statement Schedules, of this
Annual Report on
Form 10-K. |
|
(6) |
|
In fiscal 2009, we received approximately $88 million of
net proceeds from the sale of 5.4 million shares of our
common stock. |
25
|
|
ITEM 7:
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
All
statements made in this Annual Report on
Form 10-K,
other than statements of historical fact, are forward-looking
statements, as defined under federal securities law. The words
look forward to, anticipate,
believe, estimate, expect,
intend, may, plan,
will, would, should,
could, guidance, potential,
opportunity, continue,
project, forecast,
confident, prospects,
schedule, designed, future
discussions, if and similar expressions
typically are used to identify forward-looking statements.
Forward-looking statements are based on the then-current
expectations, beliefs, assumptions, estimates and forecasts
about our business. These statements are not guarantees of
future performance and involve risks, uncertainties and
assumptions which are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is
expressed or implied by these forward-looking statements.
Factors which may affect our business, financial condition and
operating results include the effects of changes in the economy,
consumer spending, the financial markets and the industries in
which we and our clients operate; changes affecting the Internet
e-commerce
and marketing service, our ability to develop and maintain
relationships with clients and suppliers and the timing of our
establishment, extension or termination of our relationships
with clients; our ability to timely and successfully develop,
maintain and protect our technology, confidential and
proprietary information, and to timely and successfully enhance,
develop and maintain our product and service offerings; our
ability to execute operationally to attract and retain qualified
personnel, close our recently announced agreement to acquire
Fanatics, Inc. (Fanatics), to successfully integrate
our recent acquisitions of other businesses, including Fanatics;
and the performance of acquired businesses, including Fanatics.
More information about potential factors that could affect us is
described in Item 1A of Part I, Risk
Factors. We expressly disclaim any intent or obligation to
update these forward-looking statements.
Executive
Overview
Fiscal 2010 Financial Results Compared to Fiscal 2009 and
Significant Events:
|
|
|
|
|
Net revenues increased by $353.8 million, or 35%; net
revenues from product sales increased by $235.2 million, or
43%; and service fee revenues increased by $118.6 million,
or 26%.
|
|
|
|
Income from operations decreased to a loss of $17.3 million
in fiscal 2010 compared to income of $10.3 million in
fiscal 2009.
|
|
|
|
Net loss was $36.5 million in fiscal 2010, inclusive of a
provision for income taxes of $0.7 million, compared to net
loss of $11.0 million in fiscal 2009, inclusive of an
income tax provision of $2.3 million.
|
|
|
|
We made the following acquisitions:
|
|
|
|
|
|
MBS Insight (MBS), a database solutions provider;
|
|
|
|
FetchBack, a provider of comprehensive retargeting solutions;
|
|
|
|
VendorNet, a provider of supply chain management software and
services; and
|
|
|
|
M3 Mobile, a mobile marketing agency.
|
|
|
|
|
|
We purchased a 27% equity interest in Intershop Communications,
AG., a provider of
e-commerce
software.
|
|
|
|
In March 2010, we amended and expanded our existing secured
revolving credit facility by $60 million to
$150 million (the Existing Credit Facility).
The Existing Credit Facility is available for letters of credit,
working capital and general corporate purposes, including
possible acquisitions and expires in March 2013.
|
|
|
|
In June 2010, we called our outstanding $57.5 million 3%
convertible notes due 2025 for redemption and substantially all
of the notes were converted into 3.2 million shares of our
common stock.
|
|
|
|
In the fourth quarter of fiscal 2010, we recorded an
$88.3 million impairment of goodwill and intangible assets
comprised of $81.5 million for the Rue
La La reporting unit and $6.8 million for the
International
e-Commerce
reporting unit.
|
26
|
|
|
|
|
In fiscal 2010, we recorded income of $61.0 million due to
the reduction in the fair value of deferred acquisition payments
for Rue La La to $0 based on revised estimates of Rue
La Las financial projections for fiscal years 2011
and 2012.
|
|
|
|
Subsequent Events:
|
|
|
|
|
|
On February 9, 2011 we signed a definitive agreement to
acquire Fanatics, Inc. (Fanatics), an online
retailer of licensed sports merchandise for approximately
$277 million, including $171 million of cash and
4.8 million shares of our common stock, which were valued
at $106 million at the time of signing. We expect the
acquisition to close in the second quarter of fiscal 2011.
|
|
|
|
We entered into a new $400 million credit agreement
(the New Credit Facility) that will close
simultaneously with and will be contingent upon the closing of
the Fanatics acquisition. The New Credit Facility will replace
our $150 million Existing Credit Facility and includes a
$285 million revolving line of credit and a
$115 million term loan, with the option to increase the
commitments under these facilities by up to an additional
$50 million to a total of $450 million. The New Credit
Facility becomes effective if our acquisition of Fanatics closes
on or before May 10, 2011.
|
|
|
|
We have authorized a share buy-back program of up to an
aggregate of $50 million of our common stock over the next
two years, commencing on the closing of the Fanatics
acquisition. Shares may be repurchased from time to time at
prevailing prices in the open market, including pursuant to
Rule 10(b)5-1
trading plans.
|
Consolidated
Results (amounts in tables in millions):
Comparison
of Fiscal 2010 and 2009:
Total Net
Revenues, Costs and Expenses and Income (Loss) from
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
% of Net
|
|
|
Fiscal
|
|
|
% of Net
|
|
|
Increase/
|
|
|
|
|
|
|
2009
|
|
|
Revenues
|
|
|
2010
|
|
|
Revenues
|
|
|
(Decrease)
|
|
|
% Change
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from product sales
|
|
$
|
542.2
|
|
|
|
54
|
%
|
|
$
|
777.4
|
|
|
|
57
|
%
|
|
$
|
235.2
|
|
|
|
43
|
%
|
Service fee revenues
|
|
|
462.0
|
|
|
|
46
|
%
|
|
|
580.6
|
|
|
|
43
|
%
|
|
|
118.6
|
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
1,004.2
|
|
|
|
100
|
%
|
|
|
1,358.0
|
|
|
|
100
|
%
|
|
|
353.8
|
|
|
|
35
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues from product sales
|
|
|
398.6
|
|
|
|
40
|
%
|
|
|
565.4
|
|
|
|
41
|
%
|
|
|
166.8
|
|
|
|
42
|
%
|
Marketing
|
|
|
54.8
|
|
|
|
6
|
%
|
|
|
63.6
|
|
|
|
5
|
%
|
|
|
8.8
|
|
|
|
16
|
%
|
Account management and operations
|
|
|
273.1
|
|
|
|
27
|
%
|
|
|
361.9
|
|
|
|
27
|
%
|
|
|
88.8
|
|
|
|
33
|
%
|
Product development
|
|
|
120.2
|
|
|
|
12
|
%
|
|
|
161.3
|
|
|
|
12
|
%
|
|
|
41.1
|
|
|
|
34
|
%
|
General and administrative
|
|
|
82.9
|
|
|
|
8
|
%
|
|
|
112.0
|
|
|
|
8
|
%
|
|
|
29.1
|
|
|
|
35
|
%
|
Depreciation and amortization
|
|
|
63.4
|
|
|
|
6
|
%
|
|
|
83.8
|
|
|
|
6
|
%
|
|
|
20.4
|
|
|
|
32
|
%
|
Changes in fair value of deferred acquisition payments
|
|
|
0.9
|
|
|
|
0
|
%
|
|
|
(61.0
|
)
|
|
|
−4
|
%
|
|
|
(61.9
|
)
|
|
|
|
|
Impairment of goodwill and intangible assets
|
|
|
|
|
|
|
0
|
%
|
|
|
88.3
|
|
|
|
6
|
%
|
|
|
88.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
993.9
|
|
|
|
99
|
%
|
|
|
1,375.3
|
|
|
|
101
|
%
|
|
|
381.4
|
|
|
|
38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
10.3
|
|
|
|
1
|
%
|
|
$
|
(17.3
|
)
|
|
|
−1
|
%
|
|
$
|
(27.6
|
)
|
|
|
−268
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
Net
Revenues from Product Sales
The increase in net revenues from product sales in fiscal 2010
was primarily driven by the acquisition of Rue La La, which
we acquired in November 2009, as well as higher shipping revenue
due to increased volume of unit shipments in the Global
e-Commerce
Services (GeC) segment.
Service
Fee Revenues
The increase in service fee revenues in fiscal 2010 was
primarily driven by growth in the GeC and Global Marketing
Services (GMS) segments. The revenue growth in both
segments was driven by increased revenue from existing clients,
the addition of new clients as well as from the impact of
companies acquired in fiscal 2010.
Costs and
Expenses
Cost
of Revenues from Product Sales
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009
|
|
|
Fiscal 2010
|
|
|
Cost of revenues from product sales
|
|
$
|
398.6
|
|
|
$
|
565.4
|
|
As a percentage of net revenues from product sales
|
|
|
74
|
%
|
|
|
73
|
%
|
The increase in cost of revenues from product sales in fiscal
2010 was driven by the addition of the Consumer Engagement
segment as well as increased net revenues from products sales in
the GeC segment. Cost of revenue from product sales as a
percentage of net revenues from product sales was relatively
flat.
Marketing
The absolute dollar increase in marketing expenses was driven by
the increase in net revenues from product sales in the GeC and
Consumer Engagement segment. As a percentage of net revenues
from product sales, marketing expenses decreased from 10% in
fiscal 2009 to 8% in fiscal 2010 due to the increase in product
sales from the Consumer Engagement segment which have lower
marketing expenses as a percentage of net revenues than product
sales in the GeC segment.
Account
Management and Operations
The absolute dollar increase in account management and
operations expenses was driven primarily by increased payroll,
professional fees and related personnel expenses in each of our
segments as well as increased fulfillment, customer care and
credit card fees in the GeC and Consumer Engagement segments
driven by increased order and shipment volume in the GeC segment
and the acquisition of Rue La La in November 2009.
Product
Development
The absolute dollar increase in product development expenses was
primarily driven by payroll and professional fees in each of our
segments for enhancements to our technology platforms, the
expansion and upgrading of our technology operations
infrastructure and costs associated with launching new clients
on our platforms as well as from companies acquired in fiscal
2010. The largest increase came from the GeC segment.
General
and Administrative
The absolute dollar increase in general and administrative
expenses was primarily driven by increased payroll and related
expenses and professional fees in each of our segments including
expenses from the companies acquired in the last year. Expenses
for acquisition related integration, transaction, due diligence
and earn-out expenses increased to $10.1 million in fiscal
2010 from $4.1 million in fiscal 2009 primarily due to
earn-out expenses associated with one of the companies we
acquired in fiscal 2010.
Depreciation
and Amortization
Depreciation expenses increased by $11.0 million for fiscal
2010 primarily due to an increase in capital expenditures in
fiscal 2010 compared to fiscal 2009 as well as depreciation on
assets from companies acquired in
28
fiscal 2009 and fiscal 2010. Amortization expenses increased by
$9.4 million for fiscal 2010 due to the intangible asset
amortization related to the companies acquired in fiscal 2009
and fiscal 2010.
Changes
in Fair Value of Deferred Acquisition Payments
The decrease in the fair value of deferred acquisition payments
was due to a revision of our estimate of the amount of deferred
acquisition payments that will be paid to the former
shareholders of Rue La La based on Rue
La Las financial performance in fiscal 2010 and
revised financial projections for fiscal years 2011 and 2012.
Based on these revised estimates, we do not expect Rue
La La to achieve the minimum earnings thresholds
needed to trigger any of the deferred acquisition payments and
have determined that the fair value of the deferred acquisition
payment liability is $0 at the end of fiscal 2010 compared to
$61.0 million at the end of fiscal 2009.
Impairment
of Goodwill and Intangible Assets
In the fourth quarter of fiscal 2010, we completed our annual
impairment testing of goodwill and indefinite-lived intangible
assets and determined there was an impairment in our Rue
La La and International
e-Commerce
Services reporting units. The fair value of each of these two
reporting units was less than their respective carrying values.
As a result, we conducted the second step of the impairment test
for both reporting units and determined that the goodwill in
both of these reporting units was impaired. We determine fair
value using widely accepted valuation techniques, including, but
not limited to, the income approach which estimates the fair
value of our reporting units based on the future discounted cash
flows, and the market approach which estimates the fair value of
our reporting units based on comparable market prices. We also
tested our finite-lived intangible assets for impairment and
determined there was an impairment in our Rue
La La and International
e-Commerce
Services reporting units.
We recorded a total goodwill impairment expense of
$77.7 million comprised of $71.3 million for the Rue
La La reporting unit in our Consumer Engagement
segment and $6.4 million for the International
e-Commerce
Services reporting unit in our GeC segment. We also recorded a
$10.6 million impairment expense related to Rue
La Las finite-lived intangible assets.
The impairments in the Rue La La reporting unit
resulted from a decline in our projected cash flows. The
goodwill impairment charge of $71.3 million reduced the
carrying value of the goodwill associated with the reporting
unit from $172.9 million to its implied fair value of
$101.6 million. The finite-lived intangible asset
impairment charge of $10.2 million related to supplier
relationships and reduced the carrying value of this intangible
asset to $0.
The impairments in the International
e-Commerce
Services reporting unit resulted from a decline in our projected
cash flows. The impairment charges reduced the carrying value of
the reporting units goodwill and finite-lived intangible
assets to $0.
Other
(Income) Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009
|
|
|
Fiscal 2010
|
|
|
Change
|
|
|
Interest expense
|
|
$
|
19.4
|
|
|
$
|
17.3
|
|
|
$
|
(2.1
|
)
|
Interest income
|
|
|
(0.5
|
)
|
|
|
(0.3
|
)
|
|
|
0.2
|
|
Other (income) expense
|
|
|
|
|
|
|
1.2
|
|
|
|
1.2
|
|
Loss on investments
|
|
|
|
|
|
|
0.7
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
$
|
18.9
|
|
|
$
|
18.9
|
|
|
$
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense decreased in fiscal 2010 primarily due to the
conversion of our $57.5 million 3% convertible notes into
shares of our common stock in June 2010. Other (income) expense
is primarily comprised of foreign currency exchange gains and
losses on transactions denominated in currencies other than the
functional currency. The $0.7 million loss on investments
is a result of the write-off on an investment in the third
quarter of fiscal 2010, which was accounted for under the cost
method, due to the deterioration in the financial condition of
the investee.
29
Income
Taxes
Our effective tax rate for fiscal years 2010, 2009, and 2008 was
(1.9%), (27.0%) and 24.8%, respectively. Our tax rate is
affected by recurring items such as tax rates in foreign
jurisdictions and the relevant amount of income we earn in each
jurisdiction, which has not been consistent as we seek to expand
our presence in the international market, as well as the
reversal of valuation allowances in some years. See
Note 11, Income Taxes, to our consolidated financial
statements included in Item 15, Exhibits and Financial
Statement Schedules, of this Annual Report on
Form 10-K
for a reconciliation of the differences between our effective
income tax rate and the statutory U.S. federal income tax
rate of 35% for fiscal years 2010, 2009 and 2008.
Segment
Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009
|
|
Fiscal 2010
|
|
$ Change
|
|
% Change
|
|
GeC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
879.6
|
|
|
$
|
1,024.4
|
|
|
$
|
144.8
|
|
|
|
16
|
%
|
Segment profit(1)
|
|
$
|
74.4
|
|
|
$
|
95.5
|
|
|
$
|
21.1
|
|
|
|
28
|
%
|
GMS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
127.6
|
|
|
$
|
189.9
|
|
|
$
|
62.3
|
|
|
|
49
|
%
|
Segment profit(1)
|
|
$
|
30.6
|
|
|
$
|
48.4
|
|
|
$
|
17.8
|
|
|
|
58
|
%
|
Consumer engagement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
26.3
|
|
|
$
|
216.7
|
|
|
$
|
190.4
|
|
|
|
100
|
%
|
Segment profit (loss)(1)
|
|
$
|
1.4
|
|
|
$
|
(9.2
|
)
|
|
$
|
(10.6
|
)
|
|
|
100
|
%
|
Segment Margins:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GeC
|
|
|
8.5
|
%
|
|
|
9.3
|
%
|
|
|
|
|
|
|
|
|
GMS
|
|
|
24.0
|
%
|
|
|
25.5
|
%
|
|
|
|
|
|
|
|
|
Consumer engagement
|
|
|
5.3
|
%
|
|
|
(4.2
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Segment profit (loss) equals net revenues less costs and
expenses excluding stock-based compensation expense,
depreciation and amortization expenses, and the following
expenses related to acquisitions: transaction expenses, due
diligence expenses, integration expenses, non-cash inventory
valuation adjustments, the cash portion of any deferred
acquisition payments recorded as compensation expense, changes
in fair value of deferred acquisition payments, and impairment
of goodwill and intangible assets. |
GeC
Segment:
Net revenues increased 16% in fiscal 2010. The growth is due to
an increase in net revenues from product sales and service fee
revenues. The increase in net revenues from product sales was
driven by an increase in shipping revenue due to increased unit
shipments as well as an increase in product revenue from clients
that operated for the entirely of both periods. The increase in
service fee revenues for fiscal 2010 was primarily due to an
increase in revenues from clients that operated during the
entirety of both periods as well as from the addition of clients
that began generating revenue for us in fiscal 2010, including
inter-company revenues from Rue La La.
Segment profit increased $21.1 million or 28% in fiscal
2010 compared to fiscal 2009 and segment operating margins
increased to 9.3% in fiscal 2010 versus 8.5% in fiscal 2009. The
increase in segment operating margins was driven primarily by
service fee revenues comprising a larger percentage of total net
revenues as service fee revenue has no associated cost of
revenue or marketing expenses.
GMS
Segment:
Net revenues increased 49% in fiscal 2010. The increase is due
to growth of revenue from existing clients, including
inter-company revenue, revenue from new clients as well as
revenue from the acquisitions of Silverlign and Pepperjam in
2009 and MBS Insight, FetchBack and M3 Mobile in 2010.
30
Segment profit increased $17.8 million or 58% in fiscal
2010 compared to fiscal 2009. Segment operating margins
increased from 24.0% to 25.5% in fiscal 2010 compared to fiscal
2009. The increase in segment profit was primarily driven by the
revenue growth described above. The increase in the segment
margins for fiscal 2010 compared to fiscal 2009 was driven by a
favorable mix of revenue from higher margin services partially
offset by expenses associated with hiring an executive
management team for the segment.
Consumer
Engagement Segment:
Net revenues increased $190.4 million in fiscal 2010. The
increase is due to Rue La La which was acquired in
November 2009. Rue La La accounted for substantially
all of the segment revenues. Segment profit decreased
$10.6 million due to Rue La La and ShopRunner.
Although Rue La Las revenue grew significantly in
fiscal 2010, we continued to invest in the business to support
expected continued growth in fiscal 2011. ShopRunner began
operations in late fiscal 2009 but didnt begin to generate
any revenue until the fourth quarter of fiscal 2010.
Comparison
of Fiscal 2009 and 2008 (amounts in tables in
millions):
Total Net
Revenues, Costs and Expenses and Loss from Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
|
|
|
|
Fiscal 2008
|
|
|
Fiscal 2009
|
|
|
$ Change
|
|
|
% Change
|
|
|
Net Revenues by Type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from product sales
|
|
$
|
577.1
|
|
|
|
60
|
%
|
|
$
|
542.2
|
|
|
|
54
|
%
|
|
$
|
(34.9
|
)
|
|
|
−6
|
%
|
Service fee revenues
|
|
|
389.8
|
|
|
|
40
|
%
|
|
|
462.0
|
|
|
|
46
|
%
|
|
|
72.2
|
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
966.9
|
|
|
|
100
|
%
|
|
$
|
1,004.2
|
|
|
|
100
|
%
|
|
$
|
37.3
|
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
e-Commerce
services
|
|
$
|
900.0
|
|
|
|
93
|
%
|
|
$
|
879.6
|
|
|
|
87
|
%
|
|
$
|
(20.4
|
)
|
|
|
−2
|
%
|
Interactive marketing services
|
|
|
84.5
|
|
|
|
9
|
%
|
|
|
127.6
|
|
|
|
13
|
%
|
|
|
43.1
|
|
|
|
51
|
%
|
Consumer engagement
|
|
|
|
|
|
|
0
|
%
|
|
|
26.3
|
|
|
|
3
|
%
|
|
|
26.3
|
|
|
|
100
|
%
|
Intersegment eliminations
|
|
|
(17.6
|
)
|
|
|
−2
|
%
|
|
|
(29.3
|
)
|
|
|
−3
|
%
|
|
|
(11.7
|
)
|
|
|
66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
966.9
|
|
|
|
100
|
%
|
|
$
|
1,004.2
|
|
|
|
100
|
%
|
|
$
|
37.3
|
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues from Product Sales. Net revenues
from product sales decreased $34.9 million in fiscal 2009.
Of this decrease, $57.1 million was due to the decrease in
revenues from clients that did not operate for the entirety of
both periods as well as a decrease due to the transition during
the first quarter of fiscal 2009 of one owned inventory client
to a non-owned inventory
e-commerce
agreement structure, and $3.9 million was due to the
decrease in revenues from clients that operated for the entirety
of both periods, partially offset by a $26.1 million
increase in revenues from Rue La La which was acquired
in mid-November.
Total shipping revenue was $133.1 million for fiscal 2009
and $120.2 million for fiscal 2008. Fiscal 2009 included
52 weeks compared to 53 weeks for fiscal 2008, and the
extra week added incremental net revenues from product sales of
approximately $11.0 million for fiscal 2008.
Service Fee Revenues. Service fee revenues
include revenues from the provision of
e-commerce
services and interactive marketing services.
E-commerce
service fee revenues are generated from a clients use of
one or more of our
e-commerce
platform components, which include technology, fulfillment and
customer care, as well as from professional services and gift
card breakage. Interactive marketing services service fee
revenues are generated from online marketing, advertising, email
and design services.
E-commerce
service fee revenues can be fixed or variable and are based on
the activity performed, the value of merchandise sold, or the
gross profit from a transaction.
Service fee revenues increased $72.2 million in fiscal
2009. This increase was primarily due to an increase in revenues
from our
e-commerce
segment including the client transition discussed above, and the
growth of our interactive marketing services segment. Partially
offsetting these increases was a decrease in revenues from
clients
31
that are no longer operating with us, including the liquidation
of a client that was one of our top ten contributors of service
fee revenues for fiscal 2008. The
53rd week
in fiscal 2008 added incremental service fee revenues of
approximately $7.5 million for fiscal 2008.
Net
Revenues by Segment
E-Commerce
Services Segment Revenues. Net revenues from
e-commerce
services decreased $20.4 million in fiscal 2009 due to a
$60.9 million decrease in net revenues from product sales
which was partially offset by an increase of $40.5 million
in service fee revenues.
Of the $20.4 million decrease in net revenues from our
e-commerce
services segment, $59.4 million was from clients that are
no longer operating with us and from the client transition,
which are both discussed above. Partially offsetting these
decreases was an increase of $25.8 million from clients
that operated for the entirety of both periods and
$13.2 million from clients that began generating revenue
for us in fiscal 2009.
Interactive Marketing Services Segment
Revenues. Net revenues from interactive marketing
services increased by $43.1 million in fiscal 2009. Key
drivers of the increase include growth of
e-mail
marketing services provided by
e-Dialog,
growth of the design, studio and online marketing services
provided by TrueAction, the acquisition of Silverlign Group Inc.
(Silverlign) in April 2009, and the acquisition of
Pepperjam in September 2009.
Consumer Engagement Segment Revenues. Net
revenues increased to $26.3 million from $0 due to the
acquisition of Rue La La in November 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
|
|
|
Fiscal 2009
|
|
|
Fiscal 2009
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
vs.
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
Net
|
|
|
Fiscal 2008
|
|
|
|
$
|
|
|
Revenues
|
|
|
$
|
|
|
Revenues
|
|
|
$ Change
|
|
|
% Change
|
|
|
Cost of revenues from product sales
|
|
$
|
405.3
|
|
|
|
42
|
%
|
|
$
|
398.6
|
|
|
|
40
|
%
|
|
$
|
(6.7
|
)
|
|
|
−2
|
%
|
Marketing
|
|
|
70.3
|
|
|
|
7
|
%
|
|
|
54.8
|
|
|
|
6
|
%
|
|
|
(15.5
|
)
|
|
|
−22
|
%
|
Account management and operations
|
|
|
260.3
|
|
|
|
27
|
%
|
|
|
273.1
|
|
|
|
27
|
%
|
|
|
12.8
|
|
|
|
5
|
%
|
Product development
|
|
|
104.2
|
|
|
|
11
|
%
|
|
|
120.2
|
|
|
|
12
|
%
|
|
|
16.0
|
|
|
|
15
|
%
|
General and administrative
|
|
|
69.0
|
|
|
|
7
|
%
|
|
|
82.9
|
|
|
|
8
|
%
|
|
|
13.9
|
|
|
|
20
|
%
|
Depreciation and amortization
|
|
|
68.1
|
|
|
|
7
|
%
|
|
|
63.4
|
|
|
|
6
|
%
|
|
|
(4.7
|
)
|
|
|
−7
|
%
|
Changes in fair value of deferred acquisition payments
|
|
|
|
|
|
|
0
|
%
|
|
|
0.9
|
|
|
|
0
|
%
|
|
|
0.9
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
$
|
977.2
|
|
|
|
101
|
%
|
|
$
|
993.9
|
|
|
|
99
|
%
|
|
$
|
16.7
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and
Expenses
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
|
|
Fiscal 2009
|
|
Cost of revenues from product sales
|
|
$
|
405.3
|
|
|
$
|
398.6
|
|
As a percentage of net revenues from product sales
|
|
|
70
|
%
|
|
|
74
|
%
|
Cost of revenues from product sales decreased $6.7 million
in fiscal 2009. The decrease in cost of revenues as a percentage
of net revenues from 42% in fiscal 2008 to 40% in fiscal 2009
was primarily due to the increase in service fees and the
decrease in product sales, because service fees have no
associated cost of revenue.
The increase in cost of revenues from product sales as a
percentage of net revenues from product sales from 70% to 74%
was primarily due to an increase in shipping revenue. Our cost
of generating shipping revenue is higher than our cost of
generating revenue on sale of products.
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
|
|
Fiscal 2009
|
|
Marketing
|
|
$
|
70.3
|
|
|
$
|
54.8
|
|
As a percentage of net revenues from product sales
|
|
|
12
|
%
|
|
|
10
|
%
|
32
Marketing: Marketing expenses decreased
$15.5 million in fiscal 2009. As a percentage of net
revenues, marketing expenses decreased from 7% in fiscal 2008 to
6% in fiscal 2009. This decrease was primarily due to the higher
percentage increase in service fees compared to the percentage
increase in product sales, because service fees typically have
no associated marketing expenses.
As a percentage of net revenues from product sales, marketing
expenses decreased from 12% in fiscal 2008 to 10% in fiscal
2009. Of the $15.5 million decrease in marketing expenses,
$7.6 million was due to a decrease in client revenue share
expenses caused by decreased sales from owned inventory clients,
$4.0 million was due to a decrease in promotional, free,
and subsidized shipping and handling costs, and
$3.9 million was due to a decrease in advertising costs.
The decreases in client revenue share expenses and advertising
costs were primarily the result of the client transition
discussed above and have minimal impact on marketing expenses as
a percentage of net revenue from product sales, because of the
corresponding decrease in net revenues from product sales as a
result of the client transition.
Account Management and Operations: Account
management and operations expenses increased $12.8 million
in fiscal 2009. As a percentage of net revenues, account
management and operations expenses remained constant at 27%. The
increase in absolute dollars was primarily due to our
acquisitions of Rue La La, Silverlign and Pepperjam in
fiscal 2009 as well as increases in personnel and related costs
mostly from our GMS segment, partially offset by decreases in
fulfillment expenses.
Product Development: Product development
expenses increased $16.0 million in fiscal 2009. As a
percentage of net revenues, product development expenses
increased from 11% to 12%. The increases in absolute dollars and
as a percentage of net revenues were primarily due to increased
personnel expenses to enhance our
e-commerce
technology platform.
General and Administrative: General and
administrative expenses increased $13.9 million in fiscal
2009. As a percentage of net revenues, general and
administrative expenses increased from 7% to 8%. The increase in
absolute dollars was primarily due to personnel and related
expenses as well as our acquisition of Rue La La.
Depreciation and Amortization: Depreciation
and amortization expenses decreased $4.7 million in fiscal
2009. As a percentage of net revenues, depreciation and
amortization expenses decreased from 7% to 6%. Amortization
expenses decreased $2.8 million primarily due to the
intangible asset amortization related to the
e-Dialog
acquisition in fiscal 2008. Depreciation expenses decreased
$1.9 million due to the acceleration of depreciation for
abandoned equipment in fiscal 2008 related to a facility closure
and from reduced capital expenditures in fiscal 2009, partially
offset by the depreciation of prior and current year fixed asset
additions.
Changes in Fair Value of Deferred Acquisition
Payments: The increase was due to the acquisition
of Rue La La in fiscal 2009.
Other
(Income) Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
|
|
|
Fiscal 2009
|
|
|
Change
|
|
|
Interest expense
|
|
$
|
18.8
|
|
|
$
|
19.4
|
|
|
$
|
0.6
|
|
Interest income
|
|
|
(1.8
|
)
|
|
|
(0.5
|
)
|
|
|
1.3
|
|
Other (income) expense
|
|
|
1.6
|
|
|
|
|
|
|
|
(1.6
|
)
|
Loss on investments
|
|
|
1.7
|
|
|
|
|
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
$
|
20.3
|
|
|
$
|
18.9
|
|
|
$
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense remained relatively constant in fiscal 2009
compared to fiscal 2008. The $1.3 million decrease in
interest income was due to lower interest rates earned in fiscal
2009. The $1.6 million decrease in other expense was
primarily due to larger foreign currency exchange losses in
fiscal 2008 compared to fiscal 2009 on transactions denominated
in currencies other than the functional currency. The fiscal
2008 $1.7 million loss on investments was due to an
other-than-temporary
impairment on an equity investment.
33
Seasonality
We have experienced and expect to continue to experience
seasonal fluctuations in our revenues from GeC. These seasonal
patterns will cause quarterly fluctuations in our operating
results. We also expect to experience seasonal fluctuations from
consumer engagement, but to a lesser degree than with GeC. We
experience less seasonality in our revenues from GMS. The fourth
fiscal quarter has accounted for and is expected to continue to
account for a disproportionate percentage of our total annual
revenues. We believe that results of operations for any
quarterly period may not be indicative of the results for any
other quarter or for the full year. We recognized 40%, 43% and
41% of our annual net revenues during the fourth quarter of
fiscals 2010, 2009 and 2008, respectively. For additional
information, see Note 16, Quarterly Results
(Unaudited), to our consolidated financial statements
included in Item 15, Exhibits and Financial Statement
Schedules, of this Annual Report on
Form 10-K.
Liquidity
and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
January 3,
|
|
January 2,
|
|
January 1,
|
|
|
2009
|
|
2010
|
|
2011
|
|
|
(In millions)
|
|
Cash and cash equivalents
|
|
$
|
130.3
|
|
|
$
|
228.4
|
|
|
$
|
242.1
|
|
Percentage of total assets
|
|
|
18
|
%
|
|
|
21
|
%
|
|
|
22
|
%
|
As of January 1, 2011, we had $242.1 million of cash
and cash equivalents, compared to $228.4 million of cash
and cash equivalents as of January 2, 2010. Cash
equivalents are comprised of money market mutual funds.
In June 2010, we called all of our $57.5 million 3%
convertible notes due 2025 for redemption and substantially all
of the notes were converted into 3.2 million shares of our
common stock.
We have experienced and expect to continue to experience
seasonal fluctuations in our cash flows. We generate the
substantial majority of cash from our operating activities in
our fourth fiscal quarter. In our first fiscal quarter, we
typically use cash generated from operating activities in the
fourth quarter of the prior fiscal year to satisfy accounts
payable and accrued expenses incurred in the fourth fiscal
quarter of our prior fiscal year. During our second and third
fiscal quarters, we generally fund our operating expenses and
capital expenditures either from cash generated from operating
activities, cash and cash equivalents, or financing activities.
Sources
of Cash
Our principal sources of liquidity in fiscal 2010 were our cash
and cash equivalents balances, cash provided by operating
activities, and cash provided by financing activities.
We generated cash from operating activities of
$140.1 million, $140.2 million, and $96.0 million
in fiscal 2010, fiscal 2009, and fiscal 2008, respectively. Cash
provided by operating activities is driven by our net loss,
adjusted for non-cash items and changes in operating assets and
liabilities. Non-cash adjustments include depreciation,
amortization, stock-based compensation expense and deferred
income taxes. Cash provided by operating activities was greater
than our net loss in fiscal 2010 primarily due to the net impact
of non-cash adjustments to our net loss as well as an increase
in cash provided by our operating assets and liabilities.
We generated $12.2 million of cash from financing
activities in fiscal 2010 primarily from the $16.8 million
of proceeds from exercise of common stock options partially
offset by principal payments on our debt and lease obligations.
During fiscal 2009, we generated $88.6 million of cash from
financing activities primarily from the proceeds on the sale of
5.3 million shares of common stock. During fiscal 2008, we
generated $5.5 million of cash from financing activities
primarily from proceeds received from capital lease financings.
As of January 1, 2011 and January 2, 2010 we had no
borrowings under our $150 million Existing Credit Facility.
During fiscal 2010, we borrowed and also repaid $25 million
on our Existing Credit Facility. We did not borrow on the
Existing Credit Facility during fiscal 2009. The Existing Credit
Facility contains financial and restrictive covenants that limit
our ability to engage in activities that may be in our long term
best interests. We do not believe the financial covenants will
limit our ability to utilize the entire borrowing availability
in fiscal 2011, if necessary.
34
Uses
of Cash
We invest cash to support our operations, our infrastructure
needs, and as consideration for acquisitions and strategic
investments. Cash used in investing activities is primarily
attributable to capital expenditures and acquisitions and to a
lesser extent for strategic investments.
Our capital expenditures totaled $70.9 million,
$43.0 million, and $57.2 million in fiscal 2010,
fiscal 2009, and fiscal 2008, respectively. Our capital
expenditures have generally been comprised of purchases of
computer hardware and software, development of internal-use
software, purchases of furniture and fixtures, and purchases of
real estate. Capital expenditures increased 65% in fiscal 2010
compared to the 25% decrease in fiscal 2009 primarily due to
investments in our
e-commerce
technology platform as well as capital expenditures in our
consumer engagement segment due to the acquisition of Rue
La La in November 2009.
We used $66.5 million of cash for acquisitions and
investments in fiscal 2010, compared to $88.9 million and
$145.0 million in fiscal 2009 and fiscal 2008,
respectively. In fiscal 2010, we acquired MBS for
$22.2 million, net of cash acquired, acquired three other
companies for an aggregate purchase price of $24.1 million,
net of cash acquired, and paid $1.6 million of deferred
acquisition payments for companies acquired in prior years. We
are also obligated to pay up to an additional
$208.4 million in earnout payments through 2016 based on
the achievement of certain performance targets by some of our
acquired companies, of which we have the ability to pay up to
$45.8 million with shares of our common stock. Acquisitions
in fiscal 2009 included primarily included Rue
La La and our fiscal 2008 acquisitions included
e-Dialog.
See Note 8, Commitments and Contingencies, to our
consolidated financial statements included in Item 15,
Exhibits and Financial Statement Schedules, of this
Annual Report on
Form 10-K,
for additional discussion of our principal contractual
commitments.
Outlook
For fiscal 2011, we expect increases in net revenues in all
three of our segments. The GeC and GMS revenue increases are
expected to be driven by increased revenue from clients who
generated revenue for us for the entirety of both periods as
well as the addition of new clients, partially offset by the
loss of clients. The expected increase in net revenues from our
existing clients is based on the Companys recent revenue
growth trends which are expected to continue as well as
projected industry growth. The GeC segment will also increase
due to the acquisition of Fanatics which we expect to close in
the second quarter of fiscal 2011. The expected revenue increase
for Consumer Engagement is due an increase in revenue from Rue
La La driven by expected continued growth in
membership and from the first full year of operation of
Shoprunner.
We expect an increase in income from operations compared to
2010. The expected increase is primarily driven by revenue
growth in each of our three segments as well as from Fanatics.
The expected percentage increase in other operating costs and
expenses is expected to be less than the expected percentage
increase in net revenues.
We expect to have a smaller net loss in 2011 as compared to 2010
based on the expected increase in income from operations noted
above.
We expect an increase in our capital expenditures primarily from
investments in our
e-commerce
technology platform and capital expenditures for companies
acquired in 2010 and 2011, as well as from the expected
acquisition of Fanatics.
We expect to generate positive cash flow from operations in
fiscal 2011, all of which we expect to be generated in our
fourth fiscal quarter. We believe that our cash flow from
operating activities, cash and cash equivalents balances, and
borrowing availability under either our Existing Credit Facility
or our New Credit Facility will be sufficient to meet our
anticipated operating cash needs, including any deferred
acquisition payments, for at least the next 12 months.
However, any projections of future cash needs and cash flows are
subject to substantial uncertainty.
We continually evaluate opportunities to sell additional equity
or debt securities, obtain credit facilities, or repurchase,
refinance, or otherwise restructure our long-term debt for
strategic reasons or to further strengthen our financial
position. Our existing and new secured revolving bank credit
facilities contain negative covenants
35
including restrictions on our ability to incur additional
indebtedness. The sale of additional equity or convertible debt
securities would likely be dilutive to our stockholders. In
addition, we will, from time to time, consider the acquisition
of, or investment in, complementary businesses, products,
services, and technologies, which might affect our liquidity
requirements or cause us to issue additional equity or debt
securities. There can be no assurance that additional
lines-of-credit
or financing instruments will be available in amounts or on
terms acceptable to us, if at all.
Contractual
Obligations
The following summarizes our principal contractual commitments,
excluding open orders for inventory purchases that support
normal operations, as of January 1, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by fiscal year
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligation(1)(2)(4)
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
Thereafter
|
|
|
Operating lease obligations
|
|
$
|
103.0
|
|
|
$
|
22.5
|
|
|
$
|
40.0
|
|
|
$
|
26.0
|
|
|
$
|
14.5
|
|
Marketing commitments
|
|
|
8.4
|
|
|
|
0.7
|
|
|
|
5.1
|
|
|
|
2.6
|
|
|
|
|
|
Client revenue share payments
|
|
|
118.9
|
|
|
|
21.9
|
|
|
|
47.7
|
|
|
|
23.6
|
|
|
|
25.7
|
|
Debt interest
|
|
|
17.2
|
|
|
|
5.5
|
|
|
|
9.1
|
|
|
|
2.6
|
|
|
|
|
|
Debt obligations
|
|
|
166.0
|
|
|
|
1.1
|
|
|
|
2.9
|
|
|
|
162.0
|
|
|
|
|
|
Capital lease obligations, including interest
|
|
|
29.8
|
|
|
|
11.4
|
|
|
|
16.6
|
|
|
|
1.8
|
|
|
|
|
|
Deferred acquisition payments(3)
|
|
|
3.3
|
|
|
|
1.5
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
446.6
|
|
|
$
|
64.6
|
|
|
$
|
123.2
|
|
|
$
|
218.6
|
|
|
$
|
40.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For additional information, see Note 7, Long-Term Debt
and Credit Facility, and Note 8, Commitments and
Contingencies, of the Notes to Consolidated Financial
Statements, included in Item 15, Exhibits and Financial
Statement Schedules, of this Annual Report on
Form 10-K. |
|
(2) |
|
Approximately $3.9 million of unrecognized tax benefits
have been recorded as liabilities in accordance with accounting
standards for Accounting for Uncertainty in Income
Taxes, and we are uncertain as to if or when such amounts
may be settled; as a result, these obligations are not included
in the table above. |
|
(3) |
|
The $3.3 million of deferred acquisition payments in the
table above represent fixed contractual future payments. We are
also obligated to pay up to an additional $208.4 million
from fiscal 2011 through fiscal 2016 based on the achievement of
certain financial targets by some of our acquired companies, of
which we have the ability to pay up to $45.8 million with
shares of our common stock. We are uncertain as to if or when
such amounts may be settled; as a result, these obligations are
not included in the table above. |
|
(4) |
|
We have entered into long-term incentive plans with certain of
our employees and executives which obligates us to pay up to
$50 million to certain employees based on the performance
of the business for which the employee is responsible. Amounts
due under these incentive plans are payable in cash and/or stock
from fiscal 2012 through fiscal 2015. We are uncertain as to if
or when such amounts may be settled; as a result, these
obligations are not included in the table above. |
Off
Balance Sheet Arrangements
We have no off balance sheet arrangements other than the
obligations not required to be recorded on the balance sheet as
shown above in the contractual obligations table.
Critical
Accounting Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make significant judgments and
estimates that affect the reported amounts of assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period as well as the related disclosures. Management bases
these significant
36
judgments and estimates on historical experience, current trends
and other assumptions it believes to be reasonable based upon
information presently available. On a regular basis, management
reviews the accounting policies, assumptions, judgments and
estimates to ensure that our financial statements are presented
fairly and in accordance with generally accepted accounting
principles. However, because future events and their affects
cannot be determined with certainty, actual results could
materially differ from those estimates.
Our significant accounting policies are discussed in
Note 2, Summary of Significant Accounting Policies,
of the Notes to Consolidated Financial Statements, included in
Item 15, Exhibits and Financial Statement Schedules,
of this Annual Report on
Form 10-K.
Management has identified the following as our critical
accounting estimates, which are defined as those that reflect
significant judgments and uncertainties, are the most pervasive
and important to the presentation of our financial condition and
results of operations and could potentially result in materially
different results under different assumptions, judgments or
conditions. Management has reviewed these critical accounting
estimates with the Audit Committee of our Board.
Accounting
for Inventory
Inventory is valued at the lower of cost (determined using the
weighted average method) or market. Inherent in this valuation
are significant management judgments and estimates, including
among others, assessments concerning obsolescence and shrinkage.
Based upon these judgments and estimates, which are applied
consistently from period to period, we record obsolescence and
shrinkage allowances to adjust the carrying amount of our
inventory. We record a charge for obsolescence based upon, among
other factors, the aging of the inventory, forecasted customer
demand, the anticipated mark-downs required to sell the
inventory in the normal course of business and the expected
recovery value we could achieve by selling the inventory through
alternative liquidation channels. We record a charge for
inventory shrinkage for damages and other losses based on rates
experienced in our fulfillment centers. We have not made any
material changes in the accounting methodology used to measure
inventory obsolescence or shrinkage during the past three fiscal
years. If the market value of our inventory decreases
significantly below its carrying value or our judgments or
estimates regarding inventory valuation allowances are
inaccurate, we may be exposed to income or losses that could
materially affect our future financial results. If the market
value of our inventory decreased to 10% below its carrying value
as of January 1, 2011, it would have affected earnings
before income taxes by approximately $6.2 million.
Accounting
for Internal Use Software
Included in our property and equipment is the capitalized cost
of internal-use software development and webstore development,
including software used to upgrade and enhance the webstores we
operate and processes supporting our business. We capitalize
costs incurred during the application development stage related
to the development of internal-use software and amortize these
costs over the estimated useful life of up to four years. Costs
incurred related to planning and training relating to or
maintenance of internal-use software is expensed as incurred. We
capitalized $52.7 million, $29.9 million and
$26.2 million, of costs associated with internal-use
software and webstore development during fiscal years 2010, 2009
and 2008, respectively. We depreciated $30.0 million,
$21.1 million and $16.5 million of previously
capitalized amounts in fiscal 2010, fiscal 2009 and fiscal 2008,
respectively.
Changes in strategy
and/or
market conditions could significantly impact the remaining
useful life
and/or the
carrying value of our internal-use software and webstore
development costs. We use estimates and make assumptions to
determine the related estimated useful lives and assess the
carrying value of internal-use software and webstore development
costs. If our judgments or estimates regarding internal use
software are inaccurate and we were to reduce the useful life of
our internal use software, we may be exposed to losses,
including impairment losses that could be material to our future
financial results.
37
Goodwill
and Other Intangible Assets
The purchase price of an acquired company is allocated between
the intangible assets and net tangible assets of the acquired
business with the residual of the purchase price recorded as
goodwill. The determination of the value of the intangible
assets acquired involves certain judgments and estimates. These
judgments can include, but are not limited to, the cash flows
that an asset is expected to generate in the future and the
appropriate risk adjusted discount rate for market participants.
Goodwill and indefinite lived intangible assets are
tested for impairment on an annual basis, or more often if
events or changes in circumstances indicate the carrying value
may not be recoverable. Application of the impairment test
requires judgment, including the identification of reporting
units, assigning assets and liabilities to reporting units,
assigning goodwill to reporting units, and determining the fair
value of each reporting unit. We determine fair value using
widely accepted valuation techniques, including, but limited to,
the income approach which estimates the fair value of our
reporting units based on the future discounted cash flows, and
the market approach which estimates the fair value of our
reporting units based on comparable market prices. These types
of analyses contain assumptions and uncertainties because they
require management to apply judgment to estimate industry
economic factors and the profitability of future business
strategies. The estimate of cash flow is based upon, among other
things, certain assumptions about expected future operating
performance and an appropriate discount rate determined by
management. Our estimates of discounted cash flows may differ
from actual cash flows due to, among other things, economic
conditions, changes to our business model or changes in
operating performance. Significant differences between these
estimates and actual cash flows could materially affect our
future financial results.
In our fiscal 2010 annual impairment test, we concluded that
goodwill was impaired in both our
Rue La La reporting unit and our International
e-Commerce
reporting unit. As a result, we recorded a goodwill impairment
charge of $77.7 million comprised of $71.3 million
impairment in our Rue La La reporting unit to reduce
the carrying value of goodwill from $172.9 million to its
implied fair value of $101.6 million, and $6.4 million
impairment in our international
e-commerce
reporting unit to reduce the carrying value of goodwill from
$6.4 million to is implied fair value of $0. The valuation
methodology applied in the current year impairment test was
consistent with the methodology applied in prior year analysis,
and based on updated assumptions, as appropriate. The impairment
was due to a decline in our projected cash flows for each of the
two reporting units.
Finite-lived intangible assets that have determinable useful
lives are tested for impairment whenever events or changes in
circumstances indicate that its carrying amount may not be
recoverable. If an evaluation of the undiscounted future cash
flows indicates impairment, the asset is written down to its
estimated fair value. Our estimates of future cash flows
attributable to our intangible assets require significant
judgment based on our historical and anticipated results and are
subject to many factors. Different assumptions and judgments,
including the expected use of the asset by the Company, could
materially affect the calculation of the fair value of our
finite intangible assets which could trigger impairment.
In fiscal 2010, we concluded that the supplier relationship
finite-lived intangible asset in our Rue
La La reporting unit and the customer contract
finite-lived intangible asset in our International
e-Commerce
reporting unit were impaired due to declines in projected cash
flows for both reporting units. As a result, we recorded an
impairment charge of $10.6 million comprised of
$10.2 million to reduce the carrying value of the Rue
La La supplier contract intangible to $0, and
$0.4 million to reduce the carrying value of the
International
e-Commerce
customer contract intangible to $0. The valuation methodology
applied was consistent with the methodology applied in the prior
year.
Income
Taxes and Deferred Taxes
Our income tax benefit or expense, deferred tax assets and
liabilities and reserves for uncertain tax positions reflect
managements best assessment of estimated current and
future taxes to be paid. We are subject to income taxes in both
the U.S. and in several foreign jurisdictions. Significant
judgments and estimates are required in determining the
consolidated income tax benefit or expense.
Deferred income taxes reflect the tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. We record deferred
38
tax assets for favorable tax attributes, including tax loss
carryforwards. A portion of the benefit of the acquired tax loss
carryforwards has been reserved by a valuation allowance
pursuant to U.S. GAAP. These valuation allowances of the
deferred tax asset will be reversed if and when it is more
likely than not that the deferred tax asset will be realized. We
evaluate the need for a valuation allowance of the deferred tax
asset on a quarterly basis. Any future release of valuation
allowance will reduce income tax expense.
If our assumptions change and we determine we will not be able
to realize these NOLs without a valuation allowance, the
additional valuation allowance will be accounted for as an
increase in income tax expense and could materially affect our
future financial results.
In accordance with accounting standards for accounting for
uncertainty in income taxes, income tax positions must meet a
more-likely-than-not recognition threshold at the effective date
to be recorded to the financial statement. The standards also
provide guidance on measurement, derecognition, classification,
interest and penalties, accounting in interim periods,
disclosure and transition.
Fair
Value of Deferred Acquisition Payments
Deferred acquisition payments represent future payments to the
selling shareholders of acquired companies that are either fixed
amounts payable at a specified future date based solely on the
passage of time or contingent payments based on the achievement
of specified earnings
and/or other
financial performance thresholds by the acquired companies over
one or more years. The determination of the fair value of our
contingent deferred acquisition payments involves certain
judgments and estimates. These judgments can include, but are
not limited to, an estimate of the future performance of our
acquired entities, an estimate of the amount and timing of the
deferred acquisition payments and the discount rate used to
calculate the fair value of the payments. We utilize a
discounted cash flow model that incorporates several different
scenarios of future performance.
We assess the fair value of deferred acquisition payments for
changes at each reporting period, and any changes are recorded
as an increase or decrease to changes in fair value of deferred
acquisition payments on the Consolidated Statements of
Operations. Changes in fair value can result from changes in our
assumptions regarding the amount and timing of payments as well
as changes in the discount rate. Our estimates of future
performance and payments may differ from actual performance and
payments due to, among other things, economic conditions,
changes to our business model, or changes in operating
performance of the acquired entities. Significant differences
between these estimates and actual performance could materially
affect the fair value of the deferred acquisition payments and
our future financial results.
Recent
Accounting Pronouncements
See Note 2, Summary of Significant Accounting
Policies, to our consolidated financial statements included
in Item 15, Exhibits and Financial Statement
Schedules, of this Annual Report on
Form 10-K.
|
|
ITEM 7A:
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
Our investment policy is to earn a market return consistent with
the safety of principal and the maintenance of adequate
liquidity at all times. We have not used derivative financial
instruments in our investment portfolio. Approved investments
include direct obligations of the U.S. Treasury, securities
explicitly backed by the full faith and credit of the
U.S. Government, money market mutual funds, so long as such
funds maintain a constant net asset value and provide daily
liquidity, and bank deposits. We protect and preserve our
invested funds by limiting default, market and reinvestment risk.
Investments in both fixed rate and floating rate interest
earning instruments carry a degree of interest rate risk. Fixed
rate securities may have their fair market value adversely
impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest
rates fall. Due in part to these factors, our future investment
income may fall short of expectations due to changes in interest
rates or it may suffer losses in principal if we are forced to
sell securities which have declined in market value due to
changes in interest rates.
As of the end of fiscal 2010, all of our cash consisted of bank
deposits.
39
In March 2010, we amended and expanded our existing secured
revolving bank credit facility (Existing Credit
Facility) to $150 million. The Existing Credit
Facility matures in March 2013 and provides for the issuance of
up to $30 million of letters of credit, which is included
in the $150 million available under the Existing Credit
Facility. The Existing Credit Facility is collateralized by
substantially all of our assets. We may elect to have amounts
outstanding under the credit facilities bear interest at either
a LIBOR rate plus an applicable margin of 2.0% to 3.25%, the
prime rate plus an applicable margin of 2.0% to 3.25%, Daily
LIBOR plus 1.0% plus an applicable margin of 2.0% to 3.25%, or
at the Federal Funds Open Rate plus 0.5% plus an applicable
margin of 2.0% to 3.25%. The applicable margin is determined by
the leverage ratio of funded debt to EBITDA, as defined in the
credit facility. We had no outstanding borrowings and
$1.8 million of outstanding letters of credit under the
Existing Credit Facility as of January 1, 2011.
We have entered into a new credit agreement providing for a
$285 million revolving credit facility and a
$115 million term loan facility, with the option to
increase the commitments under these facilities by up to an
additional $50 million to a total of $450 million (the
New Credit Facility). The New Credit Facility
becomes effective if our acquisition of Fanatics, Inc. closes on
or before May 10, 2011. For additional information, see
Note 17, Subsequent Events, of the Notes to
Consolidated Financial Statements, included in Item 15,
Exhibits and Financial Statement Schedules, of this
Annual Report on
Form 10-K.
We transact business internationally and have market risk
arising from changes in foreign currency exchange rates relating
to our international operations. We do not manage our foreign
currency exchange rate risk through the use of any financial or
derivative instruments, forward contracts or hedging activities.
To date, international operations have not been material and we
believe that potential fluctuations in currency exchange rates
will not have a material effect on our financial position.
|
|
ITEM 8:
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
|
Our financial statements, supplementary data and related
documents that are included in this Annual Report on
Form 10-K
are listed in Item 15(a), Part IV, of this Annual
Report on
Form 10-K.
|
|
ITEM 9:
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
|
Not applicable.
|
|
ITEM 9A:
|
CONTROLS
AND PROCEDURES.
|
Evaluation of disclosure controls and
procedures. We maintain disclosure controls and
procedures designed to provide reasonable assurance that
information required to be disclosed in reports filed or
submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms and
accumulated and communicated to our management, including our
chief executive officer and chief financial officer, or persons
performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
Our management, with the participation of our chief executive
officer and our chief financial officer, conducted an
evaluation, as of the end of the period covered by this report,
of the effectiveness of our disclosure controls and procedures,
as such term is defined in Exchange Act
Rule 13a-15(e).
Based on this evaluation, our chief executive officer and our
chief financial officer have concluded that, as of the end of
the period covered by this report, our disclosure controls and
procedures, as defined in
Rule 13a-15(e),
were effective at the reasonable assurance level.
Changes in internal control over financial
reporting. We monitor and evaluate on an ongoing
basis our internal control over financial reporting in order to
improve its overall effectiveness. In the course of these
evaluations, we modify and refine our internal processes and
controls as conditions warrant. As required by
Rule 13a-15(d),
our management, including our chief executive officer and our
chief financial officer, also conducted an evaluation of our
internal control over financial reporting to determine whether
any changes occurred during the fiscal quarter ended
January 1, 2011 that have materially affected, or are
reasonably likely to materially
40
affect, our internal control over financial reporting. Based on
that evaluation, there has been no such change during the
quarter ended January 1, 2011.
Managements annual report on internal control over
financial reporting. Our management is
responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in
Exchange Act
Rule 13a-15(f).
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements due
to human error, or the improper circumvention or overriding of
internal controls. In addition, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions
and that the degree of compliance with the policies or
procedures may change over time.
Our management, with the participation of our chief executive
officer and our chief financial officer, conducted an
evaluation, as of January 1, 2011, of the effectiveness of
our internal control over financial reporting based on the
framework in Internal Control Integrated
Framework issued by the committee of Sponsoring
Organizations of the Treadway Commission. Based on this
evaluation under the framework in Internal
Control Integrated Framework, our management
concluded that, as of January 1, 2011, our internal control
over financial reporting was effective to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
Our independent registered public accounting firm,
Deloitte & Touche LLP, has issued an attestation
report on our internal control over financial reporting. Their
report appears below.
41
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
GSI Commerce, Inc.
King of Prussia, Pennsylvania
We have audited the internal control over financial reporting of
GSI Commerce, Inc. and subsidiaries (the Company) as
of January 1, 2011, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring
Organizations of the Treadway Commission. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying Managements Annual Report on
Internal Control Over Financial Reporting. Our responsibility is
to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of January 1, 2011, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule as of and for the fiscal year ended January 1,
2011 of the Company and our report dated March 1, 2011
expressed an unqualified opinion on those financial statements
and financial statement schedule.
/s/ Deloitte &
Touche LLP
Philadelphia, Pennsylvania
March 1, 2011
42
|
|
ITEM 9B:
|
OTHER
INFORMATION.
|
Not applicable
PART III
|
|
ITEM 10:
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
|
Information concerning our directors is incorporated by
reference to our 2011 Proxy Statement including, but not
necessarily limited to, the sections of the 2011 Proxy Statement
entitled Proposal 1 Election of
Directors and Section 16(a) Beneficial
Ownership Reporting Compliance.
Information concerning our executive officers is included in
Item 1, Business, Part I, of this Annual Report
on
Form 10-K.
We have adopted a Finance Code of Professional Conduct that
applies to all of our Finance organization employees and our
Chief Executive Officer and Chief Financial Officer. The code is
available on our corporate website located at
www.gsicommerce.com. We intend to satisfy the disclosure
requirements under Item 5.05 on
Form 8-K
regarding an amendment to, or waiver from, a provision of its
Finance Code of Professional Conduct by posting such information
on our website at the location specified above.
|
|
ITEM 11:
|
EXECUTIVE
COMPENSATION.
|
This information is incorporated by reference to our 2011 Proxy
Statement including, but not necessarily limited to, the section
of the 2011 Proxy Statement entitled Executive
Compensation and Certain Relationships and Related
Transactions Compensation Committee Interlocks and
Insider Participation.
|
|
ITEM 12:
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
|
This information is incorporated by reference to our 2011 Proxy
Statement including, but not necessarily limited to, the section
of the 2011 Proxy Statement entitled Beneficial Ownership
of Common Stock and Executive Compensation.
Equity
Compensation Plan Information as of the End of Fiscal
2010
The following table sets forth information regarding our
existing equity compensation plans as of the end of fiscal 2010.
The weighted average exercise price in the table below does not
take restricted stock units and restricted stock awards into
account as these awards have no exercise price.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
Number of Securities
|
|
|
|
|
|
Remaining Available for
|
|
|
|
to be Issued
|
|
|
Weighted-Average
|
|
|
Future Issuance Under
|
|
|
|
upon Exercise of
|
|
|
Exercise Price of
|
|
|
Equity Compensation Plans
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Listed in Column (a))
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by stockholders(1)
|
|
|
4,715,256
|
|
|
$
|
12.57
|
|
|
|
3,698,852
|
|
Equity compensation plans not approved by stockholders
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,715,256
|
|
|
$
|
12.57
|
|
|
|
3,698,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These plans are the 1996 Equity Incentive Plan, the 2005 Equity
Incentive Plan and the 2010 Equity Incentive Plan (the
Plans). The 2010 Equity Incentive Plan provides for
the grant of incentive stock options, nonstatutory stock
options, restricted stock awards, restricted stock unit awards,
stock appreciation rights, performance stock awards, and other
forms of equity compensation. No future awards may be granted
pursuant to the 1996 Equity Incentive Plan or the 2005 Equity
Incentive Plan. We have issued stock options, restricted |
43
|
|
|
|
|
stock units and restricted stock awards under these Plans. The
stock options generally expire 10 years from the date of
grant. The stock options, restricted stock units and restricted
stock awards generally vest over four years, although some
restricted stock units and restricted stock awards vest in less
than four years. Performance stock awards generally vest one or
two years after a determination has been made about achievement
against the performance criteria. Upon the occurrence of a
change in control, certain awards will immediately become
exercisable in full. |
ITEM 13: CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
This information is incorporated by reference to our 2011 Proxy
Statement including, but not necessarily limited to, the section
of the 2011 Proxy Statement entitled Certain Relationships
and Related Transactions and Board, Committees and
Attendance at Meetings of the Board and Committees.
|
|
ITEM 14:
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
|
This information is incorporated by reference to our 2011 Proxy
Statement including, but not necessarily limited to, the section
of the 2011 Proxy Statement entitled Independent
Registered Public Accounting Firm Fees.
44
PART IV
|
|
ITEM 15:
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
|
|
(a)
|
1.
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
|
|
F-1
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
2.
|
FINANCIAL
STATEMENT SCHEDULES
|
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Charged to
|
|
|
|
|
|
|
Beginning
|
|
Costs and
|
|
|
|
Balance at
|
|
|
of Year
|
|
Expenses
|
|
Deductions*
|
|
End of Year
|
|
|
(In thousands)
|
|
Allowance for Doubtful Accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2008
|
|
$
|
1,833
|
|
|
$
|
5,475
|
|
|
$
|
(4,561
|
)
|
|
$
|
2,747
|
|
Fiscal Year 2009
|
|
$
|
2,747
|
|
|
$
|
6,477
|
|
|
$
|
(4,576
|
)
|
|
$
|
4,648
|
|
Fiscal Year 2010
|
|
$
|
4,648
|
|
|
$
|
5,317
|
|
|
$
|
(5,639
|
)
|
|
$
|
4,326
|
|
|
|
|
* |
|
Deductions include write-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
Charged
|
|
|
|
|
Beginning
|
|
Charged
|
|
(Credited) to
|
|
Balance at
|
|
|
of Year
|
|
to Expense
|
|
Goodwill
|
|
End of Year
|
|
|
(In thousands)
|
|
Valuation Allowance for Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2008
|
|
$
|
40,402
|
|
|
$
|
2,463
|
|
|
$
|
(389
|
)
|
|
$
|
42,476
|
|
Fiscal Year 2009
|
|
$
|
42,476
|
|
|
$
|
3,122
|
|
|
$
|
4,199
|
|
|
$
|
49,797
|
|
Fiscal Year 2010
|
|
$
|
49,797
|
|
|
$
|
2,411
|
|
|
$
|
|
|
|
$
|
52,208
|
|
The Company has reduced the previously reported net operating
loss carryforwards and related valuation allowance to present
the amounts of the net operating loss carryforwards that were
available to offset future taxable income, after consideration
of limitations required by Section 382. The previously
reported amounts were presented on a gross basis, which included
certain amounts that were not available to offset future taxable
income due to previous acquisitions and ownership changes as
defined in Section 382 of the Internal Revenue Code. The
fiscal year 2008 beginning of year balance, the fiscal 2008 end
of year balance, and the fiscal 2009 beginning of year balance
were each reduced by $81,015 to reflect this change. In
addition, the fiscal year 2009 charge to goodwill was reduced by
$27,148. The fiscal 2009 end of year balance was reduced by
$108,163. These adjustments had no net impact on the previously
reported net deferred tax assets since the additional net
operating loss carryforwards had a full valuation allowance
against them.
All other schedules have been omitted since the required
information is included in the financial statements or the notes
thereto or is not applicable or required.
45
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
2
|
.1
|
|
Agreement and Plan of Merger, dated as of October 27, 2009,
by and among GSI Commerce, Inc, Cola Acquisition Corporation,
Retail Convergence, Inc., certain principal stockholders of
Retail Convergence, Inc. and William J. Fitzgerald (as
Stockholders Representative). The schedules and exhibits
to the merger agreement are omitted pursuant to
Item 601(b)(2) of
Regulation S-K.
GSI agrees to furnish supplementally to the SEC, upon request, a
copy of any omitted schedule or exhibit. (filed with
GSI Commerce, Inc.s Current Report on
Form 8-K/A
filed on April 6, 2010 and incorporated herein by
reference)
|
|
2
|
.2
|
|
Stock Purchase Agreement by and among
e-Dialog,
Inc. (a wholly-owned subsidiary of GSI Commerce, Inc.), MBS
Insight, Inc., and World Marketing, Inc., dated April 30,
2010. The schedules and exhibits to the merger agreement are
omitted pursuant to Item 601(b)(2) of
Regulation S-K.
GSI agrees to furnish supplementally to the SEC, upon request, a
copy of any omitted schedule or exhibit. (filed with
GSI Commerce, Inc.s Quarterly Report on
Form 10-Q
for the quarter ended July 3, 2010 and incorporated herein
by reference)
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of Global
Sports, Inc. (filed as Appendix B to GSI Commerce,
Inc.s Definitive Proxy Statement on Schedule 14A
filed on April 27, 2001 and incorporated herein by
reference)
|
|
3
|
.2
|
|
Certificate of Amendment to Amended and Restated Certificate of
Incorporation of Global Sports, Inc. (filed with GSI Commerce,
Inc.s Quarterly Report on
Form 10-Q
for the quarter ended June 29, 2002 and incorporated herein
by reference)
|
|
3
|
.3
|
|
Certificate of Amendment to Amended and Restated Certificate of
Incorporation of GSI Commerce, Inc. (filed as Appendix B to
GSI Commerce, Inc.s Definitive Proxy Statement on
Schedule 14A filed with the Securities and Exchange
Commission on April 13, 2010 and incorporated herein by
reference)
|
|
3
|
.4
|
|
Amended and Restated Bylaws of GSI Commerce, Inc. (filed with
GSI Commerce, Inc.s Current Report on
Form 8-K
filed on March 16, 2009 and incorporated herein by
reference)
|
|
3
|
.5
|
|
Certificate of Designations, Preferences and Rights of
Series A Junior Participating Preferred Stock (filed with
GSI Commerce, Inc.s Current Report on
Form 8-K
filed on April 3, 2006 and incorporated herein by reference)
|
|
4
|
.1
|
|
Specimen Common Stock Certificate (filed with GSI Commerce,
Inc.s Quarterly Report on
Form 10-Q
for the Quarter ended June 29, 2002 and incorporated herein
by reference)
|
|
4
|
.2
|
|
Registration Rights Agreement, dated July 31, 1995, by and
between Global Sports, Inc. and MR Acquisitions, Inc.
(filed with GSI Commerce, Inc.s Current Report on
Form 8-K
filed on July 31, 1995 and incorporated herein by reference)
|
|
4
|
.3
|
|
Registration Rights Agreement dated as of November 17, 2009
between GSI Commerce, Inc. and the holders named therein (filed
with GSI Commerce, Inc.s Registration Statement on
Form S-3
dated November 18, 2009 and incorporated herein by
reference)
|
|
4
|
.4
|
|
Rights Agreement, dated as of April 3, 2006, between GSI
Commerce, Inc. and American Stock Transfer &
Trust Company, as Rights Agent, including all exhibits
thereto (filed with GSI Commerce, Inc.s Current Report on
Form 8-K
filed on April 3, 2006 and incorporated herein by reference)
|
|
4
|
.5
|
|
Indenture dated as of July 2, 2007 between the Company and
The Bank of New York, as trustee (filed with GSI Commerce,
Inc.s Current Report on
Form 8-K
dated July 5, 2007 and incorporated herein by reference)
|
|
4
|
.6
|
|
Form of 2.50% Convertible Senior Note due 2027 (filed with
GSI Commerce, Inc.s Current Report on
Form 8-K
dated July 5, 2007 and incorporated herein by reference)
|
|
4
|
.7
|
|
Senior Indenture of GSI Commerce, Inc. with The Bank of New York
Mellon, as trustee (filed with GSI Commerce, Inc.s
Registration Statement on
Form S-3
dated November 18, 2009 and incorporated herein by
reference)
|
|
4
|
.8
|
|
Subordinated Indenture of GSI Commerce, Inc. with The Bank of
New York Mellon, as trustee (filed with GSI Commerce,
Inc.s Registration Statement on
Form S-3
dated November 18, 2009 and incorporated herein by
reference)
|
46
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.1+
|
|
GSI Commerce, Inc.s 1996 Equity Incentive Plan, amended
and restated as of March 5, 2008 (filed with GSI Commerce,
Inc.s Annual Report on
Form 10-K
for the fiscal year ended December 29, 2007 and
incorporated herein by reference)
|
|
10
|
.2+
|
|
GSI Commerce, Inc.s 2005 Equity Incentive Plan as amended
(filed as Appendix A to GSI Commerce, Inc.s
Definitive Proxy Statement on Schedule 14A filed with the
Securities Exchange Commission on April 25, 2008 and
incorporated herein by reference)
|
|
10
|
.3+
|
|
GSI Commerce, Inc. 2010 Equity Incentive Plan (filed as
Appendix A to GSI Commerce, Inc.s Definitive Proxy
Statement on Schedule 14A filed with the Securities and
Exchange Commission on April 13, 2010 and incorporated
herein by reference)
|
|
10
|
.4+
|
|
Form of Restricted Stock Unit Grant Notice Under the GSI
Commerce, Inc. 2010 Equity Incentive Plan (filed with GSI
Commerce, Inc.s Quarterly Report on
Form 10-Q
for the quarter ended July 3, 2010 and incorporated herein
by reference)
|
|
10
|
.5+
|
|
Form of Performance Restricted Stock Unit Award Under the GSI
Commerce, Inc. 2010 Equity Incentive Plan (filed with GSI
Commerce, Inc.s Quarterly Report on
Form 10-Q
for the quarter ended July 3, 2010 and incorporated herein
by reference)
|
|
10
|
.6+
|
|
Form of Restricted Stock Unit Grant Notice Issued to Directors
Under the GSI Commerce, Inc. 2010 Equity Incentive Plan (Initial
Award) (filed with GSI Commerce, Inc.s Quarterly Report on
Form 10-Q
for the quarter ended July 3, 2010 and incorporated herein
by reference)
|
|
10
|
.7+
|
|
Form of Restricted Stock Unit Grant Notice Issued to Directors
Under the GSI Commerce, Inc. 2010 Equity Incentive Plan (Annual
Award) (filed with GSI Commerce, Inc.s Quarterly Report on
Form 10-Q
for the quarter ended July 3, 2010 and incorporated herein
by reference)
|
|
10
|
.8+
|
|
GSI Commerce, Inc. Leadership Team Incentive Plan (filed as from
Appendix B to GSI Commerce, Inc.s Definitive Proxy
Statement on Schedule 14A filed with the Securities
Exchange Commission on April 25, 2008 and incorporated
herein by reference)
|
|
10
|
.9+
|
|
Leadership Team Deferral Plan, as amended and restated effective
March 5, 2008 (filed with GSI Commerce, Inc.s
Annual Report on
Form 10-K
for the fiscal year ended December 29, 2007 and
incorporated herein by reference)
|
|
10
|
.10+
|
|
Form of Change in Control Agreement (filed with GSI Commerce,
Inc.s Quarterly Report on
Form 10-Q
for the quarter ended April 3, 2010 and incorporated herein
by reference)
|
|
10
|
.11+
|
|
Form of Indemnification Agreement (filed with GSI Commerce,
Inc.s Quarterly Report on
Form 10-Q
for the quarter ended October 2, 2010 and incorporated
herein by reference)
|
|
10
|
.12+
|
|
Employment Agreement, dated August 23, 2006, by and between
GSI Commerce, Inc. and Michael G. Rubin (filed with GSI
Commerce, Inc.s Current Report on
Form 8-K
filed on August 29, 2006 and incorporated herein by
reference)
|
|
10
|
.13+
|
|
Amendment
2008-1 to
the Employment Agreement between GSI Commerce, Inc. and Michael
G. Rubin, dated as of December 30, 2008 (filed with GSI
Commerce, Inc.s Annual Report on
Form 10-K
filed on March 16, 2009 and incorporated herein by
reference)
|
|
10
|
.14+
|
|
Form of Performance Restricted Stock Unit Award Issued to
Michael Rubin Under the GSI Commerce, Inc. 2010 Equity Incentive
Plan (filed with GSI Commerce, Inc.s Quarterly Report on
Form 10-Q
for the quarter ended October 2, 2010 and incorporated
herein by reference)
|
|
10
|
.15+
|
|
Michael Rubin Form of Restricted Stock Unit Agreement
|
|
10
|
.16+
|
|
Offer Letter, dated January 31, 2005, between GSI Commerce,
Inc. and Stephen J. Gold (filed with GSI Commerce,
Inc.s Current Report on
Form 8-K
on February 2, 2005 and incorporated herein by reference)
|
|
10
|
.17+
|
|
Amendment, dated July 31, 2009, to Offer Letter, dated
January 31, 2005, between GSI Commerce, Inc. and Stephen J.
Gold (filed with GSI Commerce, Inc.s Current Report on
Form 8-K
on August 6, 2009 and incorporated herein by reference)
|
|
10
|
.18+
|
|
Separation Agreement, dated May 28, 2010, between GSI
Commerce, Inc. and Stephen J. Gold (filed with GSI Commerce,
Inc.s Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
June 3, 2010 and incorporated herein by reference)
|
47
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.19+
|
|
Offer Letter, dated March 26, 2007, between GSI Commerce,
Inc. and Scott Hardy (filed with GSI Commerce, Inc.s
Quarterly Report on
Form 10-Q
for the quarter ended March 29, 2008 and incorporated
herein by reference)
|
|
10
|
.20+
|
|
Employment Agreement, between GSI Commerce, Inc. and Christopher
Saridakis, dated March 23, 2010 (filed with GSI Commerce,
Inc.s Quarterly Report on
Form 10-Q
for the quarter ended July 3, 2010 and incorporated herein
by reference)
|
|
10
|
.21
|
|
Amended and Restated Credit Agreement, dated as of
March 24, 2010, by and among GSI Commerce Solutions, Inc.,
the Guarantors named therein, the Lenders named therein, PNC
Bank, National Association, as administrative agent, and PNC
Capital Markets LLC and Bank of America, N.A., as joint lead
arrangers and joint bookrunners (filed with GSI Commerce,
Inc.s Quarterly Report on
Form 10-Q
for the quarter ended October 2, 2010 and incorporated
herein by reference)
|
|
12
|
.1
|
|
Statement Regarding Computation of Ratios of Earnings to Fixed
Charges
|
|
21
|
.1
|
|
List of Subsidiaries
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP
|
|
24
|
.1
|
|
Power of Attorney, incorporated by reference to the signature
page of this Annual Report on
Form 10-K
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)
under the Securities Exchange Act of 1934
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)
under the Securities Exchange Act of 1934
|
|
32
|
.1
|
|
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
+ |
|
Management contract or compensatory plan or arrangement |
|
|
|
Confidential treatment has been requested for certain portions
of this exhibit. Omitted portions have been filed separately
with the Securities and Exchange Commission. |
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly
caused this Report to be signed on its behalf on the date
indicated by the undersigned thereunto duly authorized.
Date: March 1, 2011
GSI COMMERCE, INC.
Michael G Rubin
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this Report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title(s)
|
|
Date
|
|
|
|
|
|
|
/s/ Michael
G. Rubin
Michael
G. Rubin
|
|
Chairman, President and Chief Executive Officer (principal
executive officer)
|
|
March 1, 2011
|
|
|
|
|
|
/s/ Michael
R. Conn
Michael
R. Conn
|
|
Executive Vice President, Finance and Chief Financial Officer
(principal financial officer and principal accounting officer)
|
|
March 1, 2011
|
|
|
|
|
|
/s/ M.
Jeffrey Branman
M.
Jeffrey Branman
|
|
Director
|
|
March 1, 2011
|
|
|
|
|
|
/s/ Michael
Donahue
Michael
Donahue
|
|
Director
|
|
March 1, 2011
|
|
|
|
|
|
/s/ Ronald
D. Fisher
Ronald
D. Fisher
|
|
Director
|
|
March 1, 2011
|
|
|
|
|
|
/s/ John
A. Hunter
John
A. Hunter
|
|
Director
|
|
March 1, 2011
|
|
|
|
|
|
Joshua
Kopelman
|
|
Director
|
|
|
|
|
|
|
|
/s/ Mark
S. Menell
Mark
S. Menell
|
|
Director
|
|
March 1, 2011
|
|
|
|
|
|
/s/ Jeffrey
F. Rayport
Jeffrey
F. Rayport
|
|
Director
|
|
March 1, 2011
|
49
|
|
|
|
|
|
|
Signature
|
|
Title(s)
|
|
Date
|
|
|
|
|
|
|
David
S. Rosenblatt
|
|
Director
|
|
|
|
|
|
|
|
/s/ Lawrence
S. Smith
Lawrence
S. Smith
|
|
Director
|
|
March 1, 2011
|
|
|
|
|
|
/s/ Andrea
M. Weiss
Andrea
M. Weiss
|
|
Director
|
|
March 1, 2011
|
50
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
GSI Commerce, Inc.
King of Prussia, Pennsylvania
We have audited the accompanying consolidated balance sheets of
GSI Commerce, Inc. and subsidiaries (the Company) as
of January 1, 2011 and January 2, 2010, and the
related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
fiscal years in the period ended January 1, 2011. Our
audits also included the financial statement schedule listed in
the Index at Item 15(a) 2. These financial statements and
financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of GSI Commerce, Inc. and subsidiaries as of
January 1, 2011 and January 2, 2010, and the results
of their operations and their cash flows for each of the three
fiscal years in the period ended January 1, 2011, in
conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth
therein.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
January 1, 2011, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 1, 2011 expressed an
unqualified opinion on the Companys internal control over
financial reporting.
/s/
Deloitte &
Touche LLP
Philadelphia, Pennsylvania
March 1, 2011
F-1
|
|
|
|
|
|
|
|
|
|
|
January 2,
|
|
|
January 1,
|
|
|
|
2010
|
|
|
2011
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
228,430
|
|
|
$
|
242,146
|
|
Accounts receivable, net
|
|
|
70,582
|
|
|
|
96,382
|
|
Inventory, net
|
|
|
55,678
|
|
|
|
62,412
|
|
Deferred tax assets
|
|
|
12,347
|
|
|
|
16,439
|
|
Prepaid expenses and other current assets
|
|
|
13,187
|
|
|
|
16,984
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
380,224
|
|
|
|
434,363
|
|
Property and equipment, net
|
|
|
163,329
|
|
|
|
188,829
|
|
Goodwill
|
|
|
373,003
|
|
|
|
318,179
|
|
Intangible assets, net
|
|
|
132,875
|
|
|
|
132,972
|
|
Long-term deferred tax assets
|
|
|
|
|
|
|
2,279
|
|
Other assets, net
|
|
|
12,417
|
|
|
|
30,540
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,061,848
|
|
|
$
|
1,107,162
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
126,914
|
|
|
$
|
144,323
|
|
Accrued expenses and other
|
|
|
150,173
|
|
|
|
197,417
|
|
Deferred revenue
|
|
|
20,645
|
|
|
|
23,808
|
|
Convertible notes
|
|
|
55,443
|
|
|
|
|
|
Current portion long-term debt
|
|
|
5,260
|
|
|
|
11,136
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
358,435
|
|
|
|
376,684
|
|
Convertible notes
|
|
|
116,948
|
|
|
|
123,391
|
|
Long-term debt
|
|
|
28,142
|
|
|
|
32,287
|
|
Deferred acquisition payments
|
|
|
63,763
|
|
|
|
1,750
|
|
Deferred tax liabilities
|
|
|
8,534
|
|
|
|
|
|
Deferred revenue and other long-term liabilities
|
|
|
9,686
|
|
|
|
10,017
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
585,508
|
|
|
|
544,129
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value:
|
|
|
|
|
|
|
|
|
Authorized shares 5,000
|
|
|
|
|
|
|
|
|
Issued and outstanding shares none
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value:
|
|
|
|
|
|
|
|
|
Authorized shares 90,000 and 180,000
|
|
|
|
|
|
|
|
|
Issued and outstanding shares 60,033 and 66,984
|
|
|
600
|
|
|
|
670
|
|
Additional paid in capital
|
|
|
642,852
|
|
|
|
765,857
|
|
Accumulated other comprehensive loss
|
|
|
(1,498
|
)
|
|
|
(1,378
|
)
|
Accumulated deficit
|
|
|
(165,614
|
)
|
|
|
(202,116
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
476,340
|
|
|
|
563,033
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,061,848
|
|
|
$
|
1,107,162
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
GSI
COMMERCE, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 3,
|
|
|
January 2,
|
|
|
January 1,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from product sales
|
|
$
|
577,073
|
|
|
$
|
542,249
|
|
|
$
|
777,348
|
|
Service fee revenues
|
|
|
389,853
|
|
|
|
461,966
|
|
|
|
580,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
966,926
|
|
|
|
1,004,215
|
|
|
|
1,357,994
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues from product sales
|
|
|
405,254
|
|
|
|
398,604
|
|
|
|
565,402
|
|
Marketing
|
|
|
70,282
|
|
|
|
54,831
|
|
|
|
63,625
|
|
Account management and operations
|
|
|
260,325
|
|
|
|
273,070
|
|
|
|
361,853
|
|
Product development
|
|
|
104,208
|
|
|
|
120,176
|
|
|
|
161,336
|
|
General and administrative
|
|
|
68,964
|
|
|
|
82,922
|
|
|
|
111,978
|
|
Depreciation and amortization
|
|
|
68,153
|
|
|
|
63,395
|
|
|
|
83,763
|
|
Changes in fair value of deferred acquisition payments
|
|
|
|
|
|
|
951
|
|
|
|
(60,963
|
)
|
Impairment of goodwill and intangible assets
|
|
|
|
|
|
|
|
|
|
|
88,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
977,186
|
|
|
|
993,949
|
|
|
|
1,375,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(10,260
|
)
|
|
|
10,266
|
|
|
|
(17,318
|
)
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
18,841
|
|
|
|
19,430
|
|
|
|
17,292
|
|
Interest income
|
|
|
(1,772
|
)
|
|
|
(478
|
)
|
|
|
(338
|
)
|
Other expense
|
|
|
1,562
|
|
|
|
(2
|
)
|
|
|
1,212
|
|
Loss on equity investments
|
|
|
1,665
|
|
|
|
|
|
|
|
736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
20,296
|
|
|
|
18,950
|
|
|
|
18,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and equity-method
|
|
|
|
|
|
|
|
|
|
|
|
|
investment earnings
|
|
|
(30,556
|
)
|
|
|
(8,684
|
)
|
|
|
(36,220
|
)
|
(Benefit) provision for income taxes
|
|
|
(7,585
|
)
|
|
|
2,344
|
|
|
|
660
|
|
Equity-method investment earnings
|
|
|
|
|
|
|
|
|
|
|
(378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(22,971
|
)
|
|
$
|
(11,028
|
)
|
|
$
|
(36,502
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share- basic and diluted
|
|
$
|
(0.49
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic and diluted
|
|
|
47,347
|
|
|
|
51,457
|
|
|
|
64,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
GSI
COMMERCE, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Dollars
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Loss) Income
|
|
|
Loss
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Consolidated balance at December 29, 2007
|
|
|
46,848
|
|
|
$
|
468
|
|
|
$
|
412,203
|
|
|
$
|
(131,615
|
)
|
|
|
|
|
|
$
|
(156
|
)
|
|
$
|
280,900
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,971
|
)
|
|
|
(22,971
|
)
|
|
|
|
|
|
|
(22,971
|
)
|
Cumulative translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,171
|
)
|
|
|
(2,171
|
)
|
|
|
(2,171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(25,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
18,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,494
|
|
Issuance of common stock and warrants upon exercise of options
|
|
|
128
|
|
|
|
1
|
|
|
|
1,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,385
|
|
Issuance of stock awards upon vesting
|
|
|
655
|
|
|
|
7
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based awards retained for taxes
|
|
|
|
|
|
|
|
|
|
|
(222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(222
|
)
|
Tax deficit in connection with exercise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of stock options and awards
|
|
|
|
|
|
|
|
|
|
|
(919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated balance at January 3, 2009
|
|
|
47,631
|
|
|
$
|
476
|
|
|
$
|
430,933
|
|
|
$
|
(154,586
|
)
|
|
|
|
|
|
$
|
(2,327
|
)
|
|
$
|
274,496
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,028
|
)
|
|
|
(11,028
|
)
|
|
|
|
|
|
|
(11,028
|
)
|
Cumulative translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
829
|
|
|
|
829
|
|
|
|
829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(10,199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
23,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,749
|
|
Issuance of common stock and warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
upon exercise of options
|
|
|
772
|
|
|
|
8
|
|
|
|
5,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,320
|
|
Issuance of stock awards upon vesting
|
|
|
1,368
|
|
|
|
14
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based awards retained for taxes
|
|
|
|
|
|
|
|
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60
|
)
|
Tax benefit in connection with exercise of stock options and
awards
|
|
|
|
|
|
|
|
|
|
|
1,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,175
|
|
Acquisition consideration
|
|
|
4,798
|
|
|
|
48
|
|
|
|
93,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93,945
|
|
Common stock issued in public offering, net of costs
|
|
|
5,464
|
|
|
|
54
|
|
|
|
87,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated balance at January 2, 2010
|
|
|
60,033
|
|
|
$
|
600
|
|
|
$
|
642,852
|
|
|
$
|
(165,614
|
)
|
|
|
|
|
|
$
|
(1,498
|
)
|
|
$
|
476,340
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,502
|
)
|
|
|
(36,502
|
)
|
|
|
|
|
|
|
(36,502
|
)
|
Cumulative translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120
|
|
|
|
120
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(36,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
26,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,829
|
|
Issuance of common stock and warrants upon exercise of options
|
|
|
2,116
|
|
|
|
22
|
|
|
|
16,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,860
|
|
Issuance of stock awards upon vesting
|
|
|
1,608
|
|
|
|
16
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit in connection with exercise of stock options and
awards
|
|
|
|
|
|
|
|
|
|
|
21,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,918
|
|
Conversion of convertible debt
|
|
|
3,227
|
|
|
|
32
|
|
|
|
57,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated balance at January 1, 2011
|
|
|
66,984
|
|
|
$
|
670
|
|
|
$
|
765,857
|
|
|
$
|
(202,116
|
)
|
|
|
|
|
|
$
|
(1,378
|
)
|
|
$
|
563,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 3,
|
|
|
January 2,
|
|
|
January 1,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
(In thousands)
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(22,971
|
)
|
|
$
|
(11,028
|
)
|
|
$
|
(36,502
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
54,557
|
|
|
|
52,633
|
|
|
|
63,630
|
|
Amortization
|
|
|
13,596
|
|
|
|
10,762
|
|
|
|
20,133
|
|
Amortization of discount on convertible notes
|
|
|
9,462
|
|
|
|
10,440
|
|
|
|
8,469
|
|
Changes in fair value of deferred acquisition payments
|
|
|
|
|
|
|
951
|
|
|
|
(60,963
|
)
|
Impairment of goodwill and intangible assets
|
|
|
|
|
|
|
|
|
|
|
88,318
|
|
Stock-based compensation
|
|
|
19,403
|
|
|
|
24,762
|
|
|
|
27,843
|
|
Foreign currency transaction losses
|
|
|
1,571
|
|
|
|
14
|
|
|
|
1,216
|
|
Loss on equity investments
|
|
|
1,665
|
|
|
|
|
|
|
|
736
|
|
Gain on disposal of equipment
|
|
|
(354
|
)
|
|
|
(10
|
)
|
|
|
|
|
Equity-method investment earnings
|
|
|
|
|
|
|
|
|
|
|
(378
|
)
|
Deferred income taxes
|
|
|
(7,722
|
)
|
|
|
202
|
|
|
|
(1,950
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(8,130
|
)
|
|
|
10,010
|
|
|
|
(22,421
|
)
|
Inventory, net
|
|
|
4,437
|
|
|
|
7,677
|
|
|
|
(6,734
|
)
|
Prepaid expenses and other current assets
|
|
|
2,142
|
|
|
|
(544
|
)
|
|
|
(3,040
|
)
|
Other assets, net
|
|
|
1,724
|
|
|
|
2,159
|
|
|
|
871
|
|
Accounts payable and accrued expenses and other
|
|
|
23,513
|
|
|
|
33,967
|
|
|
|
60,494
|
|
Deferred revenue
|
|
|
3,076
|
|
|
|
(1,771
|
)
|
|
|
407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
95,969
|
|
|
|
140,224
|
|
|
|
140,129
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for acquisitions of businesses, net of cash acquired
|
|
|
(145,001
|
)
|
|
|
(88,892
|
)
|
|
|
(47,850
|
)
|
Cash paid for property and equipment, including internal use
software
|
|
|
(57,180
|
)
|
|
|
(43,007
|
)
|
|
|
(70,913
|
)
|
Proceeds from disposition of assets
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
Release of restricted cash escrow funds
|
|
|
|
|
|
|
1,052
|
|
|
|
|
|
Cash paid for equity investments
|
|
|
|
|
|
|
|
|
|
|
(18,605
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(200,681
|
)
|
|
|
(130,847
|
)
|
|
|
(137,368
|
)
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on revolving credit loan
|
|
|
70,000
|
|
|
|
|
|
|
|
25,000
|
|
Repayments on revolving credit loan
|
|
|
(70,000
|
)
|
|
|
|
|
|
|
(25,000
|
)
|
Proceeds from sale of common stock
|
|
|
|
|
|
|
92,596
|
|
|
|
|
|
Proceeds from long term borrowing
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
Proceeds from capital lease financing
|
|
|
7,901
|
|
|
|
|
|
|
|
|
|
Equity issuance costs paid
|
|
|
|
|
|
|
(4,728
|
)
|
|
|
|
|
Debt issuance costs paid
|
|
|
(561
|
)
|
|
|
|
|
|
|
(887
|
)
|
Repayments of capital lease obligations
|
|
|
(3,032
|
)
|
|
|
(4,503
|
)
|
|
|
(6,171
|
)
|
Repayments of mortgage note
|
|
|
(195
|
)
|
|
|
(184
|
)
|
|
|
(196
|
)
|
Excess tax benefit in connection with exercise of stock options
and awards
|
|
|
14
|
|
|
|
92
|
|
|
|
1,599
|
|
Proceeds from exercise of common stock options and warrants
|
|
|
1,385
|
|
|
|
5,320
|
|
|
|
16,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
5,512
|
|
|
|
88,593
|
|
|
|
12,168
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(1,996
|
)
|
|
|
145
|
|
|
|
(1,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(101,196
|
)
|
|
|
98,115
|
|
|
|
13,716
|
|
Cash and cash equivalents, beginning of period
|
|
|
231,511
|
|
|
|
130,315
|
|
|
|
228,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
130,315
|
|
|
$
|
228,430
|
|
|
$
|
242,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
9,798
|
|
|
$
|
8,055
|
|
|
$
|
7,928
|
|
Cash paid during the period for income taxes
|
|
|
699
|
|
|
|
3,032
|
|
|
|
815
|
|
Noncash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual for purchases of property and equipment
|
|
|
3,712
|
|
|
|
2,363
|
|
|
|
4,257
|
|
Equipment financed under capital lease
|
|
|
2,497
|
|
|
|
451
|
|
|
|
15,249
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
GSI
COMMERCE, INC. AND SUBSIDIARIES
(amounts in thousands, except per share data)
|
|
NOTE 1
|
DESCRIPTION
OF BUSINESS
|
GSI Commerce, Inc. (GSI Commerce or the
Company), a Delaware corporation, operates a network
of businesses that enables enterprise clients to maximize their
opportunities in the digital channel. The Company has three
reportable segments: Global
e-Commerce
Services (GeC), Global Marketing Services
(GMS) and Consumer Engagement. Each business segment
offers products and services that either are, or aim to be,
market leaders in their respective areas on a stand-alone basis,
but also complement each other, which allows for cross-selling
within and between businesses. The combination of these segments
provides a unique view into the digital channel and gives GSI
Commerce insight into customer and transaction lifecycles, as
well as multi-channel activities. The GeC segment offers a
comprehensive suite of
e-Commerce
services that enable companies to operate
e-commerce
businesses and to integrate their
e-commerce
businesses with their multi-channel retail offerings. GSI
Commerce sells its products and services on an individual basis
and also as bundled solutions. The GMS segment offers a broad
suite of services to help clients exploit digital marketing
channels. The consumer engagement segment operates consumer
facing
e-commerce
businesses that are complimentary to the clients of GeC and GMS
segments.
|
|
NOTE 2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
The following summarize the Companys significant
accounting policies:
Fiscal Year: The Companys fiscal year
ends on the Saturday closest to December 31. The fiscal
year is named for the calendar year ending on that
December 31. Fiscal 2009 and fiscal 2010 each included
52 weeks and fiscal 2008 included 53 weeks.
Basis of Consolidation: The financial
statements presented include the accounts of the Company and all
wholly owned subsidiaries. Inter-company balances and
transactions among consolidated entities have been eliminated.
Use of Estimates: The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates and
assumptions.
Cash and Cash Equivalents: Cash primarily
consists of bank deposits. Cash equivalents consist of money
market mutual funds. All investments with an original maturity
of three months or less are considered cash equivalents.
Accounts Receivable, Net: Accounts receivable
consists of receivables from the Companys clients and
customers. Included in accounts receivable are allowance for
doubtful accounts which is estimated based on specific
identification and historical trends. The allowance for doubtful
accounts was $4,326 as of January 1, 2011, and $4,648 as of
January 2, 2010.
Inventory: Inventory is valued at the lower of
cost (determined using the weighted average method) or market.
Inherent in this valuation are significant management judgments
and estimates, including among others, assessments concerning
obsolescence and shrinkage rates. Based upon these judgments and
estimates, which are applied consistently from period to period,
the Company records a valuation adjustment to the carrying
amount of its inventory.
The Companys obsolescence reserve represents the excess of
the carrying value over the amount it expects to realize from
the ultimate sale or other disposal of the inventory. The
obsolescence reserve establishes a new cost basis for the
Companys inventory. Subsequent changes in facts or
circumstances do not result in the reversal of previously
recorded reserves or an increase in that newly established cost
basis.
F-6
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
The Companys shrinkage loss reserve represents estimated
physical inventory losses (e.g., theft or damages). Inventory
cycle counts are taken on a regular basis to ensure that the
inventory reported in the Companys consolidated financial
statements is accurately stated.
Property and Equipment: Property and equipment
are stated at cost, net of accumulated depreciation or
amortization and depreciated using the straight-line method over
the estimated useful lives of the assets.
The Company reviews property and equipment for impairment when
events or changes in circumstances indicate the carrying amount
of an asset may not be recoverable. Impairment exists when the
sum of undiscounted estimated future cash flows expected to
result from the use of the asset is less than the assets
carrying value. If an impairment exists, an impairment loss is
recognized for the difference between the assets carrying
value and its estimated fair value. When an impairment loss is
recognized, the carrying amount of the asset is reduced to its
estimated fair value based on quoted market prices or other
valuation techniques.
Expenditures for maintenance and repairs are expensed as
incurred. Major renewals or replacements that substantially
extend the useful life of an asset are capitalized.
Goodwill and Other Intangible Assets: Goodwill
is measured as the excess of the cost of an acquisition over the
sum of the amounts assigned to tangible and intangible assets
acquired less liabilities assumed. The determination of the fair
value of the other intangible assets acquired involves certain
judgments and estimates. These judgments can include, but are
not limited to, the cash flows that an asset is expected to
generate in the future and the appropriate weighted average cost
of capital.
The Company does not amortize goodwill or indefinite-lived
intangible assets but performs tests for impairment annually, or
when indications of potential impairment exist, utilizing a fair
value approach at the reporting unit level. The Company
determines fair value using widely accepted valuation
techniques, including, but not limited to, the income approach
which estimates the fair value of its reporting units based on
the future discounted cash flows, and the market approach which
estimates the fair value of its reporting units based on
comparable market prices. In testing for a potential impairment
of goodwill or indefinite lived intangible assets, the Company
estimates the fair value of its reporting units to which
goodwill or indefinite lived intangible assets relates and
determines the carrying value (book value) of the assets and
liabilities related to those businesses.
The Company amortizes other finite-lived intangible assets,
including customer lists and vendor relationships, over their
estimated useful lives. The Company records an impairment charge
on these assets when it determines that their carrying value may
not be recoverable. The carrying value is not recoverable if it
exceeds the undiscounted future cash flows resulting from the
use of the asset and its eventual disposition. The excess of the
carrying value of the intangible asset of its fair value is
recognized as an impairment loss. The Companys estimates
of future cash flows attributable to its other intangible assets
require significant judgment based on the Companys
historical and anticipated results and are subject to many
factors, including the expected use of the asset by the Company.
See Note 5, Goodwill and Other Intangible Assets,
for more information about goodwill and other intangible assets.
F-7
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
Other Assets, Net:
The following table summarizes our other assets as of:
|
|
|
|
|
|
|
|
|
|
|
January 2,
|
|
|
January 1,
|
|
|
|
2010
|
|
|
2011
|
|
|
Equity investments
|
|
$
|
3,420
|
|
|
$
|
22,644
|
|
Unamortized debt issuance costs
|
|
|
2,754
|
|
|
|
2,792
|
|
Deferred compensation
|
|
|
1,396
|
|
|
|
1,640
|
|
Deferred client revenue share charges
|
|
|
2,247
|
|
|
|
816
|
|
Other
|
|
|
2,600
|
|
|
|
2,648
|
|
|
|
|
|
|
|
|
|
|
Total other assets, net
|
|
$
|
12,417
|
|
|
$
|
30,540
|
|
|
|
|
|
|
|
|
|
|
The Companys equity investments represent an equity method
investment in a publicly traded foreign company and cost method
investments in several private companies. See Note 6,
Acquisitions and Investments, for more information about
the equity method investment that was made in fiscal 2010.
Unamortized debt issuance costs are primarily attributable to
the Companys July 2007 offering of $150,000 subordinated
convertible 2.5% notes due 2027, and are amortized using
the effective interest method over a weighted average remaining
amortization period of 4.0 years into interest expense.
Deferred client revenue share charges are being amortized on a
straight-line basis over the expected benefit period of the
underlying contracts.
Accrued Expenses: Accrued expenses include
$88,730 of amounts payable to the Companys clients and
accrued payroll of $23,430 as of the end of fiscal 2010. No
other individual balance was greater than 5% of total current
liabilities as of January 1, 2011.
Accrued expenses include $62,705 of amounts payable to the
Companys clients and accrued payroll of $25,617 as of the
end of fiscal 2009. No other individual balance was greater than
5% of total current liabilities as of January 2, 2010.
Deferred Acquisition Payments: Deferred
acquisition payments consist of the Companys estimate of
the fair value of future acquisition payments that are payable
either based solely on the passage of time, or are contingent
and based on the achievement of performance criteria
(earnout). The Company determines the fair value of
the contingent deferred acquisition payments by utilizing
discounted cash flow models that incorporate several different
assumptions of future performance. The liability is accreted up
to the estimated payment amount over the earnout period using a
risk-adjusted discount rate with a corresponding charge recorded
to changes in fair value of deferred acquisition payments on the
Consolidated Statements of Operations. In addition to accreting
up the liability based on the passage of time, the fair value of
deferred acquisition payments is also assessed for changes at
each reporting period with any changes recorded as an increase
or decrease to changes in fair value of deferred acquisition
payments on the Consolidated Statements of Operations and a
corresponding increase or decrease to deferred acquisition
payments of the Consolidated Balance Sheets.
Revenue Recognition: The Company recognizes
revenues when the following revenue recognition criteria are
met: persuasive evidence of an arrangement exists, delivery has
occurred, the selling price is fixed or determinable and
collectability is reasonably assured. Revenue is classified as
either product sales or service fees.
Net Revenues from Product Sales: Product sales
include the sale of inventory from webstores operated by the
Company in the GeC and Consumer Engagement segments when the
Company is the principal in the transaction, and shipping
revenue for products fulfilled by the Company through its
freight accounts. When the Company is the primary obligor in a
transaction, has general inventory risk, has established the
selling price, has discretion in supplier selection and has
credit risk, or has several but not all of these indicators, it
records revenue on a gross basis as a principal and records
these revenues as revenues from product sales. Product sales
revenues are recorded net of
F-8
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
estimated returns based on historical experience and current
trends. The Company recognizes product sales revenue when title
and risk of ownership passes to the consumer either upon
shipment of products to customers or upon receipt of products to
customers depending on the terms and conditions of the sale. The
majority of product sales are shipped from the Companys
fulfillment centers. The Company also relies upon certain
vendors to ship products directly to customers on its behalf
which are recorded as product sales as the Company is the
principal in these transactions. Product sales are recorded
exclusive of sales tax.
Service Fee Revenues: Services fees are
generated from the sale of services to the Companys
clients and consumers in each of its three segments. For
transactions involving the sale of inventory in which the
Company is deemed to be the agent, rather than the principal,
the Company records service fee revenue based on the net fee
retained.
Revenue arrangements with multiple deliverables are divided into
separate units of accounting if the deliverables in the
arrangement have value to the customer on a standalone basis and
the Company allocates the arrangement consideration based on the
relative selling price for each deliverable.
For webstores for which the Company owns the inventory and
records revenue as product sales in its GeC and consumer
engagement segments, the Company sells gift cards to its
customers through the webstores and through selected third
parties. The Company recognizes income from gift cards when:
(i) the gift card is redeemed by the customer; or
(ii) the likelihood of the gift card being redeemed by the
customer is remote and the Company determines that it does not
have a legal obligation to remit the value of unredeemed gift
cards to the relevant jurisdictions (gift card
breakage). Based on historical redemption patterns, the
likelihood of a gift card being redeemed becomes remote
24 months after the gift card is issued. At that time, the
Company recognizes income for those cards for which the Company
does not have a legal obligation to remit the value of the
unredeemed gift cards to the relevant jurisdiction. Gift card
income is included in service fee revenues in the Companys
Consolidated Statements of Operations.
Fiscal 2008 was the first year in which the Company obtained
sufficient historical redemption data for its gift card program
to make a reasonable estimate of the ultimate redemption
patterns and began recognizing gift card income. The Company
recognized gift card income of $6,598 for fiscal 2010 and $2,314
for fiscal 2009. In fiscal 2008, the Company recognized $2,974
of gift card income, of which $1,649 would have been recorded
prior to fiscal 2008 had the Company began recognizing gift card
income prior to fiscal 2008.
The Companys deferred revenue consists of unredeemed sales
of gift cards, payments received for service fees in advance of
the delivery of the Companys service obligation, and an
estimate of product sales returns in exchange for webstore
credits.
Cost of Revenues from Product Sales: Costs of
revenues from product sales are attributable to the
Companys GeC and Consumer Engagement segments. Cost of
revenues from product sales include the cost of products sold
and inbound freight related to these products, as well as
outbound shipping and handling costs for products fulfilled by
the Company through its freight accounts, other than those costs
related to promotional free shipping and subsidized shipping and
handling which are included in marketing expenses in the
Consolidated Statements of Operations. The Company does not
record cost of service fee revenue because the Company is deemed
to be an agent, rather than the principal.
Marketing: Marketing expenses include client
revenue share charges, net advertising and promotional expenses
incurred by the Company in operating its clients
e-commerce
businesses and its consumer engagement webstores, subsidized
shipping and handling costs and catalog costs.
Client revenue share charges are payments made to the
Companys clients in exchange for the use of their brand
names, logos, the promotion of its clients URLs, webstores
and toll-free telephone numbers in clients marketing and
communications materials, the implementation of programs to
provide incentives to consumers to
F-9
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
shop through the
e-commerce
businesses that the Company operates for its clients and other
programs and services provided to the consumers of the
e-commerce
businesses that the Company operates for its clients, net of
amounts reimbursed to the Company by its clients. Client revenue
share is calculated as either a percentage of product sales or a
guaranteed annual amount. Client revenue share charges were
$36,685 for fiscal 2010, $34,233 for fiscal 2009 and $41,796 for
fiscal 2008.
The Company expenses the cost of advertising, which includes
online marketing fees, media, agency, and production expenses,
the first time the advertisement runs or when the advertising
appears. Advertising and promotional expenses are recorded net
of amounts reimbursed to the Company by its clients, and were
$19,998 for fiscal 2010, $15,684 for fiscal 2009 and $19,750 for
fiscal 2008.
The Company defines shipping and handling costs as only those
costs incurred for a third-party shipper to transport products
to consumers and these costs are included in cost of revenues
from product sales to the extent the costs are less than or
equal to shipping revenue. In some instances, shipping and
handling costs exceed shipping charges to the consumer and are
subsidized by the Company. Additionally, the Company selectively
offers promotional free shipping whereby it ships merchandise to
consumers free of all shipping and handling charges. The amount
of shipping and handling costs in excess of our shipping
revenues was $0 for both fiscal 2010 and fiscal 2009, and $4,009
for fiscal 2008.
Catalog costs consist primarily of creative design, paper,
printing, postage and mailing costs, which are deferred and
amortized over the expected future revenue stream, which is
generally a period not exceeding six months. The Company
amortizes capitalized advertising costs based on the ratio of
actual revenues to the total of actual and estimated future
revenues on an individual catalog basis. Deferred catalog costs
included in prepaid expenses and other current assets were $620
as of January 1, 2011 and $692 as of January 2, 2010.
Catalog costs were $6,086 for fiscal 2010, $5,470 for fiscal
2009 and $5,222 for fiscal 2008.
Account Management and Operations: Account
management and operations expenses include fulfillment and
customer care expenses, credit card fees, and payroll related to
the buying, business management and marketing functions of the
Company.
The Company defines fulfillment costs as personnel, occupancy
and other costs associated with its fulfillment centers,
personnel and other costs associated with its logistical support
and vendor operations departments and third-party warehouse and
fulfillment services costs. Fulfillment costs were $115,395 for
fiscal 2010, $92,663 for fiscal 2009 and $100,131 for fiscal
2008.
Product Development: Product development
expenses consist primarily of payroll and related expenses for
the Companys technology, engineering, production, creative
and management information systems departments.
General and Administrative: General and
administrative expenses consist primarily of payroll and related
expenses for employees of general corporate functions including
executive, finance, accounting, tax, legal, human resources,
among others as well as occupancy costs for the Companys
headquarters and other offices.
Foreign Currency Translation and
Transactions: The functional currency of the
Companys foreign operations is the applicable local
currency. The functional currency is translated into
U.S. dollars for balance sheet accounts using current
exchange rates in effect as of the balance sheet date and for
revenue and expense accounts using a weighted-average exchange
rate during the period. The translation adjustments are recorded
as a separate component of stockholders equity, captioned
accumulated other comprehensive income or loss in the
Consolidated Balance Sheets. Cumulative translation adjustments
included in accumulated other comprehensive loss in the
Consolidated Balance Sheets were $1,378 as of January 1,
2011 and $1,498 as of January 2, 2010. Net losses resulting
from transactions denominated in currencies other than the
functional currencies were $1,216 for fiscal 2010, $14 for
fiscal 2009 and $1,571 for fiscal 2008, and are included in
other expense, net on the Consolidated Statements of Operations.
F-10
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
Stock-Based Compensation: The Companys
outstanding stock based awards primarily consist of restricted
stock units and restricted stock awards. The Company measures
compensation cost for restricted stock units and restricted
stock awards at their fair value on the date of grant and
recognizes compensation expense over the service period during
which awards are expected to vest. The fair value of restricted
stock units and restricted stock awards is determined based on
the number of shares granted and the quoted price of the
Companys common stock. Such value is recognized as expense
on a straight-line basis over the requisite service period, net
of estimated forfeitures. The estimation of the number of stock
awards that will ultimately vest requires judgment, and to the
extent actual results or updated estimates differ from the
Companys current estimates, such amounts will be recorded
as a cumulative adjustment in the period in which estimates are
revised. The Company considers many factors when estimating
expected forfeitures, including trends in employee turnover,
employee class and historical experience. The impact of the
change in estimate for the change in forfeiture rate increased
costs and expenses $512 in fiscal 2009 and $784 in fiscal 2008.
See Note 10, Stock Awards, for more information
about stock-based compensation.
Income Taxes: The Company recognizes deferred
tax assets and liabilities for temporary differences between the
financial reporting basis and the tax basis of the
Companys assets and liabilities and expected benefits of
utilizing net operating loss carryforwards. The impact on
deferred taxes of changes in tax rates and laws, if any, applied
to the years during which temporary differences are expected to
be settled, is reflected in the consolidated financial
statements in the period of enactment.
The Company records net deferred tax assets to the extent it
believes these assets will more likely than not be realized. In
making such determination, the Company considers all available
positive and negative evidence, including future reversals of
existing taxable temporary differences, projected future taxable
income, tax planning strategies and recent financial operations.
In the event the Company determines it would be able to realize
its deferred tax assets in the future in excess of their
recorded amount, the Company would make an adjustment to the
valuation allowance which would reduce the provision for income
taxes.
The Company does not provide for U.S. taxes on its
undistributed earnings of foreign subsidiaries since it intends
to invest such undistributed earnings indefinitely outside of
the U.S. If such amounts were repatriated, the amount of
U.S. income taxes would be immaterial.
The Company recognizes a tax benefit from an uncertain tax
position only if it is more likely than not that the
position is sustainable upon examination, including resolutions
of any related appeals or litigation processes, based on its
technical merits. The tax benefit of a qualifying position is
the largest amount of tax benefit that is greater than 50%
likely of being realized upon settlement with a taxing authority
having full knowledge of all relevant information. The liability
for unrecognized tax benefits is classified as noncurrent unless
the liability is expected to be settled in cash within
12 months of the reporting date. The Company records any
estimated interest or penalties from the uncertain income tax
position as income tax expense.
F-11
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
Recent Accounting Pronouncements:
The following is a summary of recent accounting standards issued
by the Financial Accounting Standards Board (FASB):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Date for
|
Subject
|
|
Date Issued
|
|
Summary
|
|
Effect of Adoption
|
|
the Company
|
|
Multiple Element Arrangements
|
|
October 2009
|
|
Removes the objective-and-reliable-evidence-of-fair-value
criterion from the separation criteria used to determine whether
an arrangement involving multiple deliverables contains more
than one unit of accounting. Replaces references to fair
value with selling price to distinguish from
the fair value measurements required under accounting standards
for Fair Value Measurements. Provides a hierarchy
that entities must use to estimate the selling price, eliminates
the use of the residual method for allocation, and expands the
ongoing disclosure requirements.
|
|
No material impact.
|
|
January 2, 2011, with early adoption permitted. The Company
chose to prospectively adopt this standard on January 3, 2010
|
|
|
NOTE 3
|
FAIR
VALUE OF FINANCIAL AND NONFINANCIAL INSTRUMENTS
|
Fair value is measured as the price at which an asset could be
exchanged in a current transaction between knowledgeable,
willing parties. A liabilitys fair value is defined as the
amount that would be paid to transfer the liability to a new
obligor, not the amount that would be paid to settle the
liability with the creditor.
Assets and liabilities measured at fair value are categorized
based upon the level of judgment associated with the inputs used
to measure their fair value. Hierarchical levels, directly
related to the amount of subjectivity associated with the inputs
to fair valuation of these assets and liabilities, are as
follows:
Level 1 Inputs are unadjusted, quoted prices in
active markets for identical assets or liabilities at the
measurement date.
Level 2 Inputs (other than quoted prices
included in Level 1) are either directly or indirectly
observable for the asset or liability through correlation with
market data at the measurement date and for the duration of the
instruments anticipated life.
Level 3 Inputs are unobservable and reflect
managements best estimate of what market participants
would use in pricing the asset or liability at the measurement
date. Consideration is given to the risk inherent in the
valuation technique and the risk inherent in the inputs to the
model.
The Companys financial and nonfinancial assets and
liabilities subject to fair value measurements on a recurring
basis are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on January 2, 2010
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
Significant
|
|
|
|
Active Markets for
|
|
|
Other Observable
|
|
|
Unobservable
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds
|
|
$
|
13,606
|
|
|
$
|
|
|
|
$
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred acquisition payments(2)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
60,963
|
|
F-12
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on January 1, 2011
|
|
|
Quoted Prices in
|
|
Significant
|
|
Significant
|
|
|
Active Markets for
|
|
Other Observable
|
|
Unobservable
|
|
|
Identical Assets
|
|
Inputs
|
|
Inputs
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred acquisition payments(2)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
(1) |
|
Cash and cash equivalents totaled $242,146 as of January 1,
2011, and were comprised entirely of bank deposits. Cash and
cash equivalents totaled $228,430 as of January 2, 2010,
and were comprised of $13,606 of money market mutual funds and
$214,824 of bank deposits. |
|
(2) |
|
Deferred acquisition payments, a Level 3 category
liability, represent the fair value of estimated acquisition
payments that are contingent upon RueLaLa, Inc., formerly known
as Retail Convergence, Inc. (Rue La La)
achieving specified minimum earnings thresholds. The Company
utilized a discounted cash flow model that incorporated several
different assumptions of future performance and a discount rate
of 13.6% to determine the fair value of its deferred acquisition
payments. |
In fiscal 2010, the Company revised its estimate of the amount
of deferred acquisition payments that will be paid based on Rue
La Las financial performance in fiscal 2010 and
revised financial projections for fiscal years 2011 and 2012.
Based on these revised estimates, the Company does not expect
Rue La La to achieve the minimum earnings thresholds
needed to trigger any of the deferred acquisition payments and
has determined that the fair value of the deferred acquisition
payment liability is $0 at the end of fiscal 2010 compared to
$60,963 at the end of fiscal 2009. As a result of this change in
estimate, the Company recorded income of $60,963 in fiscal 2010
to reduce the liability to $0 which is reflected in changes in
fair value of deferred acquisition payments on the Consolidated
Statements of Operations. In fiscal 2009, the Company recorded
accretion expense of $951 which was recorded to changes in fair
value of deferred acquisition payments on the Consolidated
Statements of Operations.
The following table provides a reconciliation between the
beginning and ending balances of items measured at fair value on
a recurring basis in the table above that used significant
unobservable inputs (Level 3):
|
|
|
|
|
|
|
January 1,
|
|
|
|
2011
|
|
|
Balance, beginning of period
|
|
$
|
60,963
|
|
Changes in fair value of deferred acquisition payments included
in the Companys Condensed Consolidated Statements of
Operations
|
|
|
(60,963
|
)
|
|
|
|
|
|
Balance, end of period
|
|
$
|
|
|
|
|
|
|
|
F-13
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
|
|
NOTE 4
|
PROPERTY
AND EQUIPMENT
|
The major classes of property and equipment, at cost, as of
January 2, 2010 and January 1, 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2,
|
|
|
January 1,
|
|
|
|
Useful Life
|
|
2010
|
|
|
2011
|
|
|
Computer hardware and software
|
|
up to 4 yrs.
|
|
$
|
231,954
|
|
|
$
|
300,238
|
|
Building and building improvements
|
|
up to 30 yrs.
|
|
|
44,822
|
|
|
|
45,011
|
|
Furniture, warehouse and office equipment, and other
|
|
up to 7 yrs.
|
|
|
45,722
|
|
|
|
49,359
|
|
Land
|
|
|
|
|
7,889
|
|
|
|
7,889
|
|
Leasehold improvements
|
|
Lesser of 15 years
or lease term
|
|
|
8,847
|
|
|
|
11,983
|
|
Capitalized leases
|
|
up to 7 yrs.
|
|
|
29,132
|
|
|
|
42,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
368,366
|
|
|
|
456,534
|
|
Less: Accumulated depreciation
|
|
|
|
|
(205,037
|
)
|
|
|
(267,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
$
|
163,329
|
|
|
$
|
188,829
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys net book value in capital leases, which
consist primarily of warehouse equipment and computer hardware
and software, was $24,624 as of January 1, 2011, and
$18,500 as of January 2, 2010. Amortization of capital
leases is included within depreciation and amortization expense
on the Consolidated Statements of Operations. Interest expense
recorded on capital leases was $1,400 for fiscal 2010, $1,470
for fiscal 2009 and $1,375 for fiscal 2008.
|
|
NOTE 5
|
GOODWILL
AND OTHER INTANGIBLE ASSETS
|
The following table summarizes the changes in the carrying
amount of goodwill for each of the Companys reportable
segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
|
|
|
|
GeC
|
|
|
GMS
|
|
|
Engagement
|
|
|
Consolidated
|
|
|
January 3, 2009
|
|
$
|
82,758
|
|
|
$
|
112,238
|
|
|
$
|
|
|
|
$
|
194,996
|
|
Acquisitions
|
|
|
|
|
|
|
4,787
|
|
|
|
172,888
|
|
|
|
177,675
|
|
Foreign currency translation
|
|
|
332
|
|
|
|
|
|
|
|
|
|
|
|
332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, 2010
|
|
|
83,090
|
|
|
|
117,025
|
|
|
|
172,888
|
|
|
|
373,003
|
|
Acquisitions
|
|
|
2,556
|
|
|
|
20,708
|
|
|
|
|
|
|
|
23,264
|
|
Goodwill impairment
|
|
|
(6,387
|
)
|
|
|
|
|
|
|
(71,307
|
)
|
|
|
(77,694
|
)
|
Foreign currency translation
|
|
|
(394
|
)
|
|
|
|
|
|
|
|
|
|
|
(394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2011
|
|
$
|
78,865
|
|
|
$
|
137,733
|
|
|
$
|
101,581
|
|
|
$
|
318,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the fourth quarter of fiscal 2010, the Company completed its
annual impairment testing of goodwill and indefinite-lived
intangible assets and determined there was an impairment in its
Rue La La and International
e-Commerce
Services reporting units. The fair value of each of these two
reporting units was less than their carrying values. As a
result, the Company conducted the second step of the impairment
test for both reporting units and determined that the goodwill
in both of these reporting units was impaired. The fair value of
the reporting units was determined using Level 3 inputs,
primarily by using the income approach which estimates the fair
value based on the projected future discounted cash flows, and
the market approach which estimates the fair value based on
F-14
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
comparable market prices. These valuation techniques contain
assumptions and uncertainties because they require judgment to
estimate industry economic factors and the profitability of
future business strategies. The estimate of cash flow is based
upon, among other things, certain assumptions about expected
future operating performance and an appropriate discount rate.
The impairment of $71,307 in the Rue La La reporting
unit, which is part of the Consumer Engagement segment, resulted
from a decline in the Companys projected cash flows and
reduced goodwill from its carrying value of $172,888 to its
implied fair value of $101,581.
The impairment of $6,387 in the International
e-Commerce
Services reporting unit, which is part of the GeC segment,
resulted from a decline in the Companys projected cash
flows and reduced goodwill from its carrying value of $6,387 to
its implied fair value of $0.
The Companys intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
January 2,
|
|
|
January 1,
|
|
|
Average
|
|
|
|
2010
|
|
|
2011
|
|
|
Life
|
|
|
Gross carrying value of intangible assets subject to
amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract based
|
|
$
|
56,455
|
|
|
$
|
60,636
|
|
|
|
2.5
|
|
Customer related
|
|
|
22,200
|
|
|
|
22,200
|
|
|
|
2.6
|
|
Technology
|
|
|
4,805
|
|
|
|
13,723
|
|
|
|
3.4
|
|
Trade name
|
|
|
840
|
|
|
|
840
|
|
|
|
1.5
|
|
Foreign currency translation
|
|
|
(482
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,818
|
|
|
|
97,399
|
|
|
|
2.7
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract based
|
|
|
(25,795
|
)
|
|
|
(36,904
|
)
|
|
|
|
|
Customer related
|
|
|
(489
|
)
|
|
|
(6,649
|
)
|
|
|
|
|
Technology
|
|
|
(2,428
|
)
|
|
|
(4,962
|
)
|
|
|
|
|
Trade name
|
|
|
(532
|
)
|
|
|
(716
|
)
|
|
|
|
|
Foreign currency translation
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,172
|
)
|
|
|
(49,231
|
)
|
|
|
|
|
Net carrying value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract based
|
|
|
30,660
|
|
|
|
23,732
|
|
|
|
|
|
Customer related
|
|
|
21,711
|
|
|
|
15,551
|
|
|
|
|
|
Technology
|
|
|
2,377
|
|
|
|
8,761
|
|
|
|
|
|
Trade name
|
|
|
308
|
|
|
|
124
|
|
|
|
|
|
Foreign currency translation
|
|
|
(410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets subject to amortization, net
|
|
|
54,646
|
|
|
|
48,168
|
|
|
|
|
|
Indefinite life intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
78,229
|
|
|
|
84,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
132,875
|
|
|
$
|
132,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2010, the Company tested the intangibles in its Rue
La La and International
e-Commerce
reporting units as a result of declines in projected cash flows
in both reporting units. The Company concluded that the supplier
relationship finite-lived intangible asset in our Rue
La La reporting unit and the customer contract
finite-lived
F-15
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
intangible asset is our International
e-Commerce
reporting were impaired. The Company recorded an impairment
charge of $10,624 comprised of $10,241 to reduce the carrying
value of the Rue La La supplier contract intangible to
$0, and $383 million to reduce the carrying value of the
International
e-Commerce
customer contract intangible to $0.
Amortization expense of intangible assets was $20,098 for fiscal
2010, $10,722 for fiscal 2009 and $13,553 for fiscal 2008.
Estimated future amortization expense related to intangible
assets as of January 2, 2010, is as follows:
|
|
|
|
|
Fiscal 2011
|
|
$
|
18,304
|
|
Fiscal 2012
|
|
|
13,297
|
|
Fiscal 2013
|
|
|
9,710
|
|
Fiscal 2014
|
|
|
5,614
|
|
Fiscal 2015
|
|
|
1,243
|
|
|
|
|
|
|
|
|
$
|
48,168
|
|
|
|
|
|
|
|
|
NOTE 6
|
ACQUISITIONS
AND INVESTMENTS
|
The Company accounts for acquisitions using the acquisition
method of accounting. Under the acquisition method, assets
acquired and liabilities assumed from acquisitions are recorded
at their fair values as of the acquisition date. Any excess of
the purchase price over the fair values of the net assets
acquired are recorded as goodwill. The Companys purchased
intangible assets and goodwill are not deductible for tax
purposes. However, acquisition method accounting allows for the
establishment of deferred tax liabilities on purchased
intangible assets, other than goodwill.
MBS
On April 30, 2010, the Company acquired 100% of the issued
and outstanding capital stock of MBS Insight, Inc.
(MBS), a wholly owned subsidiary of World Marketing,
Inc. for $22,200. MBS is a database marketing solutions provider
that offers a knowledge-based marketing services and solutions
that help marketers innovate, advance, and automate their
marketing efforts for greater return on their investment. The
acquisition strengthens the Companys suite of products
providing marketers with an operational, multichannel view of
customers in order to understand customer behavior and
preferences in real time.
F-16
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
The table below summarizes the fair values of the MBSs
assets and acquired liabilities assumed, including cash
acquired, as of acquisition date:
|
|
|
|
|
Total current assets
|
|
$
|
2,472
|
|
Property, plant, and equipment
|
|
|
949
|
|
Goodwill
|
|
|
11,563
|
|
Identifiable intangible assets:
|
|
|
|
|
Customer relationships
|
|
|
8,611
|
|
Technology
|
|
|
2,551
|
|
Trade name
|
|
|
1,710
|
|
|
|
|
|
|
Total assets acquired
|
|
|
27,856
|
|
Total current liabilities
|
|
|
(1,476
|
)
|
Long-term deferred tax liabilities
|
|
|
(4,180
|
)
|
|
|
|
|
|
Total liabilities assumed
|
|
|
(5,656
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
22,200
|
|
|
|
|
|
|
MBS results of operations are included on the
Companys Consolidated Statements of Operations beginning
on April 30, 2010. MBS revenue and net loss for the
period from April 30, 2010 to January 1, 2011 included
in the Companys Consolidated Statements of Operations is
$11,761 and $51, respectively.
Rue
La La
On November 17, 2009, the Company completed the acquisition
of 100% of the outstanding common stock of Rue
La La pursuant to the terms of an Agreement and Plan
of Merger dated October 27, 2009. Rue
La La operates RueLaLa.com, a provider of online
private sales and SmartBargains.com, an off-price
e-commerce
marketplace. The Company believes the acquisition will allow the
Company to enter the private sale and off-price
e-commerce
marketplace markets and broaden its
e-commerce
solution offerings.
As consideration for the acquisition of Rue La La, the
Company paid cash of $92,133 and issued 4,572 shares of the
Companys common stock valued at $93,945 based on the
closing share price on the acquisition date. In addition, the
Company is obligated to make additional payments of up to
$170,000 over a three year period beginning with Rue
La La fiscal year 2010 contingent on Rue
La Las achievement of certain financial performance
targets, of which the Company has the ability to pay up to
$44,100 with shares of the Companys common stock. To reach
the maximum earnout, Rue La La will need to achieve
earnings before interest, taxes, depreciation and amortization
(EBITDA) of $51,900 in fiscal year 2012, excluding
compensation expense on the earnout payment and certain other
adjustments as defined in the Rue La La merger
agreement. A maximum of $46,200 of the earnout will be paid to
Rue La La employees based on performance conditions,
which will be treated as compensation expense. The remaining
$123,800 of the earnout was accounted for as additional
acquisition consideration. On the acquisition date, the Company
recorded a liability of $60,012 which represents the fair value
of the portion of the earnout that was accounted for as
additional acquisition consideration. Adjustment to the fair
value of the Companys estimate of the earnout payment is
recorded to changes in fair value of deferred acquisition
payments on the Companys Consolidated Statements of
Operations and could have a material impact to its financial
results. See Note 3, Fair Value of Financial and
Nonfinancial Instruments, for more information on the
current estimate of the fair value of the earnout.
Additionally, the Company incurred approximately $2,100 in
transaction costs directly related to the acquisition that were
expensed in fiscal 2009. Rue La Las results of
operations are included on the Companys Consolidated
Statement of Operations beginning on November 17, 2009.
F-17
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
The table below summarizes the fair values of the Rue
La La assets and acquired liabilities assumed based on
the total consideration at acquisition of $246,090 which
represents $92,133 of cash, $93,945 of common stock issued, and
$60,012 of deferred acquisition payments. The following table
also includes cash acquired of $8,841 as of the acquisition date:
|
|
|
|
|
Total current assets
|
|
$
|
31,129
|
|
Property, plant and equipment
|
|
|
8,031
|
|
Goodwill
|
|
|
172,888
|
|
Identifiable intangible assets:
|
|
|
|
|
Trade name
|
|
|
59,569
|
|
Member relationships
|
|
|
22,200
|
|
Supplier relationships
|
|
|
11,186
|
|
Non-compete agreements
|
|
|
241
|
|
|
|
|
|
|
Total assets acquired
|
|
|
305,244
|
|
Total current liabilities
|
|
|
(29,718
|
)
|
Long-term deferred tax liabilities and other
|
|
|
(29,436
|
)
|
|
|
|
|
|
Total liabilities assumed
|
|
|
(59,154
|
)
|
Total consideration
|
|
|
246,090
|
|
|
|
|
|
|
Liability arising from contingent consideration
|
|
|
(60,012
|
)
|
|
|
|
|
|
Consideration paid at acquisition date
|
|
$
|
186,078
|
|
|
|
|
|
|
e-Dialog,
Inc.
On February 13, 2008, the Company completed the acquisition
of e-Dialog,
Inc.
(e-Dialog)
pursuant to the terms of an Agreement and Plan of Merger dated
January 23, 2008.
e-Dialog is
a provider of advanced
e-mail
marketing services and solutions to more than 100 companies
in the U.S. and Europe. The Company believes the
acquisition will expand the breadth and depth of its marketing
services capabilities, its reach into existing and new vertical
markets, and its growing European presence. The Company also
believes that
e-Dialog
will benefit from the Companys large scale and
market-leading position in
e-commerce
and multichannel services. As consideration for the acquisition
of e-Dialog,
the Company paid $148,363 in cash. In connection with the
acquisition, the Company issued 568 restricted stock units and
restricted stock awards with an aggregate value of approximately
$9,300 to employees of
e-Dialog
based on the market price of the Companys stock on the
grant date. Recipients are required to remain employed for
specified periods of time subsequent to the acquisition in order
for the stock units to vest. The $9,300 will be recognized as
stock-based compensation cost, net of estimated forfeitures,
over the required service period.
The total purchase price was $150,066, including
acquisition-related transaction costs of $1,703.
Acquisition-related transaction costs include advisory, legal
and other external costs directly related to the merger.
e-Dialogs
results of operations are included in the Companys
Consolidated Statement of Operations beginning on
February 13, 2008.
F-18
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
The following table summarizes the fair values of the
e-Dialog
assets acquired and liabilities assumed, including cash
acquired, as of the acquisition date:
|
|
|
|
|
Total current assets
|
|
$
|
17,067
|
|
Property, plant and equipment
|
|
|
4,530
|
|
Goodwill
|
|
|
112,238
|
|
Identifiable intangible assets:
|
|
|
|
|
Customer contracts
|
|
|
19,470
|
|
Internal-developed software
|
|
|
4,493
|
|
Trade name
|
|
|
17,874
|
|
|
|
|
|
|
Total assets acquired
|
|
|
175,672
|
|
Total current liabilities
|
|
|
(6,564
|
)
|
Long-term deferred tax liabilities
|
|
|
(19,042
|
)
|
|
|
|
|
|
Total liabilities assumed
|
|
|
(25,606
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
150,066
|
|
|
|
|
|
|
Other
Acquisitions
During fiscal 2010, the Company made three other acquisitions.
Results of operations for each of the Companys 2010
acquisitions are included in the Companys Condensed
Consolidated Statements of Operations beginning on each
respective acquisition date.
Unaudited
Pro Forma Financial Information
The financial information in the table below summarizes the
combined results of operations of the Company, MBS, Rue
La La and
e-Dialog on
a pro forma basis, as though the companies had been combined as
of the beginning of each of the periods presented. The pro forma
financial information is presented for informational purposes
only and is not indicative of the results of operations that
would have been achieved if the acquisition had actually taken
place at the beginning of each of the periods presented and is
not intended to be a projection of future results or trends. The
pro forma financial information for all periods presented
includes pro forma adjustments, net of any applicable tax for a
reduction to interest income on the Companys cash and cash
equivalents used to fund the acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
January 3,
|
|
January 2,
|
|
January 1,
|
|
|
2009
|
|
2010
|
|
2011
|
|
Net revenues
|
|
$
|
1,069,291
|
|
|
$
|
1,121,214
|
|
|
$
|
1,363,657
|
|
Net loss
|
|
$
|
(40,499
|
)
|
|
$
|
(25,707
|
)
|
|
$
|
(36,728
|
)
|
Equity
Method Investment
As of January 1, 2011, the Company owned 27% of the common
stock of Intershop Communications AG (Intershop), a
provider of
e-commerce
software based in Germany and publicly traded and listed on the
Frankfurt Stock Exchange. The carrying amount of the investment
as of January 1, 2011 is $19,824, which includes a
cumulative translation adjustment of $841 due to the increase in
the exchange rate between the Euro and the United States
dollar. The Company recorded $378 during fiscal 2010 for its
share of Intershops earnings in equity-method investment
earnings on the Consolidated Statements of Operations.
F-19
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
The Company accounts for this investment using the equity method
of accounting, and monitors its investment periodically to
evaluate whether any changes in fair value below its cost basis
become
other-than-temporary.
The Company has elected to record its share of earnings/losses
for Intershop on a three-month lag due to timeliness
considerations. The Companys investment in Intershop is
included in other assets, net in the Companys Condensed
Consolidated Balance Sheets. As of January 1, 2011, the
market value of the Companys investment in Intershop,
based on the quoted market price of its stock, is $20,051.
Other
Investment
During fiscal 2010, the Company recorded an
other-than-temporary
impairment loss of $736 related to one of its cost-method
investments which reduced the carrying value of the investment
to $0.
|
|
NOTE 7
|
LONG-TERM
DEBT AND CREDIT FACILITY
|
The following table summarizes the Companys long-term debt
as of:
|
|
|
|
|
|
|
|
|
|
|
January 2,
|
|
|
January 1,
|
|
|
|
2010
|
|
|
2011
|
|
|
Convertible notes
|
|
$
|
172,391
|
|
|
$
|
123,391
|
|
Notes payable(1)
|
|
|
12,479
|
|
|
|
15,989
|
|
Capital lease obligations
|
|
|
20,923
|
|
|
|
27,434
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
205,793
|
|
|
|
166,814
|
|
Less: Current portion of convertible notes
|
|
|
(55,443
|
)
|
|
|
|
|
Less: Current portion of notes payable
|
|
|
(195
|
)
|
|
|
(1,073
|
)
|
Less: Current portion of capital lease obligations
|
|
|
(5,065
|
)
|
|
|
(10,063
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
145,090
|
|
|
$
|
155,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The estimated fair market value of the notes payable
approximated their carrying value as of January 2, 2010 and
January 1, 2011. |
In May 2008, the FASB issued accounting standards which require
the issuer of convertible debt instruments with cash settlement
features to separately account for the liability and equity
components of the instrument. The Companys subordinated
convertible notes are subject to the provisions of these
standards because the Company has the ability to elect cash
settlement of the conversion value of the notes. The liability
component of the notes is determined based on the present value
of the notes using the Companys nonconvertible debt
borrowing rate on the issuance date. In order to determine the
fair value of the debt portion and equity portion of the
Companys convertible notes, the Company used a market
approach to determine the market rate for comparable
transactions had the Company issued nonconvertible debt with
similar embedded features other than the conversion feature by
using prices and other relevant information generated by market
transactions at or near the issuance date of its convertible
notes. The equity component is the difference between the
proceeds from the issuance of the note and the fair value of the
liability component. The resulting debt discount, equal to the
excess of the principal amount of the liability over its
carrying amount, is amortized to interest expense using the
effective interest method over the expected life of the debt.
The Company adopted these standards on January 4, 2009, and
applied it retrospectively to all prior periods presented.
F-20
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
|
|
3%
|
Convertible
Notes due 2025
|
In fiscal 2005, the Company completed a public offering of
$57,500 aggregate principal amount of 3% subordinated
convertible notes due June 1, 2025. The notes bear interest
at 3%, payable semi-annually on June 1 and December 1.
In April 2010, the Company called the notes for redemption and
in June 2010, the Company issued 3,227 shares of common
stock upon the conversion of $57,469 aggregate principal amount
of the 3% convertible notes at the election of the holders of
the notes, which was recorded as an increase to additional paid
in capital in the Condensed Consolidated Balance Sheets. The
Company paid $31 to redeem the remaining 3% convertible notes
that were not converted.
The following table provides additional information about the
Companys 3% convertible notes:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
January 2,
|
|
|
January 1,
|
|
|
|
2010
|
|
|
2011
|
|
|
Carrying amount of the equity component
|
|
$
|
18,187
|
|
|
$
|
|
|
Principal amount of the liability component
|
|
$
|
57,500
|
|
|
$
|
|
|
Unamortized discount of liability component
|
|
$
|
2,057
|
|
|
$
|
|
|
Net carrying amount of liability component
|
|
$
|
55,443
|
|
|
$
|
|
|
The following table provides the components of interest expense
for the Companys 3% convertible notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 3,
|
|
|
January 2,
|
|
|
January 1,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Amortization of the discount on the liability component
|
|
$
|
4,021
|
|
|
$
|
4,517
|
|
|
$
|
2,053
|
|
Contract interest coupon
|
|
|
1,725
|
|
|
|
1,725
|
|
|
|
719
|
|
Amortization of the liability component of the issue costs
|
|
|
359
|
|
|
|
391
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
6,105
|
|
|
$
|
6,633
|
|
|
$
|
2,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.5% Convertible
Notes due 2027
In July 2007, the Company completed a private placement of
$150,000 aggregate principal amount of 2.5% subordinated
convertible notes due June 1, 2027, raising net proceeds of
approximately $145,000, after deducting initial purchasers
discount and issuance costs. The notes bear interest at 2.5%,
payable semi-annually on June 1 and December 1.
Holders may convert the notes into shares of the Companys
common stock (or cash or a combination of the Companys
common stock and cash, if the Company so elects) at a conversion
rate of 33.3333 shares per $1,000 principal amount of notes
(representing a conversion price of approximately $30.00 per
share) beginning on March 1, 2014. Holders can require the
Company to repurchase the notes for 100% of principal amount of
the notes on June 1, 2014. At any time on or after
June 8, 2014, the Company may redeem any of the notes for
cash at a redemption price of 100% of their principal amount,
plus accrued and unpaid interest, if any, up to but excluding,
the redemption date. Based on the Companys closing stock
price of $23.23 on January 1, 2011, the if-converted value
of the notes does not exceed the aggregate principal amount of
the notes.
F-21
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
The following table provides additional information about the
Companys 2.5% convertible notes:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
As of
|
|
|
January 2,
|
|
January 1,
|
|
|
2010
|
|
2011
|
|
Carrying amount of the equity component
|
|
$
|
26,783
|
|
|
$
|
26,783
|
|
Principal amount of the liability component
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
Unamortized discount of liability component
|
|
$
|
33,052
|
|
|
$
|
26,609
|
|
Net carrying amount of liability component
|
|
$
|
116,948
|
|
|
$
|
123,391
|
|
Remaining amortization period of discount
|
|
|
|
|
|
|
41 months
|
|
Effective interest rate on liability component
|
|
|
|
|
|
|
8.60
|
%
|
The following table provides the components of interest expense
for the Companys 2.5% convertible notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 3,
|
|
|
January 2,
|
|
|
January 1,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Amortization of the discount on the liability component
|
|
$
|
5,445
|
|
|
$
|
5,923
|
|
|
$
|
6,443
|
|
Contract interest coupon
|
|
|
3,750
|
|
|
|
3,750
|
|
|
|
3,750
|
|
Amortization of the liability component of the issue costs
|
|
|
434
|
|
|
|
457
|
|
|
|
482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
9,629
|
|
|
$
|
10,130
|
|
|
$
|
10,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated fair market value of the 2.5% subordinated
convertible notes was $162,570 as of January 1, 2011 and
$157,125 as of January 2, 2010 based on quoted market
prices.
Note
Payable
In fiscal 2004, a wholly-owned subsidiary of the Company entered
into an agreement to purchase a new corporate headquarters in
King of Prussia, Pennsylvania, together with an option to
purchase an additional parcel of land. The purchase price for
the building was $17,000. In connection with the purchase of the
corporate headquarters, a wholly-owned subsidiary of the Company
entered into a $13,000 mortgage note collateralized by a first
lien on substantially all of the assets of that subsidiary. The
mortgage note bears interest at 6.3% per annum and has a
maturity date of July 2014. The Company recorded interest
expense related to the note of $771 for fiscal 2010, $783 for
fiscal 2009 and $805 for fiscal 2008.
Capital
Lease Obligations
Certain of the Companys warehouse equipment and computer
hardware and software have been acquired under capital leases.
The capital leases have maturity dates ranging from August 2011
to September 2014 and bear interest at rates ranging from 2% to
9% per annum. Capital lease obligations were as follows:
|
|
|
|
|
|
|
January 1,
|
|
|
|
2011
|
|
|
Gross capital lease obligations
|
|
$
|
29,855
|
|
Less: imputed interest
|
|
|
(2,421
|
)
|
|
|
|
|
|
Total present value of future minimum lease payments
|
|
|
27,434
|
|
Less: current portion
|
|
|
(10,063
|
)
|
|
|
|
|
|
Long-term portion
|
|
$
|
17,371
|
|
|
|
|
|
|
F-22
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
Credit
Facilities
In March 2010, the Company amended and expanded its existing
secured revolving credit facility expanding the credit facility
to $150,000. The credit facility expires in March 2013 and is
available for letters of credit, working capital, and general
corporate purposes, including possible acquisitions. The
$150,000 secured revolving credit facility provides for the
issuance of up to $30,000 of letters of credit, which is
included in the $150,000 available under the secured revolving
credit facility. The secured revolving credit facility is
collateralized by substantially all of the Companys assets
and the terms of the secured revolving credit facility limits
the Companys ability to declare or pay dividends on its
common stock. The Company may elect to have amounts outstanding
under the credit facilities bear interest at either a LIBOR rate
plus an applicable margin of 2.0% to 3.25%, the prime rate plus
an applicable margin of 2.0% to 3.25%, Daily LIBOR plus 1.0%
plus an applicable margin of 2.0% to 3.25%, or at the Federal
Funds Open Rate plus 0.5% plus an applicable margin of 2.0% to
3.25%. The applicable margin is determined by the leverage ratio
of funded debt to EBITDA, as defined in the credit facility. The
Company had no outstanding borrowings and $1,770 of outstanding
letters of credit under the secured revolving credit facility as
of January 1, 2011. See Note 17, Subsequent Events,
for information regarding the Companys credit facility.
|
|
NOTE 8
|
COMMITMENTS
AND CONTINGENCIES
|
Legal
Proceedings
The Company is involved in various litigation incidental to its
business, including alleged contractual claims, claims relating
to infringement of intellectual property rights of third
parties, claims relating to the manner in which goods are sold
through its integrated platform and claims relating to the
Companys collection of sales taxes in certain states. The
Company collects sales taxes for goods owned and sold by it and
shipped into certain states. As a result, the Company is subject
from time to time to claims from other states alleging that the
Company failed to collect and remit sales taxes for sales and
shipments of products to customers in states.
Based on the merits of the cases
and/or the
amounts claimed, the Company does not believe that any claims
are likely to have a material adverse effect on its business,
financial position or results of operations. The Company may,
however incur substantial expenses and devote substantial time
to defend these claims whether or not such claims are
meritorious. In the event of a determination adverse to the
Company, the Company may incur substantial monetary liability
and may be required to implement expensive changes in its
business practices, enter into costly royalty or licensing
agreements, or begin to collect sales taxes in states in which
we previously did not. An adverse determination could have a
material adverse effect on the Companys business,
financial position or results of operations. Expenditures for
legal costs are expensed as incurred.
F-23
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
Operating
and Capital Commitments
The following summarizes the Companys principal operating
and capital commitments, excluding open orders for inventory
purchases that support normal operations, as of January 1,
2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by fiscal year
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Thereafter
|
|
|
Total
|
|
|
Operating lease obligations(1)
|
|
$
|
22,453
|
|
|
$
|
21,980
|
|
|
$
|
18,028
|
|
|
$
|
14,659
|
|
|
$
|
11,396
|
|
|
$
|
14,486
|
|
|
$
|
103,002
|
|
Marketing commitments(1)
|
|
|
705
|
|
|
|
2,570
|
|
|
|
2,570
|
|
|
|
2,570
|
|
|
|
|
|
|
|
|
|
|
|
8,415
|
|
Client revenue share payments(1)
|
|
|
21,931
|
|
|
|
23,158
|
|
|
|
24,534
|
|
|
|
15,991
|
|
|
|
7,606
|
|
|
|
25,663
|
|
|
|
118,883
|
|
Debt interest(1)
|
|
|
5,465
|
|
|
|
4,557
|
|
|
|
4,512
|
|
|
|
2,288
|
|
|
|
363
|
|
|
|
|
|
|
|
17,185
|
|
Debt obligations
|
|
|
1,073
|
|
|
|
1,471
|
|
|
|
1,471
|
|
|
|
161,621
|
|
|
|
353
|
|
|
|
|
|
|
|
165,989
|
|
Capital lease obligations, including interest(2)
|
|
|
11,438
|
|
|
|
9,940
|
|
|
|
6,677
|
|
|
|
1,800
|
|
|
|
|
|
|
|
|
|
|
|
29,855
|
|
Deferred acquisition payments(3)
|
|
|
1,500
|
|
|
|
750
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(4)
|
|
$
|
64,565
|
|
|
$
|
64,426
|
|
|
$
|
58,792
|
|
|
$
|
198,929
|
|
|
$
|
19,718
|
|
|
$
|
40,149
|
|
|
$
|
446,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Not required to be recorded in the Consolidated Balance Sheet as
of January 1, 2011 in accordance with accounting principles
generally accepted in the United States of America. |
|
(2) |
|
Capital lease obligations, excluding interest, are recorded in
the Consolidated Balance Sheets. |
|
(3) |
|
The $3,250 of deferred acquisition payments in the table above
represent fixed contractual future payments. The Company is also
obligated to pay up to an additional $208,400 from fiscal 2011
through fiscal 2016 based on the achievement of certain
financial targets by some of our acquired companies, of which
the Company has the ability to pay up to $45,800 with shares of
the Companys common stock. The Company is uncertain as to
if or when such amounts may be settled; as a result, these
obligations are not included in the table above. |
|
(4) |
|
The Company has entered into long-term incentive plans with
certain of its employees and executive which obligates the
Company to pay up to $50,000 to certain employees based on the
performance of the business for which the employee is
responsible. Amounts due under these incentive plans are payable
in cash and/or stock from fiscal 2012 through fiscal 2015. As
payment is not probable for any of these plans the Company is
uncertain as to if or when such amounts may be settled; as a
result, these obligations are not reflected in the Consolidated
Balance Sheet as of January 1, 2011 and not included in the
table above. |
Approximately $3,893 of unrecognized tax benefits have been
recorded as liabilities as of January 1, 2011, and the
Company is uncertain as to if or when such amounts may be
settled; as a result, these obligations are not included in the
table above. Changes to these tax contingencies that are
reasonably possible in the next 12 months are not expected
to be material.
The Company leases customer contact centers, fulfillment
centers, office facilities and certain fixed assets under
non-cancelable operating leases. Rent expense under operating
lease agreements was $20,207 for fiscal 2010, $21,796 for fiscal
2009 and $20,482 for fiscal 2008. Certain of these leases
contain customary renewal and extension provisions.
F-24
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
|
|
NOTE 9
|
STOCKHOLDERS
EQUITY
|
Preferred
Stock:
Under the Companys Certificate of Incorporation, the
maximum number of authorized shares of preferred stock,
$0.01 par value, is 5,000. The preferred stock may be
issued in one or more series, the terms of which may be
determined at the time of issuance by the Board of Directors,
without further action by stockholders, and may include voting
rights (including the right to vote as a series on particular
matters), preferences as to dividends and liquidation and
conversion and redemption rights. No preferred stock was issued
or outstanding for fiscal 2010 or fiscal 2009.
Common
Stock:
Under the Companys Certificate of Incorporation, the
maximum number of authorized shares of common stock,
$0.01 par value, is 180,000 at the end of fiscal 2010 and
was 90,000 at the end of fiscal 2009. In May 2010, the
Companys stockholders approved an increase to the total
number of authorized shares of common stock from
90,000 shares to 180,000 shares.
In August 2009, the Company completed a registered public
offering of 5,439 common shares at $17.00 per share. Net
proceeds from the sale of the common shares after deducting
underwriting discounts and commissions and offering expenses
were approximately $88,000.
Stockholders
Right Plan:
On April 2, 2006, the Board of Directors authorized
95 shares of Series A Junior Preferred Stock
(Series A) and declared a dividend distribution
of one right (a Right) for each outstanding share of
common stock to the stockholders of record on the close of
business on April 14, 2006. Each Right entitles the
registered holder to purchase from the Company a unit consisting
of one one-thousandth of a share of Series A, at a price of
$85 per unit, subject to adjustment. However, the Rights are not
exercisable unless certain events occur, such as a person or
group acquiring or obtaining the right to acquire, or making a
tender offer or exchange offer for, beneficial ownership of 20%
or more of the Companys outstanding common stock (or, in
the case of any stockholder that as of April 2, 2006
beneficially owned 19% or more of the Companys outstanding
shares of common stock, 25.1% or more). Subject to certain
exceptions, upon exercise of the Right, each holder of a Right
will have the right to receive shares of the Companys
common stock, or other consideration, having a value equal to
two times the exercise price of the Right. Additionally, at
certain times, the Company has the right to redeem the Rights in
whole, but not in part, at a price of $.001 per Right. The
description and terms of the Rights are set forth in a Rights
Agreement, dated April 2, 2006. The Rights will expire on
April 14, 2016, unless the Rights are earlier redeemed or
exchanged in accordance with the terms of the Rights Agreement.
As of January 1, 2011, no Series A shares were issued
or outstanding.
In May 2010, the Companys stockholders approved the 2010
Equity Incentive Plan (2010 Plan). The 2010 Plan
authorizes the award of 3,500 shares of the Companys
common stock. In addition, any outstanding stock awards
previously granted under the Companys 2005 Equity
Incentive Plan or the Companys Amended and Restated 1996
Equity Incentive Plan that expire, are terminated, cancelled or
forfeited, or are withheld in satisfaction of payment of
withholding taxes after May 28, 2010 will become available
for grant under the 2010 Plan. The 2010 Plan will terminate on
March 2, 2020, after which no further awards may be granted
under the 2010 Plan.
As of January 1, 2011, 3,699 shares of common stock
were available for future grants under the 2010 Plan. The equity
awards granted under the 2010 Plan generally vest at various
times over periods ranging up to five years and
F-25
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
have terms of up to ten years after the date of grant, unless
the optionees service to the Company is interrupted or
terminated.
Stock
Options and Warrants
The following table summarizes the stock option and warrant
activity for fiscal 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
(In thousands)
|
|
|
Price
|
|
|
Life (in years)
|
|
|
Value
|
|
|
Outstanding at January 2, 2010
|
|
|
3,252
|
|
|
$
|
9.88
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,027
|
)
|
|
$
|
8.30
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(3
|
)
|
|
$
|
9.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2011
|
|
|
1,222
|
|
|
$
|
12.50
|
|
|
|
3.33
|
|
|
$
|
13,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at January 1, 2011
|
|
|
1,222
|
|
|
$
|
12.50
|
|
|
|
3.33
|
|
|
$
|
13,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at January 1, 2011
|
|
|
1,222
|
|
|
$
|
12.50
|
|
|
|
3.33
|
|
|
$
|
13,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No options or warrants were granted in fiscal 2010, fiscal 2009
or fiscal 2008. The total intrinsic value of options and
warrants exercised was $38,797 for fiscal 2010, $6,736 for
fiscal 2009 and $511 for fiscal 2008 as determined as of the
date of exercise. Cash proceeds from options and warrants
exercised during fiscal 2010 were $16,823. The Company
recognized no stock-based compensation expense for options and
warrants in fiscal 2010, fiscal 2009 and fiscal 2008.
Restricted
stock Units and Awards
The following summarizes the restricted stock unit and
restricted stock award activity for fiscal 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Shares
|
|
|
Grant Date
|
|
|
|
(In thousands)
|
|
|
Fair Value
|
|
|
Nonvested shares at January 2, 2010
|
|
|
4,294
|
|
|
$
|
16.64
|
|
Granted
|
|
|
1,499
|
|
|
$
|
27.03
|
|
Vested
|
|
|
(1,792
|
)
|
|
$
|
14.42
|
|
Forfeited/Cancelled
|
|
|
(496
|
)
|
|
$
|
16.64
|
|
|
|
|
|
|
|
|
|
|
Nonvested shares at January 1, 2011
|
|
|
3,505
|
|
|
$
|
22.22
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2009, the Company granted to employees 1,809
restricted stock units at a weighted average fair value at grant
date of $11.13. During fiscal 2008, the Company granted to
employees 2,942 restricted stock units of the Companys
common stock at a weighted average fair value at grant date of
$14.28.
The total intrinsic value of restricted stock units that vested
was $47,196 for fiscal 2010, $13,152 for fiscal 2009 and $9,349
for fiscal 2008. As of January 1, 2011, there was
approximately $42,047 of unrecognized pre-tax compensation cost,
net of forfeitures, related to nonvested stock units, which is
expected to be recognized over a weighted average remaining
period of approximately 2.22 years.
F-26
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
Stock-based
Compensation Expense
The following table summarizes stock-based compensation expense
included in the Companys Consolidated Statements of
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 3,
|
|
|
January 2,
|
|
|
January 1,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Includes stock-based compensation as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Account management and operations
|
|
$
|
7,505
|
|
|
$
|
9,028
|
|
|
$
|
10,314
|
|
Product development
|
|
$
|
4,118
|
|
|
$
|
5,740
|
|
|
$
|
6,825
|
|
General and administrative
|
|
$
|
7,780
|
|
|
$
|
9,994
|
|
|
$
|
10,704
|
|
The loss before income taxes and the related benefit from income
taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 3,
|
|
|
January 2,
|
|
|
January 1,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Loss before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(20,588
|
)
|
|
$
|
1,541
|
|
|
$
|
(19,176
|
)
|
Foreign
|
|
|
(9,968
|
)
|
|
|
(10,225
|
)
|
|
|
(17,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(30,556
|
)
|
|
$
|
(8,684
|
)
|
|
$
|
(36,220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
488
|
|
|
$
|
588
|
|
|
$
|
72
|
|
State
|
|
|
1,765
|
|
|
|
1,554
|
|
|
|
878
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current
|
|
$
|
2,253
|
|
|
$
|
2,142
|
|
|
$
|
980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(10,252
|
)
|
|
$
|
4,123
|
|
|
$
|
(1,006
|
)
|
State
|
|
|
1,339
|
|
|
|
(3,921
|
)
|
|
|
1,029
|
|
Foreign
|
|
|
(925
|
)
|
|
|
|
|
|
|
(343
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deferred
|
|
$
|
(9,838
|
)
|
|
$
|
202
|
|
|
$
|
(320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(9,764
|
)
|
|
$
|
4,711
|
|
|
$
|
(934
|
)
|
State
|
|
|
3,104
|
|
|
|
(2,367
|
)
|
|
|
1,907
|
|
Foreign
|
|
|
(925
|
)
|
|
|
|
|
|
|
(313
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(7,585
|
)
|
|
$
|
2,344
|
|
|
$
|
660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-27
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
The significant components of net deferred tax assets and
liabilities as of January 2, 2010 and January 1, 2011
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
January 2,
|
|
|
January 1,
|
|
|
|
2010
|
|
|
2011
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
87,321
|
|
|
$
|
97,244
|
|
Deferred revenue
|
|
|
8,008
|
|
|
|
7,680
|
|
Stock-based compensation
|
|
|
5,022
|
|
|
|
6,087
|
|
Investment impairment and losses
|
|
|
3,479
|
|
|
|
3,611
|
|
Allowance for sales returns
|
|
|
3,072
|
|
|
|
3,971
|
|
Alternative minimum tax credits
|
|
|
2,250
|
|
|
|
2,038
|
|
Amortization
|
|
|
1,127
|
|
|
|
2,030
|
|
Research and development tax credits
|
|
|
1,390
|
|
|
|
1,390
|
|
Provision for doubtful accounts
|
|
|
1,294
|
|
|
|
1,522
|
|
Accrued expenses
|
|
|
384
|
|
|
|
784
|
|
Inventory
|
|
|
104
|
|
|
|
2,187
|
|
Restructuring
|
|
|
41
|
|
|
|
|
|
Other
|
|
|
3,629
|
|
|
|
3,954
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
117,121
|
|
|
|
132,498
|
|
Valuation allowance
|
|
|
(49,797
|
)
|
|
|
(52,208
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets, net of valuation allowance
|
|
|
67,324
|
|
|
|
80,290
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(3,174
|
)
|
|
|
(4,538
|
)
|
Amortization of intangibles
|
|
|
(45,845
|
)
|
|
|
(45,883
|
)
|
Interest on convertible notes
|
|
|
(14,492
|
)
|
|
|
(11,151
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(63,511
|
)
|
|
|
(61,572
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
3,813
|
|
|
$
|
18,718
|
|
|
|
|
|
|
|
|
|
|
As of January 1, 2011, the Company had available federal,
state and foreign net operating loss carryforwards
(NOLs) of approximately $216,202, $348,477 and
$30,852, respectively, which expire in the years 2011 through
2030. The Company has additional federal NOLs of
approximately $306,403, which are not available to offset future
taxable income due to previous acquisitions and ownership
changes as defined in Section 382 of the Internal Revenue
Code, and are not reflected in the Companys gross deferred
tax assets or valuation allowance in the table above as of
January 1, 2011. The Company has reduced the previously
reported net operating loss carryforwards deferred tax asset and
related valuation allowance as of January 2, 2010 in the
table above by $108,163 to present the amount of the net
operating loss carryforwards that were available to offset
future taxable income, after consideration of limitations
required by Section 382. The previously reported amounts
were presented on a gross basis, which included certain amounts
that were not available to offset future taxable income due to
previous acquisitions and ownership changes as defined in
Section 382 of the Internal Revenue Code. This adjustment
had no net impact on the previously reported net deferred tax
assets since the additional net operating loss carryforwards had
a full valuation against them.
F-28
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
The Companys available net operating loss carryforwards
expire as follows:
|
|
|
|
|
2011-2016
|
|
$
|
46,158
|
|
2017-2022
|
|
|
211,182
|
|
2023-2030
|
|
|
338,191
|
|
|
|
|
|
|
|
|
$
|
595,531
|
|
Realization of the $595,531 of available NOLs is dependent
on generating sufficient taxable income prior to their
expiration. The Company believes that it is more likely than not
that the benefit from certain federal, state and foreign net
operating loss carryforward will not be realized. Accordingly,
the Company has provided a valuation allowance of approximately
$48,703 on the deferred tax asset relating to these NOLs.
If and when recognized, the tax benefits relating to any
reversal of the valuation allowance on the NOLs will be
recognized as a reduction of income tax expense.
In addition, there is a valuation allowance of $3,295 and $210
on deferred tax assets related to capital losses and state
credits, respectively as of January 1, 2011. If and when
recognized, the tax benefits relating to any reversal of this
valuation allowance will be recognized as a reduction of income
tax expense.
In fiscal years 2010 and 2009, there was an excess tax benefit
generated from the exercise of vesting of stock options and
awards that decreased taxable income. The tax benefit increased
additional paid-in capital by $21,918 and $1,175, respectively.
In fiscal 2008, there was a reduction of tax benefit generated
from the exercise and vesting of stock options and awards that
increased taxable income and resulted in a reduction to
additional paid-in capital by $919.
Included in the net operating loss deferred tax asset above is
approximately $7,558 of the federal net operating loss
carryforwards attributable to excess tax benefits generated from
the exercise and vesting of stock option and awards. Due to the
provisions of accounting for share-based payments concerning the
timing of tax benefits related to excess stock deductions that
can be credited to additional paid in capital, the related
valuation allowance cannot be reversed, even if the facts and
circumstances indicate that it is more likely than not that the
deferred tax asset can be realized. The valuation allowance will
only be reversed as the related deferred asset is applied to
reduce taxes payable. The Company follows tax law ordering to
determine when such net operating loss has been realized.
F-29
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
The differences between the statutory federal income tax rate
and the effective income tax rate are provided in the following
reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 3,
|
|
|
January 2,
|
|
|
January 1,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Statutory federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Increase (decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign statutory rates differing from U.S. statutory rate
|
|
|
(1.9
|
)%
|
|
|
(5.7
|
)%
|
|
|
(1.7
|
)%
|
Valuation allowance
|
|
|
(6.8
|
)%
|
|
|
(37.4
|
)%
|
|
|
(9.7
|
)%
|
State taxes
|
|
|
(1.0
|
)%
|
|
|
18.4
|
%
|
|
|
(3.1
|
)%
|
Non-deductible goodwill impairment
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
(75.8
|
)%
|
Non-deductible change in deferred acquisition payments
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
54.1
|
%
|
Non-deductible officers compensation
|
|
|
0.0
|
%
|
|
|
(7.0
|
)%
|
|
|
(2.0
|
)%
|
Non-deductible acquisition-related costs
|
|
|
0.0
|
%
|
|
|
(8.5
|
)%
|
|
|
(1.8
|
)%
|
Non-deductible stock comp expense
|
|
|
0.0
|
%
|
|
|
(10.7
|
)%
|
|
|
0.0
|
%
|
Other non-deductible items
|
|
|
0.0
|
%
|
|
|
(6.7
|
)%
|
|
|
(1.5
|
)%
|
Other
|
|
|
(0.5
|
)%
|
|
|
(4.4
|
)%
|
|
|
4.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
24.8
|
%
|
|
|
(27.0
|
)%
|
|
|
(1.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the ordinary course of business, there are many
transactions and calculations for which the ultimate tax
determination is uncertain. The Company establishes liabilities
for tax-related uncertainties based on estimates of whether, and
the extent to which, additional taxes will be due. These
reserves are established when the Company believes that certain
positions might be challenged despite the Companys belief
that its tax return positions are fully supportable. The Company
adjusts these reserves in light of changing facts and
circumstances, such as the outcome of tax audit. The provision
for income taxes includes the impact of reserve provisions and
changes to reserves that are considered appropriate. A
reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 3,
|
|
|
January 2,
|
|
|
January 1,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Balance at the beginning of the fiscal year
|
|
$
|
1,014
|
|
|
$
|
1,708
|
|
|
$
|
2,052
|
|
Gross increases for tax positions related to current year
|
|
|
290
|
|
|
|
258
|
|
|
|
1,918
|
|
Gross increases for tax positions related to prior years
|
|
|
112
|
|
|
|
109
|
|
|
|
71
|
|
Gross increases acquired in acquisitions
|
|
|
347
|
|
|
|
|
|
|
|
|
|
Gross decreases for tax positions related to prior years
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
Gross decreases as a result of a lapse of the statute of
limitations
|
|
|
|
|
|
|
(23
|
)
|
|
|
(148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the fiscal year
|
|
$
|
1,708
|
|
|
$
|
2,052
|
|
|
$
|
3,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of unrecognized tax benefits that, if recognized,
would impact the effective tax rate were $3,861 as of
January 1, 2011 and $2,052 as of January 2, 2010.
Unrecognized tax benefits related to the opening balance sheet
of acquired companies was $0 as of January 1, 2011 and $0
as of January 2, 2010.
The Companys policy is to include interest and penalties
related to the Companys tax contingencies in income tax
expense. The total amount of interest and penalties related to
uncertain tax positions and recognized in the statement of
earnings for fiscal 2010 and fiscal 2009 was $54 and $78,
respectively. The total amount of interest
F-30
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
and penalties related to uncertain tax positions and recognized
in the balance sheet was $284 as of January 1, 2011, $230
as of January 2, 2010, and $152 as of January 3, 2009.
The Company is not currently undergoing any U.S. federal
income tax audits nor has it been notified of any pending
audits. For U.S. federal income taxes, the statute of
limitations has expired through fiscal year 2006. The Internal
Revenue Service cannot assess additional taxes for closed years,
but can adjust the net operating loss carryforward generated in
those closed years until the statute of limitations for the year
the net operating loss is utilized has expired.
The Company does not provide for U.S. taxes on
undistributed earnings of foreign subsidiaries since the Company
intends to invest such undistributed earnings indefinitely
outside of the U.S. If such amounts were repatriated, the
amount of U.S. income taxes would be immaterial.
Basic loss per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding
during the fiscal year. Diluted loss per share is computed by
dividing net income by the weighted average number of shares of
common stock outstanding during the fiscal year including the
dilutive effect of (i) stock awards as determined under the
treasury stock method, and (ii) convertible debt
instruments as determined under the if-converted method.
The following is a summary of the securities that are issuable
pursuant to equity awards or the conversion of notes that have
been excluded from the calculations because the effect on net
income per share would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Of
|
|
|
|
January 3,
|
|
|
January 2,
|
|
|
January 1,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Stock units and awards
|
|
|
3,792
|
|
|
|
4,294
|
|
|
|
3,505
|
|
Stock options and warrants
|
|
|
4,244
|
|
|
|
3,252
|
|
|
|
1,222
|
|
Convertible notes
|
|
|
8,229
|
|
|
|
8,229
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,265
|
|
|
|
15,775
|
|
|
|
9,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 13
|
MAJOR
SUPPLIERS/ECONOMIC DEPENDENCY
|
The Company purchased inventory from one supplier amounting to
$49,025 or 15% of total inventory purchased during fiscal 2010,
from one supplier amounting to $41,337 or 18% of total inventory
purchased during fiscal 2009, and from two suppliers amounting
to $39,788 or 17% and $29,989 or 13% of total inventory
purchased during fiscal 2008.
No other supplier amounted to more than 10% of total inventory
purchased for any period presented, nor did any one customer
account for more than 10% of net revenues for any period
presented.
|
|
NOTE 14
|
SEGMENT
INFORMATION
|
The Company operates three reportable segments: Global
e-Commerce
Services (GeC), Global Marketing Services
(GMS) and Consumer Engagement. For GeC, the Company
offers a comprehensive suite of
e-commerce
services that enable companies to operate
e-commerce
businesses and to integrate their
e-commerce
businesses with their multi-channel retail offerings. For GMS,
the Company offers a broad suite of services to help clients
exploit digital marketing channels. For Consumer Engagement, the
Company operates consumer facing
e-commerce
businesses that are complimentary to the clients of the GeC and
GMS segments.
F-31
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
The Company manages its segments and makes financial decisions
and allocates resources based on an internal management
reporting process that provides segment revenue and segment
profit (loss) before depreciation, amortization, changes in fair
value of deferred acquisition payments, stock-based compensation
expense and impairment of goodwill and intangible assets.
Beginning in the second quarter of fiscal 2010, the Company
started excluding the following expenses from its segment profit
(loss): acquisition related integration, transaction, due
diligence expenses, non-cash inventory valuation adjustments,
and the cash portion of deferred acquisition payments recorded
as compensation expense. The Company has conformed its prior
period segment results to reflect this change in
Form 8-K
filed on August 10, 2010 and in this footnote. The Company
believes this metric is an appropriate measure of evaluating the
operational performance of the Companys segments. The
Company also uses this metric for planning, forecasting and
analyzing future periods. However, this measure should be
considered in addition to, not as a substitute for, or superior
to, income from operations or other measures of financial
performance prepared in accordance with GAAP.
The Company manages its working capital on a consolidated basis
and does not allocate long-lived assets to segments. Pursuant to
accounting standards for Disclosures about Segments of an
Enterprise and Related Information, total segment assets
have not been disclosed.
The following tables present summarized information by
segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 3, 2009
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
Intersegment
|
|
|
|
|
|
|
GeC
|
|
|
GMS
|
|
|
Engagement
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Net revenues
|
|
$
|
900,040
|
|
|
$
|
84,508
|
|
|
$
|
|
|
|
$
|
(17,622
|
)
|
|
$
|
966,926
|
|
Segment costs and expenses
|
|
|
833,174
|
|
|
|
69,442
|
|
|
|
|
|
|
|
(17,622
|
)
|
|
|
884,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit
|
|
|
66,866
|
|
|
|
15,066
|
|
|
|
|
|
|
|
|
|
|
|
81,932
|
|
Acquisition related integration, transaction, due diligence
expenses, non-cash inventory valuation adjustments, and the cash
portion of deferred acquisition payments recorded as
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,636
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,153
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,260
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,841
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,772
|
)
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,562
|
|
Impairment of equity investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(30,556
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-32
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 2, 2010
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
Intersegment
|
|
|
|
|
|
|
GeC
|
|
|
GMS
|
|
|
Engagement
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Net revenues
|
|
$
|
879,575
|
|
|
$
|
127,580
|
|
|
$
|
26,347
|
|
|
$
|
(29,287
|
)
|
|
$
|
1,004,215
|
|
Segment costs and expenses
|
|
|
805,170
|
|
|
|
96,980
|
|
|
|
24,971
|
|
|
|
(29,287
|
)
|
|
|
897,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit
|
|
|
74,405
|
|
|
|
30,600
|
|
|
|
1,376
|
|
|
|
|
|
|
|
106,381
|
|
Acquisition related integration, transaction, due diligence
expenses, non-cash inventory valuation adjustments, and the cash
portion of deferred acquisition payments recorded as
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,007
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,395
|
|
Changes in fair value of deferred acquisition payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
951
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,266
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,430
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(478
|
)
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(8,684
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended January 1, 2011
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
Intersegment
|
|
|
|
|
|
|
GeC
|
|
|
GMS
|
|
|
Engagement
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Net revenues
|
|
$
|
1,024,370
|
|
|
$
|
189,918
|
|
|
$
|
216,735
|
|
|
$
|
(73,029
|
)
|
|
$
|
1,357,994
|
|
Segment costs and expenses
|
|
|
928,875
|
|
|
|
141,550
|
|
|
|
225,919
|
|
|
|
(73,029
|
)
|
|
|
1,223,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment profit
|
|
|
95,495
|
|
|
|
48,368
|
|
|
|
(9,184
|
)
|
|
|
|
|
|
|
134,679
|
|
Acquisition related integration, transaction, due diligence
expenses, non-cash inventory valuation adjustments, and the cash
portion of deferred acquisition payments recorded as
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,036
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,763
|
|
Changes in fair value of deferred acquisition payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60,963
|
)
|
Impairment of goodwill and intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,318
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,318
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,292
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(338
|
)
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,212
|
|
Loss on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and equity-method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investment earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(36,220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-33
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
The Company has two product groups and one service group. The
two product groups consist of the sale of general merchandise
and freight revenue, which collectively represents the
Companys net revenues from product sales. The following
table represents net revenues attributable to the Companys
product and service groups:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
January 3,
|
|
|
January 2,
|
|
|
January 1,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Product sale groupings:
|
|
|
|
|
|
|
|
|
|
|
|
|
General merchandise
|
|
$
|
456,886
|
|
|
$
|
409,198
|
|
|
$
|
594,963
|
|
Freight
|
|
|
120,187
|
|
|
|
133,051
|
|
|
|
182,385
|
|
Service fees
|
|
|
389,853
|
|
|
|
461,966
|
|
|
|
580,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
966,926
|
|
|
$
|
1,004,215
|
|
|
$
|
1,357,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys operations are substantially within the
United States.
|
|
NOTE 15
|
RELATED
PARTY TRANSACTIONS
|
On October 17, 2008, the Company entered into a letter
agreement with Linens Holding Co. (Linens) and Hilco
Consumer Capital, L.P. (HCC), pursuant to which HCC
and the Company would act jointly as agent for Linens to
liquidate, on the LNT.com webstore, certain inventory owned by
Linens located at one of the Companys fulfillment centers.
On October 16, 2008 the Company and HCC entered into a
letter agreement outlining the terms of their joint agency with
respect to the merchandise, pursuant to which the Company would
receive a percentage of the sales price of the merchandise for
performing all services necessary to take orders, process and
ship the merchandise. M. Jeffrey Branman, one of the
Companys directors, serves as Managing Director of Hilco
Consumer Capital, LLC, the managing partner of HCC. The Company
recognized net revenues of $0 during fiscal 2010, $784 during
fiscal 2009 and $6,617 during fiscal 2008 on sales of
merchandise pursuant to the agency arrangement between the
Company, HCC and Linens. The percentage of the sales price
earned by the Company under these letter agreements is
comparable to the percentage of the sales price earned by the
Company under its
e-commerce
agreement with Linens prior to its liquidation.
On February 22, 2010, Liberty Media Corporation, through
its subsidiary QVC, Inc., and QVCs affiliate QK Holdings,
Inc., sold 9,249 shares of the Companys outstanding
common stock, which represented its entire ownership of the
Company. On April 13, 2007, the Company entered into an
E-Commerce
Distribution Agreement with QVC, Inc. (the New QVC
Agreement) that replaced its existing agreement with iQVC,
a division of QVC (the Old QVC Agreement), under
which the Company provided technology, procurement and
fulfillment services for QVC, including selling sporting goods,
recreational
and/or
fitness related equipment and related products, apparel and
footwear to QVC for resale through the QVC website. Under the
New QVC Agreement, the Company provides procurement and
fulfillment services for QVC, including selling sporting goods,
recreational
and/or
fitness related equipment and related products, apparel and
footwear to QVC for resale through the QVC website. The terms of
these sales are comparable to those with other similar clients.
On May 11, 2007, the Company entered into an agreement with
QVC, Inc. (the QVC NFL Agreement), pursuant to which
the Company makes NFL licensed merchandise available to QVC for
QVC to sell both on its website and on live direct response
television programs. The Company will be the exclusive provider
of NFL licensed merchandise to QVC, subject to limited
exceptions, and the Companys fulfillment network will
fulfill product orders received from QVCs website and the
QVC live direct response programs.
The Company recognized net revenues of $10,548 during fiscal
2010, $10,140 during fiscal 2009 and $8,504 during fiscal 2008
on sales to QVC under these agreements. The Company had accounts
receivable of $580 as of January 1, 2011, and $406 as of
January 2, 2010.
F-34
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
Michael Rubin, chairman, president and CEO of the Company, was
the owner of approximately 1.6 percent of Rue
La Las capital stock (on a fully-diluted as-converted
basis). Upon acquisition, Mr. Rubin received $1,324 in cash
and 76 shares of the Companys common stock.
On February 18, 2010, the Company entered into a commercial
agreement with Intershop pursuant to which the Company has
purchased a software license and is receiving technology
consulting services as a foundation for its next generation
webstore product. In addition, the Company became the exclusive
reseller of Intershop licenses in the Americas and a
non-exclusive reseller on a global basis, and will share a
portion of the proceeds of any licenses sold by the Company with
Intershop. In fiscal 2010, the Company incurred costs of $7,104
for the software license and consulting services from Intershop.
The Company did not incur any revenue or expenses in fiscal 2010
for re-sales of Intershops software.
|
|
NOTE 16
|
QUARTERLY
RESULTS (UNAUDITED)
|
The following tables contain selected unaudited Statement of
Operations information for each quarter of fiscal 2009 and 2010.
The Company believes that the following information reflects all
normal recurring adjustments necessary for a fair presentation
of the information for the periods presented. The operating
results for any quarter are not necessarily indicative of
results for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended January 2, 2010
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Net revenues
|
|
$
|
196,475
|
|
|
$
|
187,181
|
|
|
$
|
190,311
|
|
|
$
|
430,248
|
|
Income (loss) from operations
|
|
$
|
(14,534
|
)
|
|
$
|
(12,277
|
)
|
|
$
|
(9,913
|
)
|
|
$
|
46,990
|
|
Net income (loss)
|
|
$
|
(12,110
|
)
|
|
$
|
(13,113
|
)
|
|
$
|
(9,406
|
)
|
|
$
|
23,601
|
|
Income (loss) per share basic(1)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
0.41
|
|
Income (loss) per share diluted(1)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
0.38
|
|
Weighted average shares outstanding basic
|
|
|
47,926
|
|
|
|
48,681
|
|
|
|
51,910
|
|
|
|
57,310
|
|
Weighted average shares outstanding diluted
|
|
|
47,926
|
|
|
|
48,681
|
|
|
|
51,910
|
|
|
|
68,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended January 1, 2011
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Net revenues
|
|
$
|
272,591
|
|
|
$
|
264,229
|
|
|
$
|
284,138
|
|
|
$
|
537,036
|
|
Income (loss) from operations
|
|
$
|
(12,933
|
)
|
|
$
|
(22,620
|
)
|
|
$
|
(20,221
|
)
|
|
$
|
38,456
|
|
Net income (loss)
|
|
$
|
(8,125
|
)
|
|
$
|
(25,731
|
)
|
|
$
|
(18,578
|
)
|
|
$
|
15,932
|
|
Income (loss) per share basic(1)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.41
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
0.24
|
|
Income (loss) per share diluted(1)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.41
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
0.23
|
|
Weighted average shares outstanding basic
|
|
|
60,446
|
|
|
|
63,286
|
|
|
|
66,419
|
|
|
|
66,608
|
|
Weighted average shares outstanding diluted
|
|
|
60,446
|
|
|
|
63,286
|
|
|
|
66,419
|
|
|
|
68,268
|
|
|
|
|
(1) |
|
The sum of the quarterly per share amounts may not equal per
share amounts reported for
year-to-date
periods. This is due to changes in the number of weighted
average shares outstanding and the effects of rounding for each
period. |
|
|
NOTE 17
|
SUBSEQUENT
EVENTS
|
On February 9, 2011, the Company entered into definitive
agreement to acquire 100% of the issued and outstanding capital
stock of Fanatics, Inc. (Fanatics) for approximately
$277,000 comprised of approximately
F-35
GSI
COMMERCE, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(amounts in thousands, except per share data)
$171,000 in cash and 4,772 shares of the Companys
common stock valued at approximately $106,000 at the time of the
signing. The acquisition is expected to close in the second
quarter of fiscal 2011 and is subject to the satisfaction of
customary closing conditions and expiration or termination of
the waiting period under the
Hart-Scott-Rodino
Antitrust Improvements Act. Fanatics operates over 250
e-commerce
websites and over 60
e-commerce
stores for collegiate and professional sports partners and media
organizations. The Company believes the combination of Fanatics
and the Company will create a leader in the online licensed
sports merchandise industry.
Also on February 9, 2011, the Company entered to a new
$400,000 credit facility (the New Credit Facility)
with a consortium of banks that will close simultaneously with
and will be contingent upon the closing of the Fanatics
acquisition. The New Credit Facility will replace the
Companys existing $150,000 secured revolving credit
facility and is available for general corporate purposes,
working capital, letters of credit, funding of the Fanatics
acquisition and funding of possible future acquisitions. The New
Credit Facility is comprised of a
5-year
$115,000 senior secured term loan and a
5-year
$285,000 secured revolving credit facility with the option to
increase the commitments under these facilities by up to an
additional $50 million to a total of $450 million. The
New Credit Facility becomes effective if the acquisition of
Fanatics closes on or before May 10, 2011 and once
effective will expire in February 2016. The New Credit Facility
will be secured by substantially all of the Companys
assets and contains certain affirmative and negative covenants.
Also on February 9, 2011 the Board of Directors of the
Company authorized a share buyback program of up to an aggregate
of $50 million of its common stock over the next two years,
commencing on the closing of the Fanatics acquisition. Shares
may be repurchased from time to time at prevailing prices in the
open market, including pursuant to
Rule 10(b)5-1
trading plans.
******
F-36