As filed with the Securities and Exchange Commission on October 19, 2011

No. 333-173668

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 4

to

Form S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Bluestem Brands, Inc.

(Exact name of registrant as specified in its charter)

 

 

6509 Flying Cloud Drive

Eden Prairie, Minnesota 55344

(952) 656-3700

(Address, including zip code, and telephone number,

including area code, of registrant’s principal executive offices)

 

Brian A. Smith

Chief Executive Officer

Bluestem Brands, Inc.

6509 Flying Cloud Drive

Eden Prairie, Minnesota 55344

(952) 656-3700

(Name, address, including zip code, and telephone number,

including area code, of agent for service)

 

Copies of all communications, including communications sent to agent for service, should be sent to:

 

 

Approximate date of commencement of proposed sale to the public:  As soon as practicable after this Registration Statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box: o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities act registration statement number of the earlier effective registration statement for the same offering. o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. 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):

 

(Do not check if a smaller reporting company)

 

CALCULATION OF REGISTRATION FEE

 

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

Subject to Completion, Dated October 19, 2011

 

           Shares

 

 

Common Stock

 

 

 

 

This is the initial public offering of shares of common stock of Bluestem Brands, Inc. We are offering           shares of our common stock and the selling stockholders are offering           shares of common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. The estimated initial public offering price is between           and           per share. We have applied for listing of our common stock on the NASDAQ Global Select Market under the symbol “BSTM.”

 

 

 

 

Investing in our common stock involves risk. See “Risk Factors” beginning on page 13.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

We have granted the underwriters an option for a period of 30 days to purchase up to           additional shares of common stock.

 

The underwriters expect to deliver the shares on or about          , 2011.

 

 

The date of this prospectus is          , 2011.

 

TABLE OF CONTENTS

 

 

 

 

 

We are responsible for the information contained in this prospectus and in any related free writing prospectus we prepare or authorize. Neither we nor the selling stockholders have authorized anyone to give you any other information, and neither we nor the selling stockholders take any responsibility for any other information that others may give you. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where such offers and sales are permitted. The information in this prospectus or a free writing prospectus is accurate only as of its date, regardless of its time of delivery or the time of any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

ABOUT THIS PROSPECTUS

 

Certain differences in the numbers in the tables and text throughout this prospectus may exist due to rounding.

 

We use a typical retail 52 or 53 week fiscal year ending on the Friday closest to January 31st of each year. Fiscal years are identified in this prospectus according to the calendar year in which the fiscal year begins. For example, references to “2010,” “fiscal 2010,” “fiscal year 2010” or similar references refer to the fiscal year ended January 28, 2011.

 

All share and per share information referenced throughout this prospectus has been adjusted to reflect a 1 for 94.67 reverse stock split of our common stock that became effective on September 9, 2011, other than references to our authorized equity capital and except as otherwise indicated.

 

TRADEMARKS AND TRADE NAMES

 

This prospectus includes our trademarks such as Fingerhut^®, Gettington.com^®, and Fingerhut FreshStart^sm, which are protected under applicable intellectual property laws and are the property of Bluestem Brands, Inc. or its subsidiaries. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ^®, ^sm or ^tm symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks and trade names. This prospectus also contains trademarks, service marks, trade names and copyrights of other companies, which are the property of their respective owners. Such trademarks and trade names may also appear without the ^®, ^sm or ^tm symbols.

 

 

This summary highlights information contained elsewhere in this prospectus. This summary is a brief overview of the key aspects of this offering and does not contain all of the information that you should consider in making your investment decision. You should read the following summary together with the entire prospectus, including the more detailed information regarding us, the common stock being sold in this offering and our financial statements and the related notes appearing elsewhere in this prospectus. You should carefully consider, among other things, the matters discussed in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus before deciding to invest in our common stock. Some of the statements in this prospectus constitute forward looking statements. See “Forward Looking Statements.”

 

Company Overview

 

We are a leading national multi-brand, multi-channel retailer of a broad selection of name brand and private label general merchandise which we sell through our Fingerhut and Gettington.com brands to low to middle income consumers. We estimate that our target customer demographic represents approximately 100 million consumers, or approximately one-third of the U.S. population. Our customers rely on the credit products we offer to pay over time for their purchases from us.

 

We market our merchandise to our existing and prospective customers through multi-channel marketing strategies and proprietary targeted marketing and credit decision-making tools. Very few retailers today combine the sale of general merchandise with customized credit products. We believe that the breadth of the merchandise and the flexibility and convenience of the credit products we offer, combined with our high level of customer service, create value for our customers and promote loyalty, as demonstrated by our high customer repurchase rate of approximately 57% during 2010.

 

The Fingerhut brand has provided customers with extensive branded, non-branded and private label general merchandise selections, and monthly payment plans, for over 60 years. Historically, catalogs have been the primary source of orders for Fingerhut, although customers are increasingly making purchases online. We launched Gettington.com in 2009 as an alternative e-commerce brand targeting a slightly younger, more e-commerce focused customer. Overall, online orders accounted for 44% of our total orders during 2010, compared to 25% in 2005.

 

We offer an extensive assortment of general merchandise including hundreds of well recognized name brands such as Columbia, Dyson, Fisher-Price, KitchenAid, Skechers and Sony, as well as targeted, high quality private label offerings under our own brands, including Chef’s Mark, LifeMax, Master Craft, McLeland Designs, Outdoor Spirit and Super Chef. We continuously tailor our merchandise across three key product categories:

 

 

In fiscal year 2010, we had net sales of $521 million versus $438 million in fiscal 2009, an increase of 19%. Adjusted EBITDA grew 23% over the same period, from $64 million to $78 million. Net income before loss from derivatives in our own equity grew 34%, from $16 million to $21 million, while GAAP net income declined from $9.2 million in fiscal 2009 to a loss of $11.5 million in fiscal 2010,

 

 

due to increases in the value of the conversion feature of our preferred stock and the value of our common stock warrants. Additionally, new customer acquisitions increased over that same period from 439,000 to 599,000, a 36% increase, and average order size grew 8%, from $166 to $180. For a discussion of the non-GAAP measures Adjusted EBITDA and net income before loss from derivatives in our own equity, and reconciliations to net income, see notes (i) and (j) to “Selected Consolidated Financial and Other Data.”

 

Our History

 

Founded in 1948, the Fingerhut brand stands for offering customers a wide assortment of high quality general merchandise and flexible monthly payment plans. Our company, Bluestem Brands, Inc., formerly named Fingerhut Direct Marketing, Inc., was established in 2002 when we acquired certain assets of Fingerhut Companies, Inc., from FAC Acquisition LLC, which had acquired the assets from Federated Department Stores, Inc.

 

Industry Overview

 

We participate in the general merchandise segment of the retailing industry and sell through complementary catalog and e-commerce channels.

 

General Merchandise — According to the U.S. Census Bureau, this segment generated $610.3 billion of sales in 2010, representing 14% of total U.S. retail sales and a 2.9% compounded annual growth rate from $527.9 billion of sales in 2005.

 

Catalog — The catalog retailing industry consists of retail goods purchased via mail order, catalog and other media channels. This sector generated $132.7 billion of U.S. sales in 2010 according to IBISWorld.

 

E-commerce — According to Forrester Research, U.S. online retail sales were $176.2 billion in 2010 and are expected to grow to $278.9 billion in 2015, representing a 9.6% compounded annual growth rate. In addition, Forrester predicts that online retail sales will grow from 8% of total retail sales in 2010 to 11% of total retail sales by 2015.

 

Our Target Market

 

Our target market is low to middle income, credit constrained consumers with FICO scores between 500 and 700. Based on an Equifax report provided in March 2011, the estimated size of the U.S. population with FICO scores between 500 and 700 was approximately 100 million. Within this group, we target a subset of low to middle income consumers, which we define as those with an annual household income below $75,000. Consumers with household incomes below $75,000 represented approximately 68% of all U.S. consumers in 2009, according to the U.S. Census Bureau.

 

Our Competitive Strengths

 

We believe we have a number of competitive strengths that distinguish us from our competitors and that are key to our continuing success. These include:

 

Highly Recognized Brand with Significant Customer Loyalty

 

By consistently marketing our distinct combination of leading general merchandise brands with targeted credit offers to low to middle income consumers, Fingerhut has become a highly recognized brand garnering significant customer loyalty. We believe our focus on providing timely, relevant offers using

 

 

our targeted marketing capabilities, a user-friendly customer order process and transparent credit offers instills trust and helps build positive customer relationships.

 

Expertise in Serving a Niche Customer Segment

 

We have developed significant expertise in serving low to middle income, credit constrained consumers by exclusively focusing on the specific needs of this customer segment. We have a deep understanding of our customers’ merchandise preferences and utilize our extensive marketing experience to develop a tailored message to attract their attention.

 

Integrated and Differentiated Business Model

 

We have created a differentiated business model by combining our direct marketing and credit decision-making expertise to offer integrated general merchandise and credit products across multiple channels. We believe only a few companies integrate these functions as well as we do or with the same level of success in the low to middle income demographic.

 

Sophisticated, Proprietary Marketing and Credit Decision-Making Technologies

 

We have developed sophisticated prospect and customer databases that support our ability to successfully offer, through third party financial institutions, credit to low to middle income, credit constrained consumers. Our technology enables us to make credit decisions utilizing the latest customer behavior information, and allows us to make real time underwriting decisions, at the point of sale. We believe we acquire, convert and retain customers in an efficient and cost effective manner while maintaining a high level of risk management.

 

Established Multi-Channel Platform

 

We have created and developed Internet marketing strategies and web order channels in order to capitalize on the growing e-commerce market and complement our catalog direct marketing expertise. Our online customer orders have increased from 25% of total orders placed in 2005 to 44% in 2010. Our internal data indicates that our catalogs reinforce our Internet marketing channels, as many customers respond to our catalogs by shopping and ordering merchandise on the Fingerhut.com and Gettington.com websites.

 

Highly Experienced Management Team

 

We believe that the breadth and experience of our executive team is extremely valuable in driving the success of our multi-faceted business. Our executive team members have prior experience with large organizations and collectively have significant analytical experience as it pertains to running retail and credit businesses. Our executive officers have an average of 22 years of experience with leading retail, finance and technology companies.

 

Our Growth Strategy

 

We expect to grow our sales and profits through a multi-pronged approach that leverages our expertise in serving our target market. Key elements of our growth strategy include:

 

Increasing Penetration with Existing and Prospective Customers

 

We intend to increase sales by proactively identifying new customer prospects that are best suited for our combined merchandise and credit offerings. We consistently update and test our marketing messages to optimize our marketing effectiveness. Furthermore, we will continue to refresh our merchandise offerings, which we believe attracts new customers and drives repeat existing customer purchases.

 

 

Increasing Internet Penetration

 

Our Internet marketing efforts allow us to reach existing and prospective customers in a cost efficient manner. As our current catalog customers become increasingly comfortable shopping online, we expect to continue to evolve into a more web-centric model and realize cost savings through a reduction in catalogs and other print marketing materials. Since 2008, we have consistently been ranked as a top 100 Internet retailer based on online sales by “Internet Retailer.”

 

Expanding Our Demographic Reach

 

We are committed to expanding our reach to prospective customers who we believe will benefit from our merchandise and credit offerings. As an example, we have developed robust marketing and servicing capabilities targeting the Spanish speaking sub-population of our target market.

 

Growing Gettington.com and Continuing to Introduce New Concepts

 

In 2009, we launched Gettington.com as a complementary brand to Fingerhut, targeting a slightly younger, more e-commerce focused customer. This target customer base possesses a higher average credit score than the typical Fingerhut customer and seeks a wide assortment of on-trend brands and items. Gettington.com offers more competitive price points and credit options than the Fingerhut brand, which makes it more appealing to this customer segment. Going forward, we intend to introduce additional new concepts that target low to middle income consumers while utilizing our existing infrastructure, business intelligence and technological capabilities.

 

Introducing New Credit Offerings

 

We intend to continue to develop new credit products with the goal of capturing additional consumer segments while further solidifying relationships with existing customers. As a recent example, we introduced Fingerhut FreshStart in 2010, which is designed to offer customers, otherwise unable to qualify for revolving credit, the alternative of purchasing merchandise on installment credit terms. We believe this and other new financing options that we may introduce will drive sales and profitable growth as well as enhance customer loyalty.

 

Risk Factors

 

We are subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows and prospects. You should carefully consider all of the information set forth in this prospectus and, in particular, the specific risks set forth under the heading “Risk Factors,” beginning on page 13 of this prospectus, before investing in our common stock. Risks relating to our business include, among others:

 

 

 

 

Corporate and Other Information

 

Our principal executive office is located at 6509 Flying Cloud Drive, Eden Prairie, Minnesota 55344, and our telephone number at that address is (952) 656-3700. Our website is located at www.bluestembrands.com. The information on our website is not part of this prospectus.

 

 

The Offering

 

 

 

 

 

 

 

 

 

 

 

 

The number of shares of common stock outstanding after this offering excludes, as of August 31, 2011:

 

 

 

 

 

 

Except as otherwise indicated, all information in this prospectus assumes:

 

 

 

 

 

 

SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

 

The following tables sets forth our summary consolidated financial and other data for the periods and at the dates indicated. The statement of operations data for each of the years in the three-year period ended January 28, 2011, and the balance sheet data as of January 28, 2011 and January 29, 2010, have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The statement of operations data for the 26 weeks ended July 30, 2010 and July 29, 2011 and the balance sheet data as of July 29, 2011 have been derived from our unaudited consolidated financial statements which are included elsewhere in this prospectus. The unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of our management, reflect all adjustments consisting of normal recurring adjustments, necessary for a fair presentation of this data. The consolidated financial and other data as of and for the 26 weeks ended July 29, 2011 are not necessarily indicative of the results that may be obtained for a full year.

 

The following tables also set forth summary consolidated pro forma data, which give effect to the events described in footnote (g) to the following table. The consolidated pro forma data have been derived from pro forma data included in our consolidated financial statements included elsewhere in this prospectus.

 

The historical results presented below are not necessarily indicative of the results to be expected for any future period. The consolidated pro forma financial data are unaudited and are presented for informational purposes only and do not purport to represent what our financial position actually would have been had the events so described occurred on the dates indicated or to project our financial position as of any future date. This information should be read in conjunction with “Risk Factors,” “Use of Proceeds,” “Capitalization,” “Selected Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

 

 

 

 

 

 

 

 

 

 

 

 

footnotes continued on following page

 

 

 

 

 

 

 

 

 

 

 

 

A $1.00 increase (decrease) in the assumed offering price of $      per share, which is the mid-point of the range set forth on the cover page of this prospectus, would increase (decrease) each of total debt and stockholders’ equity by $     , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, if we change the number of shares offered by us, the net proceeds we receive will increase or decrease by the increase or decrease in the number of shares sold, multiplied by the offering price per share, less the underwriting discount payable by us. At July 29, 2011, we had availability under our A/R Credit Facility of $53.5 million and under our Inventory Line of Credit of $4.0 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for details on these facilities, including borrowing base limitations thereunder.

 

 

 

This offering and an investment in our common stock involve a high degree of risk. You should consider carefully the risks described below, together with the financial and other information contained in this prospectus, before you decide to purchase shares of our common stock. If any of the following risks actually occurs, our business, financial condition, results of operations, cash flow and prospects could be materially and adversely affected. As a result, the trading price of our common stock could decline and you could lose all or part of your investment in our common stock.

 

Risks Related to the Operation of Our Business

 

Substantially all of our sales are made on credit, and we are dependent upon the availability of third party financial institutions to issue credit accounts to our customers; recent developments involving credit offerings unrelated to Bluestem have resulted in regulatory actions directed at these financial institutions.

 

We have agreements with MetaBank and WebBank, which we refer to herein as the “Credit Issuers,” that permit our customers to establish credit accounts that may be used exclusively to purchase our products and services. Approximately 95% of our sales are financed by credit extended through the Credit Issuers, and therefore we are dependent on the Credit Issuers. Under our agreements with the Credit Issuers, we are responsible for applying the Credit Issuers’ underwriting criteria and on-going administration of the credit programs. In that regard, we are required to process all applications, determine whether the Credit Issuers’ eligibility criteria are satisfied and perform certain administrative, processing and collection services. We are also required to purchase from the Credit Issuers our customers’ loan receivables after a contractual holding period, generally one or two business days. If we fail to perform these obligations or otherwise are in default under our agreements with the Credit Issuers, they can, among other things, terminate our agreements and stop lending to our customers.

 

The Credit Issuers are themselves exposed to liquidity, financial, operating and regulatory risks that may adversely affect their ability to fulfill their obligations to us and to meet our needs, particularly issuing credit accounts to our customers at levels necessary to operate our business profitably or to grow our business, and to meet the needs of our customers. These risks are especially acute in the current difficult business environment for financial institutions in general. Should the Credit Issuers refuse, become unable, limit availability or otherwise cease to provide credit to some or all of our customers, we may not be able to find replacements for the Credit Issuers. This is complicated by the very small pool of financial institutions which we believe might be able and willing to meet the credit needs of our customers. Because we do not have a bank charter, our ability to extend credit, other than through agreements with the Credit Issuers, is limited unless we were to become licensed in certain states. If we are unable to extend or execute new agreements with the Credit Issuers at the expiration of our current agreements with them, or if our existing or new agreements with our Credit Issuers were terminated or otherwise disrupted, there is a risk that we would not be able to enter into agreements with an alternate provider on terms that we consider favorable or in a timely manner without disruption of our business.

 

The foregoing risks are heightened by recent regulatory actions concerning certain of the Credit Issuers’ credit offerings, including supervisory directives and a cease and desist order issued to MetaBank by the Office of Thrift Supervision, or OTS, and a consent order issued to WebBank by the Federal Deposit Insurance Corporation, or FDIC. Neither of these actions relates to the credit offerings made available to our customers through the Credit Issuers. However, the OTS actions require MetaBank to obtain prior written approval of the OTS before entering into any new agreements concerning any credit or deposit product, or materially amending any such existing agreements. This could adversely affect our ability to amend our agreements with MetaBank or, should we desire to do so, establish new credit programs through MetaBank. In addition, the Office of the Comptroller of the Currency, or OCC, FDIC and/or another federal or state regulator may take additional actions to address these or other

matters with respect to the Credit Issuers, and we cannot predict the effect any such actions might have on our relationships with the Credit Issuers or the applicable Credit Issuer’s results of operations, financial condition or effectiveness in serving as one of our Credit Issuers. The recent regulatory actions faced by the Credit Issuers are described in more detail under “Business — Government Regulation — Recent Developments for the Credit Issuers.”

 

Our credit operations currently are dependent on our Credit Issuer relationships, and their regulators could at any time limit their ability to issue some or all products on our behalf, or that we service on their behalf, or modify those products significantly. Any significant interruption of those relationships could result in our being unable to originate new receivables and other credit products for a period of time. It is possible that a regulatory position or action taken with respect to either of the Credit Issuers might result in the Credit Issuer’s inability or unwillingness to originate future credit products on our behalf or in partnership with us.

 

Any of the above adverse events, including our failure to perform under or termination of agreements with our Credit Issuers, adverse regulatory actions, or interruption of our relationship with our Credit Issuers could materially and adversely impact our business and results of operations.

 

Commercial credit provided by external financing sources is crucial to our business operations; loss of commercial borrowing capacity or increases in our cost of capital would jeopardize our business.

 

The funding of receivables purchased from the Credit Issuers, the purchase of inventory and the cost of distributing catalogs and instituting other marketing efforts are capital intensive. We rely upon external financing sources to fund these operations. We pledge the customer accounts receivable that we purchase from the Credit Issuers as collateral for our $365 million account receivable credit facility with various financial institutions. We refer to this facility as the “A/R Credit Facility,” and to the lenders thereunder as our “Receivables Lenders.” We use advances from the A/R Credit Facility to fund our liquidity needs pending collection of the customer accounts receivable purchased from the Credit Issuers. We also have a $50 million credit facility with various lenders that is secured by our inventory. We refer to this facility as the “Inventory Line of Credit.” It is imperative that commercial credit be available to us on a daily and revolving basis at acceptable terms.

 

The availability, cost and use of funding under our credit facilities are subject to a number of risks:

 

 

 

In the event that we become unable to meet our obligations under our credit facilities, we may be required to seek waivers of events of default from our lenders or amendment of our credit facilities or, in the absence of waivers, amendment or cure, we may be required to refinance all or a part of our existing indebtedness, incur additional indebtedness, reduce credit available to our customers or sell assets. The terms of existing or future debt agreements may restrict our ability to take these actions. In 2008, under a predecessor to our current A/R Credit Facility, we were compelled to obtain a waiver for a single covenant default arising from performance of customer receivables and ultimately to replace that credit facility. In addition, when each of our existing credit facilities expires in August 2013, we will likely need to seek replacement financing. In any such case, replacement financing may be unavailable to us or available only on more expensive or restrictive terms. A number of factors such as our financial results and condition, changes within our company, disruptions in the capital markets, especially as they relate to asset based lending and securitization, our corporate and regulatory structure, interest rate fluctuations, general economic conditions and accounting and regulatory changes could make such financing more difficult or impossible to obtain or more expensive. The loss or material reduction of available financing, or any material increase in the cost of such financing would materially and adversely affect our ability to support the purchase by our customers of our merchandise with credit provided by the Credit Issuers, our ability to purchase inventory to sell to our customers, our ability to meet our cash flow needs, and our results of operations.

 

Our agreements with the Credit Issuers obligate us to bear many of the risks related to making credit available to our customers, including those associated with various federal and state laws and

regulations governing credit extensions to consumers, and our failure to comply with applicable laws and regulations, and any adverse changes in those laws or regulations could have a negative impact on our business.

 

Our operations, and the operations of the Credit Issuers, are or may be subject to the jurisdiction of federal, state and local government authorities, including the Consumer Financial Protection Bureau, which we refer to herein as the Bureau, the SEC, the FDIC, the Office of the Comptroller of the Currency, the FTC, state regulators having jurisdiction over financial institutions and debt origination and collection and state attorneys general. Because we act as a service provider to the Credit Issuers, our business practices, including the terms of our marketing, servicing and collection practices, may be subject to both periodic and special reviews by these regulatory and enforcement authorities. These reviews could range from investigations of specific consumer complaints or concerns to broader inquiries into our practices generally. If as part of these reviews the regulatory authorities conclude that we are not complying with applicable law, they could request or impose a wide range of remedies including requiring changes in advertising and collection practices, changes in the terms of our products (such as decreases in interest rates or fees), the imposition of fines or penalties, or the paying of restitution or the taking of other remedial action with respect to affected customers. They also could require us to stop offering some of our products, either nationally or in selected states.

 

To the extent that these remedies are imposed on the Credit Issuers, under certain circumstances we are responsible for the remedies as a result of our indemnification obligations with the Credit Issuers. We also may elect to change practices or products that we believe are compliant with law in order to respond to regulatory concerns. Furthermore, negative publicity relating to any specific inquiry or investigation could hurt our ability to conduct business with various industry participants or to attract new accounts and could negatively affect our stock price, which would adversely affect our ability to raise additional capital and would raise our costs of doing business. If any deficiencies or violations of law or regulations are identified by us or asserted by any regulator, or if any regulator requires us to change any of our practices, the correction of such deficiencies or violations, or the making of such changes, could have a material adverse effect on our financial condition, results of operations or business. We face the risk that restrictions or limitations resulting from the enactment, change, or interpretation of laws and regulations could negatively affect our business activities or effectively eliminate some of the credit products currently offered to our customers. In addition, whether or not we modify our practices when a regulatory or enforcement authority requests or requires that we do so, there is a risk that we or other industry participants may be named as defendants in litigation involving alleged violations of federal and state laws and regulations, including consumer protection laws. Any failure to comply with legal requirements by us or the Credit Issuers in connection with the issuance of those products, or by us or our agents as the servicer of our accounts, could significantly impair our ability to collect the full amount of the account balances. The institution of any litigation of this nature, or any judgment against us or any other industry participant in any litigation of this nature, could adversely affect our business and financial condition in a variety of ways.

 

We have agreed to perform many functions related to making credit available to our customers under our agreements with the Credit Issuers, subject to the oversight of the Credit Issuers and their regulators, including maintaining compliance with certain applicable laws, sourcing prospective borrowers, applying the Credit Issuers’ underwriting criteria for new applicants, setting up account files and maintaining bookkeeping. As a result, we may be liable to the Credit Issuers, or our agreements with them may be subject to termination, in the case of violations of such laws. Moreover, our dependence on the Credit Issuers exposes us to the risks related to the failure by the Credit Issuers to materially comply with legal or regulatory requirements.

 

Consumer credit protection laws and regulations regularly undergo significant changes. These changes can have significant effects, some of which may be materially adverse, on our product offerings and

results of operations. For example, the Credit Card Accountability Responsibility and Disclosure Act of 2009, or the CARD Act, required lenders, including the Credit Issuers, to make fundamental changes to many aspects of their open-end credit business practices, including marketing, underwriting, pricing and billing. Among other things, the CARD Act limited several practices and required new credit disclosures to consumers in connection with open-end credit accounts. The CARD Act also provides consumers with the right to opt out of certain interest rate increases and other significant changes to account terms.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, enacted in July 2010, authorized the creation of the Bureau. The Bureau is authorized to regulate consumer financial products and services, enforce compliance with federal consumer financial laws and ensure that markets for such products and services are “fair, transparent and competitive.” The Bureau is empowered to investigate and respond to complaints related to consumer financial products and services, and to monitor markets for such products and services to identify consumer risks. We cannot currently predict whether the Bureau will impose additional regulations that could affect the credit products offered by us and the Credit Issuers. However, if the Bureau were to promulgate regulations that adversely impact these credit products, such regulations could have a material adverse effect on our business, prospects, results of operations and financial condition. Other changes in the Dodd-Frank Act may also affect our business. For example, the Dodd-Frank Act established a new preemption standard of state consumer protection laws applicable to national banks and thrifts, including MetaBank. In addition, MetaBank became subject to a new federal regulator, the OCC, when the OTS was eliminated in July 2011. While the full scope of the Dodd-Frank Act’s implications are not fully known, we anticipate that new or more onerous requirements will apply to the Credit Issuers and to us.

 

We are not licensed to extend credit and rely on the Credit Issuers to extend credit to our customers, and a successful challenge to our arrangements with the Credit Issuers could result in a requirement to be licensed as a creditor in states in which we do business, unenforceability of the receivables purchased from the Credit Issuers, material modification or termination of our relationships with the Credit Issuers, discontinuance of our marketing activity or other adverse changes in our current business practices.

 

The laws of many states require entities that engage in consumer credit related activities to be licensed and, in some cases, examined by state regulators. National banks and other federally or state chartered financial institutions are generally not subject to such state laws except, in the case of state chartered banks, for laws of the state in which they are chartered. Further, federal law allows the Credit Issuers, and other similar chartered financial institutions, to extend credit without complying with many state laws, often referred to as preemption, including rate and fee limitations of states other than those from which the Credit Issuers extend credit.

 

We are not a chartered financial institution nor are we licensed to extend credit to our customers in any state. Accordingly, we rely on the Credit Issuers to extend credit to customers so that we do not have to obtain licenses and to facilitate uniform lending terms and practices nationwide. Several lawsuits against other entities have brought under scrutiny the association between certain loan marketers and banks. These lawsuits have alleged, in some cases successfully, that the loan marketers establish deceptive relationships with banks to conceal the marketers’ roles as lenders so that loan marketers do not have to comply with state laws addressing licensing, credit terms, rates, disclosure, collection practices and other consumer protection requirements where they do business. Although we believe that our relationships are distinguishable from those involved in these cases, additional state consumer protection laws would be applicable to us if, as a result of lawsuits of the type described above, we were deemed a lender. In that event, the receivables purchased from the Credit Issuers could be voidable or unenforceable, and we could be subject to other penalties. In addition, we or the Credit Issuers could be

subject to enforcement actions and penalties by regulators or state attorneys general, and we could be forced to discontinue the manner in which our customers currently obtain credit, materially modify or terminate our relationships with the Credit Issuers, materially modify rates, fees and other terms of credit extended to our customers, or be required to register or obtain licenses or regulatory approvals in those states in which we do business. These actions could force us to restructure aspects of our business, which would impose a substantial cost and compliance burden on us and, if we did not have sufficient lead time to accomplish this, could interrupt our ability to make sales. Any of the actions described above could have a material adverse effect on our business and our financial results.

 

We do not collect state sales, use or other taxes, which could subject us to liability for past sales and any imposition of an obligation to do so in the future could negatively impact our financial results.

 

We do not collect sales, use, or other state or local taxes on sales of goods shipped to customers located in states other than Minnesota, which is the only state in which we have employees, facilities and inventory. We interpret existing judicial rulings to prohibit states in which we are not physically present, and local tax jurisdictions located in such states, from imposing upon us a requirement to collect sales and use taxes. If our interpretation is not correct, or if legislation or future judicial rulings alter the law, including bills currently pending in the U.S. Congress, then we could be required to collect sales and use taxes in the future from all customers. In some cases such obligations could be retroactive, as in the case of North Carolina, discussed below. In addition, future changes in our operations could be deemed to create a physical presence in other states and thus require us to collect sales and use taxes from catalog and internet customers in such additional states. Currently, our customers may be obligated to file a use tax return and pay use tax on taxable purchases of items that we sell when we do not collect the tax. However, it may often be the case that use tax returns are not filed. Thus, if we were required to collect the tax, our customers might perceive the tax to be in the nature of a price increase, which would negatively impact our sales. In that case, we may also become less competitive with retailers that currently are collecting sales and use taxes, depending on their base pricing levels. Since customer spending is constrained by credit availability, funds spent on taxes are otherwise unavailable for making purchases. Consequently, sales related tax impositions can directly and adversely impact revenues. Collecting the tax would also impose additional administrative burdens on us.

 

Some states have enacted, and other states may be considering, legislation requiring us to notify our customers of their possible use tax liability and provide the state with information about customer purchases. We have not fully complied with such laws and could face adverse consequences as a result of such noncompliance. Some states have enacted, and other states may be considering, legislation requiring the collection of sales and use taxes from customers if a seller has commission agreements with Internet advertisers located in the state. We have terminated our relationships with Internet advertisers located in the states that have enacted such laws, including North Carolina, which is discussed in more detail below. If other states adopt similar laws, we may decide to terminate our Internet advertisers in those states as well. Such terminations could harm our business by reducing our advertising on the Internet.

 

In 2009, a statutory amendment to North Carolina law became effective which required the collection of sales tax from customers if a seller has commission agreements with Internet advertisers located in that state. However, the North Carolina Department of Revenue has announced its position that such statutory amendment was a clarification of prior law, and therefore applies to prior periods. The department is conducting an examination of our transactions with North Carolina customers for the period August 1, 2003, through March 31, 2010. We believe the department’s position is incorrect, but we could be liable for substantial sales taxes, penalties, and interest if the department’s position is sustained. We have not accrued in our financial statements for this or any other potential sales or use tax liability. There is also a possibility that other states might assess sales and use taxes against us for prior tax periods.

 

Our sales are highly dependent on consumer discretionary spending.

 

The extent to which our customers can engage in discretionary spending has a very significant impact on our net sales and results of operations. This is particularly true for us since many of our customers have low to middle income and most of the purchases made from us could be considered discretionary in nature. Most factors affecting discretionary spending are beyond our control, including unfavorable general business conditions, increases in gas and energy prices, higher interest rates and inflation. Consumer debt levels, the availability of consumer credit, increased taxation, adverse unemployment trends, declining consumer confidence, war, terrorism or fears of war or terrorism are further examples. Increased borrowing costs due to adverse mortgage rate adjustments, credit card liability or other debt service obligations also reduce available consumer discretionary spending. Further deterioration in economic conditions or increasing unemployment levels, or consumer concerns over future employment levels, may continue to reduce the level of consumer spending and inhibit consumers’ use of credit, which may adversely affect our business, our financial condition and our results of operations.

 

Our customer base is largely comprised of low to middle income consumers, who depend on the credit arranged through us to purchase our products, are sensitive to changes in economic conditions and present significant risk of default for non-payment and collection of accounts receivable acquired by us.

 

Our customer base is largely comprised of low to middle income consumers that utilize the proprietary credit products that we market to purchase our products. Our customers are at greater risk for credit delinquency and default. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Customer Accounts Receivable Asset Quality and Management — Delinquencies.” We purchase on a daily basis all loans made by the Credit Issuers to our customers and, as a result, we bear the risk of non-payment or slow payment by our customers.

 

The nature of our customer base makes it sensitive to adverse economic conditions such as those experienced since 2007. These conditions may make our customers less likely to make purchases on credit, or less likely to meet our prevailing underwriting standards, which may be more restrictive in an adverse economic environment. As a result, during such periods we may experience decreases in the growth of new customers and limit the availability of credit to existing customers, which may adversely affect our net sales and Contribution Margin.

 

In this regard, during the last half of 2007 through the first half of 2009, we refocused our efforts away from growing net sales and acquiring large numbers of new customers to, among other things, improving the overall credit quality of our customer accounts receivable and maintaining profitability and liquidity. Net sales decreased from $448.5 million in 2007 to $423.3 million in 2008 and $438.2 million in 2009 and new customer credit accounts decreased from 700,000 in 2007 to 430,000 in 2008 and 439,000 in 2009. During this period, Contribution Margin decreased from $97.3 million in 2007 to $91.5 million in 2008 and increased to $125.0 million in 2009. See note (h) to “Selected Consolidated Financial and Other Data” for a discussion of Contribution Margin and reconciliation to net income.

 

We rely on internal models to manage risk, to provide accounting estimates and to make other business decisions. Our results could be adversely affected if those models do not provide reliable estimates or predictions of future activity.

 

The accurate modeling of risks is critical to our business, particularly with respect to managing underwriting and credit extension on behalf of the Credit Issuers. Our expectations regarding response rates, customer repayment levels, as well as our allowances for doubtful accounts and other accounting estimates, are based in large part on internal modeling. We also rely heavily on internal models in making a variety of other decisions crucial to the successful operation of our business. It is therefore

important that our models are accurate, and any failure in this regard could have a material adverse effect on our results.

 

Models are inherently imperfect predictors of actual results because they are based on historical data available to us and our assumptions about factors such as credit demand, payment rates, default rates, delinquency rates and other factors that may overstate or understate future experience. Our models could produce unreliable results for a number of reasons, including the limitations of historical data to predict results due to unprecedented events or circumstances, invalid or incorrect assumptions underlying the models, the need for manual adjustments in response to rapid changes in economic conditions, incorrect coding of the models, incorrect data being used by the models or inappropriate application of a model to products or events outside of the model’s intended use. In particular, models are less dependable when the economic environment is outside of historical experience, as has been the case recently.

 

Due to the factors described above and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this prospectus, we may, among other things, experience actual charge-offs that exceed our estimates and possibly are greater than our allowance for doubtful accounts or require material adjustments to the allowance. Unanticipated and excessive default and charge-off experience can adversely affect our profitability and financial condition, breach covenants in our credit facilities, limit availability of credit under our A/R Credit Facility and adversely affect our ability to finance our business.

 

New initiatives, adding new customers and an evolving business model are important to our growth strategy and may not be successful.

 

We have limited experience introducing new brands, entering new markets and introducing new credit products or services. Consequently, whenever we attempt new projects there is no assurance of success, if any, or of our ability to recoup our investments. Recently, we launched the Gettington.com brand, began offering a total Spanish language experience to Fingerhut’s Spanish speaking customers, and began offering installment credit under Fingerhut FreshStart, where our customers make an initial down payment on their purchase. We have plans to begin offering our products for purchase through payroll deduction in 2011 to employees of businesses that agree to include that service as part of a broader employee benefit offering. Profitability, if any, in these new activities may be lower than in our existing business. Any failure of new initiatives could damage our reputation, limit our growth and adversely affect our operating results.

 

To grow our business we will seek to acquire new customers. The costs of acquiring new customers are frequently not recovered until the second year that accounts are active. Newer customers also present a higher risk of delinquency and default than established accounts. As a result, we anticipate an increase in historical levels of delinquency and default rates as we grow our new customer base. If we fail to appropriately manage the customer acquisition costs, default and collection risks associated with our growing base of new customers, it could have significant adverse effects on our business and results of operations.

 

In addition, while our catalogs continue to comprise a significant sales driver of our merchandise, we have an evolving business model. In particular, we have increased and will seek to continue to increase the proportion of our net sales that come through the Internet. However, we may not be successful in our efforts to grow Internet sales, and our actions taken in furtherance of this goal could negatively impact our catalog sales and have other adverse effects on our business and results of operation.

 

The introduction of new credit products may also require the Credit Issuers and us to comply with additional regulatory and licensing requirements. These requirements may entail additional investment

of time and capital, including additional marketing expenses, legal costs and other incremental start-up costs. Any failure to comply with applicable regulations could result in fines, suspensions, or legal actions against the Credit Issuers and/or us and could have a material adverse effect on our business, prospects, results of operations, and financial condition. Our failure to offer new products in an efficient manner, or low customer demand for any of these new products, could have a material adverse effect on our business, prospects, results of operations and financial condition.

 

We face intense competition.

 

The general merchandise retail industry is highly competitive. We have many competitors, including traditional retailers, catalog merchants and e-commerce services. Credit card issuers, banks and consumer credit agencies also compete with us for consumer lending that is critical to our customer base. Many of our competitors have greater resources and brand recognition than we do. Their more significant purchasing power and higher efficiency may permit them to offer products at more attractive prices and credit terms to customers. In addition, competition may intensify if our competitors target our historical customer base.

 

Few traditional retailers combine merchandising with convenient consumer access to non-traditional consumer credit in the way we do. The entry of such a competitor, particularly if it had significant resources and name recognition, could have a material adverse effect on our business.

 

Any easing by other lenders in general purpose and private label credit card underwriting standards for low to middle income consumers could adversely impact our net sales and profitability in several ways. It would increase credit offers by third parties to our current and prospective consumers, thereby expanding their access to available credit and reducing the effectiveness of our distinctive business model. It would also increase the direct mailing by others to our customers, affecting our catalog response rate and reducing our marketing efficiency. It could also cause adverse selection for the individuals applying for credit through us. For example, lower risk credit customers might not respond to our offers in the same proportion as higher risk credit customers. Finally, more freely available credit to consumers generally can result in higher overall consumer leverage which impacts their ability to pay for debt incurred in their purchases from us.

 

The lack of traditional brick and mortar storefronts places us at a disadvantage compared to some of our competitors. Some consumers prefer locations where they can view and handle products, make comparisons, make payments and rely on the input of store personnel. Physical storefronts are also preferred by individuals without established banking relationships that rely on a cash based economy, as is the case for many of our target customers. This is particularly true where cultural preferences extend to cash based commerce.

 

Changes in regulations or customer concerns, in particular as they relate to privacy and protection of customer data, could adversely affect our business.

 

We are subject to laws relating to the collection, use, retention, security and transfer of personally identifiable information about our customers. The interpretation and application of privacy and customer data protection laws are in a state of flux and may vary from jurisdiction to jurisdiction. These laws may be interpreted and applied inconsistently and our current data protection policies and practices may not be consistent with those interpretations and applications. Complying with these varying requirements could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business. In addition, some jurisdictions are considering imposing additional restrictions. For example, in December 2010, the Obama administration proposed giving Americans a “privacy bill of rights” that would regulate the commercial collection of consumer data online, and the creation of a federal privacy policy office that would coordinate online privacy issues in the U.S. and abroad. We cannot predict the outcomes of these initiatives.

 

Continued access to credit, demographic, purchasing and other information is critical to us, both to identify new customer prospects and to structure marketing efforts encouraging repeat business by existing customers. We identify prospective customers in various ways and rely heavily on a confidential and proprietary database that contains customer and purchasing information. By sharing portions of this data with third parties we can obtain additional prospect information in exchange, greatly leveraging the value of our database. Should regulators restrict such data sharing between companies, exchanges and cooperatives in the future, it could adversely affect our marketing capabilities. In addition, initiatives directed at focusing advertising to those most directly interested in our products and services could be at odds with laws and regulations limiting dissemination of the very consumer data needed to accomplish such focused marketing. Likewise, if new regulations were adopted limiting our ability to use credit bureau information to pre-select individuals for possible credit extension, or adversely affecting our ability to utilize the Internet and mobile phone communication channels to market our business, it could have a significant adverse effect on our business.

 

Any failure, or perceived failure, by us to comply with our own privacy policies or with any regulatory requirements or orders or other privacy or consumer protection related laws and regulations could result in proceedings or actions against us by governmental entities or others, subject us to significant penalties and negative publicity and adversely affect our operating results.

 

We could be liable for breaches of security and any failure to protect the security of personal information about our customers.

 

The nature of our business involves the receipt and storage of personal information about our customers. If we experience a data security breach, we could be exposed to government enforcement actions and private litigation. In addition, our customers could lose confidence in our ability to protect their personal information, which could cause them to discontinue usage of our services. Such events could lead to lost future sales, adversely affect our results of operations, damage our brand and require us to expend resources on alterations to our data security systems. Although we have developed systems and processes that are designed to protect consumer information and prevent fraudulent payment transactions and other security breaches, these systems and processes may not be successful and any failure to prevent or mitigate such fraud or breaches may adversely affect our operating results and our brand.

 

Challenges in anticipating merchandising trends and forecasting sales may adversely affect our business.

 

Our success is tied to our ability to anticipate changes in merchandising and customer expectations and react to them in a timely and efficient manner. Because trends change quickly and frequently, they are difficult to predict. Since we need to order merchandise well in advance of customer orders, we must order merchandise based on our best projections of consumer tastes and anticipated demand, but we cannot guarantee that such projections will be accurate. It is critical to our success that we stock our product offerings in appropriate quantities. If demand for one or more products outstrips our available supply, we may have large backorders and cancellations and lose sales. On the other hand, if one or more products do not achieve projected sales levels, we may have surplus or un-saleable inventory that would force us to take significant inventory markdowns, which could reduce our net sales and gross margins.

 

If we are unable to accurately predict customer demand, or if sales projections are inaccurate, we may fail to optimize fulfillment operations. Sales projections also form the basis for determining marketing expenditures, staffing and operations, so shortfalls in sales volume will be reflected in lower than anticipated margins.

 

Failure to successfully manage the use of catalogs and e-commerce could adversely affect our business.

 

Our catalogs and websites are key drivers of our sales. We must create, design, publish and distribute catalogs as well as web content that offer and display merchandise that our customers want to purchase at prices that are attractive. Our future success depends in part on our ability to anticipate, assess and react to changing product trends and market demand, designing and publishing catalogs and web content that address these developments in a way that generates sales. We must also accurately determine the optimal number of catalogs to publish and the most advantageous distribution strategies. There can be no assurance that we will be able to identify and react to trends in a timely fashion and distribute catalogs with a high level of effectiveness justifying our marketing investment.

 

Increases in postage and paper and other operating costs could negatively affect our results of operation and financial condition.

 

We are particularly vulnerable to postage and shipping rate increases with respect to catalog mailings, which is a central aspect of our business model, and merchandise deliveries. While some of these variations are cyclical, others have been unpredictable and significant.

 

Paper and postage represent significant components of our total cost to produce, distribute, and market our products. We use the U.S. Postal Service for distribution of substantially all of our catalogs and other marketing materials. As such, the continued rise in postal rates has increased our costs. Postal rates are dependent on the operating efficiency of the postal service and on legislative mandates imposed upon the postal service. We cannot predict the magnitude of future price changes in postage. The current economic environment is likely to lead to further potential rate increases.

 

Paper is the principal raw material used in our business for printed products and promotional materials. Paper is a commodity and its price is subject to significant volatility. The price of paper may fluctuate significantly in the future, and changes in the market supply of or demand for paper could affect delivery times and prices. We may need to find alternative sources for paper from time to time. We cannot assure that we will continue to have access to paper in the necessary amounts or at reasonable prices or that any increases in the cost of paper will not have a material adverse effect on our business. Further, we may not be able to pass such increases on to our customers. Any paper shortage may increase our paper costs, cause us to reduce our catalog circulation, force us to use different weights or grades of paper that could increase our cost, reduce the number of pages per catalog or both. Our inability to absorb the impact of increases in postage and paper costs or any strategic determination not to pass on all or a portion of these increases to customers could materially and adversely affect our results of operations and financial condition.

 

Current and future government regulation of our catalog and Internet retail operations could substantially harm our business.

 

We are subject to various laws and regulations, including regulations of the Federal Trade Commission governing the manner in which customers may be solicited, and prescribing other obligations in fulfilling orders and consummating sales. In addition to general business regulations and laws, we are subject to governmental oversight of interstate commerce generally and orders taken over the Internet in particular. Existing and future regulations and laws may impede the growth of the Internet or other online services. These regulations and laws may cover taxation, restrictions on imports and exports, customs, tariffs, user and consumer privacy, data protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, the provision of online payment services, broadband residential Internet access and the characteristics and quality of products and services. It is not clear how existing laws and regulations governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the Internet and online commerce.

Unfavorable resolution of these issues may slow the growth of online commerce and, in turn, our business.

 

Changes in any of the laws and regulations to which we are or may become subject, or additional regulation, could cause the demand for and sales of our products to decrease. Moreover, complying with increased or changed regulations could force us to change our business practices and may cause our operating expenses to increase. This could adversely affect our revenues and profitability.

 

We rely on third party carriers as part of our fulfillment operations, and these carriers could fail to adequately serve our customers.

 

We rely on a limited number of carriers to ship inventory to us and to deliver orders to our customers. If we are unable to negotiate service levels and costs that are acceptable, or our delivery vendors fail to perform satisfactorily, it could negatively affect the satisfaction of our customers and our profitability. Other transportation impediments could be caused by external factors including inclement weather, fire, flood, power loss, earthquakes, labor disputes, acts of war, terrorism and acts of God.

 

System interruption and the lack of integration and redundancy in our order entry and online systems may adversely affect our net sales.

 

Customer access to our call center and websites is key to the continued flow of new orders. Anything that would hamper or interrupt such access could adversely affect our net sales, operating results and customer satisfaction. Examples of risks that could affect access include problems with the Internet or telecommunication infrastructure, limited web access by our customers, local or more systemic impairment of computer systems due to viruses or malware, or impaired access due to breaches of Internet security or denial of service attacks. Changes in the policies of service providers or others that increase the cost of telephone or Internet access could inhibit our ability to market our products or transact orders with customers.

 

In addition, our ability to operate our business from day to day, in particular our ability to manage our credit operations and inventory levels, largely depends on the efficient operation of our computer hardware and software systems and communications systems. Our computer and communications systems and operations could be damaged or interrupted by fire, flood, power loss, telecommunications failure, earthquakes, acts of war or terrorism, acts of God, computer viruses, physical or electronic break-ins or denial of service attacks, improper operation by employees, and similar events or disruptions. Any of these events could cause system interruption, delays, and loss of critical data, and could prevent us from accepting and fulfilling customer orders and providing services, which would impair our operations. Certain of our systems are not redundant and we have not fully implemented a disaster recovery plan. In addition, we may have inadequate insurance coverage to compensate us for any related losses. Interruptions to customer ordering, particularly if prolonged, could damage our reputation and be expensive to remedy and have significant adverse effects on our financial results.

 

Our anticipated growth is subject to a number of uncertainties that could adversely affect our plans and our results of operations.

 

We have rapidly and significantly expanded our operations, and anticipate that further significant expansion will be required to address potential growth in our customer base and market opportunities. This expansion has placed, and is expected to continue to place, a significant strain on the company’s management, operational and financial resources. From September 2006 to July 2011, we expanded from approximately 608 to 904 employees. To manage the expected growth of our operations and personnel, we will be required to improve existing and/or implement new transaction processing, operational and financial systems, procedures and controls, and to expand, train and manage our already growing employee base. Furthermore, should we add fulfillment and warehouse capacity or add

new businesses with different fulfillment requirements, our fulfillment system could become increasingly complex and challenging to operate.

 

We also may be required to expand our finance, administrative and operations staff. Further, our management will be required to maintain and expand our relationships with various distributors and printers, freight companies, websites and web service providers, Internet and other online service providers and other third parties necessary to our business. There can be no assurance that our current and planned personnel, systems, procedures and controls will be adequate to support our future operations, that management will be able to hire, train, retain, motivate and manage required personnel or that our management will be able to successfully identify, manage and exploit existing and potential market opportunities. If we are unable to manage growth effectively, our business, prospects, financial condition and results of operations will be materially adversely affected.

 

If we engage in acquisitions, significant investments in new businesses, or other strategic transactions, we will incur a variety of risks, any of which may adversely affect our business.

 

We may make acquisitions of, or significant investments in, businesses or assets that offer complementary products, services and technologies. Any acquisitions or investments will be accompanied by the risks commonly encountered in acquisitions of businesses, which may include:

 

 

These risks could harm our business, financial condition or results of operations, particularly if they occur in the context of a significant acquisition.

 

General economic factors may adversely affect our financial performance.

 

General economic conditions may adversely affect our financial performance. In the United States, changes in interest rates, changes in fuel and other energy costs, weakness in the housing market, inflation or deflation or expectations of either inflation or deflation, higher levels of unemployment, unavailability of or limitations on consumer credit, higher consumer debt levels or efforts by consumers to reduce debt levels, higher tax rates and other changes in tax laws, overall economic slowdowns, changes in consumer desires and other economic factors could adversely affect consumer demand for the products and services we sell, change the mix of products we sell to a mix with a lower average

gross margin, result in slower inventory turnover and greater markdowns on inventory and result in higher levels of slow payment, default and uncollectibility in our customer accounts receivable. Higher interest rates, transportation costs, inflation, costs of labor, insurance and healthcare, foreign exchange rate fluctuations, higher tax rates and adverse changes in tax and other laws and regulations and other economic factors in the United States can increase our cost of sales, commodity pricing, operating, selling, general and administrative expenses and interest expense, and otherwise adversely affect our operations and operating results. These factors affect not only our operations, but also the operations of our sources of consumer and commercial credit critical to our business, as well as suppliers from whom we purchase goods, a condition that can limit the availability of credit or goods to us or increase the cost to us of the goods we sell to, and credit we arrange for, our customers.

 

The seasonality of our business increases the strain on our operations and results in fluctuations in our quarterly results.

 

A disproportionate amount of our net sales, 42% in 2010, occurs during our fourth fiscal quarter. If we do not maintain adequate inventory to meet seasonal customer demand, it could significantly affect our net sales and future growth. Conversely, if we overstock seasonal products in excess of demand, we may have to offer significant pricing markdowns or take inventory write-offs. If too many customers access our telephone order lines, servicing connections or websites within a short period, particularly during holidays, it could prevent us from taking orders or reduce customer satisfaction. A similar adverse impact would result from inadequate staffing in our customer service and ordering centers and warehouse fulfillment functions during times of peak volume.

 

In addition, because a disproportionate amount of our net sales occur during the fourth fiscal quarter, our financial results in such quarter will have a disproportionate effect on our financial results for the full year. Our stock price may also experience substantial volatility based on our results for the fourth fiscal quarter due to the intense focus investors and stock analysts place on these results.

 

Our international sourcing relationships and service providers subject us to risks that could adversely affect our business.

 

We source our merchandise both domestically and internationally, as do many of our third party suppliers. In addition, we rely on foreign third party service providers based in Guatemala, India, Jamaica, Panama and the Philippines for various aspects of our operations, including phone and mail order entry, collections and global import transportation/logistics.

 

International purchases subject us and our suppliers to inbound freight costs, tariffs, duties and currency fluctuations as well as other risks and could increase our costs and, therefore, decrease our gross profits as well as decrease our ability to ship our merchandise in a timely manner.

 

We may source an increasing amount of merchandise directly from vendors abroad, particularly in Asia, which will subject us to risks and uncertainties including import/export controls or regulations and quotas and possible cancellations of backorders due to delayed shipping. Any disruption or delays in, or increased costs of, importing our products could have an adverse effect on our business, financial condition and operating results. Foreign orders are often placed through third party intermediaries, and as a result may present greater difficulty in identifying and supervising vendors with respect to quality control and addressing product defects. In addition, declines in the value of the U.S. dollar relative to foreign currencies affect our buying power and the ultimate price of the products we sell to our customers.

 

Changing or uncertain economic conditions in foreign countries and political unrest, war, natural disasters or health epidemics can all be detrimental to dealings with foreign sources of product or service providers. Any of these factors may disrupt the ability of foreign vendors to supply merchandise

in a timely manner or at all, and the ability of foreign service providers to fulfill their obligations to us. Such factors could also substantially increase our costs to source merchandise through foreign vendors or engage third party service providers. The need to replace any such vendors or service providers could be expensive and disruptive to our operations.

 

If we are unable to maintain vendor relationships and obtain adequate supplies of inventory, our results of operations will be negatively impacted.

 

Our financial performance depends on the ability to purchase products in sufficient quantities at competitive prices. We offer a changing mix of products and, therefore, our buyers must develop and maintain relationships with vendors to locate sources for high quality, low cost, name brand merchandise they believe will interest our customers. We currently purchase our products from over 1,000 domestic and foreign manufacturers. Our top ten suppliers accounted for approximately 23% of our merchandise inventory purchases in 2010. Inability to obtain merchandise from any of the larger vendors could cause supply disruptions that would hamper the business.

 

If we are unable to maintain supplier relationships, our ability to offer high quality, competitively priced products to our customers may be impaired, and our net sales and gross profits would decline. If our current vendors were to stop selling merchandise to us on acceptable terms, including because of one or more vendor bankruptcies due to poor economic conditions, we may be unable to procure alternatives from other vendors in a timely and efficient manner and on acceptable terms, or at all.

 

Because the contracts with our suppliers are frequently short term in nature, we may be unable to acquire product to meet customer demand that extends beyond initial expectations and net sales may suffer. Furthermore, vendors under short term contracts may increase prices or cut off supply at any time.

 

Because our single fulfillment center is located in Minnesota, we are subject to regional risks and adverse effects upon our business and results of operations if our fulfillment operations are interrupted for any significant period of time.

 

In order to maximize efficiency, we use a single large fulfillment center located in St. Cloud, Minnesota where we warehouse our merchandise and ship customer orders. This arrangement subjects us to regional risks, such as a shutdown or interruption in operations at the regional airport, and risks associated with systems lacking redundancy. The facility is susceptible to damage or interruption from human error, fire, flood or other acts of God, power loss, telecommunications failure, terrorist attacks, acts of war, break-ins and similar events. Many of our competitors operate across the United States and thus are not as vulnerable to the risks of operating in one region. Should anything interrupt operations at this facility, we have very limited alternate ways to fill product orders and limited ability to reroute orders to third parties for drop shipping.

 

Strikes, work stoppages and slowdowns by our employees could adversely affect our business, financial position and results of operations.

 

As of July 2011, the company employed approximately 904 employees, of which approximately 223 were warehouse and order fulfillment employees subject to a collective bargaining agreement. Labor organizing activities could result in additional employees becoming unionized. Strikes, work stoppages and slowdowns by our employees could adversely affect our ability to fulfill orders and meet our customers’ needs, and customers may move their business to competitors as a result. This could adversely affect our business, financial position and results of operations. Increased unionization and the terms of future collective bargaining agreements also may affect our competitive position and results of operations.

 

We face risk related to the strength of our operational, technological and organizational infrastructure.

 

We are exposed to operational risks that can be manifested in many ways, such as errors related to failed or inadequate processes, faulty or disabled computer systems, fraud by employees, contractors or third parties and exposure to external events. In addition, we are heavily dependent on the strength and capability of our technology systems which we use to manage our internal financial, credit and other systems, interface with our customers and develop and implement effective marketing campaigns.

 

Our ability to operate our business to meet the needs of our existing customers and attract new ones and to run our business in compliance with applicable laws and regulations depends on the functionality of our operational and technology systems. Any disruptions or failures of our operational and technology systems, including those associated with improvements or modifications to such systems, could cause us to be unable to market and manage our products and services and to report our financial results in a timely and accurate manner, all of which could have a negative impact on our results of operations.

 

In some cases, we outsource delivery, maintenance and development of our operational and technological functionality to third parties. These third parties may experience errors or disruptions that could adversely impact us and over which we may have limited control. Any increase in the amount of our infrastructure that we outsource to third parties may increase our exposure to these risks.

 

If we do not respond to technological changes, our services could become obsolete and we could lose customers.

 

To remain competitive, we must continue to enhance and improve the functionality and features of our e-commerce websites and other technologies. We may face material delays in introducing new products and enhancements. If this happens, our customers may forego the use of our websites and use those of our competitors. The Internet and the online commerce industry are rapidly changing. If competitors introduce new products and services using new technologies or if new industry standards and practices emerge, our existing websites and our proprietary technology and systems may become obsolete. Our failure to respond to technological change or to adequately maintain, upgrade and develop our computer network and the systems used to process customers’ orders and payments could harm our business, prospects, financial condition and results of operations.

 

We are dependent on third parties to fulfill key operational tasks, including with respect to our credit and payment processing system, and are vulnerable to various risks with respect to these relationships.

 

We depend on a number of independent businesses to operate our business efficiently, none of which are under our control. Any adverse developments affecting these vendors, the products or services provided by them, or the fees that they charge us could have a detrimental impact on our operations and financial results. For example, we are highly dependent on software that we license from CoreCard Software, Inc. This software provides a highly customized platform that is critical to our credit and payment processing system, and we rely on CoreCard for ongoing maintenance and support of this system. In the event that CoreCard ceases to provide the maintenance and support we need, we may be forced to incur substantial additional costs in order to maintain or replace our credit and payment processing system, and there is no assurance that we would be successful in doing so. A failure or delay in responding to such developments, even for a short period of time, could have significant adverse effects on our ability to provide customers access to credit, generate sales and operate our business.

 

Examples of other critical vendors include the following:

 

 

 

Many of our vendor agreements have relatively short terms. As a result, we are at risk of increased vendor pricing and other adverse changes in vendor terms. Further, the need to replace one of our vendors, particularly on short notice, could cause significant disruption to our operations and have an adverse effect on our financial results.

 

The loss of key senior management personnel could negatively affect our business.

 

While we attempt to anticipate succession planning needs, departures by senior management can be disruptive. We depend heavily on our senior management and other key personnel, particularly Brian Smith, our Chairman and Chief Executive Officer, to execute our business plan. The loss of any of our executive officers or other key employees could harm our business. We do not have key person life insurance policies or employment agreements for our executive management team.

 

We may not be able to adequately protect our intellectual property rights or may be accused of infringing intellectual property rights of third parties.

 

We regard our trademarks, service marks, copyrights, trade dress, trade secrets, proprietary technology, and similar intellectual property as critical to our success. In particular, we believe certain proprietary information, including but not limited to our credit models, are central to our business model and give us a key competitive advantage. We rely on trademark and copyright law, trade secret protection, and confidentiality, license and work product agreements with our employees, customers, and others to protect our proprietary rights.

 

We may be unable to prevent third parties from acquiring trademarks, service marks and domain names that are similar to, infringe upon, or diminish the value of our trademarks and other proprietary rights. In addition, we currently own the exclusive right to use various domain names containing or relating to our company name and brands. We may be unable to prevent third parties from acquiring and maintaining domain names that infringe or otherwise decrease the value of our trademarks and other proprietary rights. Failure to protect our domain names could affect adversely our reputation and brand, and make it more difficult for users to find our website.

 

We may be unable to discover or determine the extent of any unauthorized use of our proprietary rights. The protection of our intellectual property may require the expenditure of significant financial and managerial resources. In addition, the steps we take to protect our intellectual property may not adequately protect our rights or prevent parties from infringing or misappropriating our proprietary rights. We can be at risk that others will independently develop or acquire equivalent or superior technology or other intellectual property rights. The use of our technology or similar technology by

others could reduce or eliminate any competitive advantage we have developed, cause us to lose sales or otherwise harm our business.

 

We cannot be certain that the intellectual property used in our business does not and will not infringe the intellectual property rights of others, and we are from time to time subject to third party infringement claims. Due to recent changes in patent law, we face the risk of a temporary increase in patent litigation due to new restrictions on including unrelated defendants in patent infringement lawsuits in the future particularly from entities that own patents but that do not make products or services covered by the patents. Any third party infringement claims against us, whether or not meritorious, may result in the expenditure of significant financial and managerial resources, injunctions against us or the payment of damages. Moreover, should we be found liable for infringement, we may be required to seek to enter into licensing agreements, which may not be available on acceptable terms or at all.

 

Complaints or litigation may adversely affect our business and results of operations.

 

We face the risk of litigation, including class action lawsuits challenging, among other things, our marketing and sales practices as well as our actions as a contract servicer for the Credit Issuers. Other potential risks of litigation relate to lending terms, rates, disclosures, collections and/or other practices, under state and federal consumer protection statutes and other laws, as well as licensing requirements relating to consumer lending activity. In particular, state attorneys general and other government prosecutors have shown an increased interest in the enforcement of consumer protection laws, including laws relating to subprime lending, predatory lending practices and privacy. We may also be subject, from time to time, to employee claims alleging injuries, wage and hour violations, discrimination, harassment or wrongful termination. In addition to the risk of loss following an adverse ruling in any such litigation, all litigated matters involve costs, in terms of both monetary expenditures and the diversion of management’s time and attention. In addition, litigation may result in orders that require us to change our business practices, pay settlement costs and damages and, in some cases, penalties. Any or all of these could negatively affect our business and financial results.

 

We may face potential claims and reputational risk arising out of the fraudulent activities of Thomas J. Petters.

 

Upon completion of this offering,           shares, or approximately     % of our outstanding common stock, will be held of record by entities formerly affiliated with Thomas J. Petters. Each of these entities and Mr. Petters is in federal bankruptcy or receivership as a result of Mr. Petters’ arrest and conviction on charges of wire and mail fraud, conspiracy and money laundering. A trustee and receiver has been appointed for these entities and Mr. Petters and exercises all ownership rights with respect to these shares and other rights of these persons. These rights include continuing contractual rights under our amended and restated stockholders agreement and amended and restated investor rights agreement, each of which will terminate upon completion of this offering, except with respect to registration rights. During the early years of our company, Mr. Petters also was a director and provided us various debt financing.

 

The trustee and receiver has broad powers to seek recovery of assets for the benefit of creditors of the bankrupt and forfeited estates of these persons. None of the fraudulent activity of which Mr. Petters was convicted was at any time alleged directly to involve our company nor has our company been the subject of or participated in any civil or criminal proceeding arising out his fraudulent activity. The trustee and receiver for the Petters affiliates and Mr. Petters has furnished to us a letter dated August 25, 2011 to the effect that based on information actually known to the trustee and receiver as of the date of the letter, it does not know of any actual or potential claim in that capacity against the company or its subsidiaries, current or former officers and directors of our company (other than the asserted and pending claims of the trustee and receiver described below), our significant securityholders

or the underwriters named on the cover page of this prospectus. Further, the trustee and receiver has agreed to provide at the time of closing of this offering a release of all claims, known or unknown, that the trustee and receiver may then have had or in the future have against our company, current or former officers and directors of our company (other than the asserted and pending claims of the trustee and receiver described below), our significant securityholders or the underwriters named on the cover page of this prospectus, arising out of any act, omission, transaction, event or occurrence that relates to our company and takes place prior to the time of closing of this offering.

 

The trustee and receiver has made demand of, and in some cases commenced litigation against, numerous individuals, charitable organizations, businesses and other persons to recover cash and other property conveyed to these persons by Mr. Petters or his affiliates on the grounds that the consideration received by Mr. Petters or his affiliates, at a time when they were insolvent, was legally insufficient, commonly referred to as a clawback. Among the individuals subject to these demands and litigation were one current and one former employee who made claims for indemnification against the company arising out of the trustee’s actions. We reimbursed to the two employees an aggregate of $10,000 in settlement payments made by them to the trustee upon a determination that the applicable standard of conduct and other requirements for indemnification had been satisfied. In addition, Brian Smith, our Chairman and CEO and a 5% shareholder of the company, was also the subject of a Trustee clawback demand in respect of two cash bonus payments in 2003 and 2005 in aggregate of $110,000 received by him from a Petters affiliate while acting as an employee of Bluestem and in consideration of services to Bluestem. The Trustee also made a clawback demand in respect of a transfer in 2005 of shares of our common stock from a Petters affiliate to Mr. Smith in consideration of services to Bluestem. The value of these shares was recorded as compensation by Bluestem at the time of transfer at $158,440. Mr. Smith responded to these demands by reimbursing the Trustee in the amount of the bonus payments and paying to the Trustee the full value of the shares at the time of transfer. Mr. Smith made a demand for indemnification to Bluestem for reimbursement of an amount equal to the $158,440 payment to the Trustee plus attorneys’ fees relating to resolution of that clawback demand. The company reimbursed to Mr. Smith such amount upon a determination by our board of directors that the applicable standard of conduct and other requirements for indemnification had been satisfied and receipt from Mr. Smith of a release of Bluestem of any claim arising out of these clawback demands.

 

Based on information furnished in publicly-filed litigation or furnished to Bluestem by the trustee and receiver, the trustee and receiver has asserted additional clawback claims known to the trustee and receiver aggregating approximately $12.7 million against four former Bluestem directors, who Bluestem believes were acting as employees of, or lenders or consultants to, Petters affiliates other than Bluestem when payments which are the subject of the clawback claims were made. The trustee and receiver has advised that similar clawback claims against a former Bluestem director and executive officer, who was also believed to be acting in a capacity unrelated to Bluestem in connection with receipt of the payments which are the subject of the clawback demand, were resolved by such individual by payment to the trustee and receiver of $2.1 million. No claim for indemnification or advancement of litigation expenses has been made against Bluestem in respect of any of these asserted trustee and receiver claims, except for a claim by one of these former directors. This former director has alleged that he has been made a defendant in a clawback proceeding demanding repayment of approximately $3.8 million “in part by reason of his official capacity as a director of Bluestem.” The company has rejected this claim for indemnification.

 

The foregoing trustee and receiver claims or, subject to the release by the trustee and receiver, other claims by the trustee and receiver against persons who have had a relationship with the company, to the extent not resolved with the company, could possibly result in claims or litigation for indemnification, advancement of expenses or other claims for damages against the company that could be successful and could result in significant payments by us for the benefit of such persons for which insurance may not be available.

 

Publicity or other events associating our company with Mr. Petters and his affiliates, regardless of their foundation or accuracy, could adversely affect our reputation in the consumer, financial and investment communities, and also could adversely affect our stock price. Such publicity or other events could also intrude on our normal business operations and distract management. Please see “Certain Relationships and Related Party Transactions — Thomas J. Petters and Affiliates” for additional information concerning our relationship with Mr. Petters.

 

We may be subject to product liability claims if people or property are harmed by products we sell.

 

Some of the products we sell may expose us to product liability claims relating to personal injury, death, or environmental or property damage, and may require product recalls or other actions. The risk may be particularly high with respect to products we sell intended for use by or with children, as well as pellet guns, knives, archery and similar products. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all.

 

Adverse publicity, or any failure to maintain our brand image and corporate reputation, could adversely affect our business and results of operations, as could various other social factors affecting credit use and consumption.

 

Our success depends in part on our ability to maintain the image of the Fingerhut and Gettington.com brands as well as our reputation for providing excellent service to our customers. Adverse publicity or widespread declines in perception regarding our products and service quality could tarnish the image of our brands, even if these developments are unfounded or the information false. We could be similarly adversely affected if customers mistakenly associate unrelated businesses with our own operations.

 

We do not insure against any diminution in the value of our brands or the business itself, arising from claims, adverse publicity or otherwise. In addition, adverse publicity surrounding labor relations, our business concentration in the low to middle income consumer sector or our reliance on financing to such customers could damage our reputation and loss of sales and brand equity could result. This could require the expenditure of additional resources to rebuild our reputation and restore the value of our brands.

 

In addition, a variety of social factors may cause changes in customer purchases contingent upon credit, including the public’s perception of consumer debt, payment patterns, personal bankruptcy, and the rate of defaults by account holders and borrowers. If consumers develop negative attitudes about incurring debt or if consumption trends continue to decline, our business and financial results will be negatively affected.

 

Risks Related to this Offering and Ownership of Our Common Stock

 

An active public market for our common stock may not develop following this offering, which could limit your ability to sell your shares of our common stock at an attractive price, or at all.

 

Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market in our common stock or how liquid that market might become. An active public market for our common stock may not develop or be sustained after the offering. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you, or at all.

 

Our principal existing stockholders will continue to own a large percentage of our voting stock after this offering, which may allow them to collectively control substantially all matters requiring stockholder approval.

 

Our principal existing stockholders will beneficially own approximately           shares, or     %, of our common stock upon the completion of this offering. Our principal existing stockholders consist of Brookside Capital Investors, L.P., funds affiliated with Bain Capital, funds affiliated with Battery Ventures, and Petters Group Worldwide and its affiliates. In addition, Brian Smith, our Chairman and Chief Executive Officer, will beneficially own approximately     %, and our directors and officers as a group will beneficially own approximately     %, of our common stock upon completion of this offering. If some or all of these stockholders decided to act in concert, they could control us through their ability to determine the outcome of the election of our directors, to amend our certificate of incorporation and bylaws and to take other actions requiring the vote or consent of stockholders, including mergers, going private transactions and other extraordinary transactions, and the terms of any of these transactions. The ownership positions of these stockholders may have the effect of delaying, deterring or preventing a change in control or a change in the composition of our board of directors. These stockholders may also use their large ownership positions to address their own interests, which may be different from those of investors in this offering.

 

Our stock price may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

 

After this offering, the market price for our common stock is likely to be volatile, in part because our shares have not been traded publicly. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, many of which are outside of our control, including:

 

 

 

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many retail and finance companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.

 

We may need additional equity capital, and raising additional capital may dilute existing stockholders.

 

We believe that our existing capital resources, including the anticipated proceeds of this offering, availability of borrowings under our credit facilities, and cash generated from our business, will enable us to maintain our current and planned operations. However, if for any reason this is not the case, we may choose or be required to raise additional funds to fund our operations. If our capital requirements vary materially from those currently planned, we may require additional equity financing sooner than anticipated. For example, if we grow at a faster rate than we currently expect, we may need to raise additional equity in order to stay in compliance with the terms of our credit facilities, or to maintain a debt to equity ratio that we feel is appropriate. Additional financing may not be available in sufficient amounts or on terms acceptable to us and may be dilutive to existing stockholders. If adequate funds are not available or are not available on acceptable terms, our ability to fund our future growth, take advantage of new opportunities, develop or enhance our offerings, or otherwise respond to competitive pressures would be significantly limited.

 

Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.

 

Sales of substantial amounts of our common stock in the public market after this offering, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares. Upon completion of this offering, we will have           shares of common stock outstanding. The shares of common stock offered in this offering will be freely tradable without restriction under the Securities Act of 1933, as amended, or the Securities Act, except for any shares of our common stock that may be held or acquired by our directors, executive officers and other affiliates, as that term is defined in the Securities Act. Those securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available.

 

We, each of our officers, directors, the selling stockholders and certain of our other stockholders, have agreed, subject to certain exceptions, with the underwriters not to dispose of or hedge any of the shares of common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except, in our case, for the issuance of common stock upon exercise of options under existing option plans. Piper Jaffray & Co. may, in its sole discretion, release any of these shares from these restrictions at any time without notice, as permitted by FINRA rules. See “Underwriting.”

 

The shares of common stock held by existing stockholders as of the date of this prospectus will, from time to time after this offering, become eligible to be sold in the public market, subject to limitations imposed under federal securities laws. See “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling shares of our common stock after this offering.

 

In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common stock.

 

Anti-takeover provisions in our charter documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.

 

Our amended and restated certificate of incorporation and amended and restated bylaws will contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. These provisions:

 

 

 

 

We are subject to Section 203 of the General Corporation Law of Delaware, which regulates corporate acquisitions. Section 203 prohibits us from engaging in a transaction involving a sale of assets, merger or consolidation of our company with an interested stockholder, as defined under Section 203, of our company for a period of three years following the date of the transaction in which the stockholder became an interested stockholder unless the transaction is approved in a prescribed manner.

 

These anti-takeover provisions could discourage, delay or prevent a transaction involving a change in control of our company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.

 

If you purchase shares of common stock sold in this offering, you will incur immediate and substantial dilution.

 

If you purchase shares of common stock in this offering, you will incur immediate and substantial dilution in the amount of $      per share because the assumed initial public offering price of $      (the midpoint of the range set forth on the cover page of this prospectus) is substantially higher than the pro forma as adjusted net tangible book value per share of our outstanding common stock. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares and to the satisfaction of accrued and unpaid dividends on our outstanding preferred stock through the issuance of new common stock. In addition, you may also experience additional dilution upon future equity issuances or the exercise of stock options to purchase common stock granted to our employees, consultants and directors under our stock option and equity incentive plans. See “Dilution.”

 

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

 

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our common stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our common stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause our stock price and trading volume to decline.

 

We do not expect to pay any cash dividends for the foreseeable future.

 

The continued operation and expansion of our business will require substantial funding. Accordingly, we do not anticipate that we will pay any cash dividends on shares of our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions, including under our existing credit facilities and other indebtedness we may incur, restrictions imposed by applicable law and other factors our board of directors deems relevant. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.

 

We will incur increased costs as a result of becoming a public company.

 

As a public company, we will incur significant legal, accounting, insurance and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act of 2002 and related rules implemented by the SEC and the NASDAQ stock market. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty.

 

These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

 

Compliance with Section 404 of the Sarbanes-Oxley Act of 2002 will require significant expenditures and effort by management, and if our independent registered public accounting firm is unable to provide an unqualified attestation report on our internal controls, our stock price could be adversely affected.

 

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and related rules and regulations and beginning with our Annual Report on Form 10-K for the year ending February 1, 2013, our management will be required to report on, and, if our market capitalization exceeds $75.0 million, our independent registered public accounting firm to attest to, the effectiveness of our internal control over financial reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. We are currently in the process of reviewing, documenting and testing our internal control over financial reporting. In this regard, subsequent to the issuance of our 2009 financial statements, we identified a deficiency in the effectiveness of our internal controls relating to the recognition of derivative liabilities associated with an outstanding contingent fee agreement, our outstanding preferred stock, our preferred stock warrants and certain of our common stock warrants. As a result, we restated our 2009 financial statements to reflect the proper derivative accounting treatment. See note 14 to our consolidated financial statements for additional information regarding the restatement. We may encounter problems or delays in completing the implementation of any changes necessary to make a favorable assessment of our internal control over financial reporting. In addition, in connection with the attestation process by our independent registered public accounting firm, we may encounter problems or delays in completing the implementation of any requested improvements and receiving a favorable attestation. If we cannot favorably assess the effectiveness of our internal control over financial reporting, or if our independent registered public accounting firm is unable to provide an unqualified attestation report on our internal controls, investors could lose confidence in our financial information and our stock price could decline.

 

This prospectus contains forward looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this prospectus are forward looking statements. Forward looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected earnings, revenues, costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies, or the expected outcome or impact of pending or threatened litigation are forward looking statements. All forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:

 

 

 

 

 

We derive many of our forward looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we

caution that it is very difficult to predict the impact of known factors, and, it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus. All written and oral forward looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward looking statements made in this prospectus in the context of these risks and uncertainties.

 

We caution you that the important factors referenced above may not contain all of the factors that are important to an investment by you in our securities. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences we anticipate or affect us or our operations in the way we expect. The forward looking statements included in this prospectus are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

 

We estimate that the net proceeds to us from the sale of the shares of common stock offered by us will be approximately $      based upon an assumed initial public offering price of $      per share, the midpoint of the range set forth on the cover of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of any shares of our common stock sold by the selling stockholders.

 

A $1.00 increase or decrease in the assumed initial public offering price of $      per share, the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease the net proceeds we receive from this offering by approximately $     , assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriter discounts and commissions and estimated offering expenses payable by us.

 

We intend to use the net proceeds from the sale of common stock by us in this offering to retire the following indebtedness:

 

 

We intend to use the remaining net proceeds to reduce the outstanding balance under the revolving credit tranche (the “Revolving Credit Tranche”) of our A/R Credit Facility. In July 2011, we obtained commitments from the lenders under our A/R Credit Facility such that, effective upon our full repayment of the Term Loan Tranche and the Senior Subordinated Secured Notes (and satisfaction of other typical conditions), the maximum commitment of the lenders under the Revolving Credit Tranche will be increased from $290 million to $350 million.

 

The outstanding $30.0 million Senior Subordinated Secured Notes bear an interest rate of 13.00% and are scheduled to mature in November 2013. The Term Loan Tranche of our A/R Credit Facility bears a fixed interest rate of 14.75% and is scheduled to mature on August 20, 2013. The Revolving Credit Tranche of our A/R Credit Facility bears an interest rate of LIBOR plus 4.25% (4.47% as of July 29, 2011) and is scheduled to mature on August 20, 2013. The indebtedness under our A/R Credit Facility was incurred in August 2010 to refinance our prior accounts receivable credit facility.

 

We have never declared or paid cash dividends on our common stock. We do not expect to pay dividends on our common stock for the foreseeable future. Instead, we anticipate that all of our earnings in the foreseeable future will be used in the operation and growth of our business. Any future determination to pay dividends will be at the discretion of our board of directors, subject to compliance with certain contractual restrictions, including restrictions under our existing credit facilities, which limit our ability to pay dividends, and will depend upon, among other factors, our results of operations, financial condition, capital requirements, restrictions contained in current and future financing instruments and other factors that our board of directors deems relevant. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” for additional information regarding our existing credit facilities, including restrictions on payment of dividends thereunder. We will pay in common stock all of the accrued and unpaid dividends payable to our preferred stockholders upon conversion of our two series of outstanding preferred stock on the closing of this offering.

 

The following table sets forth our cash and cash equivalents and capitalization as of July 29, 2011:

 

 

 

 

 

 

 

 

You should read the information below in conjunction with the sections titled “Use of Proceeds,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus.

 

 

 

 

 

footnotes continued on following page

 

Our capitalization, pro forma and pro forma as adjusted, includes 5,000,000 shares of preferred stock undesignated as to class or series, as authorized under the certificate of incorporation that becomes effective upon completion of this offering.

 

Assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, a $1.00 increase or decrease in the assumed initial public offering price of $      per share (the midpoint of the range set forth on the cover page of this prospectus) would:

 

 

 

 

The outstanding share information set forth above is as of July 29, 2011, and excludes:

 

 

 

 

 

 

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock in this offering and the pro forma net tangible book value per share of our common stock after this offering. Dilution results from the fact that the per share offering price of our common stock is substantially in excess of the book value per share attributable to our existing stockholders for the presently outstanding stock.

 

As of July 29, 2011, our pro forma net tangible book value would have been approximately $     , or $      per share of common stock. Pro forma net tangible book value per share of common stock represents the amount of total tangible assets less total liabilities, divided by the number of shares of common stock outstanding after giving effect to the conversion of all outstanding classes of preferred stock into common stock upon the completion of this offering and the payment in shares of common stock, based on an assumed initial public offering price of $      per share, the midpoint of the range set forth on the cover of this prospectus, and an assumed underwriting discount of           per share, to our preferred stockholders of all of the accrued and unpaid dividends due upon conversion of their shares of outstanding preferred stock into shares of our common stock.

 

Pro forma as adjusted net tangible book value per share represents the amount of total tangible assets less total liabilities divided by the number of shares of common stock outstanding, as adjusted to give effect to the conversion of all outstanding classes of preferred stock into common stock upon the completion of this offering, our sale of           shares of common stock in this offering at an assumed initial public offering price of $      per share of common stock, the midpoint of the range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. As of July 29, 2011, our pro forma as adjusted net tangible book value would have been approximately $     , or $      per share of common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $      per share of common stock to our existing stockholders and an immediate dilution in pro forma as adjusted net tangible book value of $      per share of common stock to investors purchasing common stock in this offering. The following table illustrates this per share dilution:

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $      per share, the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our pro forma as adjusted net tangible book value by $     , or $      per share of common stock, and the dilution per share of common stock to new investors in this offering by $     , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

The following table sets forth, as of July 29, 2011, on the pro forma as adjusted basis described above, assuming no exercise of the over-allotment option by the underwriters, the differences between existing stockholders and new investors with respect to the total number of shares of common stock purchased from us and the selling stockholders in this offering, the total consideration paid and the average price per share paid at an assumed initial public offering price of $      per share of common stock, the midpoint of the range set forth on the cover page of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses payable by us and the selling stockholders.

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $      per share, the midpoint of the range set forth on the cover of this prospectus, would increase or decrease, as applicable, total consideration paid by new investors in this offering by $     , the percent of total consideration paid by investors participating in this offering by     %, total consideration paid by all stockholders by $      and average price per share paid by all stockholders by $     , assuming the number of shares offered by us and the selling stockholders, as set forth on the cover page of this prospectus, remains the same.

 

If the underwriters’ over-allotment option is exercised in full, the number of shares held by existing stockholders after this offering would be          , or     %, and the number of shares held by new investors would increase to          , or     %, of the total number of shares of our common stock outstanding after this offering.

 

Except where specifically indicated, the tables and calculations above are based on shares of common stock issued and outstanding as of July 29, 2011, and exclude:

 

 

 

 

 

 

To the extent that the options and warrants described above are exercised, there will be further dilution to new investors. See “Description of Capital Stock.”

 

The following tables set forth selected consolidated financial and other data for the periods and at the dates indicated. The selected consolidated statement of operations data for the fiscal years ended January 30, 2009, January 29, 2010 and January 28, 2011 and selected consolidated balance sheet data as of January 29, 2010 and January 28, 2011 are derived from our audited consolidated financial statements that are included elsewhere in this prospectus. The selected consolidated statement of operations data for the fiscal years ended February 2, 2007 and February 1, 2008 and selected consolidated balance sheet data as of February 2, 2007, February 1, 2008, and January 30, 2009 are derived from our previously audited consolidated financial statements that are not included in this prospectus. The summary financial data under the heading “Selected Operating Data” relating to customer statistics are derived from our internal records.

 

The selected consolidated statement of operations data for the 26 weeks ended July 30, 2010 and July 29, 2011 and the selected consolidated balance sheet data as of July 30, 2010 and July 29, 2011 have been derived from our unaudited consolidated financial statements which are included elsewhere in this prospectus. The unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of our management, reflect all adjustments consisting of normal recurring adjustments, necessary for a fair presentation of this data. The selected consolidated financial and operating data as of and for the 26 weeks ended July 29, 2011 are not necessarily indicative of the results that may be obtained for a full year.

 

The following table also sets forth summary consolidated pro forma data, which give effect to the events described in footnote (g) to the following table. The consolidated pro forma data have been derived from unaudited pro forma data included in our consolidated financial statements included elsewhere in this prospectus. The consolidated pro forma financial data are unaudited and presented for informational purposes only and do not purport to represent what our financial position actually would have been had the events so described occurred on the dates indicated or to project our financial position as of any future date.

 

You should read this selected consolidated financial data in conjunction with the consolidated financial statements and related notes and the information under “Use of Proceeds,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The historical results set forth below are not necessarily indicative of results of operations to be expected in any future period.